Tuesday, February 9, 2016

Crystal Palace - Mind Over Money


Despite a fair degree of managerial upheaval, the 2014/15 season turned out just fine for Crystal Palace, as they finished in 10th place in the Premier League, an improvement from 11th the previous year.

Tony Pulis unexpectedly resigned just two days before the first game and was replaced by Neil Warnock who returned to the club for a second spell as manager. This didn’t work out very well, so in early January the Eagles brought in former Palace player Alan Pardew, who guided the club to the upper half of the table.

Not only did this ensure a third consecutive season in the Premier League, a feat that they have only managed twice before, but this was their best finish in England’s top flight since 1991/92, when they also finished 10th. In fact, that was the equal-second highest position the Eagles have ever finished in the football pyramid, having placed third in 1990/91. They also recorded 48 points and scored 47 goals, the most achieved in a 38 game Premier League season.

This is a far cry from 2010 when the South London club was in administration and prospects looked fairly grim before they were rescued by a consortium of wealthy businessmen, known as CPFC 2010 and fronted by Steve Parish.

"Mr. Bolasie"

Since then, Palace have enjoyed a splendid renaissance, as chief executive Phil Alexander observed, “We have made some very, very good decisions for the future of this club. It is in a very healthy place right now, but we’ve got to build on this and keep pushing forward.”

This explains the decision to allow US investors Josh Harris and David Blitzer to take a 36% stake in the club in December. There will be an initial £50 million injection of capital with more cash to follow. Harris and Blitzer will join chairman Steve Parish in a general partnership structure, with each of them having an 18% share, while the other members of the CPFC 2010 consortium (Stephen Browett, Jeremy Hosking and Martin Long) will also retain a “substantial” shareholding.

The club said that the deal “offers the best opportunity to build on the enormous progress made over the last five years”, adding, “while overseas investors are joining us, the heart and soul of the club remains in South London.”

The deal is further evidence of Palace’s steady, long-term strategy, as the money is intended for development of the stadium and the academy, as opposed to a short-term boost to the playing squad.

"McArthur Park"

Given some of the issues experienced with overseas investors at other clubs, some supporters will surely be concerned about Palace’s future direction, but the new arrivals are certainly saying all the right things: “We were drawn to the club’s rich history, exciting brand of football, strong leadership and, above all, its passionate fans.”

That said, Palace’s solid financial position probably did not hurt, as they have a very low cost base and no external debt (actually they have relatively high cash balances) with the massive new Premier League TV deal just around the corner. In fairness, the new investors are clearly passionate about sport, owning franchises in the NBA Philadelphia 76ers and NHL New Jersey Devils.

Furthermore, Parish emphasised that the success of their investment was dependent on Palace continuing to progress: “These guys aren’t interested in taking money out, they’re interested in the club increasing in value, which it will only do if we do the right things. So, the fans’ interests, their interests and my interests are completely aligned. They see an amazing opportunity – 900,000 people living in Bromley and Croydon, 2.4m in southeast London and no other professional (Premier League?) clubs until you get to Southampton.”


Palace’s development can be seen in their financials, as the club recorded a second successive year of profits in 2014/15, though profit before tax fell by £15 million from £23 million to £8 million. A lower tax charge meant a smaller reduction of £12 million in profit after tax from £18 million to £6 million.

Revenue rose by £12 million (13%) from £90 million to a record level of £102 million with increases in every revenue stream. Broadcasting income was £5.5 million (7%) higher at £79.7 million, partly due to the higher Premier League finish, but the most impressive growth came in commercial income, up £5.6 million (82%) to £12.5 million. Gate receipts also rose by £0.9 million (10%) to £10.2 million.

According to the club, “the main reason for the reduction in profitability was that further investment was required to acquire and strengthen the squad to remain competitive as well as continued investment in the infrastructure.” This translated to significant increases in the wage bill, up £22 million (49%) from £46 million to £68 million, and player amortisation, up £5 million (88%) from £6 million to £11 million.

Other non-cash expenses, player impairment and depreciation, also increased by £1 million, though other expenses were cut by £1 million from £14 million to £13 million. This presumably includes the £1 million write-back of impairment on the investment in CPFC Limited, due to that company’s improved trading position and profitability.


Despite the reduction in profits, Palace’s figures still look pretty good and are the fifth best of the 11 Premier League clubs that have so far published their 2014/15 accounts, only surpassed by Arsenal £25 million, Southampton £15 million, Hull City £12 million and Manchester City £10 million. Palace’s financial acumen had already been demonstrated in 2013/14, when they produced the fifth highest profit before tax in the top tier, which is a fine achievement for a club of their size.

Moreover, it is far from unusual for Premier League clubs to report lower profits in the second year of the television deal’s three-year cycle, as there are limited possibilities for revenue growth, while wage bills continue to grow apace.


The only teams that have significantly grown profits in 2014/15 were both boosted by once-off events: Manchester City had higher profit on player sales and exceptional charges (FFP fine) the previous season; Arsenal also had higher profit on player sales and reported more profit from property development.


The influence of player sales on a football club’s figures is clear, as the four Premier League clubs that have reported higher overall profits than Palace in 2014/15 were all helped by healthy profits from player sales: Arsenal £29 million (Vermaelen to Barcelona, Vela to Real Sociedad), Southampton an amazing £44 million (Lallana and Lovren to Liverpool, Chambers to Arsenal), Hull City £9 million and Manchester City £14 million

In contrast, Palace’s profits have been achieved without the benefit of meaningful profits from player sales, which were worth less than half a million in 2014/15, the lowest of all the clubs that have published accounts for last season. This was actually higher than 2013/14 when they only made £92,000 from this activity.


