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Legal challenge to UEFA FFP rules by 'Bosman' Lawyer

Fri, 10 May 2013 07:29:27 +0100

Jean-Louis Dupont, the lawyer who was successfully challenged football contract laws for Jean-Marc Bosman in 1995, has now challenged the Financial Fair Play rules with the European Commission. Football Clubs themselves are restricted from easily challenging the FFP rules (other than through the Court of Arbitration for Sport – CAS) because the rules were voted-in by the European Club Association. Hence Dupont is pressing the challenge on behalf of a Belgian football agent, Daniel Striani. There are several strands to the argument but notably, Dupont argues that FFP would reduce revenue for agents such as Striani.

I have attached the un-edited Press Release at the foot of this article.

Dupont is unlikely to have an easy ride given that in March 2012 the EU Competition Commissioner formally backed FFP, saying the rules were “essential for clubs to have a solid financial foundation.” The next steps are outlined by Sports Lawyer Daniel Geey in this article. Geey believes that the challenge process could take a number of years to conclude.

UEFA responded to the news of challenge; "The rules encourage clubs to 'live within their own means,' which is a sound economic principle aiming to guarantee the long term sustainability and viability of European football,. Uefa believes that financial fair play is fully in line with EU law and is confident that the European commission will reject this complaint."

The area of the FFP rules that UEFA could struggle to defend is the restriction on wealthy owners injecting cash into the club to fund spending (e.g. as in Man City, Chelsea or potentially PSG). It might be hard to argue that sustainability is adversely impacted when the club’s debt doesn't grow despite big annual losses (Man City’s owner for example, regularly injects funds to cover any losses and the club is effectively debt-free).

The first punishments for overspending are due to be announced from December this year onwards. Technically, the CFCB decision-making panel is independent from UEFA and should not consider this challenge when determining the punishments for the clubs. However, if Dupont ultimately wins the challenge and FFP is deemed to be unlawful, UEFA would be liable for any historic damages that the sanctions had caused . The compensation could run into hundreds of millions of euros. There is therefore a distinct possibility that the punishments handed-out during the first Monitoring Period may now be less harsh than would otherwise be the case. This challenge will be extremely welcome news to Paris-Saint Germain and Manchester City.

Dupont's Press Release:

Today, 6 May 2013, Mr Daniel Striani, player agent (registered with the Belgian Football Association), represented by lawyer Jean-Louis Dupont, lodged a complaint with the European Commission against UEFA in order to challenge infringements to fundamental principles of EU law caused by some provisions of the UEFA “Financial Fair Play” regulation (FFP).

Specifically, this complaint challenges the restrictions of competition caused by the “Break-even rule” (article 57 of the UEFA FFP regulation).

The rule imposes on clubs that participate in the UEFA Champions League or in the Europa League the obligation “not to overspend” (the expenses of a club cannot exceed income). In effect, a club owner is prohibited from “overspending” even if such overspending aims at growing the club.

The “Break-even” rule (which, according to article 101 of the Treaty on the functioning of the EU, is an “agreement between undertakings”) generates the following restrictions of competition:

- Restriction of investments;

- Fossilization of the existing market structure (i.e. the current top clubs are likely to maintain their leadership, and even to increase it);

- Reduction of the number of transfers, of the transfer amounts and of the number of players under contracts per club;

- Deflatory effect on the level of players’ salaries; and

- Consequently, a deflatory effect on the revenues of players’ agents (depending on the level of transfer amounts and/or of players salaries).

At the same time, because of the aforementioned restraints, the “Break-even” rule also infringes other EU fundamental freedoms: free movement of capital (as far as club owners are concerned), free movement of workers (players) and free movement of services (player agents). Consequently, such restriction of competition and violation of EU fundamental freedoms cannot be justified by the objectives put forward by UEFA (long term financial stability of club football; and integrity of the UEFA interclub competitions).

