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First signs of new Uefa financial rules having impact as clubs start shedding players

Tony Attwood

Michael Ballack and Joe Cole have left the KGB compound in Fulham on free transfers.

There’s no doubt that both are great players, and that in earlier days would have been given new contracts by the world’s leading exponents of Prefabricated Football.  You bring in already fully made talent, and exploit it for as long as you want it.

So why did they both leave?

The KGB’s deputy assistant deputy Ray Wilkins said (or at least the press quoted him as saying) that the KGB would do everything they could to keep Cole in particular under their control.  “We’ve obviously been in dialogue with Joe for months now and it’s pretty evident that Carlo [Ancelotti] and myself would love Joe to stay, but it’s down now to the club to see what we can do,” he said. “We sincerely hope Joe stays with us – he’s a smashing guy and he’s a wonderful footballer so we’ll keep our fingers crossed.”

And Ballack?   Again, they wanted him, and in any regard he is a player most teams would want.

He’s captain of Germany (although not playing after Kevin-Prince Boateng got him in the cup final thing.)   The KGB only offered him a one year deal – he wanted two.

Which sounds like the financial prudence of Arsenal.  Chelsea showing the financial prudence of Arsenal I metaphorically hear you mutter?  Surely not.

Cole unlike Ballack is fit at the moment, but injury prone in the last couple of years.  Both have been looking for huge salaries in the region of  £5 million a year which of course the Lords of Prefabricated Football can certainly afford.

The fact is then that Chelsea can indeed afford these guys, and can give them 20 year contracts if they want, but they have said no.  There is only one explanation… it is the first sign that the new UEFA financial fair play rules are coming into focus.

For all the talk about the big clubs finding their way around the new rules, and there being delays in implementation, the reality is that Chelsea know that with their current wage bill they cannot buy a place in Europe, because they don’t break even.   They have to do two things: stop having money put into the club by the owner, and stop paying wages that take them into loss.

Wages are what it is all about.  For some clubs the wage bill can be 80% of the expenditure.  (In the Championship it is 90% on average but they are just nutters).  If you want to break even it is always the same thing: stop having money from the owner and stop paying huge wages.

Arsenal have no problem with this because their wage bill is under 50% of their expenditure and they make a profit.

Manchester IOU can’t get anywhere near the break even position because they have to spend money on wages and money on financing the Glazer debt.  They can stop buying players, and cut the wage bill, but they can’t stop paying the interest on the loans.

Tottenham declare a profit – but we have yet to see the effect of Arry Otspur’s transfer activities.  The fact that he appears to be thinking of taking Cole to Tottenham suggests that he isn’t thinking long term about cutting the costs at the club to secure further years in the Champs League.

Manchester City look to be wanting to go on buying and selling in order to replace Tottenham in the top four – and this might be the new strategy.  Get into the top four first, then cut the wage bill in order to qualify for Europe.  It looks a bit dopey but it is possible.  “Let’s win things first, and worry about the rules the following season”.  On the other hand there is talk of a mass clear out at Man Prefabricated, so maybe they are going to follow Chelsea and cut the costs.

Aston Villa, the other Euro hopeful are dependent on owner donations just to stay in business and are nowhere near breaking even, so don’t stand a chance of entry to the Champs League even if they got to fourth.

Thus for the moment our Champs League teams of the future are

  • Arsenal
  • Chelsea
  • Tottenham H

and that’s it.  No one else seems to have the ability to get to the top four, and qualify.   And that is also a worry, because if we start putting only three teams in the Champs League then England will start losing places as our Euro coefficient is affected.

There’s more to these financial regs than first appeared.

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18 comments to First signs of new Uefa financial rules having impact as clubs start shedding players

  • walter

    Chelsea is becoming a selling club. 😉 Wrong as they even don’t get any money for those players.
    I never looked at it that way but must say that this is a real possibility.
    But is Chelsea really 100 % in order with the new rules? I think they made a big loss last year? It could be that I am wrong on this but that was what I believed to have heard.

    Anyway if this trend is going further it would finally bring some new balance in football. As a result if all clubs would live to the rules I think football would be a better world.

    Just thinking because of Arsenal having had such a great vision of the things ahead of us that it could well be that we disturb the balance and dominate football in the EPL. Now that would be sweet.

