Millennium Post

All debts are off

The present global financial crisis is arguably the worst since the Great Depression of 1930s. The crisis has affected almost every part of the world, more so in this age of closely interdependent economies.
In the era of austerity, when extravagance sticks out like a sore thumb, the cash splurge witnessed during the just concluded transfer window for European football clubs defies all logic.

While Spanish giant Real Madrid spent a whopping €100 million to rope in Tottenham Hotspur’s Welsh winger Gareth Bale, its fiercest rival Barcelona shelled out € 57 million to sign Brazilian sensation Neymar from Santos. Juxtapose this with the falling economy of Spain, where overall unemployment has risen to 26% leading to massive cuts in social spending, the disparity is there for everyone to see.

But how do these clubs manage to spend such enormous sums on individual players? To begin with, the sheer amount of revenue being generated by these clubs are mind-boggling. According to figures released by leading financial consultancy firm Deloitte (2011/12), Real Madrid top the table with revenues worth €512.6 million (7% increase from 2010/11), followed by Barcelona at €483 million (7.5% rise from 2010/11) and Manchester United at €395.9 million.

Real’s revenue is spread out evenly – 40% generated from broadcasting deals, 36% through commercial deals and 24% via match-day earnings (ticket sales etc). Barcelona’s revenue is also spread out in similar fashion – broadcasting deals worth 40%, 35% through commercial deals and 25% via match-day earnings. It is evident that neither club is heavily dependent on one source of revenue.

Recent lucrative commercial deals signed by Barcelona include the first ever paid shirt sponsorship with Qatar Airways worth €30 million a year (plus €15m for ‘commercial rights’ in 2010/11) which will run up to 2015/16. Real Madrid, this year, signed a shirt sponsorship deal with Fly Emirates worth €29.5 million per year for five years. The key element in their stupendous revenue generation boils down to one major factor, broadcasting revenue. Unlike most European leagues, where broadcasting rights are collectively sold, in Spain, clubs individually market their broadcasting rights.

Real Madrid and Barcelona signed deals worth €140 million a year till 2014/15. Valencia, third on the list of Spanish clubs, generate €48 million. To fathom the difference broadcasting rights make, let us take the example of the successful commercial powerhouse like Manchester United. The English champions generated income worth €70 million (approx) at the end of 2012/13 season, via a collective deal, which is barely half of what clubs like Real Madrid and Barcelona generate.

In English Premier League this year, domestic media rights packages were sold at £1.78 billion, of which 50% is equally divided amongst the 20 clubs, 25% is divided according to merit in terms of where they finish in the league and 25% is based on number of matches shown on television involving the club.
Another aspect of this operation is marketability of marquee signings like Cristiano Ronaldo or Gareth Bale.

The amount Real Madrid paid for Ronaldo was allegedly recouped within his first season at the club through shirt sales amounting to €100 million, according to reports from a Portuguese publication A Bola. With nine UEFA Champions League titles, Real Madrid are considered to be European football royalty. Besides shirt sales, notions of prestige, continued success and swashbuckling playing style have always been attached to a club like Real Madrid.

They have a global fan base ranging from East Asia to Latin America. Sponsors drive in droves to have their brand attached to Real Madrid. Barcelona too isn’t far behind due to their recent dominance of European football, winning two Champions League titles in the last four seasons. The club possess arguably the best player in the present era, Lionel Messi, and play attractive football which helps its fan base expand around the globe. These intangibles play a very definitive role in attracting high-end commercial deals.

Coming back, there is a saying ‘Revenue is Vanity’, Profit is Sanity’. After accounting for interest, depreciation and amortisation (explained a little further down), Real are left with a profit of €32.3 million. On similar footing, Barcelona is left with a profit of €48.8 million. Revenues are high and they’re in the green, with no losses accrued.

However, there is another side to the picture. Media reports last year ran a story, stating Real Madrid is in debt to the tune of € 590 million and Barcelona’s debt is reported to be worth €578 million. Prior to the acquisition of Gareth Bale, Arsenal manager Arsene Wenger said, ‘It makes a joke of the financial fair play regulations. I find it amazing that in the year the regulations come in, world football has gone completely crazy.’

For those unaware of financial fair play (FFP), here is a brief explanation. It was a measure brought in 2011 by UEFA, European football’s governing body.  In the context of many European clubs accruing huge sums of debt in the midst of the Eurozone crisis, UEFA came up with a stipulation whereby clubs must break even on football-related income and spending. They will be permitted losses of €5 million in the first three years or up to €45 million, if a wealthy owner makes a one-off payment to clear debts. Inability to comply with these stipulations could lead to clubs being debarred from participating in prestigious European tournaments.

Coming back to debt figures, a slight clarification is required. In essence, those figures are misleading as it includes things like season-ticket sales for the upcoming campaign and transfer fees (on players) not scheduled to be paid in that year’s accounts, both of which are more  liabilities than debts. When it comes to big money transfers, the entire sum is usually paid in stage payments. There is an accounting term that comes into play called amortisation, which simply put, is the annual cost of writing-down a player’s purchase price.

For example, Real Madrid striker Karim Benzema was bought for €35 million from Lyon on a six-year contract. This transfer is reflected on the club’s yearly accounts through amortisation, which is paid evenly over the entire period of his contract, and this roughly comes up to €6 million per year. Therefore, for that year’s accounts, €6 million is shown as the cost of buying Benzema.

All major companies hold debt. The key is to maintain, like in all businesses, healthy ratios against assets on the balance sheet and having the cash flow to repay it when due. UEFA’s understanding of debt comes down to, ‘A club’s net player transfers balance (i.e. net of accounts receivable from players’ transfers and accounts payable from players’ transfers) and net borrowings (i.e. bank overdrafts and loans, owner and/or related party loans and finance leases less cash and cash equivalents).’

According to this definition, Real’s actual debts are about €125 million (2011/12), down from €170 million the previous year. FC Barcelona’s debt figures are down to €335 million (2011/12) from €364 million the previous year (€ 430 million in 2009/10). In the space of two years, Barcelona has reduced debt by €95 million.

However, considering the banking crisis in Spain, where major banks were bailed out by the European Commission (EC), it wouldn’t be terribly unfair of Uli Hoeness, president of Bayern Munich, to say, ‘This is unthinkable. We pay them hundreds of millions to get them out the shit and then the clubs don’t pay their debts.’

He does have a point with regard to other clubs in Spain, which have burdened themselves with such enormous debts that they’re struggling to function. But Real and Barcelona, have steady flow of cash to pay these debts. As FC Barcelona president, Sandro Rossell, said, ‘The club is not bankrupt, because it generates income. The banks know we have a business plan that will allow them to recover the money.’ By the evidence provided above, he does have a point.

– With inputs from The Swiss Ramble

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