FFP: What Does It Really Mean For Arsenal & Their English Rivals?

A guest post today from Simon Hill, one of the AST‘s football finance experts. FFP is coming – the Premier League owners, largely for selfish reasons of course, are keen on it, and Ivan Gazidis has been banging the drum for it for years. But what will it do to the spending power of the big English teams? And Tottenham. Over to Simon:

Introduction
UEFA just released their licensing benchmark report for 2011, which gave us an insight into how they will manage the July 2013 process of licence applications for UEFA competitions for the 2013-14 season. It is an incredibly detailed and professional document and the process and resources being brought to bear on club monitoring are clearly impressive. Let’s be clear, this is no amateurish, edge of the table operation; this is a fully staffed, professional, qualified group of accountants, lawyers and experienced professionals who are leaving no stones unturned and are doing (in this accountant’s opinion) a first class job. UEFA’s FFP rule book is as thorough as any professional set of accounting standards and similarly drafted, and UEFA’s recent licensing report tackled head on the suggestion that they will baulk at banning clubs by pointing out six clubs were barred from competition in 2012-13 including Rangers, Besiktas and AEK.

For July 2013 applications, they were explicit in confirming clubs will be required to provide updated current year estimates, detailed forecasts for future years and detailed plans on how losses will be eliminated. Simply saying ‘We’ll cut costs, sell a few players and grow our sponsorship revenues’ won’t wash. Clubs will have to explain in detail what they will do and justify their figures based on industry benchmarks.

PL clubs typically have a May financial year-end and will have to use estimates for their applications. Of course, how conservatively UEFA’s assessors view future revenue and cost assumptions and assess fair market value for related partnership sponsorship will be key, but it is hard to see them going soft given the huge spread of UEFA’s apparatus (as far east as Kazakhstan and Russia) and the transparency of the reporting on compliance; they’d be ridiculed.

The “Top 5’s” likely FFP result for 2012
Most clubs have now released accounts for last year (for Spurs I have only headline figures) and we can use these to estimate the headline FFP result. I like to present these differently to normal to emphasise the costs arising from spending on the team (wages plus amortisation) and the impact player sales are having on the result, so we can see the sort of cutbacks or expansion in spending a club might be able to afford, and the reliance or otherwise on selling players to balance the books.

(All figs £m) AFC MUFC MCFC CFC THFC
Profit/(Loss) 34 (8) (100) 1 (4)
FFP Adj* 19 18 12 18 8
FFP result 53 10 (88) 19 4

*FFP adjustments are to add back depreciation charges and spending on under-18 player development (no fees or apportioned costs are allowed in this element).

So at a headline level only City have a problem and even then, because for this first year there’s an exclusion allowed for any wages paid on contracts pre-dating May 2010, they can potentially escape sanction (as wages for older contracts are likely to be anything up to £70m in City’s case).

However, a deeper look reveals a few interesting one-offs and trends:

(All figs £m) AFC MUFC MCFC CFC THFC
‘SALES’ (ie regular income) 235 320 231 256 144
minus TEAM SPEND 185 220 286 227 132
minus OTHER COSTS* 82 117 55 59 40
plus PLAYER SALES 66 9 10 29 24
equals PROFIT/(LOSS) 34 (8) (100) 1 (4)

*other costs include interest and finance charges on loans and bonds, etc.

Arsenal
Have relied on player sales to be profitable, and will not only get the benefit of the new TV deal in 2013-14 (c£35m pa), but the new Emirates sponsorship deal in 2014-15 and a new shirt deal in the same season, which will add a further £35m to income at no cost in 2014-15. In theory this enables AFC to stop selling players and bring team spending up toward the £220m mark enjoyed by MUFC and Chelsea (provided they stay in the Champions League).