Since CPFC 2010 came into existence, Palace’s finances have been on an upward trend. Losses reduced in the first two years (2011 – £9 million, 2012 – £2 million), followed by rising profits in the next two years (2013 – £2 million, 2014 – £23 million), before 2015’s fall to £8 million.

Nevertheless, in the two years since promotion to the Premier League, Palace have delivered combined profits before tax of £31 million, which is (to date) only beaten by Manchester United and Southampton.

As we have seen, many clubs have effectively been subsidising their underlying business with profitable player sales, but this has not been the case at Palace, as they have only made £17 million from player disposals in the last five years.


Indeed, Palace have only exceeded £2 million once in that period, namely 2012/13 when they made £14 million profit from player sales, mainly Wilfred Zaha to Manchester United and Nathaniel Clyne to Southampton, which the club rightly described as “a great testament to our continued investment in the Academy.”

Of course, this is somewhat of a double-edged sword, as the lack of profitable player sales might have an adverse impact on the bottom line, but it could also be considered as a sign that the club has done well to keep its squad together.

Palace’s figures have sometimes been influenced by exceptional items in the past few years. For example, the 2011 figures were restated to reflect the full impairment of goodwill (excess of the purchase price compared with the fair value of net assets acquired) following the acquisition of the club. The price of success was then seen in the 2013 accounts, which included a £5 million once-off payment arising from promotion.

It is not clear where the compensation package agreed with Newcastle United to take manager Alan Pardew away from the Geordies has been booked in these accounts, though this has been reported as £2-3 million.


It is worth exploring how football clubs account for transfers, as it can have such a major impact on reported profits. The fundamental point is that when a club purchases a player the costs are spread over a few years, but any profit made from selling players is immediately booked to the accounts.

So, when a club buys a player, it does not show the full transfer fee in the accounts in that year, but writes-down the cost (evenly) over the length of the player’s contract. Therefore, if Palace were to spend £15 million on a new player with a 5-year contract, the annual expense would be only £3 million (£15 million divided by 5 years) in player amortisation (on top of wages).

However, when that player is sold, the club reports straight away the profit on player sales, which is essentially equals to the sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold 3 years later for £18 million, the cash profit would be £3 million (£18 million less £15 million), but the accounting profit would be much higher at £12 million, as the club would have already booked £9 million of amortisation (3 years at £3 million).


This is all horribly technical, but it does help explain how some clubs can spend big in the transfer market with relatively little immediate impact on their reported profits.

Notwithstanding the accounting treatment, basically the more that a club spends, the higher its player amortisation. Thus, Palace’s player amortisation has shot up from less than £1 million in 2013 to an £11 million peak in 2015, reflecting renewed activity in the transfer market.

Palace have also booked £2 million of impairment charges in the last two seasons. This happens when the directors assess a player’s achievable sales price as less than the value in the accounts.


In our example, if the player’s value were assessed as £4 million after 3 years instead of the £6 million in the accounts, then they would book an impairment charge of £2 million. Impairment could thus be considered as accelerated player amortisation. It also has the effect of reducing the annual player amortisation going forward.

In any case, despite nearly doubling in 2015, Palace’s player amortisation of £11 million is still one of the lowest in the Premier League. It is obviously miles behind the really big spenders like Manchester United (£100 million), Manchester City (£70 million) and Chelsea (£69 million), but it is also below the likes of Swansea City (£18 million) and Stoke City (£12 million).


The other side of the player trading coin is that player values have also surged since promotion, rising from £1.4 million in 2013 to £31.9 million in 2015. Parish also noted that “the depth of squad is bigger than in the Championship.”

As player trading (and particularly profits from player sales) have had a limited impact on Palace’s figures, the improvement in their bottom line is very largely due to the profitability of their core operations.


This can be seen by looking at the club’s EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which can be considered as a proxy for the club’s profits excluding player trading – even though the famous investor Warren Buffett once memorably cautioned, “References to EBITDA make us shudder. It makes sense only if you think that capital expenditure is funded by the tooth fairy.”

Palace’s EBITDA was slightly declining (and negative) in the Championship, but has shot up in the Premier League, reaching £30 million in 2013/14, before falling back to £21 million in 2014/15.


That’s still pretty good and is only really outpaced by clubs that have higher revenue generating capacity. Obviously Palace are a long way behind those clubs that Sam Allardyce sometimes refers to as the “big boys” (Manchester United £120 million, Manchester City £83 million and Arsenal £63 million), but they are actually ahead of major clubs like Chelsea and Everton.

Since promotion Palace’s revenue has grown by more than 600% from £14.5 million to £102.4 million with all revenue streams benefitting from the elevation: broadcasting income is 20 times as much (£4 million to £80 million), while commercial is three times as high (£4.4 million to £12.5 million) and gate receipts are two-thirds higher (£6.2 million to £10.2 million).


Although probably not a financial reference, no wonder part-owner Steve Browett said that promotion to the Premier League “was never the plan, it was the dream.” That said, the club is acutely aware of the risk of going in the opposite direction: “Relegation would have significant implications for the group’s core revenue.”

The main reason for the increase in the Championship in 2012 was a successful Carling Cup run where Palace reached the semi-finals, beating Manchester United on the way.

Even after this revenue growth, Palace’s 2015 revenue of £102 million is still one of the lowest in the Premier League. All clubs are yet to report, but it looks like Palace had the 14th highest revenue last season.


It should be noted that this ranking is based on the revenue figure in the club’s accounts, which is £2 million more than the £100 million used by Deloitte in their annual Money League, which places Palace 16th in England. Either way, they have consistently outperformed their revenue, e.g. finishing 11th last season.

