Tuesday, October 14, 2008

Is the EPL Recession Proof and how Investors and Debt Impact in England

On Tuesday the "Leaders of Football" met to discuss the financial state of the English Premier League in Stamford Bridge of all places. During the meeting FA Chief Lord Triesman and EPL supremo Richard Scudamore contradicted each other, and were polar opposites when it came to the finances of the EPL.

Lord Triesman spoke of his worries of "the fit and proper persons test." This is the acid test the EPL use to ascertain whether a person is of a sound background and whether they are fit and proper to run a club. The criteria for meeting this test are only applicable to British laws, hence Thaksin Shinawatra and Roman Abramovich being allowed to run English teams.

Shinawatra is wanted in his native Thailand for embezzling millions of pounds and of being at the heart of a government that has been suspected of human rights violations. Abramovich is an oligarch from Russia who has been arrested as a part of a government conspiracy and has been implicated in theft, bribery, share-dilution scandals, and blackmail.

And while neither of these gentlemen have broken any rules or laws in Britain, Lord Triesman has suggested a change to the "fit and proper persons test" to allow foreign discretions be considered.

In allowing owners with "shady" backgrounds to own clubs in England, Lord Triesman has been critical of the EPL allowing high profile billionaire owners to come into the league if they're willing to spend money on teams thus raising the profile of the EPL.

The next topic Lord Triesman raised for concern was the spiraling debt within the Premier League. The current debt between the 20 clubs stands at an estimated £3bn.

But you must take the "Big Four" clubs into account when discussing the debt. The current debt of the "Big Four" is as follows...

Manchester United £754M, Chelsea £716M, Liverpool £368M, Arsenal £352M.

When you take these figures into account it means the top four share a debt of around £2BN, while the other 16 clubs share a debt of around £1BN. This £1BN figure is further diluted between 13 clubs when you consider that the three promoted clubs Stoke, Hull and West Brom are only in debt to the tune of £10M between them.

Only this week UEFA announced new policies it hopes to have in place in time for next season which will penalise clubs who rack up debt. Under these new proposals UEFA hope to ban clubs who are in debt from competing in European competition, namely the Champions League and the UEFA Cup.

UEFA are said to be unhappy that clubs abuse their bottom line and accrue debts, they feel that these debts give certain clubs an advantage as the debts are usually incurred through spiralling wages and transfer fees.

As it stands the EPL spend £1.44BN a year on wages, with Chelsea spending a massive £130M a season. Compare these figures to the EPL's rival leagues.

Serie A spend £722M on wages, La Liga spend £822M and the Bundesliga spend a paltry £690M. In other words, EPL clubs are mortgaging their futures on wages. In accruing these massive debts clubs like Chelsea, Liverpool, United, and Arsenal are gaining an advantage over their counterparts from Europe where self financial regulation often takes place.

It should be pointed out that EPL teams are not the only clubs not to look at their balance sheets. A few years ago Real Madrid were in such debt that the banks were at foreclosing stage. Real Madrid sold property to the city of Madrid and sold other properties to four major Spanish companies to not only clear the debt, but to also pave the way for Madrid to spend more on wages during its "galactico" phase.

Lord Triesman has suggested some kind of wages cap to be looked at. It would be impossible to force an NFL style salary cap on teams, so spending a percentage of club turnover on wages seems the most likely way. In the NFL each team has a wage budget of £66M per year and this is ridgidly administered.

And with wages rising an average of 12% per year Lord Triesman sees clubs at all levels starting to haemorrhage money. "The reason I made the point about the 12% per annum growth in wages is because some of the money is flowing through the clubs inevitably, including some of the money that is in their debt package is in their wages. I will be told in no doubt, if you want to be compete at the highest level you have got to be competitive in the wages market aswell"

This seems to be where UEFA's concerns with spiralling wages in England stem from. At the moment UEFA see the EPL dominating the Champions League and the EPL, attracting some of the best players in the world through offering high wages without concern of increasing debt at the club. UEFA have also started looking at the possibility of a wages cap based on club turnover.

English League Two clubs must adhere to a wages cap. This is done through turnover, with only 65% of turnover allowed on players wages and when managers and coaches are added in, this wages total must not exceed 75%.

A similar situation is enforced in Ireland. The FAI enforce this percentage rule with an iron fist as clubs had routinely abused their financial status by incurring debt on players wages. Shelbourne were the dominant force in Irish football through the late '90s and early '00s. They always had the best players in the country as they were paying huge wages. What wasn't known was that off the field Shels had massive debts—due to a huge wage bill.

The FAI now force every professional and semi-professional club to seek a licence at the start of every season before they will be allowed compete in the league. It has gotten to the stage where the FAI employ an auditor to check the club's finances.

Shelbourne were relegated for breaking the financial rules of the league, the season after they won the Premier Division. Current Eircom League Champions Drogheda United are also expected to go into administration as their pursuit of European football has crippled the club with massive debts.

In England, certain clubs are over spending on wages. Wigan are the highest turnover spenders, spending 100% of their turnover on wages. While Tottenham are the lowest, only spending 42% of turnover on wages.

