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The Swissramble Kieran O'Connors Blog

Discussion in 'Football Chat' started by redabbey, Dec 1, 2010.

  1. redabbey

    redabbey
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    I first came across Kieran O'Connors blog a few months ago when he wrote about the financial situation of MU ever since then I have been keeping an eye on what he writes.

    It would appear to me what this chap does not know about football finances is not worth knowing.

    His latest blog post is all about Spurs. His blog posts are always heavy going but the detail is always fascinating.

    http://swissramble.blogspot.com/
     
  2. jaza

    jaza
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    Can you copy and paste mate. i can't see it.
     
  3. redabbey

    redabbey
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    Spurs Daring To Dream

    When Tottenham Hotspur were three-nil down to Young Boys Bern after only 30 minutes of their Champions League qualifying match in August, it looked for all the world as if their European adventure would be over as soon as it had started. With Michael Dawson and Sebastian Bassong doing passable imitations of Bambi on ice, the Swiss minnows were ripping the North Londoners a new one every time they attacked. After many years of waiting for a chance to have a crack at Europe’s elite, the hopes and dreams of the Spurs fans were disintegrating before their eyes on YB’s plastic pitch.

    However, Spurs somehow reduced the deficit and predictably crushed their unheralded opponents in the return leg at White Hart Lane to secure their place in the Champions League group stage. Since that nervous start, Spurs have at times played some exhilarating football in Europe’s premier tournament, winning all three of their home games by wide margins, including an unexpected 3-1 demolition of the reigning champions Inter, leading to them already qualifying for the last 16 with a game in hand.

    They are also riding high in the Premier League, currently sitting in fifth, just one place outside the qualifying positions for next season’s Champions League, so everything would appear to be rosy in Tottenham’s garden these days.

    [​IMG]

    The news off the pitch also seems very good with the club’s press release for the 2010 financial results highlighting “record revenues of £119.8 million†and “profit from operations excluding football player trading of £22.7 million.†You have to look long and hard before you discover that Tottenham actually reported a pre-tax loss of £6.5 million, a decline of nearly £40 million from last year’s profit before tax of £33.4 million.

    Of course, most companies will accentuate the positives in their results, but this is particularly misleading, not to mention absurd if you consider that “football player trading†is almost by definition a core part of a football club’s business, especially as it forms an essential element of the modus operandi at Spurs, and represents real income and expenses. Funnily enough, the 2009 annual report instead opted to focus on the “record profits before tax of £33.4 millionâ€, rather than mention the “profit from operations excluding football player tradingâ€, presumably because that actually fell last year from £27.5 million to £18.4 million. There’s so much spin in these statements that you almost expect to hear an Australian wicket-keeper cry, “Bowled, Warnieâ€, as the great man delivers another vicious leg-break.

    To be fair, there are two ways to interpret these accounts. Taking a negative stance, I would point out that, despite reporting record turnover, the club still made a loss. They might argue that the cash profit (EBITDA) of £25.4 million, comprising the profit from operations excluding player trading of £22.7 million plus £2.8 million depreciation added back, is fairly impressive, but this is still not enough to cover interest payments of £5.0 million and net transfer spend of £27.5 million (£34.5 million of sales less £62.0 million of purchases).

    On the other hand, more positively, almost all of the reduction in profits came from lower player sales with the £15m earned in 2010 (Darren Bent to Sunderland, Didier Zokora to Seville and Kevin-Prince Boateng to Portsmouth) nowhere near as much as 2009’s unprecedented £57 million (Dimitar Berbatov to Manchester United and Robbie Keane to Liverpool). Wages rose £7 million, but this was covered by higher TV money.

    In fact, compared to the losses made at other leading clubs recently (Manchester City £121 million, Manchester United £80 million), Spurs’ modest loss of £7 million is quite encouraging, especially as their figures do not include any money from the Champions League. As Roy Kaitcer from stockbrokers Brewin Dolphin said, “The figures look very good. If I was a Spurs fan, I’d be pretty happy.â€

    That’s why the blatant attempt to “spin†the results is so disappointing, as there’s really no need to do so, with the figures indicating that the club is well run financially, all things considered. This should come as no surprise, given that this year’s loss is the first since 2004. For a club with Champions League aspirations on a relatively low turnover, that’s no mean feat and should be applauded.

    [​IMG]

    Even with this year’s increase in revenue to £120 million, Spurs are still a long way behind the traditional Big Four clubs in England: Manchester United £286 million earn more than twice as much; Arsenal £223 million (football income only) earn over £100 million more; while Chelsea £206 million and Liverpool £185 million also have significantly higher turnover, even though those are last year’s figures. Manchester City have also overtaken Spurs with their revenue rising from £87 million to £125 million.

    The problem for Spurs is that even though their revenue has grown at an imposing 69% over the last five years, this has been more than matched by other clubs, who have increased their revenue at an even faster rate. Both Manchester United 72% and, even more emphatically, Arsenal 94%, thanks to the Emirates effect, have outpaced Spurs. The 2010 accounts for Chelsea and Liverpool have not yet been published, so we don’t know their growth rate over the full period, but we can be fairly sure that the revenue gap in absolute terms will not have diminished.

    [​IMG]

    However, Spurs’ 2009 revenue of £113 million was still enough to place them 15th in the Deloittes Money League for European clubs, so it’s not that shabby. To place that into context, it’s not far behind Lyon’s £119 million, which was sufficient to fund a team that reached the Champions League semi-final last season. Moreover, if the £40+ million revenue that Spurs can expect to gain this year, mainly from their run in the Champions League, were to be added to the current revenue of £119 million, they would then have turnover of around £160 million, which would not be too far behind Inter’s £167 million – and they actually won the trophy.

    Partly as a result of the lack of Champions League broadcasting income, Spurs’ revenue mix is fairly well balanced, though the increasing influence of Sky TV money is evident, now accounting for 43% of the total turnover. Although this is obviously a key factor, Spurs are still far less reliant on TV income than most clubs in the Premier League, with only the Big Four having a lower percentage and other clubs dangerously dependent on TV with over 70% of their money coming from the Murdoch empire. The other obvious trend for Tottenham is the declining significance of gate receipts, which have fallen from 30% to 23% of the total income, hence the plans for a new stadium.

    [​IMG]

    Media and broadcasting revenue increased this year by 15% (or £7 million) to £52 million, largely due to a higher central distribution of £49 million from the Premier League. This was attributable to a higher merit fee award based on the final league position of fourth compared to eighth the previous season (£4 million increase) and a rise in the facility fee, based on the number of times Spurs featured in live television games (£2 million increase).

    The last time TV revenue rose by a similar amount was in 2008 (from £34 million to £40 million), which was as a result of the new Sky contract for 2008-2010. In the same way, the new three-year deal for 2010-13 will also deliver higher revenue to each Premier League club, thanks to the significantly higher money for overseas rights, which could be worth up to £10 million extra for Spurs.

    In spite of these riches, Spurs’ TV income in 2010 is still much lower than the other top English clubs, who enjoyed the benefit of additional cash from the Champions League, which in 2009/10 was worth an average of £30 million for the English teams (Manchester United £39 million, Arsenal £28 million, Chelsea £27 million and Liverpool £24 million).

    The money that Spurs will receive from UEFA for the Champions League 2010/11 is primarily dependent on how far they progress, though there is also a sizeable chunk linked to the TV (market) pool.

    Every team that qualifies for the Group Stage is awarded €3.9 million for participation plus another €550,000 per match played in the group phase, regardless of the result, so that’s a guaranteed €7.2 million. On top of that, there is also a performance bonus of €800,000 for every win and €400,000 for every draw in the group stage. To date, Spurs have won three matches, drawn one and lost one, giving an additional €2.8 million. If we assume that the final away game to Twente Enschede is a draw, that would increase to €3.2 million. Spurs will also pick up €3 million for advancing to the last 16. Even if they were to get eliminated at this stage, they would receive the princely sum of €13.4 million in prize money.

    There is additional performance money for each further stage reached, so if Spurs were to hit the ball out of the park (sounds wrong, but you know what I mean), they would receive the following: quarter-final €3.3 million, semi-final €4.2 million, finalists €5.6 million and winners €9 million. So if Spurs went all the way and won the damn thing (miracles can happen), they would earn around €30 million, which is serious money in anybody’s book(s).

    In addition to these fixed sums, Spurs will receive a share of the television money from the market pool. This is a variable amount, which is allocated depending on a number of factors: (a) the size/value of a country’s TV market, so the amount allocated to teams in England is more than that given to, say, Spain, as English television generates more revenue; (b) the number of representatives from your country, so an English team (with four representatives) might receive less than a German team (with only two representatives); (c) the position of a club in its domestic championship in the previous season, so if two teams from England both reach the quarter-final, the one that finished ahead of the other in the Premier League would get more money; (d) the number of matches played in the current season’s Champions League. This all makes it difficult to estimate but a reasonable figure for Spurs would be around €17 million, based on a small uplift to last year’s figures.

    That would give Spurs a total of €30 million TV money from UEFA for the Champions League, which is equivalent to £25 million at current exchange rates. That’s a tidy sum, which on its own would increase Spurs’ turnover by over 20%. Given its potential impact, it’s easy to see why clubs strain every sinew (and spend to their limit and sometimes beyond) to reach the promised land of the Champions League. Of course, there are “only†four places available, so it’s still a gamble, but the size of the prize is striking.

    Spurs have received many plaudits for their commercial acumen, but this has not yet been reflected in the financials, as commercial revenue has actually been falling for the last two seasons from £38 million to £34 million. Much of this decrease comes from corporate hospitality, which has suffered both from the economic recession and the club not being in a European competition, though the latter cause should have been addressed this season. Merchandising rose slightly to £8 million this year, but is still below the peak of £10 million in 2008, which was boosted by shirt sales relating to the clubs 125th anniversary and new kit launches.

    However, Spurs will benefit from two new shirt sponsors in what they describe as “a ground-breaking innovative split of the shirt sponsorship inventoryâ€, with software company Autonomy becoming the sponsor for all Premier League matches (£10 million a season) and asset manager Investec taking on the sponsorship for all cup competitions (£2.5 million a season). Both agreements run from July 2010 for two years, with the Autonomy deal having an option to extend for a further five years, so will only be reflected in next year’s accounts.

    The combined £12.5 million is worth £4 million more a season than the £8 million paid by previous sponsors Mansion and is the fourth highest in the Premier League, only behind Manchester United, Liverpool and Chelsea. It’s also a lot higher than the £5.5 million that Emirates pays Arsenal, though that is largely due to the upfront cash payments that were needed to help fund the Emirates construction. Nigel Currie of sponsorship consultancy Brand Rapport has praised the Spurs’ arrangement, “It seems if clubs can cut their sponsorship cloth a different way, they can extend their offer to more than one brand. I think that other clubs may now look at ways of increasing the value of their shirt sponsorship.â€

    The five-year kit deal with Puma worth a reported £5 million a season has been extended by a further year to run until the end of 2011/12. This is just one of a number of high quality partners, the list also including BT, Thomas Cook, MBNA, Sportingbet and Ladbrokes.

    The other revenue stream, gate receipts, has also been decreasing: from £31 million in 2007 to £27 million in 2010, though this is heavily influenced by the number of cup matches. In the 2006/07 season, Spurs had three major cup runs, reaching the quarter-finals in both the FA Cup and UEFA Cup and the semi-finals in the Carling Cup, generating gate receipts of £13 million, compared to £7 million in 2010. This also explains the large jump in gate receipts in 2007, as the previous year included only £100,000 for cup competitions. In other words, qualifying for the Europa League can still be beneficial in terms of match day income (assuming the fans turn up), even though the prize money is considerably less than the Champions League.

    Underlying gate receipts, i.e. those from league matches, have actually been steadily increasing every year, from £17 million in 2005 to £20 million in 2010, when the stadium was filled to its 36,500 capacity for every Premier League match, despite the season ticket prices being the third highest in the country (though prices were frozen for up to two years in 2009).

    In the annual report, the club is keen to emphasise its focus on the cost side of the business. In 2007, it somewhat ostentatiously stated, “Whilst more and more money enters the game, primarily from the central FAPL TV deal, we endeavour to control our significant cost baseâ€, while the 2009 accounts also mentioned “the club’s ongoing and prudent cost control policies.†I have little doubt that Spurs have indeed attempted to control costs, but the fact remains that (including player amortisation) these have grown by £66 million (94%) in the last five years, while revenue has only increased by £49 million (70%). Heaven knows what the cost growth would have looked like if they hadn’t adopted this frugal approach.

    Obviously, what has been driving the cost growth, just like any other football club, is player costs, namely wages and amortisation. There is some evidence of the famed Redknapp effect with wages increasing £14 million since his arrival in 2008, but, truth be told, other managers have contributed just as much to the growth with wages also rising £20 million in the previous three season. It appears as if chairman Daniel Levy is keeping the old rogue on a tight leash – a case of an irresistible force meeting an immovable object. That said, Spurs’ salaries did grow by a worrying 11% last season, which is higher than Manchester United’s 7% and Arsenal’s 6%.

    [​IMG]
     
  4. redabbey

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    This lead to an increase in the important wages to turnover ratio to 56%, but this is still very good and is, in fact, the third best in the Premier League (only behind United and Arsenal), which is a notable achievement given the small turnover. This is because Levy’s negotiating skills have managed to keep the wage bill in check to date. He has refused to compromise the wage structure at Spurs, so in the summer they were unwilling to foot the bill for Joe Cole’s exorbitant wage demands and only took on William Gallas when he lowered his salary.

    Moreover, the 2006 annual report intriguingly mentions, “The policy throughout the club is to reward performance based on the continued success of the club”, which raise the possibility that Spurs, unlike many other clubs, have actually got their bonus scheme right, though cynics might point out that there has been precious little success to reward.

    I also wonder how much of an impact on the wage bill the decision to withdraw from the Reserve League has had. For example, the 2009 accounts stated that 19 players had gone on loan, which is a policy that clearly reduces the payroll.

    [​IMG]

    Whatever the reasons, Tottenham’s wage bill of £67 million is by some distance the lowest of the “mini league” featuring the Big Four plus Spurs and Manchester City. It’s effectively half the size of Chelsea, City and United; £44 million less than Arsenal; and £23 million below Liverpool. Of course, at the same time, it’s higher than the other teams in the chasing pack like Everton and Aston Villa, leaving Spurs in an uncomfortable “piggy in the middle” position. If they want to consistently match the big boys, the chances are that they will have to push forward and spend more on wages, but they will also need to grow revenue season after season if they are to do that with confidence.

    So Levy has done a fine job in keeping wages down, but he is equally adept at negotiating his own remuneration, which has increased from £250,000 in 2004 to £1.35 million in 2010, split evenly between fees and bonus. Similarly, the remuneration of the Finance Director, Matthew Collecott, has increased from £96,000 to £504,000 in the same period. All told, these two directors have received £5.5 million and £2.1 million respectively in the last seven years. In fairness, these are not outrageous sums when compared to the figures earned by their peers at the Big Four, though some might argue that they are bigger clubs (larger turnover, more success, higher profile), so there should be a premium.

    There has also been a steep increase in player amortisation, namely the annual expense of writing down the purchase price of new players, which has more than tripled since 2005, rising from £13 million to £40 million. That’s a lot (it’s the same as Manchester United), though it’s still on the low side compared to clubs known for being big spenders in the transfer market: Manchester City £71 million, Chelsea £49 million.

    [​IMG]

    The concept of amortisation confuses many people, but it is simply how accountants handle player transfers. Instead of booking 100% of the player’s transfer price as a cost in the year of purchase, accountants treat players as assets, so the cost is capitalised and written-down (amortised) over the length of his contract. At the end of the contract, he is considered to have no value, because he can then leave the club on a free transfer.

    It’s probably easier to understand with the recent example of Rafael van der Vaart. Spurs bought the Dutch maestro for £8 million, so if we assume that his contract is for four years, then the annual amortisation is £2 million. After three years his net book value in the accounts will be £2 million (the original cost of £8 million less three years amortisation at £2 million per annum).

    Spurs’ ever-rising amortisation therefore suggests that they are big spenders in the transfer market and that is indeed the case. The last time that Spurs had a net surplus on their transfer spend was ten years ago in 2000/01, while since then they have been the very definition of a buying club, leading to an aggregate net spend of almost £150 million in the decade (£320 million purchases less £170 million sales).