Man Utd
Had one off financial costs of c£10m and will benefit from the new Chrysler deal by at least £12m pa two years before it even takes effect. They also continue to add sponsors and have a new shirt manufacturing deal due in 2014-15. Their commercial income of £118m in 2012 seems certain to keep powering away from rivals as it has grown 26 per cent in the first half of 2013 and other costs will fall as debt falls, so team spending has lots of scope to expand. It grew ten per cent in the first half of 2013.

Man City
Other costs were reduced by a £13m gain from selling unspecified intellectual property rights to associates of its owner. This looks like a one-off. In 2013-14 they have a new Nike deal and have made cuts to the surplus player pool, but commercial revenues of £97m seem implausibly high compared to MUFC (£118m) and CFC (£67m), given those other clubs’ longer-term success, hence UEFA’s acknowledged interest in assessing the fair value of the £400m Etihad deal and whatever else is hidden away in there.

Chelsea
They sell Champions League knock-out matches separately to all supporter levels including hospitality season ticket holders, so 2012 sales benefited from their run to the final by a huge amount. They also enjoyed a one-off gain from cancelling some shares of £23m which reduced other costs, and had stunningly high player sale profits (£29m) from the seemingly low-key sales of players like Zhikov, Anelka and Alex.

Tottenham
The exact split between wages and player sales is not known for 2012. I used 2011 figures to base wages, and player sale gains were flexed up to balance the result to the one announced. The gain shown stacks up with the sales that happened (Crouch, Palacios, Pavlyuchenko, etc). Even greater gains (£40m in all) have probably been realised in 2013, with Modric and the other Croatian players sold last summer.

So taking these and other factors like the new Champions League deal into account, what do results potentially look like before allowing for changes in team spend?

2013                     (£m) AFC MUFC MCFC CFC THFC
Revenue changes 5 17 5 (20)
One-offs 10 (13) (23)
Player sales (22) (17) 16
Total changes to profit (17) 27 (8) (60) 16
2012 FFP result carried forward 53 10 (88) 19 4
Pro-forma new FFP result 36 37 (96) (41) 20
2014                     (£m) AFC MUFC MCFC CFC THFC
Revenue changes 35 35 35 35 35
One-offs
Player sales removed (44) (9) (10) (12) (40)
Total changes to profit (9) 26 25 23 (5)
2013 FFP result carried forward 36 37 (96) (41) 20
Pro-forma new FFP result 27 63 (71) (18) 15

Notes
Revenue changes pick up the new CL deal, Man Utd’s Chrysler deal and Chelsea’s early exit from the CL. In 2014 they all pick up the new TV deal including foreign broadcast rights increasing on a similar basis to the UK.

One-offs relate to the exceptional non-recurring costs and profits generated in 2012 mentioned above.

Changes to profits on player sales are based on estimates of the deals done recorded by transfermarkt.com for 2013. For 2014, all player trading gains are removed just to show what results would be like.

These figures can only be viewed as a guide, especially as we haven’t flexed revenues for other new sponsorships or team performance and we haven’t flexed team spend for changes in wages and amortisation, but the big revenue and sponsorship changes are allowed for that are known to date so radical change is unlikely.

What these tell us is:
Arsenal: can afford to increase team spend from £185m and stop selling their best players, but under the new PL rules just agreed must limit new spending to largely transfer spending only, until 2014-15 when an extra £35m of commercial income becomes available. They can then up wage spending as well to get closer to the £220m mark Chelsea and United spent in 2012. Of course, a two-year absence from the champions league would make a mess of these figures and remove that prospect, and somehow Arsenal always manage to keep the good news two years away…

Man Utd: can power ahead with team spending as commercial revenues keep growing and financing costs keep falling.

Man City: either have to pull a new rabbit out of the Etihad hat or will blow PL and UEFA FFP limits. It’s true they cut the surplus playing squad and cut new spending on players in 2013 to £60m, below the amortisation rate of £80m, but those savings are unlikely to cover the pro-forma loss (maybe £20m has been cut from the wage bill). There’s also a challenge to come on the existing Etihad deal as it’s given them a commercial income 40 per cent higher than Chelsea’s and only ten per cent below Man Utd’s, which just isn’t logical. They simply must cut team spending to somewhere around the £230m mark, and further if the Etihad deal is challenged.