In Germany the average is 45%, this is further enhanced when you find that the Bundesliga is the most profitable league—making a profit of 18%. This profit in Germany is largely due to high attendances, the highest in Europe. However German ticket prices are the lowest amongst the main four European leagues.

Wages in the Premier League are comparable with Spain and Italy, where all three leagues spend an average of 62% of turnover on wages.

Two factors have driven wages in the EPL—television revenue, and the influx of new owners to the league. Television revenue worldwide comes to a staggering £1.7BN for the current deal and is expected to reach £2BN when the next deal is negotiated for the start of the 2010 season.

Having said that, should the current financial crisis continue it is conceivable that the new deal could possibly be lower. How this would be greeted hasn't even been brought up for discussion at this early stage.

With all 20 teams guaranteed revenue from the TV deal, clubs have looked upon this incoming money as an "interest free loan" and have factored their spending to account for this money even though it has not been received.

The problem with structuring your business in this way is you are not taking a future pitfall into account. Reading's wages doubled the season they were relegated, as they had factored future budgets around staying in the league. Portsmouth's wages have risen by 41% in two years as Harry Redknapp's charges chase Europe.

Everyone remembers Leeds United. Under David O'Leary, Leeds threatened the hierarchy of the EPL. Over a few seasons they challenged for the title and even got to the semifinals of the Champions League only to be beaten by Valencia. But it was here that Leeds' problems began.

They thought they had made the "breakthrough" and were guaranteed finishing in the Champions League positions every season. They structured their wages system to take TV revenue from the Champions League into account, even though they had to qualify the following season. They failed to finish in the top four and ended up £50M in debt.

But they tried again, and they failed again. Their debt spiralled out of control and eventually the club was asset-stripped of its best players and they plummeted through the divisions, ending up in the third tier of English football as the once great club was plunged into administration.

But TV revenue was not the only factor that drove Leeds into administration. The other factor of a new owner also had a huge effect.

Currently the most debt ridden clubs are clubs who have had new owners take over recently. Chelsea, Man United, Liverpool, Tottenham, and Newcastle are all in debt. The general feeling from Lord Triesman and the FA is that most foreign owners are not interested in the long term viability of a club, but are more interested in the higher profile their new "plaything" provides.

Early evidence seems to suggest "new owners" spending above themselves to either continue success or trying to bring success to their new club. The financial structure of the deal that saw Manchester United sold to the Glazer family was designed on debt.

Financial institutions provided massive loans for the purchase and now United have a debt of £754M. The foundations of paying this loan off are built on United's continued success, but their continued hunt for trophies is reliant on signing the best players, who all cost money.

Should United have a bad season and finish outside the lucrative Champions League places, then another Leeds situation could be on the horizon. And United are not the only club in this position.

Chelsea fans must be dreading the day Roman Abramovich walks away. At the moment they are in debt to the tune of £716M, with Bruce Buck, Chelsea's chairman, saying the debt is a "soft debt" as £619M is owed to Abramovich.

Liverpool are also in financial peril, their current debt stands at £368M but their current plans of building a new stadium could see that debt double. And the Anfield side also face the stark reality that finishing outside the top four could bring. That looks more likely for one of the big clubs now that Manchester City have become the richest club in the world.

Lord Triesman remarked "Not only is debt at such high levels, but transparancy lies in an unmarked grave."

These comments sparked EPL supremo Peter Scudamore into action, as he reacted to Lord Triesmans speech. "[The top four] are very sustainable brands. We have to be careful we don't adopt Michel Platini's view of debt, which is that it is bad. Debt is inevitable. You say debt is not healthy, but debt to a degree is healthy."

In the current global financial crisis it is extremely difficult to see English investors becoming involved in Premiership teams. Currently four teams are actively looking for new owners: Everton, West Ham, Tottenham, and Newcastle.

Should these clubs be sold to "foreign investors" a new problem will be brought to the FA's door.

Currently EPL rules state that in voting situations 14 clubs must vote in one direction for the proposal to be carried. At the moment nine clubs are foreign owned. If these four go too that would bring the total of foreign owned clubs to 13. Should it ever reach 14, the FA and the EPL face playing matches away from England in the guise of the 39th game.

And once a club is in debt, just because a new owner takes over it does not mean the slate is wiped clean, the debt is merely re-structured.

A worried Lord Triesman stated "There is one certain fact about debt, it has to be re-paid or re-financed. The only real way to reduce debt is to cut wages and transfer fees. Putting yearly profit into debt re-payment rather than the desperate and expensive endeavour towards those valuable European places. There is of course little desire for this in the Premier League. The vicious circle is unlikely to be broken by political will, such as perish the thought—a government enquiry into the financing of football"

Richard Scudamore chose the "Leaders of Football" conference to once again push the idea of a 39th game on foreign soil, and does not seem overly concerned with the financial problems of the Premier League. The current recession is a worrying time for most people and Scudamore seems to think that the current structure of the Premier League is recession proof, as there always seems to be a new owner for a club somewhere on the horizon.

Despite Lord Triesman's best efforts to bring this topic to the table, Scudamore and the EPL are unconcerned at the moment. Perhaps a club going bankrupt is the only thing that will shake them from their slumber and make them take notice of something that could destroy the game we love so much.