    [​IMG]

    To place that into context, only Manchester City, fuelled by the Sheikh’s billions, have spent more than Tottenham in the last five years. With a net £91 million, Spurs have spent twice as much as Liverpool, four times as much as Chelsea, nine times as much as United, while Arsenal have actually generated a surplus from their transfer activities. In fairness, the frequent changes of manager (Martin Jol, Juande Ramos, Harry Redknapp) have made a high level of player turnover inevitable, leading to what the chairman described as “one of the largest squads in the Premier League.”

    Levy would argue that the investment in the first team squad has been worthwhile in that it has meant qualification for the Champions League, which is clearly a valid point, though the impact on the club’s financials is not so palatable. Remember that this year the club made a profit before player trading of £22.7 million, but this became a £6.5 million loss after the impact of splashing the cash in the transfer market was taken into consideration. And there’s little sign of this abating, as the squad was “boosted” after the year-end with yet another £20 million of purchases, including van der Vaart, Gallas, Sandro and Stipe Pletikosa.

    [​IMG]

    To be fair, the high level of player purchases has not put the club into debt. Yes, the club holds net debt of £64 million (excluding CRPS liabilities), but the vast majority of that is property specific. In 2006 the club was actually in a net cash position to the tune of £24 million, but since then the debt has been rising year after year: 2007 £2 million, 2008 £15 million, 2009 £46 million and 2010 £64 million. If the liability component of the Convertible Redeemable Preference Shares were classified as debt (as the accounts do in the analysis of Total Borrowings), then the net debt could be considered as £79 million.

    The debt comprises £50 million of bank loans, including a £15 million short-term revolving loan from HSBC and a £33 million facility with the Bank of Scotland at a floating rate linked to LIBOR; plus £25 million of loan notes at an interest rate of 7.29% repayable in equal instalments by September 2023; less £11 million of cash. All the loans are secured on club assets.

    Even though debt has been increasing, total liabilities actually fell £11 million to £218 million last year, largely due to a decrease in trade payables. In fact, the balance sheet is quite strong with net assets of £71 million, including tangible assets of £124 million, comprising White Hart Lane £39 million, new stadium project £72 million and the new training ground at Bulls Cross in Enfield £12 million, and intangible assets (players) of £116 million. Of course, the market value of the players in the real world is far higher than the carrying value in the accounts. Transfermarkt estimates a value of £258 million, but even that is under-stated, as they only ascribe an £18 million value to Gareth Bale, who is, of course, the eighth wonder of the world.

    [​IMG]

    However, as the accounts say, “This huge investment over the years has been funded through equity contributions and long-term debt financing.” Although the club generates cash from its operating activities (£20 million in 2010), once it has made interest payments and invested in capital expenditure (players and property), it has a net cash outflow (£33 million in 2010). This has only been (partially) compensated by additional funding, which last year came via a combination of £10 million more debt and £15 million of new share capital. In fact, in the last four years, some £70 million of additional financing has been required to maintain the cash outflows at a manageable level.

    This trend is likely to increase in the future, as Spurs will have to invest a great deal of money in the planned new 56,000 stadium. As Levy explained in a statement on the club’s website, “It is indisputable that we now need an increased capacity stadium in order to continue to move the club forward and compete at the highest levels.” White Hart Lane may be an atmospheric stadium, but its 36,500 capacity cannot provide the £100 million match day revenue enjoyed by clubs like Manchester United and Arsenal. To give a fair comparison, some corporate hospitality should be added to Spurs’ gate receipts of £27 million, but their revenue would only be around £40 million (per Deloittes Money League), which is still £60 million lower. Spurs’ enthusiasm for the project is even more understandable with 33,000 supporters on the (paid-for) season ticket waiting list.

    [​IMG]

    The search for a new stadium has effectively come down to two viable options: (a) the Northumberland Development Project in the area around White Hart Lane; (b) relocation to the Olympic Stadium in Stratford. Up until a few months ago, it seemed that the NDP was the only game in town (2009 accounts: “as a club, we are proud of our roots in Haringey”), but there is now a distinct possibility that Spurs will move away from their spiritual home. Although the plans have now been approved by both the local council and the Mayor of London, revisions have added £50 million of costs, bringing the total budget required to an eye-watering £450 million.

    In order to minimise the club’s exposure to debt, it hopes to subsidise the project costs with supporting developments, such as new homes, hotel and supermarket, and sell naming rights for the stadium. According to an article in the Daily Mail, the new commercial director, Charlie Wijeratna, has been tasked with securing an astonishing £300 million over 20 years for naming rights, which would go a long way towards solving the funding issues (though there may be some implications for shirt sponsorship). However, Levy has confirmed that additional financing would still be required, either through issuing new shares in the club or bank loans, which would not be cheap (Manchester United’s bond is 8.75%, while Arsenal’s is 5.75%).

    As well as the high cost, there are other issues with this project, namely the total lack of public money being made available for regeneration (in contrast to the stadium developments at Wembley and Arsenal) and the chronically poor transport infrastructure, so it is only prudent to consider other alternatives. However, if Spurs were to abandon the White Hart Lane solution, they would face some other financial issues. First, they would have to write-off the £20 million of planning and professional fees currently held on the balance sheet. Second, they would have to sell the £50 million of property that they have already purchased, which may prove difficult, as this is by no means prime real estate, though the accounts do state that they have gained “the critical mass to achieve a substantial site sale as a contribution to a relocation.”

    Hence, the decision to keep the club’s options open by registering its interest in the Olympic Stadium site (along with AEG). Estimates of the costs required to convert this into a football stadium vary, ranging from £100 million to £200 million, but there’s no doubt that this would be a significantly cheaper opportunity, especially as there is apparently £35 million available in the Olympic legacy fund to help finance the conversion. Some of the costs would also be recouped by Tottenham selling their property around White Hart Lane.

    Many regard Spurs’ interest in the Olympic Stadium as simply a negotiating tactic, an act of brinkmanship designed to persuade Haringey council to contribute money towards the cost of the Northumberland Development, but Tottenham director Sir Keith Mills insists that the club is serious, “If the Olympic Park Legacy Company decides our bid is the preferred one, then we’ll put all our efforts behind trying to move there.” Indeed, Levy has pointed out that the Olympic site is only five miles from the current stadium with excellent transport links.

    Obviously, the majority of Tottenham fans are nervous about this prospect, including local MP David Lammy, who complained, “Levy is willing to sacrifice the atmosphere of White Hart Lane to stuff the Olympic Stadium with corporate hospitality boxes. Tottenham Hotspur should be a club for everyone, not just the suits in the City.” That’s a bit harsh, given that the chairman has a responsibility to the financial stability of the club, but essentially that’s what the argument boils down to: history and tradition against financial benefits.

    Of course, it may not be up to Spurs, as West Ham are still considered the favourites for the Olympic Stadium, not only because they are the local club, backed by Newham council, but they have also promised to retain the running track to preserve the commitment made as part of the London 2012 bid. That said, the authorities now seem relaxed over the idea of providing upgraded athletics facilities elsewhere, e.g. Crystal Palace. Furthermore, Spurs’ plan could be more commercially viable, especially if the Hammers are relegated.

    [​IMG]

    Ironically, if and when these plans come to pass, Spurs’ business model would then closely resemble that of Arsenal, as they seek to emulate their fierce rivals’ success off the pitch as well as on it. At the moment, the finances are very different with Arsenal’s profits being £50 million higher: their revenue is £100 million higher, but Spurs’ expenses are £70 million lower. Arsenal also make more money from player sales, but pay more in interest for construction loans. However, in the future, you could envisage a scenario where the additional gate receipts from a new stadium would boost Spurs’ revenue, allowing them to loosen their tight wage structure, when the two clubs would be much more similar.

    In the short-term, Tottenham’s revenue next season should already increase by around £45 million, comprising £10 million from the new Premier League TV contract, £30 million from the Champions League UEFA central distributions, £4 million from the new shirt sponsorship deal and £6 million gate receipts (4 Champions League matches at £1.5 million, though this depends on other cup matches). However, this extra money will not all go to the bottom line, as the wage bill and player amortisation will increase for new players, while there will be expenses for hosting European matches. That could easily add up to £20 million, but this would still leave a clear £25 million improvement.

    It therefore appears as if Spurs will be well placed to meet the impending UEFA Financial Fair Play Regulations. Indeed, the club’s finance director believes that these will “vindicate” their financial prudence, while also supporting their decision to go for a new stadium, as it is “now more important to drive revenues to the next level.” Given that the new rules are all about clubs operating within their means, it clearly makes sense to boost Spurs’ revenue in this way, especially as the stadium development costs are excluded from the break-even calculation.

    However, they will still have the major challenge of consistently qualifying for the Champions League. Daniel Levy has insisted that he will not jeopardise the club’s finances by chasing qualification every year, but it’s a delicate balancing act. If they don’t succeed, potentially Spurs could end up with a squad being paid Champions League wages without the revenue to compensate. That would then present them with the eternal dilemma: would they be tempted to spend more money to win their place back? Or would they balance the books by selling players, which would make it more difficult to qualify?

    That is why so much rests on the money from a new stadium, which would give them more room to manoeuvre financially and help create a virtuous circle: higher revenue, better players, regular Champions League qualification. Of course, building a new stadium is far from a straightforward task and the club will almost certainly end up with a lot of debt to service, which may well compromise their ability to invest in the first team squad, which has been the cornerstone of their recent strategy. There is also no guarantee that the crowds will turn up, even with that lengthy waiting list for season tickets.

    Spurs are in pretty good condition at the moment. The core business is clearly very healthy, for which the chairman Daniel Levy deserves a lot of credit, especially as he has one of the most spendthrift football managers around in Harry Redknapp. However, it feels as if the club is standing at a crossroads financially as they are confronted by some critically important investment decisions.

    The club’s motto is famously, “To dare is to do”, but do they simply dare to remember? After all, the annual report concludes with a reminder that next year is the 50th anniversary of the last time Spurs won the league. Or will they risk a lot of money and dare to dream?
     
  5. Ron1892

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    Follow this Chap on twitter, and always enjoy reading his work.You'd need to have time on your hands to sit down and read his work, and bring a cup of tea with you..His article on the mancs a few weeks ago was unreal.The amount of detail he goes into is fantastic.
     
  6. Ron1892

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  8. redabbey

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  9. Ron1892

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    Lille's French Revolution

    [​IMG]
    Although Lille’s faltering form in recent weeks has caused a few to doubt their ability to sustain their sparkling challenge in Ligue 1, this weekend’s victory over Nancy restored a four point lead at the top of the table. With just four games remaining until the end of the season, Les Dogues are well on course to win their first French title since 1954.

    Even though this should not be too unexpected, given that Lille finished last season in fourth place (and were the league’s leading scorers), it is still somewhat of a surprise to see a small provincial side ahead of traditional powerhouses like Marseille and Lyon. Indeed, Lille are actually chasing a domestic double, as they face Paris Saint-Germain in the French Cup Final next Saturday at the Stade de France.

    Their success has been built on an impressive attacking style of play, which once again has the Northern side leading the scoring charts, with the African combination of the powerful Moussa Sow and the pacy Gervinho netting 35 goals between them so far this season. The splendidly dreadlocked Gervinho made a distinct impression for the Ivory Coast at the World Cup in South Africa, but the Senegalese Sow has been transformed since arriving on a free transfer from Rennes last summer.

    The hub of Lille’s progressive formation is comprised of a trio of diminutive midfielders, like a less lauded version of Barcelona, featuring French internationals, Rio Mavuba (the club captain) and Yohan Cabaye, plus the experienced Florent Balmont.
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    "Gervinho - more than a haircut"

    However, the undoubted star of the show is the young Belgian winger Eden Hazard, who has been named Ligue 1’s most exciting young player in each of the last two seasons, and is being chased by virtually all of Europe’s leading clubs, as well as most French defences. This young man, as Ray Wilkins would inevitably describe him, has got the lot: speed, dribbling skills, a powerful shot and the ability to create chances. One of Lille’s youth coaches did not want to go overboard in his praise, but could not resist a stirring comparison: “You have to keep perspective, as he is still very young, but he is like Lionel Messi.â€

    Lille’s development in the last couple of seasons is all the more remarkable, as it follows the departure of the inspirational Claude Puel, the coach who had transformed them into a truly competitive team, twice guiding unfashionable Lille to qualification for the Champions League during his six-year tenure. When Puel, a protégé of Arsène Wenger, left for champions Lyon in 2008, this could have been a hammer blow to Lille’s prospects, but instead the relatively inexperienced Rudi Garcia, recruited from Le Mans, has maintained the progress.

    Famed for his ability to get results on a limited budget, Garcia has added an extra dimension to Puel’s pragmatic, hard-working side, as he let loose the attacking instincts of Les Dogues of war, resulting in Lille twice qualifying for the Europa League and potentially going one step better this season.
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    "Give yourself a round of applause, Michel"

    Nevertheless, the principal driving force behind Lille’s ascent to the top is president Michel Seydoux, a French businessman and film producer, who became the club’s majority shareholder in 2004. Although Lille attained a startling second place in his first full season as president in 2004/05, Seydoux’s approach is the polar opposite of those owners who demand short-term success. He has not been a benefactor in the traditional football club sense of pumping in vast sums of cash and demanding instant results, but has followed the sound business principles of establishing a strategy (“to challenge Lyon in 2012â€) with achievable objectives, bringing in good people to support the plan and delivering steadily improving results.

    The club has adopted a long-term view, first developing a state-of-the-art training facility at the Domaine de Luchin and then working with the local authority to build a magnificent new 50,000 stadium at the Grand Stade Lille Métropole, reinforced by admirable continuity in the management team. In fact, Lille have only had two managers (Puel and Garcia) in the last nine years, a rare statistic in the uncompromising world of football.

    Since Seydoux has taken control of Lille Olympique Sporting Club, often shortened to LOSC, this unheralded side has featured twice in Europe’s flagship competition, the Champions League. They qualified for the first time ever in 2005, repeating the feat the following season, when they reached the knockout stages, before being eliminated by Manchester United in controversial circumstances, as Ryan Giggs scored from a quickly taken free-kick.
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    Competing at such rarified levels is heady stuff for a club with a budget as relatively low as Lille. Although on the face of it, they have little to complain about, as they sit in fifth place in the French money league with a turnover of €55 million, this is considerably less than Lyon, Marseille, Bordeaux and Paris Saint-Germain. In fact, the first two have budgets nearly three times as high (Lyon €146 million, Marseille €143 million), while Bordeaux’s revenue is twice as much. Granted, this sizeable disparity owes a lot to the Champions League money those three clubs received last year, but gate receipts and commercial income are also significantly higher than LOSC.

    Given that money usually does buy success in football, as the teams with the highest turnover (and consequently wages) are most likely to win, this only makes the fact that Lille currently lead the league even more praiseworthy. To place that into context, Lens, who have almost exactly the same turnover as Lille with €52 million, are currently struggling in second to last place in the table.
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    Similarly, Lille are resolutely mid-table in terms of profits and losses, having reported small losses in each of the last two seasons: €1.1 million in 2009/10 and €0.3 million in 2008/09. This stability is not too bad, when you consider that the number of clubs making losses doubled from seven to fourteen last year with aggregate losses in Ligue 1 significantly rising from €24 million to €108 million, though to be fair over half of that came from just two clubs: Lyon €35 million, a big reversal from the previous year’s profit, despite reaching the semi-finals of the Champions League, and Paris Saint-Germain €22 million, continuing their series of poor financial results.

    One point that stands out from the P&L league table is that Lille made more profit on player sales (€23 million) than any other French club last year, which is doubly striking, as total profits from player sales in France fell by more than 40% (€90 million) compared to 2008/09. This has been a recurring feature of Lille’s business model with the club making around €80 million from such player trading in the last four seasons. There are two ways of looking at this from a financial perspective. On the one hand, it’s a vindication of Lille’s ability to make money from developing players; on the other hand, it underlines that the club has needed to sell its prize assets in order to compensate for large operating deficits, which average €23 million over the last three seasons.
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    That said, the DNCG, the organisation responsible for monitoring and overseeing the accounts of football clubs in France, has stated that Lille enjoy a “healthy financial situation†despite the recurring losses at an operating level. Indeed, Lille actually reported profits three years in a row before the last two periods’ small losses (2006 €6.9 million, 2007 €5.1 million and 2008 €6.6 million), though the first two of these seasons were boosted by revenue from the Champions League.