Moreover, detailed legal and economic analysis shows that, even if the “Break-even” rule may appear initially a plausible concept, the rule is not able to achieve efficiently its objectives as presented by UEFA (whereas other means are available to attain such objectives. For additional information, see The Wall Street Journal op-ed published 25 March 2013 - http://online.wsj.com/article/SB10001424127887324077704578357992271428024.html

As far as the integrity of the UEFA competition is concerned, in order to avoid the risk that club X would jeopardize the smooth running of the competition because its owner stops mid season providing funds (the “overspending”), it is not necessary to prohibit such “overspending” (as implemented by the “Break-even rule”), when it is sufficient to require “overspending” to be fully guaranteed (for instance, by means of bank guarantees) before the start of the competition and for its whole duration.

In short, the current prohibition – even assuming it to be justifiable (quod non) in the light of the pursued objective (i.e. integrity) – is in practice illegal because the rule is not proportionate (since it can be replaced by another measure, equally efficient but less damaging as far as EU freedoms are concerned).

In conformity with article 101.2 of the Treaties of the European Union, the complainant requests the European Commission to declare that the Break-even rule is null.

It is important to note this complaint does not at all question the legality of the UEFA rule (also included in the FFP regulation) that states that any club participating in the UEFA competition must prove – before the start of the competition – that it has no overdue payables towards clubs, players and social/tax authorities. In our view, this rule is justified in principle for the attainment of the integrity of the football competition and proportionate to this objective).

A copy of the complaint has been provided to UEFA.

ENDS

Note to editors: The Financial Fair Play (FFP) rules were first proposed by UEFA in 2009 and come fully into force in the 2013-14 football season. Clubs that do not comply with this "break-even" principle will face sanctions, including a potential ban on participation in UEFA competitions.

‘FFP was introduced following English success’

Thu, 09 May 2013 19:11:06 +0100

Italian site http://tifosobilanciato.it has published an unusually candid interview with Umberto Gandini, AC Milan Organising Director and Vice President of the European Club Association.

The European Club Association (ECA) is the representative association for Europe’s top clubs and is headed by Karl-Heinz Rummenigge, with Gandini as Vice President. The ECA works with UEFA whenever rule-changes are being proposed and also petitions UEFA for change. The Financial Fair Play rules were produced in consultation with ECA and were voted-in by the ECA members.

In the interview with Diego Tari, Gandini explained that the FFP rules stemmed directly from the 2008 Champions League final between Manchester United and Chelsea (two clubs that had exceptionally high debt levels). This is a distinctly 'off-message' admission by Gandini - English journalists have often suggested that the FFP rules were introduced specifically to prevent further English club success. Platini has been questioned on this repeatedly and has always maintained that the rules were introduced solely to tackle debt and were not anti-English. In an interview with the Telegraph last year, for example, Platini advised “The message I want to send is that this is not an English problem. This is not a question of wanting to kill the clubs in England or anywhere else, it is to help the clubs.”

Gandini's statement opens up this debate once again and somewhat undermines UEFA’s FFP positioning as a measure aimed purely at preventing Pan-European sustainability issues. It will not have escaped attention that Chelsea and City reined-in their spending to comply with FFP rules and had miserable Champions League campaigns (in a competition dominated by two Bundesliga clubs).

Gandini’s comments on Paris-Saint Germain are also of interest. Commenting on their attempts to justify their huge-backdated sponsorship from the Qatar Tourist Authority (a body connected to the club owner), Gandani explained “ To be honest … none of us envy PSG at the moment! To prove that a sponsorship of 150 euros million is for ‘fair value’ is complex and, as far as I'm concerned, difficult. “

Given Zenit and Anzhi continued high-spending, it is also interesting that Gandini questions the absence of account-auditing carried for clubs from the Russian Federation; “we have a part of the UEFA world that has stringent procedures and request a third party (audit firm) control, while another part of the same world can potentially draw up budgets and provide them to CFCB [UEFA’s financial control body] without these being subject to any external check.”

