COVID-19: Re-engineering the flawed business model of football clubs & financial impact of the virus
by Param Mehta
The Premier League (PL) is the richest football league in the world. The wealth it amasses and the traction it gets across the globe is unparalleled when compared to its Spanish, German, French and Italian counterparts. Fiery derbies, the Big 6 rivalry and astronomical sums spent on marquee players are some of the driving reasons of its immense popularity.
Behind the glory, unfortunately lies a flimsy business model which the football clubs have employed. The fault lines have only deepened in the wake of the ongoing COVID-19 crisis engulfing the world. With high transfer fees paid and eye-watering weekly wages paid to players, the PL clubs have been walking on the thin ice for quite a while now.
To put it in context, the UK’s annual median earning is in the ballpark of £35,000. Jesse Lingard of Manchester United earns £75,000. Per week. £3.9 million per annum. Disparity in wages between playing and non-playing staff has long been a hallmark of the PL era. It has now added fuel to the financial difficulties of PL clubs, in a time when revenue streams are quickly drying up.
A football club typically earns its revenue from three major sources:
Commercial Revenue (which comprises of sponsorship deals and sale of merchandise)
Matchday Revenue (which comprises of sale of ticket and accessories on match days)
Broadcasting Revenue (comprising of revenue from showcasing live matches on visual mediums)
PL clubs at the top of the division like the Big 6 (Man City, Liverpool, Chelsea, Tottenham, Arsenal and Man Utd) have a typically hedged revenue stream with Commercial Revenue driven by the brand appeal and acquisition of football players who are house-hold names. A global fan base enables them to leverage the Broadcasting Revenue to their advantage. Massive stadiums with capacities ranging from 40,000 to 76,000 spectators help to earn a hefty sum in the way of Matchday Revenue. So, in a post COVID-19 world, these clubs are not facing the financial stress of the virus because of their diversified revenue stream.
Things are quite bleak in the middle and particularly the bottom half of the PL table. These clubs are driven mainly by Broadcasting Revenue which equates to more than 2/3rd of the Total Revenue.
With smaller stadiums and lesser global outreach, these clubs bank primarily on the sale of broadcasting rights to the two TV channels Sky Sports and BT. All games in the PL have been suspended indefinitely, with at least 9 games per club yet to be played. High reliance on Broadcasting Revenue has put the state of these clubs in a dire position. They have unwittingly exposed themselves to a potential repayment risk.
Broadcasting Revenue is categorized as variable consideration as per IFRS 15. Failure to perform a performance obligation would lead to reversal of revenue and a refund of broadcasting fees paid up front by the TV channels. This would in turn lead to a high cash outflow for the clubs who themselves would be facing a liquidity crunch due to lessened revenues.
Another concerning thing is the way transfer fees are paid. It is common for the top-flight PL clubs to amortize the cost of acquisition of players in installments spread over 2 years. The generally accepted payment schedule is 50% up front, 25% at the end of the 1st year and the balance 25% at the end of the 2nd year [50, 25, 25 rule].
While this is frugal money management by conserving the liquid reserves, it also gives rise to potential default risk.
With a gross spending of £1.58 billion over the summer and winter transfer window for the PL coupled with a gross selling of £780 million, the net spend comes down to a massive £800 million.
Assuming the [50, 25, 25 rule] to prevail over all the clubs, it leaves a payable amount of £400 million (£200 million to be paid by August 2020 and a further £200 million to be paid by August 2021).
What is unnerving is that out of the £400 million payable, £100 million payable relates to transactions between English clubs.
The final nail in the coffin is hammered by the fact that, out of the £100 million payable, £98 million is the amount payable to the Championship clubs (2nd tier of English football). This huge sum is expected by the Championship clubs assuming the [50, 25, 25 rule].
This tangled web of intra club payables and receivables is bound to have a brutal impact on the Championship clubs who are in an extremely precarious position if any of the PL clubs default in a NIL active revenue environment.
This report aims to assess the potential financial impact of COVID-19 on the PL clubs. Accordingly, the sample clubs have been divided into 3 categories: The Good, The Bad and The Ugly.
This category would mainly comprise of the Big 6, with the sample club considered as Manchester United (Man Utd).
Man Utd is arguably the most adept at generating profits and in turn reinvesting them into the club. One might say Man City are bridging the gap, but the funds Man City brings in are mainly invested by its royal Abu Dhabi family, hence the ongoing tussle with UEFA over breach of FFP (Financial Fair Play) regulations. On the flipside, Man Utd is investing with the money generated by its operational revenues.