    This explains why Lille’s revenue has actually declined since its peak of €68 million in 2006 to €55 million in 2010, as the Europa League is far less lucrative than the Champions League. Like all French clubs, Lille are hugely dependent on television money and actually had the third highest reliance in France last season at 69%, only behind Auxerre and Lorient. At less than €5 million a season, gate receipts are miserably low in comparison to leading clubs in other European leagues, but that’s pretty much the norm in France with only four clubs earning more than €7 million a year, namely the usual suspects: Lyon, Marseille, Bordeaux and PSG.
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    Lille have done much better with TV revenue, earning €38 million, the fourth highest in Ligue 1 last season, comprising €35 million from domestic deals and €3 million from their run in the Europa League.

    The domestic TV money is allocated among clubs as a mixture of fixed and variable components. The fixed element comprises 50% of the total media rights and is distributed equally among all Ligue 1 clubs, worth around €12.5 million a season, while the remainder is distributed based on league performance 30% (25% for the current season and 5% for performance over the last five seasons) and the number of times a team is broadcast 20% (15% for the current season and 5% for the last five seasons).

    Although this structure is reasonably egalitarian, it does tend to favour the leading clubs, especially the broadcast element. Let’s see how this worked out for Lille last season: their fourth place was worth €11.8 million, compared to the €17.9 million received by champions Marseille. However, because clubs like Marseille and Lyon are shown on television more frequently than the provincials, Lille lose out on the notoriété with Marseille earning more than twice as much: €17.4 million compared to €7.6 million. So, in summary, last year Lille finished just three places behind Marseille in Ligue 1, but received €16.7 million less TV revenue.
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    However, there is a darker cloud on the horizon. The current television deal, which is worth €668 million a season, runs from 2008 to 2012, but is soon up for re-negotiation. The indications are that it will be renewed for a lower sum, as one of the existing broadcasters, Orange, has decided to withdraw from the bidding process, leaving Canal+ as the only game in town. This is potentially extremely bad news for French clubs, as only Serie A among major European leagues is more reliant on TV revenue, with Reuters estimating that the reduction may be as much as €200 million.

    The French deal is currently the third most valuable in Europe, only behind the Premier League €1.2 billion and Serie A €0.9 billion, but ahead of the Bundesliga €412 million (La Liga has individual club deals). Most of the shortfall compared to the Premier League is due to overseas rights, which the English have managed to sell for an incredible 20 times as much as Ligue 1’s €30 million. Indeed, one of the suggestions made by Michel Seydoux, who has been commissioned by his peers to examine the TV issue, is for the league to spread matches over the weekend, including lunchtime kick-offs, to produce higher ratings in the emerging Asian market and address this weakness.
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    Of course, French clubs can boost their income by participating in the Champions League, which is what helped Lille produce what they described as “exceptional†financial results in 2006 and 2007, when they earned €21 million and €22 million respectively, not including any uplifts in sponsorships. In the latter year, this was split £18 million central TV distributions from UEFA and £4 million gate receipts. Of course, this can be a double-edged sword, as the year afterwards in 2008, Lille’s revenue plunged €24 million (or 38%).

    Last year’s tournament was even more rewarding for the French representatives, who each earned an average of €25 million: Bordeaux €30 million, Lyon €29 million and Marseille €17 million. The more observant among you will have noticed that Bordeaux received more money than Lyon, even though they only reached the quarter-finals compared to Les Gones’ semi-final. This is because, as well as participation and performance payments, the clubs receive a share of the TV market pool, which is partly dependent on where a team finished the previous season in its domestic league. Therefore, apart from the natural pride at winning the championship, from the financial angle it would be better for Lille to qualify for the Champions League as winners rather than runners-up.

    The Europa League is nowhere near as lucrative as its big brother with Lille €3.1 million and Toulouse €2.2 million earning peanuts (relatively speaking) for their efforts last season. Indeed, if a club battles its way through the seemingly endless series of matches to win the damn thing, it only receives the paltry sum of €6.4 million. Better than a smack in the head, but less than a club earns for simply reaching the group stages of the Champions League, even if it loses all six games.
    [​IMG]
    "Moussa Sow celebrates yet another goal"

    As we saw earlier, gate receipts of €4.9 million are incredibly low compared to Lille’s counterparts overseas. For example, Manchester United, the club leading the Premier League, earned €122 million match day revenue last season, which is an amazing 25 times as much as Lille. Another way of looking at this is that United generate €3.6 million a match, so they earn more in just two matches than Lille do in an entire season. Even Hamburg, from a land which is well known for its low ticket prices, earned €49 million – ten times as much.

    Of course, Lille are far from unique in France in facing a tough financial challenge with their gate receipts, as amply demonstrated by another statistic: there is not a single French club in the Deloitte Money League top 20 clubs for match day revenue. The nearest are Lyon and Marseille, who both earn around €25 million, but this is still less than clubs like Valencia (19th position) and Werder Bremen (20th position), who earn about €28 million. Gate receipts in Ligue 1 have been on the low side for a while, as stadiums tend to be old, in need of renovation and have limited earnings potential, but worryingly they fell by 8% last season, though that was partly due to the impact of the recession.
    [​IMG]

    Attendances have continued to fall at many clubs this season, though Lille have unsurprisingly bucked the trend following the surge towards the title with their average crowds rising an impressive 9% from 14,940 to 16,286, which represents more than 90% of the capacity of their current temporary ground, the Stadium Lille Métropole, where they moved a few years ago in anticipation of redeveloping their permanent stadium, the Stade Grimonprez-Jooris.

    Instead, they have opted for the spectacular new 50,000 capacity Grande Stade Lille Métropole, which will have the highest possible 5 star UEFA rating. Featuring a retractable roof that will allow the ground to be easily converted into an indoor arena that can be used for concerts, exhibitions and other sporting events, this stadium is central to Seydoux’s ambitious plans.

    The cost to Lille is limited, as the stadium is being built by the local authority, who will rent it out to the football club. However, all the revenue generated will go into Lille’s coffers, including ancillary activities such as food and beverages, merchandising and other commercial opportunities. Importantly, there will be 7,000 places for corporate hospitality, which the English clubs have demonstrated deliver significantly more bang for your buck.
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    "Green light for the new stadium"
     
  11. Ron1892

    Ron1892
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    Lille's French Revolution

    Like all major investments, there is clearly an element of risk in this project, but the DNCG have no doubts that this is the way forward: “The arrival of a new stadium in 2012 will allow the club to cover its structural operating deficit and so meet its ambitious objective of balancing its books without taking into account transfers.” Assuming no Champions League revenue, that would imply an increase in revenue of €20 million, which would indeed be ambitious, but is not completely unrealistic.

    There must be some concern that a leap from an 18,000 ground to a 50,000 stadium will be over-kill, but Lille would be encouraged by achieving near sell-outs in the 80,000 Stade de France, when they have moved home games there in the past, both against Lyon in Ligue 1 and for some Champions League encounters. General Manager Frédéric Paquet said, “We know it won't be easy, but we're expecting gates to average between 37,000 and 40,000,” though he recognised that this was in part dependent on Lille continuing to be successful on the pitch.

    The hope for French football is that Euro 2016 will have a similarly beneficial impact on its stadiums as the 2006 World Cup had on grounds in Germany. Numerous clubs, such as Le Mans, Lyon and Le Havre, have initiated new stadium projects, while others like Marseille are looking to refurbish and redevelop their existing grounds.
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    Lille are also fair to middling when it comes to commercial income with their total of €12 million leaving them eighth highest in Ligue 1, though there is definitely room for improvement. As you might expect, Marseille €46 million and Lyon €43 million once again lead the way, but Bordeaux and PSG also do fairly well here, both earning around €35 million.

    Even though the value of shirt sponsorship has significantly increased in France, thanks to the decision to finally allow gambling websites to advertise, the top clubs in Europe are still a long way ahead of French clubs in terms of commercial revenue with Bayern Munich €173 million and the Spanish giants, Real Madrid €151 million and Barcelona €122 million, setting the pace.

    Lille’s commercial income actually fell last year from €13.8 million to €12.3 million, presumably due to the harsh economic climate, but things should improve in the future, as they announced two major deals last spring. Key shareholder Isidore Partouche’s casino operator Groupe Partouche, who have been the club’s shirt sponsor since 2003, extended their deal by five years to 2015; while Umbro replaced Canterbury, who went into administration, as the club’s kit supplier in a six-year deal.

    Like most football clubs, Lille have struggled to contain their costs, even though they emphasised the importance of doing so in both the 2006 and 2007 accounts. The fact is that expenses were only just higher than revenue five years ago, but shot up as soon as the club qualified for the Champions League and have been rising ever since, even though revenue has not been growing at the same rate. In this way, while revenue rose by a respectable 55% since 2005, costs have significantly outpaced this with 160% growth.
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    As is always the case, the wage bill is the most important element in Lille’s costs at €49 million, which has resulted in a wages to turnover ratio of 88%, far higher than UEFA’s recommended maximum limit of 70%. Wages have been rapidly growing in the last couple of seasons from €35 million in 2008, though the revenue growth has kept the wages to turnover ratio at the same level, albeit a concerning level.

    Traditionally, Lille are a low paying club, which is evidenced to some extent by the fact that they do not have one player in the list of top 20 best paid players in France, which is dominated by Lyon 7, Marseille 5, PSG 4 and Bordeaux 2. Almost unbelievably, at least to this observer, Gabriel Heinze is apparently the best paid player, followed by Yohann Gourcuff and Lucho Gonzalez.

    However, Lille now find themselves in an awkward spot. As they are fifth highest in last year’s wages league, they are ahead of most other French clubs, but they are a long way behind Lyon €112 million and Marseille €92 million. In order to catch up with these behemoths and compete on a consistent basis, they will almost certainly need to spend more. As LOSC CFO Reynald Berghe put it, “The huge investment by big clubs forces small clubs to over-spend.” This is indeed what is starting to happen at Lille with the coach Rudi Garcia and five players extending contracts, including Hazard, Mavuba, defenders Mathieu Debuchy and Franck Béria, and goalkeeper Mickaël Landreau, the last of these reportedly doubling his salary.
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    The tax situation in France does not help either. As the tax rate is very aggressive, football clubs have to pay a higher gross salary than their competitors in other countries to ensure that the net salary is at the same level. That’s bad enough, but recently the government abolished the rule on collective image rights that had previously allowed clubs to claim an exemption on some social charges.

    Another factor that potentially could adversely impact Lille is higher bonus charges, the so-called price of success, which cost Marseille €5 million last season, though general manager Paquet has claimed that the club is well equipped to handle this (whatever that means).

    What is not beyond dispute is Lille’s ability to make money from player trading. Over the last decade, the club has registered net sales proceeds of €55 million, including €45 million in the last four years alone, which has been absolutely integral to their financial stability. At times, Seydoux has acted with an icy objectivity, for example in 2007 he sold all three of the previous season’s top scorers: Peter Odemwingie, Kader Keita and Mathieu Bodmer.
    [​IMG]

    In many ways, they have a lot in common with Arsenal. First, the club has rarely splashed out large sums, but likes to act astutely in the transfer market. As Paquet explained, “What's important to us in signing players is not the figure, but whether it's the right price. We try to buy well and sell well. Today the biggest transfer fee we have ever paid was for Gervinho, who cost €6 million.” In addition, many players sold for big money leave their best days behind them in northern France, examples being Jean II Makoun, Keita and Bodmer, as is also the case for the north London club (Overmars, Petit, Henry, Vieira, Kolo Toure, etc).

    It is impossible to discuss Lille’s transfer policy without examining their relationship with Lyon, which is questionable to some, given that Michel Seydoux’s brother Jérôme is a board member at Les Gones. As is often the case, you can look at this positively or negatively. On the one hand, Lyon have to an extent funded Lille’s progress, paying them €64 million over the last seven years for just five players: Michel Bastos €18 million, Keita €16.8 million, Makoun €14 million, Eric Abidal €8.5 million and Bodmer €6.8 million. On the other hand, it seems strange that Lille would effectively act as a feeder club to one of their principal opponents, also of course giving them their successful coach, Claude Puel.
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    Even in the last two years, when the volume of transfers has been slashed in France, Lille have still managed to produce profits in the transfer market, mainly due to the sale of Bastos, with only Toulouse and Nice showing higher net surpluses. In stark contrast, the traditional big spenders Lyon, Marseille and PSG have continued to splash the cash. For Lille to be ahead of these clubs in the league, given their parsimonious policy, is highly commendable and a sign of excellent management and indeed coaching.

    French clubs’ accounts have been badly hit by the downturn in the transfer market, as they have traditionally balanced their books by selling players. The graph below clearly highlights the magnitude of the problem, as net profits in Ligue 1 have gone down very much in line with lower profits from player sales. There’s an almost perfect correlations with net profits of €25 million dropping to a loss of €114 million, a decline of €139 million, while in the same period profits on player sales decreased from €266 million to €125 million, a decline of €141 million.
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    Interestingly, the vast majority of that reduction (€102 million) came from sales abroad, as Europe’s leading clubs tightened their purse strings, partly as a result of the economic conditions, partly due to the advent of UEFA’s financial fair play rules, which aim to clamp down on big spending.

    This provoked the DNCG to talk of French football being in a “serious financial crisis” in their annual report even quoting Winston Churchill, “if you’re going through hell, keep going.” However, the Ligue 1 club presidents have protested that the official document paints too gloomy a picture, in particular underlining the relatively low level of debt in France compared to other European clubs, notably those in England and Spain. Of course, it’s the unrestrained spending in those leagues that has helped fund French clubs in the past, so they should not complain too much.

    Any road, they do have a point, as every club in Ligue 1 has reported net assets, as opposed to the debts at clubs abroad. Lille’s balance sheet is particularly strong with no bank debt and hardly any money owed to other football clubs, resulting in total debts of €23 million, compared to assets of €47 million. That gives them a very healthy debt ratio of 48%, one of only three clubs below 50% along with Auxerre and Lyon.

    [​IMG]

    In the past, clubs have used IPOs (Initial Public Offerings) to raise cash, but this seems unlikely (and unnecessary) for Lille, whose CFO Reynald Berghe said, “An IPO could be an option, but not at this point.” It’s not as if Lyon’s 2007 share offering provides an encouraging example for other French clubs, as the stock price has performed disappointingly ever since.

    Having said that, the increase in payroll and higher stadium costs will weigh heavily on Lille’s finances, unless they are boosted by Champions League money. Seydoux has estimated an operating deficit of €30 million, which falls to €25 million once the €5 million transfer of Adil Rami to Valencia that was agreed in the winter is deducted, so there might be pressure to compensate in the standard LOSC manner, i.e. by selling more players.

    If Hazard were to be sold, for example, his fee would cover the shortfall on its own, while the other members of Lille’s formidable attacking trident, Gervinho and Sow, might bring in another €25 million. At the moment, Lille are playing a straight bat to such questions with Seydoux arguing, “We have an ambitious policy. We see that in the biggest foreign clubs, the turnover of players each season is very light.” He claims that all the long-term deals “show the club’s ambition”, but equally this could just be a device to increase the selling price if push comes to shove.
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    "Adil Rami - off to Valencia at the end of the season"

    Ultimately, it usually comes down to the player’s desire to stay or go. Gervinho has so far refused to sign a new deal and rumour has it that he will head off to the Premier League in the summer. Hazard is a different case, having extended his contract, but Rudi Garcia has admitted that he could still leave, but only if Lille were to receive a “super offer” for the talented young Belgian. Certainly, there would be no shortage of interest if he became available, though Hazard himself has said, “Real Madrid and Arsenal are the clubs I dreamed of joining as a child.”

    Even if some of Lille’s stars were to jump ship, this would not necessarily turn out to be a disaster, as the club has proved highly adept at unearthing unpolished gems and taking them to a higher level, as happened with Sow this season. They have also begun to set their sights higher with Saint-Etienne’s French international Dimitri Payet being mentioned in dispatches as a possible replacement if Gervinho departs.
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    "Rudi can't fail"

    However, much of Lille’s success has been built on their youth academy. As Seydoux explained, “We don't recruit the best players, but we help them grow better than others, because of the great care we bring to nurturing our youngsters.” That policy has been further strengthened by the opening four years ago of a wonderful new training ground at a cost of €20 million at Domaine de Luchin, which, according to France Football, is “more impressive than any other in Europe, including those at Arsenal, Manchester United and Barcelona.” To date, Lille have focused on local youngsters, but Paquet has also spoken of looking at working with regional academies in the future.