Gandini also raises the issue of membership subscriptions paid to top Spanish clubs. Perhaps worryingly for Barcelon and Real Madrid, the ECA Vice President wondered “Why, for example, can the 180,000 Barcelona shareholders annually fund their Club and Abramovich (to say a random name) cannot?”

Diego Tari’s Italian site http://tifosobilanciato.it - Twitter: @Tifbilanciato

QPR need quick Premier League return to avoid becoming a 'zombie club'

Mon, 29 Apr 2013 18:06:18 +0100

Now that QPR have finally been relegated, it seems an appropriate time to outline the financial implications for the club (and other clubs in the Championship).

Perhaps the best place start is with a projection of the financial position for the club up to the end of next season (i.e. the end of their first season in the Championship):

I should point out that this carries a much heavier ‘health-warning’ than most of my projections – we simply don’t know how successful the club will be in getting players to leave in the Summer and we don’t have a full picture of the impact of any relegation clauses the club may have in place to reduce wages. However it does provide a useful yardstick for comparison.

Although we are going to have to wait nearly 12 months to see the impact of this season’s foolhardy spending. The projection suggests QPR will have lost around £68.4m during the current season. It appears that the wage spend is now well over £80m and the amortisation (i.e. the impact of transfer fee expenditure) has doubled. The Exceptional items represent the cost of sacking Warnock (2010/11) and Hughes (2011/12).

The last annual accounts (2011/12) records the net debt at £88.9m. The club recently took out a further loan of £15m for development of a Training Ground. Factoring in the above projection, net debt at the club at the end of the current season is likely to be around £168m.

With this level of debt, fans are likely to be concerned that the club could represent another ‘Portsmouth’. However, due to the club’s ownership profile, QPR are highly unlikely to suffer the same fate. QPR are 66% owned by Fernandes, Meranun and Gnanalingham and 33% owned by the Mittal family. The Mittal family are by all accounts extraordinarily wealthy (worth $10.4bn according to Forbes). Gnanalingham also has significant family money. Fernandes and Meranum will more impacted by the ongoing losses at QPR (via loans from their Tune Group). Both made their money with AirAsia and have large share-holdings in the company (valued at around £220m each). However, it is the ongoing support of the Mittal family that is the key to QPR’s stability – both the Mittal family and Tune Group provided further loans to the club in 2011/12. It seems extraordinarily unlikely that the Mittal family would be willing to let QPR get into financial difficulty.

It is interesting to note that if QPR had escaped relegation, they would not have been able to meet UEFA’s FFP Break-Even criteria (losing £91m over the two seasons of the first Monitoring Period vs the £38m maximum permitted loss). As a Championship Club, QPR do not have to apply for a UEFA licence next season unless they are fortunate enough to win a UEFA place via the League Cup or the FA Cup. However the figures suggest that the club would not be granted a licence in this scenario – QPR fans might think twice about supporting their team in the domestic cups next season, knowing that it is not possible to gain a UEFA slot even if they win the competition. In any event the UEFA rules would require the owners to put their hand in their pocket and convert around £80m+ of debt into equity – the fact that the club recently took out a £15m loan suggests the owners are not looking to reduce club debts in this way.

Looking into next year, QPR will benefit from a £23m parachute payment. However, this does not make up for the lost TV income (see TV Revenue row for the impact). It seems likely that the club will be able to manage some players out of the club and it will probably have some wage-reduction clauses in the existing contracts (although reports suggest that most high-earners don’t have these contract clauses). The heavily caveated projection suggests the club could report a loss of around £61.5m during their first season in the Championship. This figure is well above the new FFP rules for the Championship and will have significant implications for the club.

From next season, strict new FFP rules for the Championship have been introduced (with penalties). All clubs (including QPR) will need to keep club losses below £8m for the coming season. Any overspend will become apparent when the accounts for the 2013/14 season are submitted in December 2014. An overspending club will be given a transfer ban (with the first ban coming into effect in January 2015). Once this is understood, the need for QPR to ‘bounce back’ and win promotion at the very first attempt becomes apparent. If they don’t bounce-back immediately, QPR will almost certainly not be able to sign any new players after end August 2014. This would severely hamper their campaign during their second season in the Championship.