There is now a bunching of a few clubs at the £100 million level along with Palace: Leicester City, Swansea City, Sunderland, Stoke City and West Bromwich Albion.

The increase in revenue, fuelled by the TV deals, has led to the rise of the middle class clubs. As Parish observed, “The gap’s closing. The top clubs can only have squads of 25. They can’t buy every good player though they still turn over £500 million. I turn over £100 million. Our job is to bridge that gap, but over a long period you’re only ever going to be an Atletico Madrid. You can’t be a Real Madrid.”

Of course, Palace’s revenue is still miles below the English elite, e.g. Manchester United’s £395 million is around four times as much, while four other clubs earn £300 million or more: Manchester City £352 million, Arsenal £329 million, Chelsea £314 million and Liverpool £298 million.


Palace made their debut in the Money League last season in 27th place, along with Leicester City and West Brom. As Deloitte observed, “This is again testament to the phenomenal broadcast success of the English Premier League and the relative equality of its distributions, giving its non-Champions League clubs particularly a considerable advantage internationally.”

That’s obviously a fine accomplishment, but it does not really help Palace domestically, as no fewer than 17 Premier League clubs feature in the top 30 clubs worldwide by revenue. Parish has underlined this point, “This is the richest league in the sporting world by miles, but we have to be careful, as we are competing with each other.”

Even so, Palace now generate more revenue than famous clubs like (deep breath) Napoli, Valencia, Seville, Hamburg, Stuttgart, Lazio, Fiorentina, Marseille, Lyon, Ajax, PSV Eindhoven, Porto, Benfica and Celtic.


Parish gave an example of the new footballing landscape: “We had an Italian club visit us when we got promoted. A club I remember, as a kid, winning UEFA Cups. The meeting was basically, ‘Which of our players do you want to buy?’ And then you look at turnover and think, ‘Wow, we have twice theirs.’”

Clearly, TV money is the main driver behind Palace’s new standing on the world stage, contributing an incredible 78% of the club’s total revenue, though this has actually reduced from the previous season’s 82%, as commercial income has risen from 8% to 12%. Gate receipts remain at 10%.


This might sound very worrying, but this is fairly common in the Premier League. For example, in 2013/14 half the clubs in the top flight were dependent on TV for more than 70% of their revenue, with four clubs earning 80% of their revenue from broadcasting, namely Palace (“leading the way”), Swansea City, Hull City and West Brom.

Nevertheless, Parish is well aware of the need for growth in the other revenue streams: “We’re about £12 million away from the next step up: Everton, Villa, West Ham, Newcastle. We’re clicking at £22 million non-TV income. They’re at £35-£39 million. That’s the only dial we can move: bigger, nicer stadium.”

In 2014/15 Palace’s share of the Premier League TV money rose 6% from £73 million to £77 million, due to finishing one place higher in the league and being shown live on one more occasion. The distribution of these funds  is based on a highly equitable methodology, described as a “masterstroke” by Parish, with the top club (Chelsea) receiving £99 million and the bottom club (QPR) getting £65 million, a ratio of around 1.5.


Most of the money is allocated equally to each club, which means 50% of the domestic rights, 100% of the overseas rights and 100% of the commercial revenue. However, merit payments (25% of domestic rights) are worth £1.2 million per place in the league table and facility fees (25% of domestic rights) depend on how many times each club is broadcast live.

Given the importance of TV money to Palace’s business model, it is unsurprising that Parish has a good understanding of the mechanics: “The league is infinitely more financially valuable than any cup. Moving up just two places is worth as much as winning the cup (i.e. £2.5 million).”

In this way, Palace’s climb up the league table has really helped boost their revenue. For example, if they had only just escaped relegation (by finishing 17th), their merit payment would have only been £5 million, compared to the £13.7 million they actually received. Palace’s finances would also be helped if they were shown live more often, e.g. they received £9.5 million for being broadcast 11 times, compared to, say, Tottenham’s £14.8 million for being shown live 18 times.


The blockbuster new TV deal starting in 2016/17 only reinforces the need to stay in the Premier League. My estimates suggest that Palace would receive an additional £34 million under the new contract, increasing the total received to an incredible £112 million, though even that might be conservative, given the size of the overseas deals announced. As Parish surmised, “To think we might have more TV revenue than Barcelona. Higher wage bill than Atletico Madrid. It’s insane.”

Gate receipts rose by 10% (£0.9 million) from £9.3 million to £10.2 million, for a number of reasons: (a) average attendance slightly increased from 24,114 to 24,421; (b) there were two more home games staged at Selhurst Park; (c) many 2013/14 season tickets were pre-sold at Championship prices.


In fact, last season had the highest number of season ticket holders in Palace’s history with the stadium full for nearly every game (apart from the odd away section). Even though Palace’s attendance is one of the smallest in the top flight, only ahead of Hull City, Swansea City, Burnley and QPR, their fans do provide great support. As Pardew said, “It has the best atmosphere in the Premier League – bar none.”

Although season ticket prices went up by an average of 21% following promotion, they are still among the cheapest in the division and have since been frozen for two seasons. Attendances have grown from below 15,000 six years ago to just under 25,000 this season.


A combination of these factors mean that Palace’s match day revenue is one of the lowest in the Premier League. To place their £10 million into context, Arsenal generates over £100 million a year from this revenue stream, which means that they earn more from three matches than Palace do in an entire season.

As mentioned, one of the main drivers of accepting external investment was to provide funds to develop the stadium, expanding Selhurst Park to a 40,000 capacity arena, including 2,000 lucrative, corporate seats.

The plan is to build a new main stand on top of the current one, retaining the existing ordinary seating, but adding a new premium deck. The thinking was outlined by Parish: “The direction of travel for clubs has to be as much corporate as you can get, then keep the price of general admission low.”