    Lille’s commitment to youth development will stand them in good stead in the era of UEFA’s financial fair play regulations for two reasons: first, costs incurred for such activities are excluded from the break-even calculation; second, they will be able to enhance profits by later earning useful transfer fees on players developed in-house.

    In fact, FFP could be beneficial to clubs like Lille, as similar rules have applied in France for 20 years, so they are very accustomed to operating within such constraints. Lille’s CFO Reynald Berghe is quietly enthusiastic about UEFA’s initiative, “It will help bring about more equality at the European level. It could be positive for French clubs.” Of course, it will also benefit those clubs who generate the most revenue, hence the desire to maximise receipts from ticket sales, which is the main driver for Lille to build a spanking new stadium.
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    "His name is Rio..."

    That’s all future music. In the short term, Lille’s fans will understandably be concentrating on whether they can hang on to their lead at the top of one of Europe’s most competitive leagues and win their first title for 57 years. They have a tricky run-in, but proved their mettle by defeating closest challengers Marseille in the intimidating Stade Vélodrome a couple of months ago.

    Lille stand on the cusp of an extraordinary achievement, namely to join Europe’s elite on a fraction of their budget. Off the pitch, they have done remarkably well to cope with a structural deficit, thanks to some skillful “wheeling and dealing” in the transfer market. It has been a triumph of long-range planning, as recognised by another football visionary, Lyon President Jean-Michel Aulas, who three years ago warned his fans, “Our next challenger as France’s biggest club will not be Marseille or Bordeaux, but Lille.” Prophetic words.

    SwissRamble
     
    #11 Ron1892, May 10, 2011
    Last edited: May 10, 2011
  12. Ron1892

    Ron1892
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    Udinese Selling Their Way To The Top

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    Following back-to-back victories against Lazio and Chievo Verona, Udinese stand on the brink of achieving the improbable dream of qualifying for the Champions League for only the second time in their history. They only need one more point to guarantee their entrance through the “gates of paradiseâ€, as Europe’s flagship competition was described by their down-to-earth coach Francesco Guidolin, but the last game of the season is against this year’s champions Milan, so this objective is still far from a fait accompli.

    For a self-professed small club from the provinces, this would be a notable feat, especially as they only finished in 15th place last season and started this year’s campaign with four consecutive defeats, languishing in last place after six games. Before the season kicked-off, most pundits had predicted mid-table as the height of their aspirations, but Udinese’s free-flowing brand of attacking football (only Inter have scored more goals so far this season) has brought them many new admirers, as well as the record number of points in Serie A for Le Zebrette (little zebras).

    Indeed, the venerated owner Giampaolo Pozzo proudly stated, “We play the best football in Italyâ€, a claim that was difficult to argue with after a series of scintillating performances, including an astonishing 7-0 win against Palermo (in Sicily), a thrilling 4-4 away draw against Milan and a richly deserved 3-1 victory against Inter. This is all the more impressive as Udinese are a young team of many nationalities with players emanating from all over the globe.

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    Thus, the team that overcame Chievo featured four South Americans, most obviously the brilliant Chilean Alexis Sánchez, but also the pacy wing-backs, Mauricio Isla (also from Chile) and the Colombian Pablo Armero, plus the formidable centre-half Cristián Zapata (also from Colombia).

    It also included two players from the African continent: midfielder Kwadwo Asamoah, who played every match for Ghana in the 2010 World Cup, and the Moroccan international Mehdi Benatia. Finally, the team contained three Europeans from smaller nations: the new Swiss captain, hard-working midfielder, Gökhan Inler, and his compatriot Almen Abdi, plus the coveted Slovenian goalkeeper, Samir Handanovič, who recently tied the league record of saving six penalties during the course of one season.

    However, the bandiera of the team is the captain Antonio “Totò†Di Natale, who has been at the club since 2004, resisting all overtures to move away, including an offer last summer from Juventus. He was the top scorer in Serie A last season with an incredible 29 goals, an exploit that he is almost certain to repeat this season, as he is currently leading the capocannoniere charts with 28 goals.

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    However, Pozzo has also paid tribute to the efforts of Guidolin, “Praise should be divided between him and the team. If you don’t have a great coach, nothing will be achieved.†After working minor miracles last year when he guided Parma to an unexpected 8th place in their first season back in the top flight, Guidolin somewhat surprisingly returned to Udinese for his second spell after a brief period in charge in 1998/99. As befitting the Friuli area, which is famous for its hard-working ethic (as epitomised by Fabio Capello), Guidolin’s motto for the team has been “humble but ambitious.†Nevertheless, after a distinctly unpromising start, Guidolin proved himself capable of making big decisions, when he “took a gamble†by moving the mercurial Sánchez from the wing to the middle, playing just behind Di Natale, which has turned out to be a masterstroke.

    Despite being one of the oldest football clubs in Italy Udinese have never really won anything of note, though they do seem to have firmly established themselves in the top tier, having competed in Serie A for sixteen consecutive seasons, a record only matched by Milan, Inter, Lazio and Roma.

    Furthermore, they have qualified for Europe eight times in the last 15 years, the highlight being when Luciano Spalletti’s team, built around the goals of Vincenzo Iaquinta and that man Di Natale, reached the Champions League in 2005, when they were eliminated at the group stages by a late goal from Barcelona. They also had a good run in the late 90s, when they qualified for the UEFA Cup four years in a row, initially under Alberto Zaccheroni, whose team was inspired by the prolific German striker Oliver Bierhoff. Most recently, Udinese got as far as the UEFA Cup quarter-finals in 2008/09 before being knocked-out by Werder Bremen.

    [​IMG]

    The main man behind Udinese’s rise during this period has been the owner, Giampaolo Pozzo, an Italian businessman who bought the club at a difficult moment in 1986, when it was embroiled in a betting scandal, resulting in a nine-point penalty that meant relegation to Serie B.

    History repeated itself in 1990, when the authorities imposed a four-point penalty after they deemed a phone call to Pozzo’s counterpart at Lazio on the eve of an important match as evidence of untoward activities. Since that time, Pozzo has relinquished his role as club president, leaving the day-to-day running to Franco Soldati and his son Gino, who has proved a veritable figlio d’arte (as the Italians say), following in his father’s footsteps to perfection. However, Giampaolo still very much remains the power behind the throne.

    In the 90s Pozzo implemented a strategy that has become the envy of other clubs. Udinese have become famous for their skilled operations in the transfer market, especially their ability to find hidden talents all over the world, which they develop and later sell for large gains. The reputable Italian financial newspaper Il Sole 24 Ore approvingly described this business model as running “like a Swiss watch.â€

    In reality, Udinese have been forced to be innovative, as their budget is much lower than the leading Italian clubs. It is fair to say that Serie A is not easy for provincial clubs, as the likes of Milan, Inter, Juventus and Roma have traditionally benefited from substantial financing by industrialist owners and superior television and commercial deals. It is also difficult for the smaller clubs to attract Italian talent into their primavera, hence Udinese’s decision to cast their net further afield.

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    The club set up a global scouting network of around 50 observers with hundreds more local contacts in order to identify the most promising young players before they had become fully established and attracted the attention of the larger clubs. Furthermore, they have focused on “alternative†markets in Africa and South America that are relatively unexploited in order to purchase youngsters at a reasonable price. They usually buy from second tier countries, examples being Chile and Colombia in South America (as opposed to Brazil and Argentina) and Switzerland and Slovenia in Europe.

    This arrangement also works well for the players, who accept low salaries in return for further development, experience in one of Europe’s best leagues and the opportunity to put themselves in the shop window. Although Udinese’s policy of acting as a stepping stone for their best players may not make their fans happy, there’s no doubt that the profits from the regular sales makes a huge contribution to the club’s financial self-sufficiency.

    The sensational Alexis Sánchez is a great example of how carefully Udinese nurture their talent. Although the club bought him as a precocious 16-year old talent in 2006, he did not arrive at Udinese until the summer of 2008, having been loaned out twice as part of the development process: initially to the Chilean club Colo Colo, then to River Plate in Argentina to give him experience abroad, but not too far from home.

    [​IMG]

    Udinese have bolstered their strategy by forming a partnership with Granada, a club playing in the Spanish second division, where they loan youngsters that need playing time, such as the Ghanaian Jonathan Mensah. Given the Friuli club’s connections with the South American market, it is no coincidence that they opted for a club in a Spanish speaking country to park their players. In total, Granada currently have an amazing 14 players on loan from Udinese.

    In fact, one of the logical results of Udinese’s approach is that they end up having an extremely large squad, so they absolutely need to loan out a vast number of players every season (earning them €3.6 million in 2010). Including the players at Granada, I make the current total 63, though I may well have lost count. This is the sort of “wheeler dealing†that makes Harry Redknapp look like a rank amateur.

    The problem with all these ins and outs is that it makes it difficult for Udinese to progress to the next level, but their consistent presence in Serie A’s top ten over the years is ample proof of their ability to remain competitive despite the constant departures. It is strange to say, but they have effectively sold their way to the top without weakening their squad, as seen by this small club providing no fewer than eight players at last year’s World Cup: Di Natale, Sánchez, Isla, Asamoah, Inler, Handanovič, the Italian Simone Pepe (since loaned to Juventus) and the Serb Aleksandar Luković (since sold to Zenit St. Petersburg).

    Of course, like every other club, Udinese’s record in the transfer market is not perfect and they have bought their fair share of duds (also suffering from a fake passport scandal in 2000), but overall their policy has been a solid money-maker. The scouting network reportedly costs €4 million a year, but this investment has produced some staggering financial results.

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    In the last decade, Udinese have received over €206 million from sales in the transfer market. Deducting purchases of €94 million during the same period gives net proceeds of an astonishing €112 million. In most years since 2005, there have been at least a couple of big money sales, including the likes of David Pizzarro (Inter), Marek Jankulovski (Milan), Per Krøldrup (Everton), Vincenzo Iaquinta (Juventus), Sulley Muntari (Portsmouth), Andrea Dossena (Liverpool), Asamoah Gyan (Rennes), Fabio Quagliarella (Napoli), and last summer, Gaetano D’Agostino and Felipe (both to Fiorentina). It’s a seemingly endless production line of players who were bought cheaply, but sold on for large sums.

    Even as the transfer market stagnates elsewhere, Udinese have somehow managed to keep ahead of the others. Last year, their net sales were higher than any other club in Serie A, while the previous season they were only surpassed by Milan, thanks to the truly exceptional sale of Kaká to Real Madrid.

    [​IMG]

    Over the last four years, their net proceeds of almost €60 million have been far ahead of other Italian clubs. In fact, only five other clubs had a net surplus in that period. To place Udinese’s performance into context, their net gains are higher than those other five clubs put together – that’s extraordinary.

    And it’s not just the players who appreciate Udinese’s ability to develop individuals. Friuli has also proved to be an ideal environment for ambitious coaches with the two most eminent graduates in recent times being Luciano Spalletti, who has gone on to win the Russian League with Zenit St. Petersburg and the Coppa Italia with Roma, and Alberto Zaccheroni, who instantly delivered a scudetto to Milan.

    The reason why Udinese are so concentrated on making money from player sales is immediately apparent when you look at how small their revenue is. Although it is the tenth highest in Italy at €41 million, leaving them in mid-table respectability (or mediocrity, depending which way you look at it) in the Serie A money league, it is streets behind the leading clubs. Last season, three clubs earned more than five times as much revenue: Inter €225 million, Milan €208 million and Juventus €205 million. Roma generate three times as much revenue at €123 million, while Fiorentina, Napoli and Lazio all have turnovers more than double that of Udinese.

    [​IMG]

    This really puts Udinese’s performance this season into perspective, especially when you consider that a club with the same revenue, Sampdoria, has just been relegated. If they do manage to get into the Champions League, the gap to the leading European clubs becomes more like an abyss with clubs like Real Madrid and Barcelona earning ten times as much income.

    This highlights the challenge that would face Udinese in Europe. As an example, when Sampdoria crashed out to Werder Bremen in the final qualifying round for the group stages, they were facing a team whose annual budget is two and a half times as high as their own. Another interesting comparative is that Udinese’s 2009/10 revenue was lower than every single club in the Premier League, so less than the likes of Burnley, Hull City and Portsmouth, who were all relegated to England’s second tier.

    Other points stand out from the analysis of the revenue mix. Udinese get a very small proportion (9%) of their revenue from gate receipts with only two clubs having a lower percentage (Siena and Juventus). On the other hand, Udinese’s reliance on TV income is very high at 64%, even without European revenue.

    [​IMG]

    The importance of player trading to Udinese’s business can be seen very well in the above graph. If profit on player sales is considered as “revenueâ€, its contribution has been notable in the past few years, averaging 35-40% of normal turnover since 2008. Put another way, the club makes six times as much from the transfer market as gate receipts. In fact, it makes almost twice as much from player sales as gate receipts and commercial income combined. This would be very worrying if Udinese had not shown that they are more than capable of maintaining this “revenue stream†year after year.

    Of course, Udinese are not unique in their ability to generate profits on player sales, but they compare favourably to other clubs who are equally renowned in this area. For example, in the last three years Udinese made €78 million, which may be less than the €91 million earned by Lyon and €111 million earned by Porto in the same period, but in fairness those clubs do have a far higher spending capacity.

    [​IMG]

    In spite of their low turnover, Udinese have managed to operate a sustainable model with cumulative net profits of €3 million over the last six years. After two years of solid profits in 2008 (€7.9 million) and 2009 (€6.9 million), the club did report a small loss of €6.9 million last year. There were a number of reasons for this decline: lower gate receipts, as there was no European competition in 2009/10, €1.5 million; increase in staff costs to strengthen the squad and a payment following the departure of former coach, Pasquale Marino, €4 million; lower profit from player sales, €7 million; and a €4 million tax payment on prior years’ profits.

    Essentially, the profit and loss account reiterates the importance of profit on player sales, which is used to more or less balance the books. Obviously, whether this is sufficient depends on how much money is made from player trading. Last year, profit from player sales of €23.6 million was not enough to offset the €26.1 million operating loss, but in 2009 the higher profits on player sales of €30.9 more than compensated for the operating loss of €17.4 million.

    Eagle-eyed financial observers may have noticed that the revenue figures used in my money League are lower than those used in the club’s own books. The reason for the difference is that Italian accounts report gross revenue, while I have shown net income, as this is consistent with the approach used in other countries. Therefore, I have excluded the following: (a) gate receipts given to visiting clubs €0.6 million; (b) TV income given to visiting clubs €4.3 million; (c) revenue from player loans €3.6 million. Adding the €8.5 million adjustments to the €40.8 million in my analysis gives the €49.3 million reported in Italy.

    [​IMG]
     
  13. Ron1892

    Ron1892
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    Udinese Selling Their Way To The Top

    If we look at how Udinese compare to other clubs in terms of profit, a few points emerge. First, they are indeed one of the more profitable clubs with only five ahead of them over the last two years – when their result was a perfect example of how to break-even with an aggregate profit of exactly zero. Second, the significance of profit on player sales is yet again emphasised with only two clubs recording higher profit on player sales as a percentage of turnover (Parma and Genoa). Third, just look at the size of the losses made in then last two years by Inter €223 million and Milan €77 million.

    Note that the profit on player sales used by La Gazzetta dello Sport are higher than mine, as they have only shown plusvalenze, leaving minusvalenze in costs. Very technical, but rest assured that the source data is identical.

    By now, it should be abundantly clear to everyone that Udinese’s business model is hugely reliant on profit made by selling players, but, whisper it quietly, the winds of change may just be blowing at Udinese. Last week, Giampaolo Pozzo spoke of three factors that might grow the club’s resources outside its traditional prowess in the transfer market, namely the Champions League, television money and a renovated stadium. If these plans come to fruition, Udinese may be able to modify its celebrated strategy and hang on to its stars.

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    Along with his son Gino, he understands that for Udinese to grow, the club’s approach needs to be fine-tuned with more emphasis on other revenue streams. That does not mean that Udinese will totally jettison their “buy low, sell high†strategy, not least because they’re so damn good at it, but it does suggest that they realise that they need to do more financially to advance to the next level. As the owner put it, “We are fighting with the dagger between our teeth for the last slice of the TV money. Then, there’s the plan to improve the stadium. And Europe brings higher earnings.†Obviously, this will not be easy, but let’s look at each of these potential growth areas in turn.