Although Man Utd’s EBITDA has seen a 18% decrease over the last year, they have generated a net income of £36 million for the Q2 2020 YTD. Missing out on UCL in the 2019–20 season, has meant a decrease of £49 million in Broadcasting and Matchday Revenue but it has been covered up slightly by a £9 million spike in Commercial Revenue driven by inking of the sponsorship deal with Mondelez. Having £101 million in cash on their books, means it is highly unlikely for them to default on their transfer related payables and debt.
However, it should be noted that it still has a massive £674 million in debt and transfer payables because of the LBO engineered by the Glazers as well as the aggressive and expensive transfer strategy employed by the club’s chairman Ed Woodward. Man Utd along with City, Chelsea and Liverpool are likely to emerge as leaders in the upcoming transfer market with their financial might ready to extract advantage over other English clubs.
This category comprises of one member of the Big 6, Tottenham Hotspur and other mid-size clubs like Leicester City, Wolves, Everton and Newcastle. The sample club considered is Tottenham Hotspur.
Tottenham have been on the rise for quite some time now with consistent top 4 finishes complemented by a deep run into the final of last year’s UEFA Champions League. Match their growing ambition off the pitch under the shrewd guidance of the club’s chairman Daniel Levy, the club has also made a colossal investment of £ 1 billion for their new Tottenham Hotspur Stadium heavily financed by an outstanding loan debt of £637 million.
To appease the new manager Jose Mourinho, fresh blood of new players were also bought in, to raise a payable amount of £83 million due to other clubs. Boasting the highest operating ratio amongst all other big clubs, Tottenham do not look like a club in turmoil.
But the looming stadium loan and outstanding payables would test the financial strength of the club in trying times. They have also reversed the decision to accept the furloughing scheme offered by the UK government which might be a sign of better finances but only time would certify that.
The most frightening and abject category unfortunately has a host of clubs in it, with clubs mainly in the lower half and relegation zone. They have made substantial player investments to match the big clubs, leading to a high amount of payables on their books with not enough cash reserves. The sample clubs considered are Aston Villa, Brighton, Bournemouth, Sheffield and West Ham.
As discussed earlier, 2/3rd revenue of these clubs is derived from Broadcasting with clubs like Bournemouth having staggering 88% revenue derived from Broadcasting.
Due to cancellation of matches their primary source of revenue has gone along with Matchday Revenue also disappearing. These clubs do not have the brand image to ink multi million pound sponsorship deals with the top brands, hence they cannot bank upon Commercial Revenue heavily. Having high payables on their books is not an ideal situation for them at this stage.
The unsettling thing here is these clubs do not have the funds to make the outstanding player payments in this environment. If any one of these club defaults, what would follow would be somewhat similar to the 2008 financial crisis in with the big banks offloading positions they had with each other leading to a defaults and finally the collapse.
The impact on the lower tier Championship clubs would be disastrous as they have an amount of £85 million receivable from The Ugly category PL clubs. For instance, Bristol City and Brentford; two clubs of the Championship have £16 million apiece receivable from Brighton, Bournemouth and Aston Villa combined who themselves face uncertain liquidity positions. A domino effect cascading from the PL to the Championship would be catastrophic for the Championship clubs on already shoestring budgets.
Like any crisis, the right way to combat it is to take it slowly and pragmatically. A football club in UK is responsible for its stakeholders, the primary parties being the non-playing staff and support staff. A club is usually the number one employer in its area and the first one to get affected will be the foot soldiers in the form of non-playing staff.
Wage cuts in the already inflated weekly wages of players is definitely a way forward, but capital infusions into the club by the owners should be promoted to steady the ship for the long term.
In this unpredictable environment, many clubs have accepted the government initiated Furloughing Scheme which guarantees 80% wages by the government upto £2500 per month with the balance being borne by the club. Liverpool and Tottenham have received backlash upon accepting the scheme which has led to a reversal of decision. Smaller clubs like Norwich and Newcastle are the only ones in the top flight to have adopted the scheme in a desperate attempt to safeguard their near future.
This event has surely changed the world and it is already changing the world of football. The inflated transfer fees era which was started by Neymar’s transfer to PSG in August, 2017 will finally be halted by a virus which originated in China. Bizarre times.
Player wages and valuations will come under scrutiny post this crisis, with the football community wondering whether such mammoth numbers are justifiable.
The management and owners will need to re-engineer the way they run football clubs and hopefully come up with practical plans to manage player wages, transfer fees as well as the well-being of their non-playing staff.
What remains to be seen is whether steps are taken to change or will it relapse back to the age-old tradition of free market capitalism. If the latter happens, the gap between the Davids and the Goliaths will only become wider.
About the Author
Param Mehta is a qualified CA and a finance professional with a passion for football and a penchant for the numbers behind it. You can follow his blog here