Palace have done well to grow their commercial income by 82% (£5.6 million) from £6.9 million to £12.5 million in 2014/15, comprising sponsorship and advertising £3.6 million, other commercial activities £4.8 million and other income £4.1 million. This has taken Palace above Southampton, West Brom and Swansea City, though the leading clubs are practically out of sight: Manchester United £197 million, Manchester City £173 million, Liverpool £116 million, Chelsea £108 million and Arsenal £103 million.

Progress has been made on the principal sponsorship deals following promotion. According to club sources, the shirt sponsorship has gone up from £500k in the Championship (GAC) to £2 million last season with Neteller (a service from online payments provider, Optimal Payments) to the current deal with online gaming company Mansion House worth around £3 million a season.

This is still a long way below the leading clubs, e.g. Manchester United’s Chevrolet deal is worth £47 million, while Chelsea’s new agreement with Yokohama Rubber is for £40 million, but it does better reflect Palace’s profile. The club also signed a new two-year kit supplier deal with Macron from 2014/15, replacing Avec, a subsidiary of Nike, as a sign of their more elevated status.


Given Parish’s marketing background, it is no surprise that the chairman is keen to “create a brand position for the club” that could be the source of future sponsorship income, based around qualities like its South London identity, a magnificent crowd atmosphere and player development.

For the first time last year Palace featured in the Brand Finance list of the 50 most valuable brands in world football, “Crystal Palace have returned emphatically to the Premier League, which has strengthened the brand and given it a great platform and exposure to big global audiences.”

As a sign of growing commercial focus, Parish has talked of expansion in America, facilitated by its new owners: “The US represents a particular area of interest for us. We have quite a US centric brand. I’ve always said that if somebody from America bought a football club and wanted to rename it, they might call it something like Crystal Palace. Red and blue. An eagle as its mascot emblem.”


The wage bill rose by 49% (£22 million) from £46 million to £68 million, which means that it has increased by £49 million since promotion. The important wages to turnover ratio has also worsened from 51% to 66%, though in fairness it is much better than the 129% reported in the last Championship season (though this included £4.6 million of promotion bonus payments).

The reasons for the growth include better players signed to strengthen the squad, contracts extended on higher wages, bonus payments for Premier League survival (last year contingent liabilities included £5 million for this eventuality) and an increase in headcount from 142 to 187 (players, managers and coaches up from 88 to 102, administration and commercial up from 54 to 85).


Palace’s wage bill will continue to rise, as evidenced by the purchase of Yohan Cabaye, which Pardew confirmed has broken the club’s wage structure. Parish added, “Nothing about the Cabaye deal is a bargain: we paid full whack to the club, full whack to the player. But sometimes you just have to pay to take you to another level.”

Palace’s 16% increase in the wages to turnover ratio to 66% is by far the highest reported to date in 2014/15, but basically only brings them into line with most Premier League clubs, e.g. Swansea City 69%, Chelsea 69%, Stoke City 67%, Southampton 63%, Everton 62% and West Ham 60%.


Palace’s £68 million wage bill is still firmly at the lower end of the wages league, which is one of the main reasons for their high operating profits. To place this into context, the top four clubs all have wage bills around the £200 million level: Chelsea £216 million, Manchester United £203 million, Manchester City £194 million and Arsenal £192 million.

What is interesting is the convergence of many mid-tier clubs at around the £70 million level: West Ham £73 million, Southampton £72 million, Swansea City £71 million, Sunderland £70 million (2013/14 figures), Aston Villa £69 million (2013/14), Palace £68 million, Stoke City £67 million and West Brom £65 million (2013/14).


Parish is of the opinion that simply increasing spending is no guarantee of success, “One of the great myths in the Premier League is that the more money you spend the better you do.” He can point to Leicester City’s rise and the increasingly competitive nature of the Premier League as evidence for his theory, but it is still a real challenge for clubs like Palace to consistently compete with the financial might of the leading clubs.

The chairman has made another good point about player salaries: “The wages in the Premier League are crazy. They’re mad compared to any other league and the problem we are giving ourselves is, if we want to sell a player, there are no other leagues in the world that can afford them.”


After many years of net sales, including some forced player selling as a result of administration, Palace have averaged net transfer expenditure of £22 million annually in the last three years (per the Transfer League website).

Last summer saw the arrivals of Cabaye, Connor Wickham and Alex McCarthy, which Parish described as “investing heavily… to continue to bring this club up to the standard required to be a force within this division.”

Over the last three seasons, Palace actually have the 8th highest net spend in the Premier League, around the same level as Newcastle United, Everton and Chelsea. However, in many ways this is simply the logical result of promotion, as the club explained, “We had to assemble a team to compete in the Premiership in a reasonably short window.”


They have struggled a little in the recent window, as shown by the short-term deal with Emmanuel Adebayor, a striker that often flatters to deceive. Parish explained the club’s predicament thus: “We are trying to improve on where we are. If you want to go up from 10th or 11th in the Premier League, you are dealing with players towards the top of the pyramid. The quality narrows and the prices go up and it makes them more difficult to get. It is good news we're in that market, but it's a much tougher market to deal in.”

Many supporters have hoped that the American investment would finance the purchase of new players, but Parish has emphasised that this money is earmarked for infrastructure investment: “I should stress, this isn’t for new players. We can manage that out of our own resources.” Nevertheless, there should still be a little more money available, as the money currently spent on the stadium and academy can be diverted to the playing squad, but we are not talking huge sums.


However, as Pardew noted, “The most important factor is we are under no pressure financially. So when a club does come to talk to us about one of our star performers, they will have to drive a very hard bargain and really twist our wrist.” This gives the chance a better chance of hanging on to key players like Yannick Bolasie.