    Reaching the Champions League would be the biggest game changer. Last time Udinese qualified in 2005/06, they received around €12 million revenue: €9 million from UEFA’s central distribution (participation fees, prize money and TV income) and €3 million additional gate receipts. However, the sums available these days are considerably higher with the four Italian qualifiers last season earning an average of €29 million (Inter €49 million, Milan €24 million, Fiorentina €22 million and Juventus €21 million).

    It’s also worth noting that while the Europa League would help boost funds, it is nowhere near as rewarding as the Champions League with last season’s three Italian representatives (Roma, Lazio and Genoa) only earning around €2 million each. Indeed, the team that actually wins the Europa League, having played countless matches, only receives €6.4 million. Udinese are well aware of this fact, having earned just €1.2 million from their UEFA Cup adventure in 2008/09, and Pozzo has spoken of the “big difference†between the two competitions, so it is very worthwhile securing that fourth place.

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    The importance of qualification to Udinese’s plans has been underlined by the owner’s recent announcements. First, he said, “With the Champions, I would like to keep Sánchez and the other family jewels†and then went a stage further, “If we get into the Champions, then I will buy.â€

    Of course, they’re not there yet and have two more hurdles to clear. First, they have to cement their position in Serie A, taking at least a point from Milan, but this would only qualify them for the Champions League play-off round and they could face a very tricky tie to reach the lucrative group stage. Just look how close Spurs came to disaster in their match against the Swiss minnows, Young Boys Bern, before finally squeaking through.

    The other obvious point is that it will be really hard for Udinese to qualify for the Champions League on a regular basis, especially as Italy will lose one of their four places from 2011/12, now the Bundesliga has overtaken Serie A in UEFA’s table of coefficients. In such an eventuality, Udinese would have to cope with a dramatic reduction in funds, as happened to them in 2007, when their revenue fell by more than a third from €44 million to €28 million, turning a €6.5 million profit into a €6.3 million loss.

    [​IMG]

    Udinese’s domestic TV deal was worth around €26 million last season, having risen in 2008 when the new contract was introduced, but this pales into insignificance compared to the €90-100 million that Juventus, Milan and Inter have been earning from their individual deals. These vast differences have meant that the playing field in Italy has been anything but level, but years of protest finally led to a new collective agreement being implemented at the beginning of this season. We know that the total money guaranteed by exclusive media rights partner Infront Sports will be approximately 20% higher than before at over €1 billion a year, but it is still unclear what the impact will be on each club’s revenue.

    There is a complicated distribution formula, which will still favour the bigger clubs, though there is likely to be a reduction at the top end. Under the new regulations, 40% will be divided equally among the 20 Serie A clubs; 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last); and 30% is based on the population of the club’s city (5%) and the number of fans (25%).

    The larger clubs will lose out from the new arrangement, but the mid-tier clubs like Udinese will benefit. There is still a question over how the number of fans (worth 25% of the deal) will be calculated, leading to a major dispute between the larger clubs (represented by Milan, Inter, Juventus, Roma and Napoli) and the smaller clubs (represented by Udinese, Parma, Sampdoria, Palermo and Catania), even over which market research companies to use. Pozzo is at the forefront of this battle, as he understands the importance of the decision to the revenue of clubs like his. Whatever the final ruling, it seems reasonably certain that Udinese’s TV revenue will grow – the only question is by how much.

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    However, Udinese’s real Achilles heel, like so many Italian clubs, is their paltry match day income. Last season’s gate receipts of €3.6 million were exactly the same as the amount Manchester United generate in a single match at Old Trafford. In fact, the so-called theatre of dreams took in €122 million of match day income last season, which is an incredible 34 times as much as Udinese.

    That is partly explained by Udinese’s ongoing struggle to attract spectators. In fact, last season’s average attendance of 17,356 was only the 13th highest in Serie A. Given the relatively small size of Udine (population 175,000), that’s perhaps not overly surprising, but it’s hardly conducive to financial stability at a football club. This also underlines the club’s need to work the transfer market, as the profit from one good player sale (€8 million) is the equivalent of Udinese tripling their gate receipts.

    Nevertheless, the club has announced plans to renovate the Stadio Friuli, though interestingly the work will actually reduce the stadium’s capacity from the current (restricted) 30,667 to a more realistic 22,000. Although one objective is to increase revenue, the underlying objective is to make the stadium a “theatre of footballâ€, which will be more attractive to local fans and tempt the crowds back. Pozzo explained, “We don’t want a cathedral in the desert.â€

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    "Design for life"

    The initial plans were for a multi-purpose development, including restaurants, hotels, gyms and a commercial area, but this met with opposition from existing concerns. Instead, the local council has in principle approved a modern, two tier stadium with all seats fully covered and the athletics track eliminated, bringing the spectators closer to the pitch, the inspirations being the Stadio Luigi Ferraris in Genoa and the Stadio Dino Manuzzi in Cesena.

    There will be more hospitality areas and the club will be allowed to stage a number of events, such as music concerts and rugby matches, which will generate additional revenue, but this is not likely to be significant in my opinion. There has been no mention to date of any naming rights.

    Unlike Juventus, the “new†stadium will not belong to the club, but continue to be owned by the council. In return for Udinese paying all the construction costs, which are estimated to be around €25 million, the council will give the club a 65-year lease and reduce the annual rent, which is currently €200,000 a year. The other condition that Pozzo has imposed is that the building work must commence this summer, so that the new stadium is ready in time for the start of the 2013/14 season.

    It had been hoped that the new stadium would be used for Euro 2016, but that tournament has now been awarded to France. UEFA’s minimum capacity for hosting such international events is 34,000, but the plans allow for the Stadio Friuli’s capacity to be increased at a later date by adding a third tier if necessary.

    [​IMG]

    There is also room for growth in the club’s commercial revenue, which actually slightly decreased in 2010 to €11.1 million, one of the lowest in Serie A. The shirt sponsorship deal with Rumanian car manufacturer Dacia (owned by Renault) was extended two years in July 2009, but is only worth €1 million a season, a lot less than other Italian clubs: Milan – Emirates €12 million, Inter – Pirelli €9 million, Juventus – BetClic €8 million, Roma – Wind €7 million, Napoli – Acqua Lete €5.5 million and Fiorentina – Mazda €4 million.

    Those clubs also receive higher sums from their kit suppliers than the €1.1 million Udinese get from Lotto Sports (Inter – Nike €18 million, Milan – Adidas €13 million, Juventus – Nike €12 million, Roma – Kappa €5 million and Napoli – Macron €4.7 million). However, one of the indirect benefits of qualifying for the Champions League is higher commercial income, as sponsors see greater exposure.

    [​IMG]

    Given the low revenue, the club has admitted that it is under “continual pressure to contain costsâ€, which effectively means the wage bill. Udinese have done a reasonable job here with wages rising in line with revenue since 2005, both with growth around 55%. The problem is that as the turnover is so small, even a minor increase in the wages has an inordinate impact on the important wages to turnover ratio, e.g. a €4 million rise in 2010 caused this ratio to worsen from 58% to 71%.

    Nevertheless, Udinese’s wage bill of €31 million is still one of the smallest in Serie A and looks utterly insignificant compared to those of the “big fourâ€, who appear to be playing in a different league altogether: Inter €234 million, Milan €172 million, Juventus €138 million and Roma €101 million. This is a double-edged sword for the club: on the one hand, it’s financially prudent, but on the other hand it makes it difficult to hold on to players. Then again, given Udinese’s high reliance on profits from player sales, maybe this is not an issue.

    [​IMG]

    Only one player at Udinese, Di Natale, receives more than €1 million annual salary with the next highest paid being Sánchez €0.7 million and Zapata €0.65 million. Totó’s value looks even better, if you consider that he has scored exactly twice as many goals this season as Zlatan Ibrahimović, who is on €9 million a year.

    Bonus payments can also have an impact on successful clubs, but Udinese’s players have apparently only been promised €3 million in total if they remain in the top four, described as a “cherry on the cake.â€

    Player amortisation, the cost of writing down transfer fees over the length of a player’s contract, is not that high at €14 million, but this is material when your turnover is only €44 million. Indeed, the increase in 2007 was noted in the accounts as one of the reasons for that year’s loss.

    [​IMG]

    Udinese’s net debt has been steadily increasing in the last four years and now stands at €36 million after deducting €1 million cash. This includes €13 million bank loans and €24 million from a factoring arrangement with Unicredit. Although the bank loans are clearly not excessive, it is worth noting that only three Italian clubs have higher balances: Milan €164 million, Inter €71 million and Juventus €33 million.

    This is nothing to really worry about, especially as Udinese have net balances owed to them on transfer fees of €24 million, made up of €28 million owed to other clubs and a hefty €52 million owed by other clubs. Given the way that Italian clubs do business with many stage payments, this is by no means unusual, but the fact that the balances are so high is a direct result of Udinese’s buying and selling strategy. There shouldn’t be any major issues here, though the exception that proves the rule was the dispute with Portsmouth over money owed for Muntari.

    [​IMG]

    In fact, Udinese has one of the strongest balance sheets in Serie A with net assets of €38 million, only behind Fiorentina and Juventus. This fine achievement is actually under-stated, as the players are only valued at €48 million in the accounts, while the respected Transfermarkt website has estimated that a more realistic market value would be in the order of €111 million. No wonder Pozzo allowed himself to proclaim, “Fortunately the club is in the best of (financial) health.â€

    So what of the future?

    In the accounts, the club confidently expects a “positive result†for 2010/11, based on the new collective TV rights deal and (stop me if you’ve heard this one before) “notable†profits on player sales in the 2010 summer window – already higher than the total achieved in the whole of 2009/10.

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    "Gokhan Inler - Swiss efficiency"

    Nevertheless, other clubs will inevitably still apply pressure on Udinese to sell their talented players this summer. There would be no shortage of suitors for Sánchez, including Barcelona and Manchester United, though Manchester City are understood to be in pole position with a reported bid of €35-40 million. In some ways, although no club would want to lose a player of his calibre, this would be the ultimate vindication of the Udinese strategy, as they only paid €3 million for the little maestro. Even Guidolin admitted, “He is destined to join a top club, considering the quality he has shown for some time.â€

    At least a deal of this magnitude would mean that Udinese would have no need to sell any of the other players, though Asamoah, Inler and Zapata are all in demand. For the moment, Pozzo is holding firm, “Our wish is to strengthen the squad, but it’s up to the players. However, this time nobody wants to leave.†Furthermore, the players’ values should go up if they perform well in the Champions league.

    Those may be the words of an astute salesman, but, as we have seen, Udinese should soon have more money from other sources. Pozzo again: “I know we are regarded as a selling club, but now things have changed, as the money in Italy will no longer just go into the pockets of the usual 4-5 big clubs.â€

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    "Happy days for Asamoah"

    Longer-term the advent of UEFA’s Financial Fair Play Rules should theoretically benefit well-run clubs like Udinese, but paradoxically it also poses two threats to their strategy. First, it could reduce the value of transfer fees, as clubs do not want to carry high amortisation costs – indeed, transfer spending was down almost 30% in Europe’s major leagues in 2010. Second, more clubs will try to emulate Udinese’s success at developing youth players, so the competition will become even more intense. This is why Udinese have started to invest in facilities to house teenagers, as they search for even younger players.

    The chances are that Udinese will not completely abandon their successful buying and selling strategy, but changes to the TV rights in Italy, allied with their modernised stadium should add a few more strings to their bow. In the short-term, they can hope to further enhance their financial status by qualifying for the Champions League. What a present that would be for their respected owner, Giampaolo Pozzo, who celebrates his 70th birthday next week after 25 years at the club.

    Swiss Ramble
     
  14. Sim Sala Bim

    Sim Sala Bim
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    eye rape in that article
     
  15. Ron1892

    Ron1892
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    Liverpool's Future Strategy

    [​IMG]

    If ever a football club’s season could be described as the proverbial “game of two halves†that would be the one experienced by Liverpool fans this year. Following Roy Hodgson’s appointment as manager last July as the replacement for the popular Rafael Benitez, the Reds endured their worst league start in more than 50 years, falling into the relegation zone in October after a dismal home defeat to newly promoted Blackpool.

    Hodgson’s grim tenure came to an end in January, when he was replaced by Kenny Dalglish, who inspired a revival that took Liverpool back up the table to sixth place. Moreover, the team threw off the shackles and played some sparkling football, including wins over Manchester United, Chelsea and Manchester City. Although Dalglish’s record in his previous reign on the Mersey was highly impressive, winning three league titles and three FA Cups, some had expressed doubts about the Scot’s credentials, as he had not managed a club for more than a decade and he was initially appointed on a temporary basis.

    However, the mood at Anfield has clearly taken a massive turn for the better and virtually all of the non-believers have now been converted. Thus, it was no surprise that Dalglish was duly confirmed as permanent manager a couple of weeks ago, when he was given a three-year contract along with his first team coach Steve Clarke. As new owner John W Henry said, “Kenny is a legendary figure, both as a supremely gifted footballer and successful manager.â€

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    "John W Henry - the man with a plan"

    The new ownership is, of course, the other vital change to occur at Liverpool during this momentous season with New England Sports Ventures (NESV) taking over from the reviled pair of Tom Hicks and George Gillett last October. Well known for its stewardship of the Boston Red Sox, one of the most famous baseball teams, and involvement in NASCAR, the company has now changed its name to the Fenway Sports Group (FSG), but the key executives remain the same. As far as Liverpool are concerned that means John W Henry, the principal owner, and Tom Werner, the chairman, who both hold 50% of the voting rights in the football club.

    They look like a good fit for Liverpool, as explained by the club’s former chairman Martin Broughton, “New England have a lot of experience in developing, investing in and taking Boston Red Sox - as the closest parallel - from being a club with a wonderful history, a wonderful tradition that had lost the winning way, and bringing it back to being a winner.†In fact, after buying the Red Sox in 2002, NESV delivered success just two years later, as they won the World Series in 2004, ending an 86-year wait for honours, and then repeating the feat in 2007.

    On the face of it, they could not be more different to their unpopular predecessors, Hicks and Gillett, who saddled Liverpool with a mountain of debt when they bought the club in March 2007. Ever since then, the Reds had been on a financial knife edge. Even though the eternally optimistic former managing director Christian Purslow claimed that he could not “conceive of a situation where Liverpool Football Club could go into administrationâ€, the reality was that the choice had been taken out of his hands.

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    "Luis Suarez - happy days"

    The club’s bank loans were due for repayment in January 2010, but the club failed to make the £250 million payment, and the club only survived when the bank extended the date first to March and then by a further seven months to October to facilitate the sale of the club. Liverpool’s auditors KPMG had gone public with their concern over the level of debt the previous year, when they described the issue as “a material uncertainty which may cast significant doubt on the group’s and parent company’s ability to continue as a going concern.â€

    UEFA were also well aware of Liverpool’s financial difficulties. Last month William Gaillard, Senior Advisor to UEFA President Michel Platini, spoke about them, while warning football dignitaries of the dangers of leveraged buy-outs, “The club has been rescued, thank God, but it was a close call. They suddenly found themselves being owned by two failed banks that had been taken over by governments.â€

    In fact, the Royal Bank of Scotland (or indeed Wachovia) could have put the club into administration (with a nine point penalty) at any time in the last few months of the Hicks and Gillett regime. Importantly, this meant that RBS could dictate terms, allowing them to place Purslow and commercial director Ian Ayre on a reconstituted board, while stipulating that the owners could no longer appoint new representatives to the board. This meant that when the decision to sell the club was taken, Hicks and Gillett no longer had a majority, so could be outvoted by the other board members.

    [​IMG]

    "Keep calm and Carra on"

    Even though he is from Texas, Tom Hicks did not know when to “fold them†and tried to block the sale, describing the transaction as “an epic swindle at the hands of rogue corporate directors.†So RBS brought a legal action before the High Court to obtain a judgment on the ability of the new board to complete the sale to NESV, which they duly won. Even the elegant Broughton could not resist putting the boot in, describing the former owners’ actions as “a flagrant abuse of their undertakings.â€

    Acting on behalf of the club, Barclays Capital had contacted 130 potential investors, but only two bids had been received before the deadline with NESV’s winning out. They paid a total of £300 million for the club: £218 million for the equity, effectively the amount that Hicks and Gillett owed to RBS, and £83 million to assume responsibility for other debts. This was a pretty good outcome for the club, as the acquisition debt was wiped out, leaving NESV with more funds to spend on the football side of the club – and it had the added bonus of serving up a side order of schadenfreude, as Hicks and Gillett lost their £144 million investment.