Given that only one club out of the last 9 have bounced back at the first attempt, QPR’s challenge should not be underestimated. The matter becomes even more pressing when you consider that the Transfer Ban would not be lifted until the club can prove that it was on track to bring losses below £6m season (£5m from 2016) – conceivably QPR could have Transfer Ban in place for several seasons.

If QPR were fortunate enough to win promotion at the first attempt, they would be affected by the new ‘Fair Play Tax’. Any club that wins promotion as a result of overspending will have to pay ‘tax’ based on a sliding scale. Assuming QPR lose £61.5m next season, the club would end up paying a tax of £58.2m – a huge amount (see here for details of the rules and the calculation). This tax would then be divided up and allocated to those clubs in the Championship that have complied with the FFP rules (adding an extra incentive for overspending clubs such as Leicester to comply). Interestingly, as any unused parachute payments are also divided up amongst clubs, some Championship outfits may ultimately be happy to see QPR bounce back as the scenario would benefit them by a further £2m.

Given the need for QPR to win promotion at their first attempt, it will be interesting to see if the new FFP rules actually encourage QPR to continue their overspending. The club will have to weigh up the potential benefits of a place in the Premier League, against the Transfer Tax and the risk of becoming a 'zombie club' with an almost indefinite Transfer Ban should they fail to quickly return to the top flight.

Sunderland's Tullow Oil sponsorship ends amid controversy

Fri, 19 Apr 2013 11:15:42 +0100

Sunderland's contentious sponsorship deal with 'Invest In Africa' has hit problems. Amid some confusion, the club's lucrative deal has been cancelled, with the club suggesting the split is 'by mutual consent'.

Back in July 2012 I wrote an article about Sunderland's new sponsor 'Invest in Africa' - a 'non-profit organisation' backed by Tullow Oil. At the time, many people were surprised by the size of the sponsorship deal which reported as being 'worth £20m a season'. This was a significant increase in the club's previous deal with the Tombola Bingo/gambling company which was worth around £1m to the club.

When the original deal was struck, environmental campaigners alleged that 'Invest In Africa' was a 'PR front' for Tullow Oil, a company accused of striking shady deals with Ugandan government officials and of depriving locals of their fishing grounds.

Tullow are now mired in a potentially hugely-damaging court case in Uganda and are accused of bribing officials in return for oil-exploitation rights. The magazine Foreign Policy recently accused the company of having a “a complete absence of corporate social responsibility". Shortly after the issue blew-up, David Milliband resigned from his post on the board at Sunderland, citing De Canio's admiration of fascism as the reason. Since then, the campaigning website Platform has published a piece suggesting that the Tullow court case was the greater driver for Milliband. This triggered a extremely interesting piece of investigative journalism from the BBC who produced this short news report on the Tullow issues as they affected Sunderland (I would recommend you watch it).

Upon launching Invest In Africa,Tullow announced that they planned to bring five other major partners to the Invest In Africa initiative and that it would not succeed if they did not acquire other collaborators. Tullow spokesman Cazenove advised that "there will be other partners, significant companies, household names from various sectors, and soon". Nine months on, and with just one additional partner, Invest In Africa doesn't appear to have worked as intended - it seems likely that it is Tullow rather than Sunderland who have pulled the plug on the shirt sponsorship deal.

When the deal was cancelled, the club announced that the contract had always had a one-year review/break agreement. Howeverreports suggest that Tullow were considering pulling the deal even before the De Canio appointment. Would Sunderland really cancel a £20m a year deal when it had recently announced a £26m operating loss? It is interesting to note that the club don't yet have another sponsorship deal in place - they announced that there is a deal in the pipeline but it would be dependent on the division the club is in next season. Cancelling a highly lucrative deal, when there is no guaranteed replacement, does seem rather unusual. I should point out that there are suspicions that the headline '£20m' sponsorship is probably not quite as it first appeared and that, although sizeable, it may have brought in somewhat less than the quoted figure (i.e. it was linked to Premier League/Cup success and UEFA qualification).