  • IvoryGoonz

    Enjoy, because that’s what is going to happen. Only way Chelsea, Man U and Liverpool are going to get a chance at the CL is if they reduce their wage bill first. This means quality of their squad will go down and will not be able to compete anymore for the top spots. Unless they ask players to take cuts ontheir wages, but why would they if they can get it elsewhere?
    So you might see finally soon why “He knows”.
    I’ve been barking about it myself for so long… Now it’s time for Platini to go and let the video in.
    The more refs on the pitch, the more the probability of corrupted refs goes up. And you can’t bribe a video camera can you? Unless you know personally R2D2…
    Now that would be the end of cheating teams in Italy…
    Finally great news: at least all this will show our children that being a good student such as Arsen always pays up on the long run.

  • Phil

    Spot on Tony. Both Ballack and Cole played a part for Chelsea this season, and they are a weaker squad without them. With the homegrown rules situation, they won’t be replaced either, and we all know the paucity of Chelsea’s youth so…

  • Marc

    The stupid thing is once (if, sorry Tony but I still have a feeling that they will end up being watered down) the new rules start to bite players will accept lower wages because all clubs will be in the same position. Some clubs will pay more than others because they are big / richer but that’s life and business. My question is how are the likes of Real Madrid and Barca going to deal with this. They constantly behave how they want not only with no sanction but sometimes the support of the authorities? I’m thinking of the ridiculous comments made by Blatter about Ronaldo and economic slavery.

  • DarkPrince

    I think what chelsea did is smart. It may seem that its because of the new financial rules but its not. Everybody knows who chelsea are after this summer. It maybe Torres, it maybe kaka, it may even be aguero. And what they are tryin to do is actually making their team more strong. They are thinkin ‘Why pay joe cole £100,000 per week if we can bring in better players’. And Joe cole and Ballack maybe very good players but they are not the best in their position. And another name which comes in mind is Yaya toure. He is the perfect replacement for Ballack and has been heavily linked to Chelsea also. And we have to worry about this because they are going to get strong in each department. They are also finding a centre back. And as for the financial rules, i again say, big clubs will find their way around it. Uefa has given too much time to adjust.

  • The Swiss Rambler

    @Marc,

    I can fully understand why you might dislike the “Spanish practices” of Real Madrid and Barcelona, but the reality is that both clubs are profitable. Yes, their costs are high, but so is their revenue.

    This is before they amend their P&L for allowed adjustments (depreciation on infrastructure, losses from non-football activities). As it stands, they are well within UEFA’s financial fair play guidelines.

  • Fem Dee

    @Swiss Rambler, if the Spanish big guns are profitable because they write down their infrastructure costs then why can’t all the big clubs in EPL and everywhere else – by doing the same thing? Is this the “way around it” that many opine will turn up sooner rather than later?

  • Swiss Rambler – can Real Mad really be profitable, when they buy all those players (Christiano Ronaldo et al) and pay them big salaries?

    Could you do a piece for us about their finances – or if you have done one or your site, point us to it and I’ll put up the link.

  • @Tony,

    Sure, I reviewed Real Madrid’s finances last week, where I made a number of surprising discoveries:

    1. They are profitable (at least for the moment).
    2. Their net debt is only €38m according to UEFA’s Financial Fair Play definition, though their own accounts give a figure of €327m, which is probably a fairer reflection of their business model.
    3. Their wages to turnover ratio is 46% – exactly the same as Arsenal’s.

    Of course, that is not the whole story and there is a sting in the tail (or two), but food for thought. You can find the article at:

    http://swissramble.blogspot.com/2010/06/will-real-madrid-be-able-to-fund.html

  • @Fem Dee,

    Sorry, I should have been a bit clearer. The UEFA guidelines allow clubs to adjust the P&L for investment in “good” things, so you can deduct investments in the stadium, training ground, youth academy, etc.

    For most clubs, this is not a significant factor, but it helps them towards break-even. In the case of Real Madrid, this adjustment merely increases their profit. In other words, they are already profitable without the adjustment.

    Of course, my review of their finances looked at their last set of accounts (until 30 June 2009), and these did not yet incorporate the impact of their spending spree last summer, either in terms of higher wages or player amortisation, so their next results may tell a slightly different story. However, in the last two years, they have been profitable.