Palace are in the fortunate position of having no external bank debt. The only debt that the club has is £10.7 million of interest-free shareholder loans, split between the four owners: £3.0 million from each of Steve Parish, Stephen Browett and Jeremy Hosking plus £1.7 million from Martin Long. In fact, once £28.7 million of cash is considered, the club actually has net funds of £18.0 million.


In addition, £8.9 million is owed to other football clubs for transfer stage payments (up from £2.7 million), though Palace’s contingent liabilities, dependent on things like number of appearances, are now only £0.3 million. After year-end Palace spent £21.5 million on new players, but recouped £7.4 million in sales proceeds.

Palace’s £11 million gross debt is also one of the lowest in the Premier League, which must have been attractive to their new investors. In fact, there are actually five clubs with debt above £100 million, namely Manchester United £411 million, Arsenal £234 million, Newcastle United £129 million, Liverpool £127 million and Aston Villa £104 million.


Palace’s prudent approach is evident from looking at the cash flow statement. In the two years after the club exited administration, the owners provided £14.7 million of financing, split between the £10.7 million of debt and £4.0 million of new share capital, but the club has not needed any additional funding since 2012.

The impact of promotion to the Premier League is particularly striking, as Palace have generated an impressive £78 million from operating activities in the last two years. They have spent around half of that (£40 million) on player purchases (net), £9 million on capital expenditure, £4 million on tax, while they have put £25 million into the bank account – another tick in the box for the Americans.


The capex was used in many areas, including the purchase of the training ground in Beckenham for £2.3 million in 2013, new bar and restaurant facilities in the stadium, improvements to the retail catering areas and a new pitch with undersoil heating.

Palace’s cash balance of £29 million is actually the 6th highest in the Premier League, only behind Arsenal £228 million, Manchester United £156 million, Manchester City £75 million, Tottenham Hotspur £39 million and Newcastle United £34 million.


One challenge that Palace will have to confront is the Premier League’s new Financial Fair Play rules, or more accurately its Short Term Cost Control regulations. Given their return to profitability, they will have no problems meeting the loss targets (no more than £105 million aggregated over a three-season period between 2013 and 2016), but they might well have issues with the wage bill targets.

Specifically, clubs whose player service costs are more than £52 million will only be allowed to increase their wages by £4 million per season for the three years from 2013/14. However this restriction only applies to the income from TV money, so any additional money from higher gate receipts, new sponsorship deals or profits from player sales can still be spent on wages.

Parish is aware of this problem: “There are regulations, cost control measures and targets we have to hit. And we were close with ‘issues’ in that respect.” My guess is that they have just about managed to stay within this de facto salary cap in 2014/15, though this could be a real headache in future years – unless the rules are amended in light of the new TV deal.

"Dann! Dann! Dann!"

For the time being, Crystal Palace are a great story. The Eagles survived administration and have managed to establish themselves in the Premier League, one of the most competitive divisions around.

It will clearly be difficult to maintain their upward momentum, as the air becomes even more rarified at the highest levels, but the sensible approach adopted by Palace’s owners should be applauded.

While some supporters might prefer a “pedal to the metal” strategy, Palace are likely to continue to follow their course, which Parish has described as “evolution rather than revolution” – even with the additional funds injected by their American investors. Given the club’s previous flirtation with financial disaster, that seems fair enough.

Monday, February 1, 2016

Money League - Oh! You Pretty Things


A couple of weeks ago Deloitte published the 19th edition of their annual Football Money League, which ranks leading clubs by revenue, this time for the 2014/15 season. On the face of it, little has changed compared to the previous year, as Real Madrid once again top the table for the 11th year in a row with annual revenue of €577 million (£439 million), and there are no new entrants in the top 10.

However, there has been some movement with Barcelona (€561 million) overtaking both Manchester United (€520 million) and Bayern Munich (€474 million) to reclaim second place, as they became only the third club to break the €500 million revenue barrier.


In turn, United fell to third place, while Bayern dropped to fifth place, the first time in 12 years that it has slipped down the table. Paris-Saint Germain (€481 million) climbed to fourth place, the highest position ever achieved by a French club, on the back of their commercial growth.

The seemingly inexorable rise of the English clubs continued apace, as the top 20 now includes nine clubs from the Premier League. Although the Spanish giants still lead the way, there are no fewer than five English clubs in the top nine: Manchester United £395 million, Manchester City £353 million, Arsenal £331 million, Chelsea £320 million and Liverpool £298 million.


Then, a fair way back, come Tottenham Hotspur £196 million, Newcastle United £129 million, Everton £126 million and West Ham £122 million.

Total revenue for the top 20 clubs rose €470 million (8%) from €6.161 billion to €6.631 billion, split between commercial €2.7 billion (41%), broadcasting €2.6 billion (39%) and match day €1.3 billion (19%).


However, individual clubs sometimes have a very different revenue mix. Within the top 20, the highest reliance on a specific revenue stream was as follows: match day – Arsenal 30%; broadcasting – Everton 69%; commercial – Paris-Saint Germain 62%.

On the other side of the coin, the clubs with the smallest share of their total revenue from each category were: match day – Milan 11%; broadcasting – Paris-Saint Germain 22%; commercial – Everton 16%.


It is worth emphasising the role that exchange rates play in these rankings, as Sterling has strengthened by 10% against the Euro (moving from 1.1958 last year to 1.3145 this year). This has greatly benefited the English clubs relative to their continental counterparts. In fact, around half (€262 million) of the €532 million year-on-year growth for this year’s top 20 clubs is purely down to this FX movement, leaving the real growth as €270 million (4%).