To add to the rather unclear picture, Sunderland recently entered into an association with the Nelson Mandela Foundation and have committed to raise funds for the organisation as part of the club strategy for growing their 'brand' in Africa. Sunderland hope to seal a new sponsorship deal with an African company (although it would be fortunate to sign a replacement contract as lucrative as the Tullow/Invest In Africa deal).

Just as managers never truly leave a club 'by mutual consent', there is likely to have been one party driving the divorce. This leaves us with some unanswered questions; did Sunderland take a highly principled decision and end a lucrative contract, following allegations against Tullow; or did Tullow end the deal following lack of interest in the initiative from other partners? Although it appears that Tullow ended the deal, if it transpires that Sunderland did take the lead and act out of principle they should be applauded. However, without more information from the club it is hard for fans to know whether to cheer or jeer.

Galatasaray ‘teetering on the edge of bankruptcy’

Sun, 24 Mar 2013 10:18:29 +0100

On the face of it, things don't get much better for Galatasary fans. They have a team of top stars, are through to the last 8 of the Champions League and have now been drawn against Real Madrid - life is certainly sweet for the Turkish champions. However, the club has spent heavily and recent announcements from the club confirm the club has some serious, immediate problems.

Club President Aysal recently revealed that the club is teetering on the edge of bankruptcy with total debt of $328m. Worryingly, the club has $78m of short-term debt. Aysal explained that the club is financially exposed and that if anyone made a petition to wind up the club, it might prove successful. In a recent interview, he also advised that he would not have taken the job as President if he had known how bad things really were!

Galatasaray have spent heavily on an all-out assault on the Champions League - they are aiming to break into the top-tier of European football on a permanent basis. Just inside the top 30 in the Delloitte Money League, there is a belief that if the club can become a fixture in the top footballing tier of Europe, the commercial revenue will follow. The club have been paying high wages in pursuit of on-field success - January transfer window signings included Drogba (E4m a year and the club picking up his tax-bill) and Sneider (a deal that will cost the club around £22m in fees and wages over the three year deal). The players join established stars such as Eboue and Elmander.

Galatasaray don't operate on a 'benefactor model' like Man City or Chelsea but are part of Public Limited Company with shareholders. When it needs an injection of cash, the company needs to create more shares. In 2011 the company created new shares, raising around $50m. This was a highly controversial move, not least because it diluted the value of the investments of the existing shareholders (the chairman of the financial regulators, the Capital Markets Board, who allowed the share issue, was subsequently sacked).

After further heavy spending, the club now needs more capital. The club recently announced that it intended to raise $96m via a new share issue – the purchasers would be Russian bank VTB. Worryingly for the club, the proposed share issue has been blocked by Turkish regulators. The Capital Markets Board has ruled that making a further share issues would have a serious impact on existing shareholders and cannot be supported. An action by 16 private investors has also been launched aimed at permanently preventing the share issue. To make things worse for the club, in February the Capital Markets Board fined Galatasaray £250k for misleading the regulator and the public over player contracts in 2010. The regulator looks to be standing firm - currently the share issue is going nowhere. Politics and football are closely linked in Turkey and there remains the possibility that the club President may have somewhat overstated the threat of bankruptcy to help drive through the contentious share issue.

Club President Aysal announced that in addition to clearing part of the debt, some of the funds from the proposed share issue are required to meet FFP requirements. Under FFP rules, any new losses need to be covered by injections of equity from the club owners. For Galatasaray, the owners are the shareholders. Although we don’t yet know the size of the club losses over the 2011/12 and 2012/13 season, the President’s announcement suggests that a significant injection of cash is needed by the end of 2013 just to meet FFP requirements. Without the injection of equity from shareholders to cover the losses over the first Monitoring Period (2011/12 and 2012/ 13 ), Galatasary would fail the FFP test.