Chelsea: seem likely to have a difficult year in 2013. The amortisation charge seems set to grow as spending of £80m was above the £50m amortisation charge and you can see why old players on super high wages are being cut from the squad. There is a Gazprom deal to help revenue but it can’t be that huge, although by 2014 they’ll just about be okay on a team spend of £227m, so you can see why they support the rules.

Tottenham: will hope they can now avoid selling players to balance the books in the absence of Champions League cash, and potentially encourage backers for the new ground or use future Champions League cash to bridge some of the current spending gap to Arsenal (£132m plays £185m, and CL cash to Spurs is worth a good £30m pa).

So:

  • for United the new rules are a chance to keep powering ahead
  • for Chelsea it’s a chance to prevent City getting away from them
  • for Spurs it’s a chance to have a viable business model and competitive team
  • for City, it seems to mark an end to extravagance and a return to a more level playing field, albeit one dominated by Man Utd’s commercial strength. City are the big loser as they lack the match day revenue potential of Arsenal and Chelsea
  • for Arsenal it’s more ‘jam tomorrow’ and, meanwhile, spare cash is left trapped in the business unless it’s spent on transfer fees or covering the loss of champions league income

Footnote:
Liverpool are not included in the analysis as the latest available figures are from summer 2011. At that time income was around £180m pa and team spending approximately £170m pa, a clearly unsustainable situation. It is not known how far team spending has been cut through to 2013 but the TV deal in 2014 will certainly ensure financial balance and a substantial level of team spending can now ensue, logically in excess of that managed by Spurs right now (£132m). So their motive for accepting the proposals is easy to identify as they were in danger of being cut adrift and of losing precious commercial revenues to more recently successful teams like City and Chelsea.

Simon is not on twitter, but follow me and if he says anything else interesting I’ll let you know immediately: @AngryOfN5

 

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4 thoughts on “FFP: What Does It Really Mean For Arsenal & Their English Rivals?

  1. Well done Simon! While I am far from an adept at figures and finances, it seems the two North London clubs are well placed to stay in the race with the oil-rich and sugar-daddy Clubs for a little while yet.

  2. Can’t Arsenal add more than 4 million to their wage bill? They also have the front loaded part of the Emirates deal coming in next year.

    Plus, is it allowed under domestic FFP rules to pay signing on fees to players from the tv money, which’ll mean keeping wages low?

  3. As a total sceptic and despite any facts or figures to the contrary, I have zero expectation of any significant improvement in Arsenal’s fortunes in major competitions while Kroenke remains. Indeed, the gap between Arsenal and the best will grow wider.

  4. For me the impact of FFP may well be felt in the medium rather than short term. I agree that Man U are set under the new system, and Arsenal’s model will give them an increasingly strong position as time goes on. Spurs? Apologies, but cannot raise the interest to analyze (gives away my allegiance I guess).

    Where it gets interesting is with Chelsea and City. Both have elevated themselves by pumping a few hundred million directly into the squad. In both cases it appears the intention was a one-time event to make them competitive.

    Chelsea executives had publicly stated that their intention was that by now they should be breaking even, and organically replacing their squad. In practice, they have had to spend big again to refresh the squad over the last couple of years (and I think they had a big debt–> equity swap recently that speaks towards their profitability). City have not done this, but they are earlier in the cycle that Chelsea followed.

    I guess my point is that I see the potential for both clubs to hit the wall in four or five years, with a desperate need to refresh their squads and no effective way to do so. Man U and Arsenal do have the advantage here as well, with their youth systems taking part of the load.

    I cannot comment on United’s youth team, but the Beckham group suggests it has been in place for a while. I do know Arsenal’s was set up a decade ago and is just now starting to bear fruit. It means City and Chelsea can do the same, but in time?

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