This effect is perhaps best highlighted with Manchester United, whose revenue increased in Euro terms by €2 million from €518 million to €520 million. However, the exchange rate movement produce a Euro increase of €51 million, so their underlying revenue actually fell by €50 million. This is backed up by looking at their figures in Sterling, where the revenue decreased by £38 million from £433 million to £395 million.


Partly as a result of this favourable movement in exchange rates, the revenue of all English clubs grew compared to 2013/14  with Liverpool €86 million and Arsenal €76 million leading the way.


It’s a slightly different story if the FX impact is stripped out, with the most impressive real growth being reported by Barcelona €76 million, Liverpool €56 million, Roma €53 million, Juventus €45 million and Arsenal €41 million. The big losers were Milan €51 million, Manchester United €50 million and Bayern Munich €14 million.

The main drivers for the revenue growth in 2014/15 were broadcasting €207 million (up 9%) and commercial €202 million (up 8%). The match day increase lagged at €60 million, but this still represented 5% growth.


The revenue growth at the leading football clubs in the last few years is remarkable, rising from below €4 billion in 2009 to the current €6.6 billion, an increase of €2.7 billion (just under 70%). Deloitte expect the €7 billion threshold to be reached next season with new TV deals driving the total towards €8 billion in 2016/17.

Perhaps surprising to some, commercial income has been the main contributor with growth of €1.5 billion (115%) from €1.3 billion to €2.7 billion, followed by broadcasting, up €1.0 billion from €1.6 billion to €2.6 billion. In the same period, match day has risen by less than €0.3 billion (25%) from €1.0 billion to €1.3 billion.


These growth rates have obviously been reflected in the revenue share. Since 2009, commercial has significantly increased from 32% to 41%, while broadcasting has eased from 42% to 39%. Match day has slumped from 26% to just 19%, its lowest ever share.

In fact, with further increases anticipated in commercial and broadcasting revenue in the coming years, the revenue that clubs generate from match day should fall in importance even more than its current record low. This trend of corporates paying more for a club’s upkeep than the match going supporters could be considered a good thing – so long as the growth elsewhere were reflected in lower ticket prices.


Real Madrid and Barcelona have the highest broadcasting revenue with £152 million apiece, as they continue to benefit from the freedom to negotiate their own lucrative TV rights deals for La Liga. Even though this is due to change next season, the new collective deal is significantly higher than the aggregate of the previous individual arrangements – and the big two will be protected from any revenue reduction.

Juventus are in third place, partly due to receiving the highest Champions League distribution of £68 million (€89 million). This is heavily influenced by their share of the Italian market pool, due to a combination of a very good TV deal and the fact that they only had to divide this with one other Italian club, Roma, as these were the only two to qualify for the group stages.

"Play to win"

The importance of revenue from European competition is highlighted by Paris Saint-Germain, whose £43 million payout was actually higher than their domestic money £38 million. Similarly, Atletico Madrid generated half of their broadcasting money from Europe. This will be further emphasised by the higher Champions League deal starting from the 2015/16 season.

The English clubs fill all the places between fourth and tenth for broadcasting income, thanks to the size of the Premier League contract. This is even before next year’s blockbuster deal, which should increase the TV revenue of the top clubs by around £50 million a season.

The relative weakness of the Bundesliga TV deal is evidenced here with the German clubs towards the lower end of the table. Their domestic money is nowhere near the English clubs: Bayern Munich £43 million, Borussia Dortmund £37 million and Schalke £33 million.


Commercially, six clubs are well above the rest: Paris-Saint German £226 million, Bayern Munich £212 million, Manchester United £201 million, Real Madrid £188 million, Barcelona £186 million and Manchester City £174 million. There then follows a big gap to Liverpool at £116 million.

Indeed, there is much work to do for many English clubs on the commercial side with three of them filling the bottom spots: in the top 20: Everton £20 million, West Ham £24 million and Newcastle £25 million.

"The Leader"

PSG benefited from renewed deals with Emirates and Nike, but the lion’s share of their revenue comes from their innovative €200 million arrangement with the Qatar Tourism Authority. Barcelona also saw a hefty commercial increase, partly due to additional sponsorship bonuses paid in their treble winning season.

There seems little sign of a saturation point being reached commercially, at least for the elite, as Manchester United’s revenue will further increase in 2015/16 following the start of their record £750 million ten-year Adidas kit deal. Moreover, in the last few days the media has reported that even this mega deal will be eclipsed by Real Madrid signing a new 10-year contract, also with Adidas, for a staggering £106 million a season.


Arsenal have the highest match day revenue in the world with £100 million, despite the Emirates Stadium having a substantially lower capacity than the Bernabéu, home of Real Madrid, and Nou Camp, Barcelona’s famous ground. This is a reflection of Arsenal’s ticket prices and a high proportion of corporate seating.

Match day revenue has more than doubled from the £44 million Arsenal generated in their last season at Highbury, which helps explain why Tottenham and Chelsea are so keen to redevelop their grounds. Even though the construction is a significant investment, football clubs still need to assess this option or risk falling further behind their rivals.

What is particularly striking is the low match day income for Italian clubs. Juventus’ move to a club-owned stadium has helped increase their revenue to £39 million, but the others’ revenue is miles behind: Roma £23 million, Milan and Inter both £17 million. It was recently reported that the average attendance in Serie A had dropped below 22,000 in the 2015/16 season.


For the fourth time in the last seven seasons the Money League top 20 clubs is wholly populated by representatives from the “Big Five” leagues, namely England, Germany, Spain, Italy and France. The number of English clubs rose from eight to a record nine, while the other leagues were unchanged: Italy four, Germany three, Spain three and France one. The only club from outside the “Big Five” last year, Galatasaray from Turkey, dropped to 21st place.