There are three main financial reasons that a club might fail the FFP test:

1. Overdue payables (i.e. falling behind on tax/social security and transfer fee commitments)

2. Failure to inject equity to cover losses (i.e. club debts increasing)

3. Overspending (i.e. failing to Break Even)

UEFA’s CFCB panel has already handed out UEFA bans to several clubs (including two in Turkey) for having ‘overdue payables’ and clearly takes this failure very seriously. However, given that the FFP rules were introduced specifically to tackle the issue of growing club-debts, it seems likely that this offence might be viewed as the most serious of all the three offences. Galatasaray will find themselves in a very difficult position indeed if it cannot raise the funds to inject the required equity. Although Aysal likes to point out that “Sustainable success creates income”, it remains to be seen just how sustainable Galatasaray’s success will be.

**Update 24 March**

This article generated lots of interest and is worth a post-script. Following concern about the interview where the threat of ‘bankruptcy’ was raised, the Galatasaray president has since stated that he was misunderstood. In a club statement he explained that he had really meant to articulate that the club had had historic problems which it was now on the way to overcoming. Whether this explanation is credible might depend on which side of the polarised Galatasaray/Fenerbahce divide you sit. As I have pointed out, there is a suspicion that the President may have overplayed the immediate financial worries to drive through the share issue.

So, where does Galatasaray’s money come from and are they really in trouble?

I am grateful to Luca Marotta from http://luckmar.blogspot.co.uk/ for providing the latest Galatasaray accounts. My turkish and online translation tools are not good enough to enable me to dive into the detail of this (though I am sure Turkish fans will enjoy analysing the accounts). However there are a few things that jump out.

gssportif-31052012f.pdf
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Galatasaray lost €15m in the year ending May 2012 and since then the club have spent heavily. However, the Champions League success will bring in something around €27m this season. With the addition to the extra games and commercial revenue, all things being equal, it is possible that the club might report a modest profit this campaign (though analysis of the accounts would be required to really understand the position). The other thing to point out is the negative equity in the club. The spending looks to be fuelled by debt and the shareholders equity is a huge negative figure (-€107m). There is clearly a need for cash injection into the club and from 2012/13 the permitted loss under FFP rules average just €10m a season. Clearly Galatasaray have club set-up that would easily exceed €10m loss without a Champions League campaign.

So, Galatasaray’s model might just work long-term provided they continue to enjoy Champions League success every season and also get a much-needed injection of capital into the club. It seems a rather precarious existence and we should be mindful of Leeds, who had a spectacular financial collapse when they failed to qualify for the Champions League. Only the Turkish champions are guaranteed a place in the lucrative group stages and the club should be mindful that that they failed to qualify as recently as 2011.

Further reading:

http://www.hurriyet.com.tr/ekonomi/22713376.asp

http://www.hurriyetdailynews.com/galatasaray-face-bankruptcy-risk-chair-confesses.aspx?pageID=238&nID=42161&NewsCatID=362

http://www.hurriyetdailynews.com/where-is-galatasarays-money-coming-from.aspx?pageID=238&nid=40424

http://www.todayszaman.com/newsDetail_getNewsById.action;jsessionid=00C2F4AE4FD814C3FEC9CE3B9F3EB973?newsId=307040&columnistId=0

http://hanoglu1907.blogspot.co.uk/2013/03/aysal-iflasin-esigindeyiz-demis-gunaydin.html

Could UEFA strip Malaga or PSG of a Champions League title?

Thu, 14 Mar 2013 08:27:50 +0100

With Malaga and Paris St-Germain in the last 8 of the Champions League, questions have been raised about the impact of potential FFP punishments on the Qatar owned clubs’ campaigns. Both are very much the ‘bad boys’ of FFP and it is interesting to explore what might happen to the clubs if either win the current UEFA Champions League campaign.