    The last accounts published under the old administration reflected the club’s financial shortcomings, as they reported a £20 million loss, which was £6 million worse than the previous year, even though profit on player sales rose dramatically from £4 million to £23 million, mainly due to the sale of Xabi Alonso to Real Madrid. The wage bill climbed an incredible 18% to £113 million, which was much higher than the 4% revenue growth.

    [​IMG]

    That said, for the last two years, Liverpool have only made a small loss before interest payments, £2.3 million in 2010 and £3.5 million in 2009, but the impact of interest on the loans that Hicks and Gillett took out to buy the club has been hugely detrimental with net interest payable increasing from £13 million last year to £18 million in 2010.

    However, that’s not the whole story, as these are only the accounts for The Liverpool Football Club and Athletic Grounds Limited, while the majority of the club’s debt was held in the holding company. Unfortunately, the 2010 accounts for Kop Football (Holdings) Limited, the largest group company incorporated in the UK, have not yet been published, but we do know that the net interest payable at that level in 2009 was a whopping £40 million, leading to a net loss for the group of £55 million. If we make the reasonable assumption that the level of interest in 2010 is the same, this would mean that the club had paid around £125 million of interest during Hicks and Gillett’s unhappy reign.

    Another interesting point is the large amounts paid out for changes in management, which amounts to £12 million in the last two years, including around £8 million for Rafael Benitez and his coaching staff in 2010 and £3 million compensation for directors’ loss of office in 2009 (reportedly Rick Parry).

    In fact, Liverpool have only made a profit once in the last five years, specifically 2008, when they registered an £8 million surplus, largely due to £22 million profit on player sales, after a number of experienced players were moved on (Crouch, Sissoko, Carson, Riise and Guthrie). However, the new Premier League deal was also an important contributory factor, leading to a £16 million rise in television revenue.

    [​IMG]

    Like all football clubs, the additional riches provided by the ever-increasing TV deals has been a critical factor in Liverpool’s revenue growth, contributing almost half (£29 million) of the £64 million rise in turnover since 2005. However, the fastest growing activity is commercial income, which has risen an impressive 68% in the same period. Match day revenue has also grown from £33 million to £43 million, but remained relatively flat compared to the other revenue streams. On the plus side, Liverpool’s revenue is fairly evenly distributed among the three main revenue streams, which means that they are not unduly reliant on one area.

    There are a couple of ways to look at Liverpool’s revenue of £185 million. On the one hand, this puts them in a more than respectable ninth place in the Deloitte’s Money League, which ranks clubs in order of revenue, but, on the other hand, they are still a long way behind the clubs at the top of the (money) tree. In particular, the Spanish giants generate considerably more income with Real Madrid and Barcelona earning £359 million and £326 million respectively, approaching twice as much as the Reds. Moreover, bitter rivals Manchester United earn £100 million more than Liverpool every season, which is a considerable competitive advantage.

    [​IMG]

    Furthermore, Liverpool dropped a place in the Money League last season and can expect a further decline next year, as they will not have the benefit of Champions League revenue, while Manchester City’s commercial revenue is likely to climb again under their Middle East owners. This would mean that four English clubs will receive more money than Liverpool (United, Arsenal, Chelsea and City), which would be a concern, unless the new owners can address the club’s weaknesses.

    One obvious issue is the wage bill, which has soared to £114 million, up from £96 million the previous year, mainly due to contract extensions. This has increased the important wages to turnover ratio to 62%, the first time that it has gone above 60% in that period. In fairness, this is still below UEFA’s recommended maximum limit of 70% and is much better than most other clubs in the Premier League, notably big-spending Manchester City (107%) and Chelsea (82%). What is worrying, however, is that performance on the pitch has worsened, while the wage bill has risen, which is the opposite of what usually happens in football, culminating in the team failing to qualify for the lucrative Champions League.

    [​IMG]

    That was then, this is now.

    The recently appointed managing director, Ian Ayre, described the results as “a footnote in our historyâ€, as he suggested that the club was now “moving forward.†It is entirely appropriate that we concentrate on the new owners’ future strategy, not least because John W Henry made his fortune as a futures trader.

    Actually, I say “fortuneâ€, but everything’s relative. While his estimated worth of £375 million might be enormously impressive to the proverbial man in the street, it’s small change compared to the billions owned by other prominent owners of football clubs, such as Sheikh Mansour, Roman Abramovich, Stan Kroenke and even the Glazers. It’s actually even lower than the likes of Peter Coates at Stoke City and David Sullivan at West Ham.

    Therefore, Liverpool fans should not expect a classic sugar daddy. Instead they have got a group of savvy businessmen with proven expertise and a superlative record in sports management. Nevertheless, the new owners will still need to access substantial funds in order to strengthen the squad and address the stadium situation (either build a new stadium or redevelop Anfield), so the obvious question is how will this be financed? Liverpool fans would not want to see the club take on large levels of debt once again, so Henry’s team really has to address the club’s faltering business model.

    Although we are not privy to their strategic plan, we can make some fairly good guesses at where they will try to turn around Liverpool’s finances, based on their announcements to date, which I have attempted to summarise in a 15-point plan.

    [​IMG]

    1. Put your shirt on it

    While discussing the most recent financial results, Ian Ayre stated, “We have had significant commercial growth since these accounts were published.†He can point to the shirt sponsorship deal with Standard Chartered starting next season, which “can generate up to £81 million†over four years. Although it is understood that some of this may be performance related, this implies £20 million per annum, which is £12.5 million higher than the current deal with Carlsberg. This is in line with Manchester United’s Aon deal, but Barcelona’s £25 million deal with the Qatar Foundation has raised the bar again - even higher than Bayern Munich’s £24 million deal with Deutsche Telekom.

    Last month it was reported that Liverpool had secured a £25 million kit deal with Warrior Sports, a subsidiary of New Balance, from the 2012/13 season, though this has not been officially confirmed. This is an example of the synergy that FSG can bring to the party, as Warrior recently announced a deal to manufacture kit for the Red Sox. The deal would more than double the amount received from Adidas, who currently pay £12 million a year. Although the press reported this as a record for English football, it is actually slightly lower than Manchester United’s Nike deal, which had a contractual step-up from £23.3 million to £25.4 million this season, but it’s still a mighty impressive increase.

    In total, the two shirt deals will deliver a substantial revenue increase of around £25 million a season (Standard Chartered £12.5 million, Warrior £13 million).

    [​IMG]

    2. Going global

    Liverpool’s commercial income of £62 million is already pretty good, being sixth highest in the Money League, though it is only half the amount earned by Bayern Munich and Real Madrid and it actually fell last year if you consider that LiverpoolFC TV Ltd was brought in-house in July 2009. In fact, Liverpool sell more shirts than any other club except Madrid, Barcelona and United.

    An important element of the club’s strategy is therefore to “leverage the club’s global following to deliver revenue growthâ€, which Tom Werner emphasised, “We consider Liverpool to have untapped potential globally.†This is clearly one of the key drivers for American investors, as explained by Don Gerber, head of Major League Soccer, “There’s a belief that there’s a valuable global franchise with these clubs.â€

    In particular, Werner has stated that the club is focused on Asia (“The support the club has there is already considerableâ€), hence the pre-season tour to China and South Korea. However, this has lead to club sponsor Standard Chartered, who make much of their income in Asia, somewhat crassly suggesting that they would like Liverpool to sign players from that region, citing the example of Park Ji-Sung at United.

    Liverpool fans would have been equally perplexed at the news that basketball star LeBron James had bought a stake in the club, but this is part of his marketing deal with FSG and has helped raise Liverpool’s profile in the States.

    More worrying is Ian Ayre’s apparent support for the 39th game, a proposal to play an extra round of Premier League matches at neutral venues outside England: “We have a duty to fans around the world to give them access to the product.†I’m not sure that the fans on the Kop would necessarily agree with that sentiment.

    [​IMG]

    3. Nothing succeeds like success

    While it is true that success on the pitch should lead to financial strength, this is not always the case, which is amply demonstrated by the distribution of Premier League revenue. In Liverpool’s case, their share of the revenue only fell £2.3 million in 2009/10 to £48 million, even though they dropped from second to seventh place.

    This is because of how the Premier League distribution model works with half of the domestic money and all of the overseas rights being split evenly among the 20 clubs. It’s true that 50% of the domestic rights are still up for grabs, but that does not make a big difference for the leading clubs: (a) 25% is for merit payments with each place in the league worth £800,000; (b) 25% is paid in facility fees, based on how often a club is shown live on television, which will always be a lot for a club like Liverpool.
     
  16. Ron1892

    Ron1892
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    Liverpool's Future Strategy

    However, the key point here is that a club’s revenue will effectively go up by default, simply from its presence in the Premier League, as each new TV deal increases the size of the pot available to distribute. The three-year deal for 2004-2007 was worth £1.45 billion, while 2007-10 rose to £2.5 billion and the latest contract for 2010-13 is worth an incredible £3.4 billion. Figures have not yet been released for 2010/11, but the increase for Liverpool will be at least £7 million.

    [​IMG]

    4. We are the champions

    The relatively small difference between the leading clubs in terms of Premier League distributions only emphasises the importance to Liverpool of qualifying for the Champions League. Last season the Reds earned £26 million from this competition, even though they were eliminated at the group stage, supplemented by £3 million after parachuting into the Europa League and reaching the semi-finals. That figure does not include extra gate receipts or higher payments from success clauses in commercial deals.

    Liverpool’s failure to qualify for Europe’s flagship tournament for the last two seasons has cost them dearly. Given that UEFA’s prize money has been increasing on the back of higher TV deals, all in all, it’s probably now worth at least £35 million a season. It is therefore imperative that Liverpool reclaim their traditional place among Europe’s elite.

    [​IMG]

    5. The revolution will be televised

    While TV rights as a whole have been rising, the really interesting aspect is that overseas fans that have been behind the explosive growth with the revenue doubling each time the rights are re-negotiated: 2001-04 £178 million, 2004-07 £325 million, 2007-10 £625 million and 2010-13 £1.4 billion.

    As Steve McMahon, the former Liverpool player turned executive at the Singapore-based Profitable Group, said, “It is a global game. The television figures when Liverpool or Manchester United play are 600 or 700 million.†These figures dwarf the Super Bowl, hence the interest of American investors in the Premier League.

    This is particularly relevant to Liverpool, as FSG have substantial expertise in this sphere, owning 80% of New England Sports Network, a regional cable television network, while Tom Werner is an experienced television producer. Although English football clubs have clearly benefited from television money, they are strictly amateurs compared to their cousins across the water. To give an idea of the size of the prize, the value of the New York Yankees’ official cable network is three times as high as the club itself.

    Perhaps the most intriguing question is how Premier League clubs react to new technology. To date, digital rights have been treated as little more than an afterthought to the main TV deal, but the emergence of fast, broadband networks might just be the catalyst for clubs to interact directly with fans, when revenue could potentially explode.

    [​IMG]

    6. A fair day’s work for a fair day’s pay

    On completing due diligence, John W Henry said that Liverpool’s wage bill was one of “a number of unpleasant shocksâ€. Specifically, he was thought that it was a huge payroll for a squad with little depth. It stands to reason that the £114 million wage bill should be reduced, especially when you consider that it is so much higher than Tottenham’s £67 million. That does not imply a “slash and burn†approach, more a case of the club getting better value for money, as Henry explained, “We have to be more efficient. When we spend a dollar, it has to be wisely. We cannot afford player contracts that do not make long-term sense.â€

    7. Steady as she goes

    One obvious way to cut costs would be to stop sacking managers. Including the £7.3 million reportedly paid to Roy Hodgson (after just six months), this adds up to the best part of £20 million in the last three years. Encouragingly, Henry said, “Our goal in Liverpool is to create the kind of stability that the Red Sox enjoy. We are committed to building for the long-term.†That said, Tom Werner did say that he saw “no reason why Roy can’t be our coach this year and in the future†only two months before he was given his P45, though, in fairness, Hodgson was not FSG’s appointment. The new owners will also try to bring continuity by adopting the director of football model, which has not always been successful in England, but has worked very well at clubs like Lyon.

    [​IMG]

    "Cheer up, Fernando. You just made Liverpool £50m"

    8. The art of the deal

    One possibility that would help reduce the wage bill is offloading players who are no longer wanted. We can anticipate Liverpool selling the likes of Jovanovic, Poulsen and Aurelio at generous prices in order to get them off the books. There are also quite a few players currently out on loan that are likely to leave, including Aquilani, Konchesky and Degen.

    Such sales have a triple whammy effect, as they also reduce player amortisation, which is on the high side at Liverpool, and potentially bring in a profit on sale (if the sales price is higher than the remaining value in the accounts). Liverpool will report a very high profit on sale in this year’s accounts, mainly due to the £50 million sale of Fernando Torres to Chelsea, but also Javier Mascherano to Barcelona for £17 million and Ryan Babel to Hoffenheim for £6 million, and next year’s profit could also be on the high side if the new owners clean house.

    Babel is a good example of how this works in accounting terms. Purchased from Ajax in 2007 on a five-year contract for £11.5 million, you would assume that his £6 million sale in January would have produced a loss. In total, that would be correct, but in this year’s accounts the club will actually show a £2.6 million profit, as the player’s value in the books had been written-down to £3.4 million (£11.5 million cost less 3.5 years amortisation at £2.3 million a year).

    [​IMG]

    9. Can’t buy me love

    Liverpool have effectively been a selling club during the Hicks and Gillett era with the net spend dramatically slowing down after their arrival. Some have speculated that the new owners will be equally cautious, referring to FSG’s belief in the application of statistical analysis made famous by Moneyball, Michael Lewis’ best seller about the innovative methods adopted by Billy Beane at the Oakland Athletics baseball club. However, there is a bit more to their transfer market strategy, as explained by Larry Lucchino, president and CEO of the Red Sox, who said that they “take some of the quantitative analysis approaches and overlay them with the resource advantages of our market.â€

    In other words, they have used their financial muscle to complement best value purchases by also spending big on the right players. It’s more like the Barcelona method, rather than the Arsenal strategy they have publicly praised. Henry underlined this willingness to splash the cash when necessary by pointing out that the Red Sox had been second in spending over the last decade in major league baseball.

    [​IMG]

    "Andy Carroll - big fee for a big man"

    A more obvious example occurred in January when Liverpool paid £35 million for Andy Carroll and £23 million for Luis Suarez. Incidentally, Henry has explained that the seemingly exorbitant Carroll fee still fits in with FSG’s principles, as they were happy to pay this, as long as they secured £15 million more when selling Torres.

    With all the likely ins and outs, my guess is that Liverpool fans and director of football Damien Comolli can expect a very busy summer in the transfer market.

    10. Give youth a chance

    So FSG’s preferred model is one with top quality stars supplemented by home grown youngsters, as outlined by Henry, “We have been successful through spending and through securing and developing young players.†Tom Werner added, “We certainly feel we can do a better job bringing in more players that are home grownâ€, as he promised to invest in the scouting network.

    This makes complete sense in the Financial Fair Play era, as youth development costs are excluded from UEFA’s break-even calculation. In addition, any profit on the sale of players that don’t quite make it at Liverpool is useful in balancing the books.

    In fairness, the academy set up by Rafa Benitez is already prospering with many players involved in first team action this season (Jay Spearing, Martin Kelly, John Flanagan and Jack Robinson). Last month, the progress was endorsed by no fewer than seven Liverpool youngsters being named in England’s Under-19 squad, following the selection of four players in the Under-17 squad.

    [​IMG]

    11. Grounds for hope

    Although Anfield is a wonderfully atmospheric old ground, its capacity is only 45,400, which is much less than Old Trafford (76,000) and The Emirates (60,400). Liverpool’s match day revenue of £43 million is less than half of Manchester United (£100 million) and Arsenal (£94 million), while even Chelsea, whose Stamford Bridge ground is even smaller (41,800), generate more than them (£67 million). Liverpool only earn around £1.6 million from each home match, which is significantly less than United (£3.6 million) and Arsenal (£3.5 million).