  • T2T

    Why Real Madrid and Barcelona will qualify: They both negotiate their TV-deals; not like in the EPL where there is a system where the most in-demand clubs (e.g. ManU, Chelsea, Arsenal, Spurs,…) “subsidize” the less popular clubs (Portsmouth, Hull, Burnley). Therefore, bot Real Madrid and Barcelona get very good TV deals.

  • Rhys Jaggar

    Swiss Rambler

    Did you also do a cashflow analysis of Real Madrid?

    It’s usually a more realistic measure of what’s going on, as a P+L which includes player amortisation depresses profits in P+L terms in the years after purchase, whilst failing to signify cash outgoings in the year of purchase. Unless, of course, purchase price is spreasd through the contract term also. Amortisation is most important if you intend selling players before the end of their contract, since the asset price found in the accounts is usually the higher cost of a player buying out his contract or the sale price which might be secured.

    For a galactico like, say, Kaka, you might expect to pay 70m for him and make profits of 30m per year for 3 years to pay for him. So the effect on the finances would be materially affected by how the payment for the transfer was tranched. It might be close to neutral each year if the transfer were tranched through three or four years, but strongly in the red upfront but strongly profitable if the transfer fee were cash upfront.

    My hunch is that Real will find it perfectly possible to pay for these transfers through commercial work if the payments are tranched through 3 or more years. It might sound like they spent 250m in one year, but reality might be closer to 70 – 80m per year for 3 years. I guess the key question about their finances is whether you can continue to increase e.g. shirt sales through new galacticos or whether the total shirts sold starts to reach a plateau. Since it is the incremental increase which is the justification for a transfer fee………..

  • @Rhys Jaggar,

    Cash flow is obviously important and can reveal issues that are hidden by the P&L, but there’s nothing untoward in Real Madrid’s cash flow statement. Indeed, the net cash inflow of €27m is a touch more than the pre-tax profit of €25m.

    I agree that the phasing of the transfer fees is important and highlighted in my review how much of Real’s debt is due to outstanding transfer fees. As you say, this is a key element of Real’s business model.

    However, you’re wrong about how football clubs record the value of players in their books. The costs associated with acquiring players’ registrations or extending their contracts, including agents’ fees, are capitalised and amortised, in equal instalments, over the period of the respective players’ contracts. I have never seen any club record the asset price as the “sale price which might be secured”, unless it’s really obvious that the NBV is too high, in which case the value is reduced. This is why football clubs’ balance sheets are almost certainly under-valued, as the sale price is usually higher than the value in the books.

  • Richard B

    @Swiss Rambler
    Does the sale price of a player only end up as being higher than the NBV if there is competition for his signature – i.e.
    an auction? In the case of Fabregas and his (reported) desire to only go to one club there is, in theory, no auction – except where a story is placed that Real Madrid want him as well. Placed by whom, one might ask?

  • @Richard B,

    The sale price is usually higher than NBV, leading to a profit on sale. For example, if a player is bought for £15m on a 5 year contract, the annual amortisation is £3m. So, after 3 years, his NBV will be £6m, which is the original cost of £15m less £9m amortisation (3 years @ £3m).

    If he is then sold for £11m, the profit on sale is then booked in the accounts as £5m (sales proceeds of £15m less £6m NBV). In this case, many fans would expect to see £11m in the P&L, but they would be wrong.

    Of course, as Rhys emphasised above, the cash movements can be very different.

    Now, coming round to your question, there is no doubt that an auction can push up a player’s price, but there is no link to his NBV. In the case of Fabregas, I would expect his NBV to be zero unless there was a fee paid for extending his contract. Either way, any transfer fee received for Fabregas would almost certainly be pure profit. Not that I am advocating his sale!