Paris St-Germain look likely to fall-foul of the rule relating to the Break Even requirement which requires clubs to balance their incomings and outgoings. The club have been overspending and look set to fail the initial test by around £200m. Although the club will technically come close to breaking-even over the first Monitoring Period (covering seasons 2011/12 and 2012/13) it will only be achieved through the huge inflated deal with the Qatar Tourist Authority. For reasons that I explored here and here, it is very likely that, the QTA deal will be deemed to be what it is: an artificial deal aimed at injecting cash into the club as a way to get round the FFP Break Even rules.

For PSG, The key punishment to consider is UEFA's ‘sanction 9’ which is “the withdrawal of a title or award”. This punishment was added to the rule-book during 2012 – it isn’t just a hangover from earlier rule-shaping but is something deliberately and specifically introduced by UEFA fairly recently. Crucially this suggests that UEFA can now envisage a scenario when the punishment will be of use.

So, how could this affect PSG?

The decision on FFP compliance takes place according to the following timetable produced by UEFA.

UEFA's slide It isn’t particularly easy to read but we can see that the final decision on club licensing for the First Monitoring Period takes place between December and April (the pink box).

By December this year, it is possible that PSG will be the reigning European champions. Given that they are set to fail the Break Even test, UEFA’s independent panel (CFCB) are obliged to give PSG one or more of the available 9 punishments (see foot of this article for the punishments). Such is the scale of the overspend that it is quite possible that they would receive a ban from competing in the 2014/15 Champions League. It is also entirely possible that the panel will also invoke sanction 9 ‘withdrawal of title or award’. PSG could well be viewed as having carried out their successful Champions League campaign with a wage spend brazenly in breach of the rules. In simple terms, ‘financial doping’ – and as we all know drug cheats can expect to be stripped of their medals and banned from future competitions. For PSG, FFP could be rather like having a drugs test shortly winning their medal. In this scenario, David Beckham would be asked to send his medal back to UEFA.

Should PSG fail the Break Even test when it is carried out in December 2013, UEFA will also have to look at the other available punishments. They can withhold prize money but interestingly could also throw a club out the Champions League – the sanction of ‘disqualification from competition in progress’. So irrespective of whether they win the Champions League in May, PSG could find themselves thrown out of next year’s competition half-way through the campaign (i.e. the 2013/14 campaign). That would create a real shock, but if UEFA want to ‘throw the book’ at PSG, they have the available punishments to do so.

Clearly this would be the worst-case scenario for PSG - and there is a considerable element of speculation here on how the rules may or not be applied. However,the fact that the rules are in place and that UEFA General Secretary Infantino recently used the 'cheat' word to describe PSG's approach, should at least give them cause for concern. The CFCB panel that determine the punishments are independent from UEFA and have shown that they are not afraid to punish and exclude clubs.

The Malaga position is also interesting. In December the CFCB panel banned Malaga from next year’s UEFA competitions due to ‘overdue payables’ (i.e. funds owned to other clubs, or overdue tax). Malaga were also threatened with another year’s exclusion and need to report back to CFCB in March (the results should be out fairly soon). However, crucially for the club, Malaga were not thrown-out of from current Champions League campaign. This suggests that they will not have any further sanction should they actually win the competition (they will probably pass the Break Even test). If they were to win the competition in May, Malaga would not be able to defend their title. This would be an interesting ‘first’ for UEFA.

Liverpool – large cash injection from owners required under FFP rules

Sun, 10 Mar 2013 21:46:53 +0100

Liverpool recently reported a £40.5m loss the 2011/12 season (the first year of the initial FFP Monitoring Period). I have attached a table summarising the accounts, together with a projection for the next accounting period.

Not being a Liverpool supporter, I am grateful for the assistance of Mike Donald (@mdonald1987) for his help in pulling the above together and providing information on events at the club.