England only had six clubs in the top 20 in 2013, but funnily enough had eight back in 2006, so the current dominance is not a completely new phenomenon. The big losers are Germany, whose representation has fallen from five clubs in 2009 to three, and France, who had three clubs in 2012, but now just the one.

Turkey had two clubs in the top 20 as recently as 2013, while the last time a Scottish club made the rankings was Celtic in 2007. Portugal’s last representative was Benfica a year earlier in 2006.


The top 30 clubs is where the English strength is really reflected with the number of representatives rising from eight in 2013 to 17 in 2015 (up 3 from 14 in 2014), including three debutants: Crystal Palace, Leicester City and West Bromwich Albion. As Deloitte observed, “This is again testament to the phenomenal broadcast success of the English Premier League and the relative equality of its distributions, giving its non-Champions League clubs particularly a considerable advantage internationally.”

This has produced some notable exclusions from the top 30, including Valencia, Seville, Hamburg, Stuttgart, Lazio, Fiorentina, Marseille, Lyon, Ajax, PSV Eindhoven, Porto, Benfica and Celtic.


If we look at the growth of the highest ranked club in each of the “Big Five” leagues since 2009, the absolute growth of Real Madrid (€176 million), Manchester United (€193 million) and Bayern Munich (£184 million) is broadly similar, though the percentage growth is much smaller at Madrid (44%), compared to United (59%) and Bayern (63%).

The outlier is Paris Saint-Germain, whose revenue has shot up by €380 million from €101 million to €481 million since the Qatari takeover. Juve have recorded impressive growth of 60%, but in absolute terms the increase was “only” €121 million, which means that the gap to the other four clubs has widened.

Despite a sizeable reduction in revenue following their failure to qualify for Europe in 2014/15, Manchester United still managed to remain in the top three of the Money League, thus demonstrating the underlying strength of the club’s business model.


In England, the two Manchester clubs (United and City) continued to lead the way, but Arsenal overtook Chelsea, due to the commencement of the new kit supplier deal with Puma. Liverpool’s healthy growth was due to the Reds’ return to the Champions League, which boosted both broadcasting and match day revenue.

Since 2009 Manchester City have registered the stand-out growth of £362 million, which is around twice as much as their peers, mainly due to their commercial success, including the celebrated Etihad deal.

Despite their revenue fall in 2015 (in Sterling terms), United are still well ahead of City, while there is a bunching of the pursuers (Arsenal, Chelsea and Liverpool), whose relative positions basically depend on the timing of their principal sponsorship agreements, e.g. Chelsea’s Yokohama Rubber deal will only be included in the next set of figures.

In a similar way, the revenue at the mid-tier clubs (Newcastle United, Everton and West Ham) is also converging, albeit at a much lower level. The interesting one is Tottenham, who are stuck in the middle between the top five clubs and the rest. “Neither Fish Nor Flesh”, as Terence Trent D’Arby once put it.


In Spain, it’s essentially a case of the rich get richer, though Barcelona’s growth last year (€76 million) was much better than Real Madrid (€28 million). Nevertheless, Madrid kept their noses in front and their figures will soon be enhanced by the barely credible new kit supplier deal with Adidas.

The other Spanish clubs are so far behind that they are almost out of sight with the nearest challenger being Atletico Madrid at €187 million – exactly one third of Barca’s revenue. Valencia did not even reach the top 30 clubs, which is unsurprising given that their 2014 revenue was less than €100 million.

There will be a boost in broadcast revenue for Spanish clubs with the new collective selling regime in La Liga, but the gap will remain massive.


In Germany, the situation is even worse, as Bayern Munich are in a league of their own. Despite a dip in revenue in 2015, due to a decrease in commercial income, Bayern’s €474 million is nearly €200 million more than Borussia Dortmund’s €281 million with Schalke 04 another €61 million behind. Incredibly, there is then a further €100 million difference to the closest German clubs, namely Hamburg and Stuttgart.

Since 2009 only Dortmund have managed to keep pace with Bayern, at least in terms of growth: €175 million vs. €184 million. In the same period, Schalke only grew by €95 million, while Stuttgart’s revenue was flat and Hamburg’s actually fell.

How do you say, “mind the gap”, in German?


In Italy, it’s a similar story, as Juventus’ revenue of €324 million is €125 million more than Milan’s €199 million. The bianconeri also led the way in Italy in 2009, but since then they have increased their revenue by €121 million, while it has been a tale of woe for their rivals from Milan: in the same period, Milan’s revenue has barely moved, while Inter’s revenue has actually fallen by €32 million to €165 million.

There has been encouraging growth at Roma, largely thanks to their return to the Champions League in 2014/15 for the first time since 2010/11. Napoli suffered from the opposite effect, as they participated in Europe’s premier competition the previous season, though they have still grown revenue by €38 million since 2009 to €126 million to creep into the top 30 clubs.

These are worrying time for Italian clubs, as they struggle to match the growth of their foreign peers, largely due to the continuing lack of stadium development, which is reflected in feeble match day income.

In 2006, it was a very different story with three Italian clubs in the top seven: Juventus 3rd, Milan 5th and Inter 7th. The nerazzurri are now perilously close to falling out of the top 20. As a man who lived three years in Milan at a time when Arrigo Sacchi’s team bestrode Europe like a colossus, it gives me absolutely no pleasure to say this, but how the mighty have fallen.


Paris Saint-Germain remain the only French club in the Money League this year and have moved up a position to fourth. Marseille and Lyon have been regular representatives in the top 20 (16th and 17th respectively in 2012), but their lack of revenue growth has seen them disappear from the rankings.

