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FFP Breakdown by Accountant/Football Fan
Topic Started: Feb 21 2013, 02:26 PM (20,290 Views)
DaG
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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.
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ZeeZoo
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As per, United blowing the field away. Guaranteed Arsenal won't see any major improvements, the club just doesn't understand the need for trickling the profits back into the club.
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ZeeZoo
Feb 21 2013, 02:32 PM
the club just doesn't understand the need for trickling the profits back into the club.
We don't make profits outside player sales, and pretty much all the cash from player sales is pumped right back in for replacements. Please refrain from guessing in this thread.
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Wenger - We’re able to spend money now
Arsène Wenger insists Arsenal are in a position to compete for the very best talent in the transfer market - but he also wants to keep developing young players.

Having lost successive games to Blackburn Rovers and Bayern Munich, the Frenchman's squad has been under scrutiny.

Wenger says he is in a good position to strengthen this summer, but will not lose sight of the Club’s core values and principles.

“I think, now, we are in a stronger situation where we can spend some money,” he said. “We went out to spend money at Christmas but we didn't find the players.

“I'm not reluctant to spend. First of all, we only had money recently. Secondly, in England there is a way of thinking that every problem is sorted out just by spending money - but that's not always the case. If it was, the same teams would win the Champions League every year.

“I believe that the problem today is not the money, it about finding the talent that strengthens your team.

"I also believe we have to be faithful to what this club is about, which is to give a chance to the young players we educate - that is vital. Therefore [we should only] bring in the players who really give us a plus.

"If we find tomorrow a player of top, top, top quality, we will take him."

Despite their defeat to Bayern Munich on Tuesday night, Wenger insists Arsenal can still compete with Europe’s elite.

“We are not far away, but it is difficult to convince you today,” he said. “We are not so far at the moment from Bayern.

“We need to be intelligent and strong in this period. We have to keep a guideline of what we have done until now. Strengthen the team in the positions we feel we are a bit weaker. But we have a basis of a team that is very strong for me. I believe in some areas of our team we can compete with anybody in the world. We analyse all the European and English teams and in some areas of our team we are very competitive.

“We speak about the Wilsheres, the Cazorlas and we have a very strong technical basis, but we have to be more efficient.”
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I BOW TO RAIDZ
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Every year you have a fucking war chest. I'm not buying....and neither is wenger.
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DaG
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redDevilMoe
Feb 23 2013, 02:27 AM
Every year you have a fucking war chest
Nobody who knows anything about Arsenal has ever believed that though, just nonsense journalism. Ignorant prats like you eat it up though.
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Desperately trying to worm his way into a few more years of failure. Same piffle, different season.
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Swiss Ramble ‏@SwissRamble
(Gullible wanker) Interims (6 months to 30 November 2012) profit before tax £17.8m (2011 £49.5m), profit after tax £14.9m (2011 £38.0m).

Swiss Ramble ‏@SwissRamble
(Gullible wanker) Interims profit before tax of £17.8m (2011 £49.5m) split: football £15.6m (2011 £48.9m) and property development £2.2m (2011 £0.6m)

Swiss Ramble ‏@SwissRamble
Main reason for £34m fall in (Gullible wanker) football profit is lower profit on player sales £43m (2011 £63m) & match day revenue £38m (2011 £46m)

Swiss Ramble ‏@SwissRamble
(Gullible wanker) Interims player sales £43m mainly RVP and Song, while previous year £63m included Fabregas, Nasri and Clichy

Swiss Ramble ‏@SwissRamble
(Gullible wanker) Interims results: excluding property profit £2m and profit from player sales £43m, AFC actually made a loss of £27m before tax


Swiss Ramble ‏@SwissRamble
(Gullible wanker) Interims revenue £138.4m (2011 £116.7m) split between football £106.1m (2011 £113.5m) & property £32.3m (2011 £3.2m)

Swiss Ramble ‏@SwissRamble
(Gullible wanker) Interims revenue: match day £37.8m (11 £46.0m), broadcasting £40.1m (11 £40.6m), commercial £27.7m (11 £26.6m), loans £0.6m (11 £0.4m)

Swiss Ramble ‏@SwissRamble
(Gullible wanker) Interims results: cash balances still high £123m. Lower than May (£154m), due to timing of season ticket renewals

Swiss Ramble ‏@SwissRamble
(Gullible wanker) Interims gross debt cut to £246m (May 2012 £253m), while net debt worsens to £123m (May £99m) due to lower cash of £123m (May £154m)
Edited by DaG, Feb 25 2013, 04:55 PM.
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ZeeZoo
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£123M in cash reserves, that is unreal. Where those funds when trying to hang on to Fabregas/van Persie? Why such the haggle over Walcott?

Such, such tight arses.
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DaG
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ZeeZoo
Feb 26 2013, 01:08 AM
£123M in cash reserves, that is unreal. Where those funds when trying to hang on to Fabregas/van Persie? Why such the haggle over Walcott?

Such, such tight arses.
25m required for debt service reserve, plus 60m or so for working capital requirements. 30m+ left barely covers CL contingency.
Edited by DaG, Feb 26 2013, 01:25 AM.
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ZeeZoo
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DaG
Feb 26 2013, 01:25 AM
ZeeZoo
Feb 26 2013, 01:08 AM
£123M in cash reserves, that is unreal. Where those funds when trying to hang on to Fabregas/van Persie? Why such the haggle over Walcott?

Such, such tight arses.
25m required for debt service reserve, plus 60m or so for working capital requirements. 30m+ left barely covers CL contingency.
Lol, CL contingency, such a small time club fighting for survival.

Why do you need 25M for a debt service "reserve" and what are the working capital requirements?
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DaG
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ZeeZoo
Feb 26 2013, 01:31 AM
Why do you need 25M for a debt service "reserve" and what are the working capital requirements?
You got top GSCE marks in business, figure it out yourself.

Here's a hint: debt covenants
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ZeeZoo
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DaG
Feb 26 2013, 01:37 AM
ZeeZoo
Feb 26 2013, 01:31 AM
Why do you need 25M for a debt service "reserve" and what are the working capital requirements?
You got top GSCE marks in business, figure it out yourself.

Here's a hint: debt covenants
Ahhh.

So is Arsenal's finances going to get better + when will they genuinely be able to pump serious money into the team?
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DaG
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ZeeZoo
Feb 26 2013, 01:42 AM
So is Arsenal's finances going to get better + when will they genuinely be able to pump serious money into the team?
Yes, of course they will get better. As for the second question, as I've been saying for so long, 2014. We'll be able to keep everyone at the club this summer and add 2 or 3 on top of them, but we won't really be able to make a big splash if we're going to 'stay the course'.

However, if we've finished top four this season, a 20-30m kit deal will be virtually money in the bank starting in 2014, meaning that the board may back Wenger big time a year in advanced knowing that we'll have it covered in a year. Doubt that though.
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DaG
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I imagine that after we've signed the new kit deal Kroenke will look to sell up to Usmanov as share prices should increase further.
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