    The previous owners felt that the only way to increase match day income was to build a new stadium, but they put the plans for Stanley Park on hold, due to the economic crisis. However, FSG are also looking at the option of redeveloping Anfield. The Red Sox chief operating officer Sam Kennedy summed up the situation, “We have the expertise for building new and renovating old, and both options are definitely still on the table.â€

    The ownership built new stadiums in Baltimore and San Diego, but perhaps more pertinently redeveloped Fenway Park, the iconic Red Sox stadium, applying creative techniques such as more seats, concessions, advertising and corporate hospitality, which increased match day income by 50%.

    Given that the accounts state that nearly £50 million of previously capitalised stadium development costs are “highly likely†to be written-off, the implication is that the preference is for redevelopment at Anfield, not least because Henry admitted that the previous stadium move proposals “just didn’t make any economic sense or they would have been built.â€

    Whichever route is taken, it will still cost a lot of money, e.g. the Fenway Park renovation cost north of £200 million. As the costs are so high, the possibility of ground sharing with Everton cannot be ruled out, but the counter-argument is that any future revenue would also have to be shared.

    [​IMG]

    Pepe Reina has his say"

    12. You’ll never walk alone

    The downside of staying at Anfield is that fans are likely to have to pay more for their tickets. To compensate for the revenue shortfall at the Red Sox, ticket prices have rocketed in Boston. Indeed, season tickets next season have already gone up 6.5%, though 2.5% of that is to cover the VAT increase, with the cheapest tickets on the Kop now costing £725, the most expensive £802. Surprisingly, the entry level tickets are more expensive than any other team in the Premier League except Arsenal, according to a survey by Sporting Intelligence. This is on top of significant price increases last season.

    13. What’s in a name?

    Ian Ayre has confirmed that Liverpool would actively look for a stadium naming rights partner – but only if they move to a new stadium. Not many English clubs have succeeded in securing naming rights, but it is more common in America and could provide up to £10 million a season, maybe more with FSG’s contacts.

    [​IMG]

    14. Never was so much owed by so many to so few

    Liverpool’s debt had reached shocking levels under the previous unwanted regime. Although there was “only†£123 million net debt in the football club, the full picture was revealed in the holding company where debt had grown to over £400 million, including £280 million owed to the banks, which had surged after the bank applied penalty fees for the loan extension, and £144 million owed to Hicks and Gillett.

    The really good news is that Henry has confirmed that the change in ownership has removed all the debt except for £37 million for development work on the proposed new stadium, which is part of a £92 million credit facility agreed with RBS. Normal working capital requirements mean that £87 million of this had been used by 31 January this year.

    This is enormously significant to the club’s finances, as the prohibitively expensive annual interest payments of £40 million have been drastically reduced to just £3 million, which means that Liverpool are “able to invest more in the team rather than servicing debt†according to Ian Ayre.

    Of course, debt could substantially rise again for future stadium developments, but Henry does not appear overly concerned, “I think fans will understand that stadium debt is different from acquisition debt.â€

    [​IMG]

    "Steven Gerrard reflects on the first half of the season"

    15. All’s fair in love and war

    John W Henry has praised UEFA’s forthcoming Financial Fair Play rules that aim to make clubs live within their means, while curbing excessive spending, “UEFA is doing a great thing in making clubs sustainable and that’s good news for us.†In fact, UEFA’s William Gaillard claimed that the main reason why Henry (and indeed Thomas di Benedetto at Roma) had invested in European football was the new regulations, as “they make a much more predictable environment, more similar to what they are used to in American sport.â€

    Although the new owner is concerned that other clubs might seek to find ways around the rules, especially after Chelsea’s massive spending spree in the January transfer window, this will not be the Liverpool way: “We've always spent money we've generated rather than deficit spending and that will be the case in Liverpool. It's up to us to generate enough revenue to be successful over the long term. We will not deviate from that.â€

    So, FSG have plenty to offer in their play book, but some have wondered whether their proficiency in American sports will mean much in England. Turning round the Red Sox is one thing, but Liverpool football club is (quite literally) a different ball game. While Liverpool share many similarities with the Red Sox, such as a glorious history, passionate fanbase, small stadium and, er, they both play in red, there are also quite a few differences in the two sports.

    [​IMG]

    "Lucas and Meireles reinvigorated by King Kenny"

    In particular, Premier League football clubs do not have a salary cap, have to deal with powerful agents and need to worry about the threat of relegation. That last point may not apply to Liverpool, but at the other end of the table they are concerned with the financial consequences of missing out on the Champions League. It is also fair to say that Boston is a wealthier city than Liverpool, so FSG’s strategy of raising ticket prices may not be appropriate on the Mersey, though you have to think that the new owners are too smart to squeeze the orange too hard.

    Of course, an owner’s nationality should not be an issue. As Martin Broughton said, “There’s nothing wrong with being American. Ask Sunderland, Ellis Short is a great owner there. Wherever you come from you need the right people. These are the right people.†There might be a nagging concern that they will not bring the same level of commitment to Liverpool as to their American franchise, but if that were the case, it begs the question of why they would get involved in the first place.

    Fundamentally, they are businessmen, who will have been attracted by Liverpool’s “fire sale†price and enormous potential, but Henry has said that investors in sports franchises are not in it for the money, “I don’t think you go into sport to make a profit.†He has asserted that all the money NESV has made in baseball has been ploughed back into the Red Sox, be it the team or the club’s infrastructure. Ultimately, money can be made from football if and when the value of the club appreciates, but that is likely to mean a long-term investment.

    [​IMG]

    "Anfield of Dreams"

    Let’s not forget that Liverpool football club is one of football’s great institutions with an incredible history: winning the Champions League and European Cup five times, the English League championship eighteen times and the FA Cup seven times. In business terms, it remains one of the leading sports brands, with the club competing in the most watched domestic league on the planet.

    Arguably, John W Henry has got himself a bargain here, though there is much to do to strengthen the club’s business model. As the club’s sponsor said, âœI don’t think English Premier League clubs know how valuable they are.†If Henry can help instill the winning mentality back into Liverpool, as his group did with the Red Sox, this could be a licence to print money. Of course, the fans are more interested in whether the team does the business on the pitch. Over to you, Kenny.

    SwissRamble
     
  17. ISTANBUL VET

    ISTANBUL VET
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    Thanks for that.
     
  18. redabbey

    redabbey
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  19. Ron1892

    Ron1892
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    Romanov's Battle For Hearts And Minds

    Oscar Wilde, the famous Irish playwright, was not known for his love of sport, but his warning “to expect the unexpected†could certainly apply to the world of football, not least at Heart of Midlothian, where the colourful owner Vladimir Romanov continues to resist the path of predictability. Just two games into the Scottish Premier League (SPL), the volatile Lithuanian decided to sack the club’s manager Jim Jefferies, replacing him with the former Sporting Lisbon manager Paulo Sérgio. The popular Jefferies was in his second spell as Hearts manager after a ten-year absence, retaining much goodwill for delivering the Scottish Cup in 1998, ending 36 years without a trophy.

    The timing seemed quite strange, not just because the change in manager came so early in the campaign, but also because Hearts had secured third place behind the Old Firm last season. Moreover, Jefferies had been allowed to bring in four new recruits: the imposing forward John Sutton from Motherwell, Danny Grainger from St. Johnstone and two experienced midfielders from Kilmarnock, the Moroccan Mehdi Taouil and Jamie Hamill. In theory, the addition of these new players to a talented squad, including the exciting wingers Andrew Driver and David Templeton plus the commanding captain Marius Žaliūkas, should have been the catalyst for a successful season.

    [​IMG]

    "The Romanov revolution"

    However, if you scrape below the surface, there is some method in Romanov’s apparent madness, as Hearts’ last victory was way back in March last season. As the man himself said, “With only one competitive win in 15 games, only fools and idiots would not raise questions and suspicions.†The club’s third place in 2010/11 was also a little deceptive, as the run-in was disappointing in the extreme, so Jefferies’ dismissal was not completely unjustified.

    Of course, Romanov has plenty of previous when it comes to hiring and firing with Sérgio becoming the ninth manager during his seven-year tenure. That’s not counting caretaker or interim managers, though no Hearts manager could confidently describe his position as permanent. As Scotland manager and former Jambos legend Craig Levein said, “I don’t understand what boxes need to be ticked at Hearts to keep you in a job. You would need to be insane to do this job. At times it defies logic.â€

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    "See you, Jimmy"

    The owner’s lengthy list of victims includes John Robertson, George Burley, Graham Rix, Valdas Ivanauskas, Anatoly Korobochka, Stephen Frail, Csaba László and, of course, Jefferies. Of those, Burley was perhaps the unluckiest, being given the boot with Hearts top of the SPL after nine unbeaten matches, though Ivanauskas went just a few months after winning the Scottish Cup and qualifying for the Champions League in 2006. However, the most telling image of the problems during Romanov’s reign came when three senior players (club captain Steven “Elvis†Pressley, Paul Hartley and Craig Gordon) held an impromptu press conference at the club’s training ground to inform the world of “significant unrest.â€

    To put it mildly, Romanov is an interesting character, who polarises opinions in the game, even among Hearts’ own supporters. Some view him as the “great dictatorâ€, while others consider him to be the saviour of the club.

    It is true that there is rarely a dull moment with “Mad Vladâ€, who also owns the Lithuanian club FBK Kaunas and Belarusian club FC Partizan Minsk. Prone to numerous verbal outbursts, including accusations that Celtic and Rangers were “buying off†match officials, his club has received several fines from the Scottish football authorities. Some have attributed this to language difficulties, but his son Roman, now Hearts’ chairman, once joked, “He has all the words he needs: ‘Yes, ‘No’ and ‘You’re fired’.†Managers have complained of constant interference, including transfer choices and team selection, such as when he ordered Jefferies not to pick Žaliūkas during a contract dispute.

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    "One careful Driver"

    On the other hand, there is little doubt that he has kept the club alive. Before his arrival, Hearts were in dire straits financially. Auditors PricewaterhouseCoopers (PwC) described the club as being technically insolvent, while the Hearts Supporters’ Trust said, “We were heading for the abyss.†Former chairman, George Foulkes, summed it up, “Most fans have mixed feelings about Romanov. If (former CEO) Chris Robinson was still there, we’d probably be in the First Division and playing in front of 5,000 people at Murrayfield.â€

    This was a reference to Robinson’s 2004 plans to sell Tynecastle, the club’s famous old ground, which he claimed was “not fit for purposeâ€, and instead rent Murrayfield from the Scottish Rugby Union. Although this deal would have reduced the club’s burgeoning debt, it was deeply unpopular with supporters, who launched a Save Our Hearts campaign to prevent the move. Despite this opposition, a deal was still signed with a housing developer for £20 million, but this was called off after Romanov purchased the club, so the initial response to the Lithuanian was very favourable.

    The previous board’s willingness to go against the supporters’ wishes by selling the stadium highlighted the seriousness of the club’s financial challenges, and it was with some relief that the fans saw Romanov steadily increase his stake in the club throughout 2005 to become by far the largest shareholder. In return, Romanov got hold of a venerable football institution, part of the inaugural Scottish league in 1890, which has won the championship four times, though two of these victories came in the 19th century, while the last victory arrived back in 1960. However, history doesn’t pay the bills, so Foulkes was right to give Romanov credit for “the fact we remain a going concern.â€

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    This can be seen by the increasing debt, which reached £36 million at the time of the last published accounts in July 2010. That is simply enormous when the turnover is only £8 million and follows a series of what the club itself described as “significant operating losses.†The debt mainly comprises £24.3 million owed to the parent company UAB Ukio Banko Investicine Grupe (UBIG) at 4.5% interest, repayable in December 2011; £8.9 million owed to another group company UAB Hearts Developments (HD) at 3.5%, where the repayment date has been extended to August 2012; and £2.5 million convertible loan stock at LIBOR.

    There is a fairly confusing paper trail for this debt, as it was owed to AB Ukio Bankas at the beginning of the year, then transferred to UBIG and another company called ImpExNet. The latter balance was then again transferred to HD during the course of the year. I’m not sure why this has to be so complex, but the important point is that all of these companies are under the effective control of Romanov. As Hearts director Sergejus Fedotovas said, “The key fact, that sets Hearts apart from many other clubs, is our debt is in the form of funding from our own parent company.†That’s true, but can occasionally be a double-edged sword if the owner loses patience with his investment.

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    "Paulo Sérgio wonders what he's let himself in for"

    That said, the debt position in 2010 would have been even worse without a £7.9 million forgiveness of debt from the parent company (effectively Romanov), which was not enough to prevent net debt from rising by £1.3 million. Actually, the debt would be horrifically high without several timely interventions from the owner, such as a £12 million debt-for-equity swap in 2007/08. Excluding these adjustments, the debt would stand at £56 million – seven times annual turnover.

    After the latest accounts closed, there was yet another debt-for-equity swap to the tune of £10 million. While this “demonstrates that UBIG remain committed to providing ongoing support†and reduces the club’s interest burden, it does also further strengthen Romanov’s hold on the club. Depending on your perspective, there are two ways of looking at this situation: on the one hand, the club would almost certainly go bust without Romanov’s backing; on the other hand, he is largely responsible for the increase in debt from the £20 million or so at the time of his takeover, due to his hefty spending on players.

    Either way, according to PwC’s annual review of Scottish Premier League football, Hearts have the highest net debt in the SPL, which has been the case for the last few years. In fairness, only St. Johnstone and Hamilton are operating debt-free, but the magnitude of Hearts’ debt is more worrying, accounting for a third of the SPL’s net debt of £109 million.

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    This, in turn, means that Hearts have the weakest balance sheet in the SPL with net liabilities of £24 million. With the exception of Dundee United and Hamilton, all other SPL clubs have net assets. Of course, like all football clubs, the value of the players on the balance sheet is under-stated, as this equals acquisition cost less cumulative amortisation. In Hearts’ case, the book value of the players is just £370,000 compared to an estimated value of £18.5 million on the respected Transfermarkt website.

    The noises coming out of Tynecastle suggest that Romanov has given new manager Paulo Sérgio no less a target than winning the league this season. Although the Portuguese said that he did not feel under any additional pressure, he did emphasise that the squad needed strengthening, “Everyone knows what a team such as Hearts needs. If we get the money, we can compete with the biggest clubs in Scotland, Rangers and Celtic.â€

    Fedotovas claimed that the club was working on bringing two to three new players in before the transfer window closed on 31 August, potentially including former captain Michael Stewart, but Sérgio should be aware that criticism of the owner for not spending in the transfer market helped lead to the downfall of Csaba László, the longest serving manager under Romanov’s regime – at all of 19 months.

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    History suggests that Sérgio is unlikely to see Romanov put his hand in his pocket for new players, as there has been only one season at the club (2005/06) when Hearts have made net purchases – and that was just £2.3 million. Although there have been many arrivals, almost all of these have been on a free transfer with Hearts’ record buy being Bosnian international Mirsad Bešlija in 2006 at just £850,000. Indeed, since 2005 there have been net sales proceeds of £16 million, largely derived from the big money sales of Craig Gordon to Sunderland, Roman Bednar to West Brom, Christophe Berra to Wolves, Lee Wallace to Rangers and Paul Hartley to Celtic.

    Given the limited budgets in Scottish football, this lack of spending is not too surprising with only the “Big Twoâ€, Celtic and Rangers, having the resources to spend reasonably large sums. That said, over the last five years, nobody has spent less than Hearts.

    Nine of the current 12 SPL clubs have net sales over that period, but Hearts lead this league table with net sales of £18 million. Of course, this could be considered as a sign of good financial management, but it does mean that Sérgio, like many managers before him, is likely to be disappointed if he expects to see any big money purchases.

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    This tight-fisted approach is not just down to the whims of the owner, but is also symptomatic of the financial pressures under which Hearts are operating. Only this week the club was threatened with a winding-up order by Her Majesty’s Revenue and Customs (HMRC) over an unpaid tax bill for the second time in two years. Although this was swiftly paid in full, as happened on the previous occasion that they faced administration proceedings, this is clearly not good news.

    Fans have become all too accustomed to the club sailing close to the wind with many reports of wages and bonuses being paid late, but these frequent cash flow problems are not exactly an indicator of a thriving business. You only need to ask the fans of Dundee, Livingston and Gretna to appreciate that football clubs in Scotland can enter administration.

    Indeed, the club itself states that it “does not have formal funding facilities in place that allow it to meet its liabilities as they fall due†and is “dependent on the continued support of UBIG.†That’s fine, so long as the money continues to be pumped in, though the auditors have regularly noted their concerns in the accounts, partly attributed to the lack of available information that might allow them to conclude that UBIG would be “able to meet its commitment.†In plain English, they don’t know whether UBIG can provide the club with enough money to pay its bills on time.