A combination of PSG’s “friendly” commercial deals and healthy Champions League income means that the financial difference between them and other French clubs is not so much a gap as an abyss. Little wonder that Ligue 1 is pretty much a cakewalk for the Parisians.


After a few years when the gap between the 10th place club and 11th place club seemed to be closing, it has widened this year from €18 million to €43 million, being the difference between Juventus €324 million and Borussia Dortmund €281 million.

The gap between top and bottom, defined as 1st place to 20th place, has been constantly growing. In fact, it has more than doubled since €207 million in 2006 to €416 million in 2015, representing the difference between Real Madrid €577 million and West Ham €161 million.


That said, the financial threshold for membership of the Money League club is becoming increasingly challenging with the requirement for a place in the top 20 rising 12% from €144 million to €161 million. This has nearly doubled in the last 10 years from €85 million.

As Deloitte noted, Napoli, down in 30th position this year with revenue of €125 million, would have had a position in the top 20 as recently as two seasons ago with the same revenue.


Although Deloitte have done a fine job in adjusting the clubs’ reported revenue figures in order to enable a meaningful, like-for-like comparison, it is still worth exploring some of these adjustments, as the supporters of individual clubs might be a little puzzled over differences with the figures they might expect to see.

I have taken an example of each of the following adjustments to demonstrate that reported revenue figures are not always black and white and there is often room for interpretation, even with something as theoretically rigorous as a football club’s accounts:

  • Profit on player sales
  • Different classification of revenue types
  • Holding company vs. football club
  • Operating income
  • Change in accounting year
  • Restatement of prior year revenue
  • Calendar year 


Continental clubs often include profit on player sales in their revenue figures, as seen by Bayern Munich boasting of €524 million revenue in their 2014/15 press release. The difference between this number and the €474 million in the Money League is the €50 million they earned from selling players.

This is further complicated with Italian clubs who include profit on player sales in revenue, but any losses made on player sales are booked in expenses.


The classification between different revenue categories can be different, as seen with Everton. Commercial revenue in the club accounts rose 37% from £19 million to £26 million, comprising sponsorship, advertising and merchandising £10.4 million plus other commercial activities £15.6 million.

This always seemed a bit high with the suspicion that Everton had included the commercial element of the Premier League TV deal within commercial income, even though most other clubs classify it as broadcasting income, and Deloitte have duly reduced commercial and increased broadcasting (though the total revenue is the same).


Football’s a simple game, but clubs increasingly operate within a more complex corporate structure. In particular, sometimes there is a holding club that owns the football club with different revenue figures (usually higher).

A good example is Chelsea, where the football club (Chelsea FC plc) had revenue of £314.3 million in 2014/15, which is around £5 million lower than the £319.5 million shown in the Money League. This is almost certainly because Deloitte have used the figures from the holding company (Fordstam Limited). Although this company has not yet published its 2015 accounts, the £324.4 million reported in 2014 is exactly the same as the figure in last year’s Money League.


Football clubs usually separate non-trading income from turnover and classify this as Other Operating Income. As an example, West Ham reported revenue (turnover) of £120.7 million, but Deloitte have also included £1.7 million of Other Operating Income to give their revenue figure of £122.4 million.


Clubs sometimes change their accounting date, i.e. when they close their accounts, which means that the length of that accounting period is not the usual 12 months. For example, Swansea City changed their close from May to July in 2014/15 in order to be more aligned to the football season, so their latest accounts cover 14 months.

Their revenue was only slightly higher, as there is no additional match day or broadcasting income in June and July, but commercial agreements are evenly accrued. Thus, Deloitte have reduced the 2014/15 revenue from the £103.9 million reported by the club to £101.0 million.


The Money League occasionally restates the revenue figures used in its own report the previous year. One example of this is Paris Saint-Germain, where Deloitte reported €474.2 million last year, but have included €471.3 million as a 2014 comparative this year. This does not impact this year’s rankings, but does affect the stated year-on-year growth.

Most clubs now use the football season for their accounting period, but some use the calendar year, especially in Italy. As an example, Milan’s most recently published accounts cover the 12 months up to 31 December 2014 and the adjusted revenue is around €215 million, which is higher than the €199 million reported by Deloitte.

The main reason for the difference is that Milan’s 2014 accounts include a part of the Champions League money they earned in the 2013/14 season.

"Paint me down"

Next year’s Money League may well see Manchester United topple Real Madrid, as the English giants are projecting revenue of £500-510 million for the 2015/16 season, following their return to the Champions League and the start of the record Adidas kit deal, which would make them the first English club to break through the half-billion pounds barrier.

Beyond that, Real Madrid might well bounce back if reports of their huge new sponsorship deal with Adidas are not exaggerated.

Obviously a club’s financial performance does not begin and end with its revenue, as explained by no less an authority than the famous German actress, Marlene Dietrich, “There is a gigantic difference between earning a great deal of money and being rich.”

"Points of authority"

In the past, clubs suffered from what Alan Sugar’s described as the “prune juice effect”, whereby any increases in revenue simply fed through to higher player wages, transfer fees and agents’ commission.

This is no longer automatically the case, largely due to the implementation of various Financial Fair Play regulations, which has increased profitability, especially in England, thus making it more likely that overseas investors will explore the purchase of football clubs.

In “All The President’s Men” the whistle blower Deep Throat advised the investigative journalists to “Follow the money. Always follow the money.” The circumstances were clearly somewhat different in the movie, ultimately leading to the resignation of the President of the United States, but that is still sound advice that is more true than ever in the world of football.

In other words, money talks and is almost invariably reflected in success on the pitch. There might be the occasional exception to the rule, as we have seen with Leicester City's rise this season, but after all is said and done those clubs at the top of the Money League will usually be the ones competing for trophies.
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