  • Valentin

    Tony,

    I think that you are wrong on Chelsea.
    Chelsea parent company recallable 0% interest rate loan by Abramovitch is banned (even if the loan is not to Chelsea FC). Not only loan between friend company (sugar daddy easiest way of sponsoring the team without actually looking like it) are banned, but also material debt to parties whose relationship and interest cannot be established.
    Moreover, despite the suggar daddy Chelsea FC itself is still showing a loss.
    In order to meet the target, they have not only to trim their wage bill, but also start to show they can generate a profit.
    I think that the Guardian who mentionned that by releasing Cole, Ballack, Belleti, and Deco they are saving about £ 17 millions in wage per year.
    Anelka has a new contract (but on the same term no increase), but I am pretty sure that when Drogba’s renewal will be up they will demand that he drop his wages.
    Remember that they refused Terry asking for a seven years contract with the possibility to become a coach at Chelsea.
    They are also renegotiating the term of the bonuses. Bonus on winning the premiership, the FA Cup and reaching the Champion’s league final. No more victory bonus for tonking Hull, Stoke or Wigan.
    The reason Chelsea had been quite aggressively pursuing young players is that they knew that their previous business model was not sustainable.
    Gael Kakuta is only the tip of the iceberg in term of poaching youngsters. Chelsea has now a very bad reputation all over Europe and particularly in France because of their way to induce youngsters to join them without properly compensating the formative club. Remember the Leeds youngsters (BTW, one has been released and the other is likely to be let go at the end of this season), imaging 10 times worse abroad.

    SwissRambler,
    The only reason why Real Madrid and Barcelona are showing an profit is because they only show an operational profit.
    The idea that they make money on the player by selling T-Shirts and cashing on the players’ commercial image rights is fanciful in the extreme.
    European Club makes about €10 per T-Shirts. At €40 millions even Benzema (the cheapest of the three major star bought last season) cannot repay their investment.
    The only reason why they have those huge star is because they negotiate theor own lucrative TV deal. They therefore need to have that star quality at home and abroad to attract the highest bid possible. That is why they they need to create that buzz whenever the new contract is up or the season before.
    That was the case last year, now that the new contract has been signed they have less a need to impact.
    Ibrahimovic to Barcelona was exactly the same principle. Yes getting rid of Eto was important for the dressing room, but Inter would have taken Eto for Ibrahimvic anyway. Remember the previous year where Barcelona won everything and got their thunder stolen by Real and its super stars. By officially paying over the odd for Ibrahimovic they created some buzz. Unfortunately that did not translate on the pitch where Ibrahimovic just showed how unsuited to the Barcelona game he was.
    Despite negotiating their own lucrative deal and cashing on the imagie right of the players they sign both clubs (Real Mad and Barcelona) are still unable to repay their debt. They can service it, but they cannot repay the capital in full.
    If you read their papers, there is no realistic description of any timetable to repay their infrastructure loan.
    From UEFA perspective, infrastructure loan are accepted but loans without repayment schedule in place are not.
    If you allow that, that allows owners to by-pass the related ownership companies restriction. I set up a company unrelated to football and pay the bank. The bank then loan the money to the Football Club. I do not appear anywhere in the loan documentation between the Club and the bank. The rate the bank charge is just their (bribe) commission for heliping me cheating.
    I also believe that next year (2011-2012) we may see a lot of financial troubles at both spanish team.
    Because of the issue with Spanish local banks, in order to merge they have to announce their non-repaying loan and mark them to their real values. Because of the non-repayment of the loan, they will have to ask both Clubs to make a token repayment gesture without alloing them to increase their original loan. (The same way RBS asked the Liverpool Bankrupt’s owner to show the money before reconducting the original loan). I am pretty sure that will affect them in such a sense that they will not be able to make big purchase without the personnel intervention (payment o guarantee) of an external parties. Already Rosell (the most likely next Barcelona President) has said that they could not afford to pay more than €40 millions for Cesc. I think that they are likely to offer that plus Yaya Toure. Yaya Toure would be officially evaluated at €25 millions with both club saving faces.

  • Richard B

    @Valentin
    The saving of face in the Fabregas situation could be key given that we ‘stole’ him from them and Yaya Toure had a trial at Arsenal (I saw him play for us at Barnet) but we didn’t take him on despite having the chance. For both clubs there’s a chance of looking foolish but for Barcelona it will be greater because of the comparative valuation levels.
    Maybe it’s better that both players stay where they are!

  • Arsefactor

    Does it not make more sense for man city and chelsea to be buying players now that they can sell on when the regulations come in?
    So if they stock up on some high value players now then when the regs come in they can sell them and show it as profit on their books?