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    The fundamental problem is that Hearts make colossal losses, at least for a club of this size. The apparent recovery to break-even in 2010 is misleading, as this is almost entirely due to the debt forgiveness of £7.9 million. If this once-off factor were to be excluded, the club made an underlying loss of £8 million last season and completely unsustainable cumulative losses of £38 million in the last five years. The figures would be even worse without the substantial £10 million profit on player sales in 2008, largely Craig Gordon.

    Although these losses might not seem that terrible compared to some made in other leagues, they need to be placed into context. A loss of £8 million on turnover of £8 million means that the club spends £2 for every £1 of revenue it generates. A similar business model would have produces losses of £62 million at Celtic and £56 million at Rangers in 2009/10.

    Another problem that the club has is the large amount of interest charged. Again, this might only be £1.6 million in 2010, but this represents 20% of Hearts’ revenue of £7.9 million and is clearly too high for a business of this scale.

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    In fairness, there have been some slight signs of improvement with the operating losses (excluding player sales and interest payable) falling from £11.8 million to £6.9 million in the last three years, despite revenue declining in the same period. This is because the club have cut the wage bill and managed to introduce some operational efficiencies (seen in Other Expenses). They’re still a long way off their stated aim of “reaching operational break-even in the medium termâ€, but at least they’re heading in the right direction.

    Even with the debt forgiveness, Hearts have the second highest losses in the SPL over the last two years with £8.6 million, only surpassed by Rangers. Excluding the debt forgiveness in 2010, Hearts would have comfortably held the unwanted title of least profitable club in the SPL. To be fair, only three clubs were profitable during this period, namely Hamilton, Hibernian and St. Mirren, though five other clubs restricted their losses to below £1 million.

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    This poor financial performance is all the more depressing when you consider that Hearts have the third highest revenue in Scotland with £7.9 million, just ahead of their local rival Hibernian and Aberdeen, who both have turnover of £7.1 million. This goes some way towards explaining Romanov’s expectations of the team, though they are still miles behind the Old Firm, who enjoy revenue around £60 million.

    This revenue is obviously a lot lower than their counterparts in the Premier League, but more worryingly it is also worse than all but two teams in the English Championship. Indeed, clubs like Cardiff City, Leicester City and Ipswich Town generate twice as much revenue as Hearts, even without the benefit of parachute payments from the Premier League. Little wonder that players head south at the first opportunity.

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    Hearts’ plight has not been helped by the fact that their revenue has actually been declining from a peak of £10.3 million in 2006 and 2007 to last year’s £7.9 million – a fall of only £2.4 million, but that’s almost a quarter of the club’s revenue gone. Three years ago the Heart of Midlothian Shareholders’ Association warned, “The club needs to generate more revenue and that is difficult in the short-termâ€, and how right they were. In fact, revenue is now lower than 2005 levels.

    Two other pointsare evident from this graph. First, the club’s revenue is to a certain extent linked to success, as the year when the club finished second in the SPL and won the Scottish Cup produced revenue of over £12 million. Second, Hearts earn half of their revenue from match day income, which is different from many other leagues, where TV money rules. As the PwC review stated, “The majority of the income for Scottish clubs is actually coming from fans coming through the turnstiles.â€
     
  20. Ron1892

    Ron1892
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    Hearts’ accounts proudly refer to match day revenue increasing to over £3.9 million, but the reality is that this is 27% lower than the £5.3 million generated in 2006. The fall is partly because of shorter cup runs, but is largely due to a significant reduction in attendances from just under 17,000 (almost full capacity) to 14,484. which further declined to 14,185 in 2010/11.

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    Nevertheless, crowds have increased since 10 years ago and Hearts are the third best-supported team in Scotland, only behind Rangers 49,000 and Celtic 45,300, for the sixth year in succession. They are also only one of three teams in the SPL to fill more than 80% of their stadium’s capacity, which is pretty good in the current tough economic climate. This might be due to the relatively low cost of watching football at Tynecastle. According to a recent BBC survey, only four teams in the SPL are cheaper. However, the good news end there, as every single team in the Premier League and 18 teams in the English Championship had higher attendances.

    One reason why gate receipts are so crucial is the incredibly small amount of television money received for the Scottish Premier League rights, which worked out last year at £1.5 million for Hearts. In the SPL 48% of the TV revenue is divided equally, while 52% is distributed to teams dependent upon their final league position, so the higher up the table that a club finishes, the more money it will receive.

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    While TV revenue has powered revenue growth in other leagues, this is clearly not the case in Scotland. This disparity can be seen by looking at the TV revenue earned by clubs in the “Big Five” leagues, which absolutely dwarf Hearts’ revenue: Barcelona £146 million, Milan £116 million, Manchester United £105 million, Bayern Munich £68 million and Lyon £64 million. Scottish clubs can be boosted by European revenue, but even Ranger only earned £18 million, while Celtic’s adventures in the Europa League only added £1.5 million to their domestic revenue.

    In fact, the entire annual payment to all SPL clubs is only £13 million, which puts them behind TV deals in Greece, Portugal, Poland and Romania. To place that into context, it is less than a third of the £40 million that the team finishing bottom of the English Premier League can expect to receive this season. A still more amazing statistic is that the total SPL payment is worth only 1% of the Premier League rights. Actually, even a club in the English Championship now earns more than a club in the SPL with £3.5 million a season (including the solidarity payment from the Premier League).

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    The situation was not helped by the collapse of Setanta last year. The upstart Irish channel was replaced by a combination of Sky and ESPN, but there was a harsh price to pay, as the new deal was worth only £65 million over five years, compared to the previous £125 million over four years. Sky had offered more than twice as much the year before, but the SPL clubs got greedy and gambled on the higher Setanta bid. There is some optimism, as there is a break-clause in the current TV deal after three years, and rival broadcasters might be encouraged by an increase in viewing figures, as outlined by SPL chief executive Neal Doncaster, “Early indications this season are that TV viewer numbers for SPL matches are well up on last year, which in turn showed a huge improvement on the year before.”

    Commercial income had been on a rising trend, but has been shrinking in the last couple of years, falling 44% from £3.3 million in 2008 to £1.9 million in 2010, even though the 2009 accounts confidently stated, “Hearts expect to improve commercial revenues.” In fairness, PwC’s annual review of Scottish football noted that the global downturn had impacted discretionary spending on corporate sponsorship, hospitality and merchandise.

    After six years of their shirts being sponsored by Romanov’s bank Ukio Bankas for a “six-figure deal”, Hearts have a new two-year agreement from this season with short-term loans company Wonga. Financial details have not been divulged, but the club say that it is the biggest deal in Scotland outside of the Old Firm. Their shirt manufacturer Umbro has extended the original three-year deal for a further two years until 2012. According to the club, this “could be worth almost £1 million per year, depending on shirt sales.” The latest accounts also “expect improvement” from the new retail franchise agreement with SRM Hearts Limited.

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    One of the toughest issues for Hearts is their hefty wage bill. At £9.1 million, it is the third highest in Scotland, but to a certain extent is in “no man’s land”, as it is a lot lower than Celtic (£36.5 million) and Rangers (£28.1 million), but is twice as much as their main opposition: Hibernian £4.8 million, Aberdeen £4.6 million, Kilmarnock £4 million, Dundee United £4 million and Motherwell £3.4 million.

    The dilemma is whether to try to hang on to the coat tails of the Big Two in an attempt to meet Romanov’s aspirations, when doing so leads to an unsustainable wages to turnover ratio. It looks like this was their strategy in the first part of Romanov’s reign, when the wage bill exploded from £4.5 million to £12.5 million, but since then the taps have been turned off, as the wage bill has been cut three years in a row, though it is still more than double the amount before his arrival, partly due to Hearts having one of the largest squads in the SPL.

    The accounts do specifically mention the “exit of some of the club’s higher earners”, including the likes of José Gonçalves, Michael Stewart, Christian Nadé and Laryea Kingston. This trend is likely to continue in 2010/11 “as a number of players reach the natural end of their contracts”, demonstrated by the hard line taken by the board during contract negotiations with Žaliūkas.

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    The reduction in wages has lowered the wages to turnover ratio, but only from 126% to 115%, which is still hideously high. To place that into context, it is even more than big spending Manchester City (107%), while the next highest in Scotland is 76% from Motherwell and St. Mirren. Indeed, the average in the SPL is a respectable 61%. If Hearts wanted to lower their ratio to UEFA’s maximum recommended limit of 70%, they would either have to increase revenue by an unrealistic £5.1 million to £13 million or (more likely) cut their wage bill by a further £3.6 million to £5.5 million.

    That, of course, would bring its own issues, as Hearts would then struggle to attract and retain good quality players. Recently, two prominent Scottish strikers have moved to England, rejecting offers from Rangers in the process, starkly highlighting the problem: David Goodwillie went to mid-table Premier League side Blackburn Rovers (wage bill £47 million), while veteran Kenny Miller joined Championship team Cardiff City (wage bill £17 million).

    More encouragingly, Hearts have managed to cut their operating costs by over 40% from £7.7 million in 2007 to £4.5 million last year. Even though there was a slight increase in 2010, the club say that “these are expected to reduce significantly in the current financial year following a series of improvements.”

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    Nevertheless, the continued support of Romanov is still paramount, as can be seen from the cash flow statement. Sometimes, poor figures at a football club do not reflect reality, as the P&L is affected by non-cash items such as player amortisation and depreciation, but this is not the case here, as the cash flow from operating activities is negative every year. Even in a year when a relatively large amount of cash is received from player sales, e.g. £9.3 million in 2008, this is not enough to turn cash flow positive. The only way this has been achieved is by Romanov’s company putting in additional loans: around £38 million since the takeover.

    Another note of concern regarding cash flow is the huge increase in the average creditors payment period from 36 days in 2004 to 94 days in 2010. This might just be astute commercial practice of obtaining improved payment terms, but it could also be a warning sign that the club is having difficulty in paying its bills on time.

    Perhaps the most puzzling aspect of Romanov’s involvement is the fundamental question of why he would invest in Hearts at all, as Scottish football is not exactly booming. Attendance levels keep falling (most of the stadiums are half-empty), they have one of the worst TV deals in Europe and commercial opportunities are suffering from the economic downturn. Although SPL profits improved in 2009/10, the PwC survey noted that if they excluded exceptional factors such as debt forgiveness and Rangers reaching the Champions League group stages, there were still large underlying losses and warned of “more pain to come as the league strives to find a sustainable financial footing.”

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    "Stevenson's rocket"

    This has resulted in countless proposals to reform the game in Scotland, usually revolving around the number of teams in the league. The current momentum seems to be behind a reduction to a 10-team league, though the majority of fans would prefer a return to a larger division with 14, 16 or even 18 teams. The problem is finding a formula that somehow manages to eliminate the tedium of teams playing each other four times a season without reducing the number of games (with its consequent impact on revenue) and/or imposing an artificial structure, such as the mid-season split. Other possibilities include a winter break, a move to summer football and an earlier start to the season.

    Some insight into Romanov’s strategy was provided by the 2007 annual report, “Future revenues will be generated through increased participation in European competitions, larger attendance in a redeveloped Tynecastle stadium and an associated greater sponsorship and retail income.”

    However, the European dream seems further away then ever after the drop in the UEFA coefficient, which means that Scotland now only has one place available for the Champions League (and that is only for the qualifying rounds, no direct entry). Furthermore, it will be a long time before Scotland gets back up to two places, as the calculation takes into consideration the last five years, so next year will drop the very successful 2007/08 season, which featured Celtic reaching the last 16 of the Champions League and Rangers being UEFA Cup finalists.

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    "John Sutton heads for the heights"

    Paradoxically, this might actually work in Hearts favour, as the Old Firm’s revenue has been badly impacted by reduced involvement in the Champions League, which means that they can no longer attract the calibre of player that they could in the past, theoretically making the title race more competitive.

    If Hearts were to reach the Champions League group stages, it would make a massive difference to their revenue. In the last two seasons, Rangers received an average of £15 million from UEFA, excluding additional gate receipts. The Europa League is nowhere near so lucrative with Celtic only receiving £1.5 million from their 2009/10 participation. That said, the speed with which Hearts sold out their glamour tie in the Europa League against Tottenham Hotspur demonstrates that the appetite in Scotland for watching top players remains undiminished, as did the astonishing 58,000 crowd that watched Hearts play Barcelona in a pre-season friendly at Murrayfield in 2007.

    Romanov has wanted to redevelop Tynecastle for some time with a planning application submitted in 2008 for a £51 million development that would include a new 10,000-seat main stand and other facilities such as a hotel, restaurant, offices and corporate hospitality. At the time, the deputy chief executive said, “The project will enable the club to be self-sufficient in the future and naturally to reduce the debt to zero.”

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    "Home is where I want to be"

    However, the club’s statements in this area have often appeared overly ambitious, as the plans have been scaled back pretty much every year. The 2006 accounts spoke of turning Tynecastle into “a truly top class European football venue” by increasing the capacity to 26,000, which had been lowered to 23,000 in the 2007 accounts and 20,000+ the following year – which also said that the new main stand would be fully operational for the 2011/12 season…

    Although the 2010 accounts continued to focus on “revenue generating opportunities through a redeveloped Tynecastle”, they did also note that the planning application had been unable to progress because of restrictions placed on the stadium zone, so it was perhaps no surprise when the club announced in May that it was going to formally revisit the possibility of selling Tynecastle and moving to a new, purpose-built stadium in Edinburgh, though the reviled Murrayfield is apparently no longer an option.

    Frankly, the financial projections around this project have never been entirely convincing. Even though the club would be able to reduce its debt by selling their stadium, it would have to raise much more to build a new stadium, which might prove difficult in the current credit crunch. The club would hope that a significant chunk of the funding would come from other companies who would want to avail themselves of some of the commercial opportunities, but the only realistic source of financing might prove to be a certain Lithuanian bank.

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    "David Templeton - example of Project Youth"

    The club would also have to write-off £1.4 million of costs so far incurred in the plans to redevelop Tynecastle, which are currently sitting on the balance sheet, booked as “assets in the course of construction.”

    It looks increasingly likely that Hearts will have to rely on profitable player trading to balance their books, so they have invested in their academy, as any money received for players developed in-house is a pure gain in the books. The success of this strategy can be seen through the emergence of Lee Wallace, Andrew Driver, Eggert Jonsson, Calum Elliot, David Templeton and Scott Robinson.

    Some have put forward more scurrilous suggestions to explain Romanov’s investment, such as Hearts being used as a vehicle to launder money, especially after Ukio Bankas was involved in such an investigation in Belgium last year. If this is the case, then it is a particularly ingenious scheme, as little money appears to be going back to Romanov or his companies. Interest charged on his loans is not paid, rather it is accumulated as additional debt. In fact, much of it has been written-off, including £2 million in 2010 alone. Admittedly, there is a raft of related party transactions, but the money involved is small beer.

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    "A message to you, Rudi"

    There has also been conjecture that Romanov’s involvement in Hearts is an elaborate way to curry favour with the natives, so that they would look favourably upon his application to open at branch of Ukio Bankas in the UK, but no licence has been granted to date with Romanov complaining, “This is another example where the contribution to the economy is not wanted.”

    Maybe he considers Hearts as a good place to showcase the talents of Lithuanian footballers, as many have been transferred or loaned from FBK Kaunas to the Scottish capital. Or is it just a plaything, where he can give his family and friends good jobs in the world of football?

    Whatever his motives, Romanov’s actions resemble more those of a traditional benefactor, rather than a hard-headed businessman. That’s fine, while he is around and his other companies provide enough funds to support the football club, but the concern is that the club would collapse (in the same way that Gretna did) if he left for any reason.

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    There seems little chance of Romanov ever getting his money back, as it is difficult to imagine that he would find someone to take the club off his hands, unless he substantially reduced the price. Even then it would hardly be a fait accompli, as the club’s business model in its current form is unworkable. As a pertinent comparison, it took Rangers an eternity to find a buyer.

    In fairness to the owner, he has been at the club for nearly seven years now, so he cannot be accused of being “here today, gone tomorrow.” Under new manager Paulo Sérgio, the club has had a couple of encouraging results, but the most important man at the club remains Vladimir Romanov, a man maybe best summed up by Winston Churchill’s famous quote, “a riddle wrapped in a mystery inside an enigma.”

    SwissRamble
     

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