The good news for Liverpool fans is that the club appears to have turned a corner. Based on information announced by the club it looks like Liverpool's next published accounts (relating to the current season) will be a significant improvement on their £40.5m loss reported for the 2011/12 season. They look on course to lose around £15m for the 2012/13 season and are moving towards Break Even and potentially profit once the new TV deal kicks-in during the 2013/14 season.

The newly published accounts for 2011/12 are a little difficult to compare to previous results because Liverpool have changed their account cut-off dates as a consequence of changing their annual accounting period from end July to end May. Consequently, the recently released accounts cover 10 months rather than the usual 12. I should point out that the loss of £40.5m was very much in line with expectations. In May and Sept last year I produced a projection forecasting a£48m loss for the full 12 months –the shortened accounting period essentially explains the difference.

Interestingly, the change in the cut-off dates actually helps the club's financial results by around £10m net. The main difference relates to the fact that only 10 months of wage costs are now included (plus around £3m of other expenses). This reduces the expenses by around £23m. However this is partially offset by a reduction in Commercial Income to reflect the shorter reporting period which reduces income by around £13m. The other costs and revenues are shown on a full-year basis – hence the net benefit of around £10m.

This is particularly interesting because the FFP rules don’t specifically mention any restriction or requirement for the annual reporting period to cover a full 12 months. This looks like it might have been simple oversight by UEFA but means that Liverpool appear to be the first club to have successfully found and used a loophole to help club. Although Liverpool would have passed FFP without this change, it does help reduce the amount of equity that the club owners will need to inject into the club. I should point out that the accounting change was made with some justification and probably wasn’t simply a ruse by the owners. Now that clubs rely proportionately less on Season Ticket revenue and more on pre-season tours, it makes sense for the accounting cut-off to be at the end of May rather than July.

The Liverpool owners converted £47m of club debt to an interest-free loans last August. This is obviously a step forward but is a far-cry from the UEFA (and the Premier League’s new rules) that requires to convert losses to equity. The concept of converting debt to equity is not always well understood – essentially it works as follows: The club creates new shares which are then purchased by the owners. Consequently, the club gain an injection of cash which is used to ensure the debts do not grow further. All the owners gain is a piece of paper (share certificate) - the owners owned 100% of club shares prior to the change and still own 100% of club shares. By converting debt to equity in this way, the owner faces the very real prospect of losing their money entirely – crucially they also have to have the available liquid cash available to inject into the club. The owners will only get their money back if the sell the club (and then it depends on the sale price) or if the club make a profit in future and the club pay the owners a dividend. Understandably, converting debt to equity is not something owners want to do if they can help it. However Liverpool’s owners are going to have to put their hands in their pocket and do this to ensure they can apply for a UEFA licence. Clubs apply for a license in advance so we can be sure Liverpool will apply – however this requirement will mean Liverpool’s owners will have to put their hands in their pockets for around £26m to cover the two years of the first Monitoring Period (see table below).

The FFP rules allow certain types of expenditure to be excluded from the Break Even calculation. The exempted figures include spend on youth development and community spend. However club accounts currently don’t break down this spend and analysts have had to make guesses about how much this might be. Recently Man City intimated that it spent £10m on youth development and community spend in one year so £20m is probably a good estimate for Liverpool over the two years of the Monitoring Period. Of course, if the actual figure turns out to be less than £10m a season, the owners will need to inject a higher amount of equity.

The Post Balance Sheet Events (PBE) section of any accounts are always worth a read (often one of the final pages). This section tells us if anything significant that has happened since the cut-off for the accounts, up to the time the accounts were signed-off by the auditors. Here they report on events between 1 June 2012 and 28 November 2012 (i.e. the summer transfer window). Liverpool report that they made a loss on player trading of £8.4m over this period. This is interesting as the club only sold three players of note: Adam, Kuyt and Aquilani. The ‘loss on player trading’ figure relates to the difference to their selling price and their book value (i.e. amortised figure). It is difficult to see where the £8.4m book value loss came from for these players (it looks like the club may well have given Aquilani away on a free transfer). With no sales in January, this looks like the figure that will appear in the next year’s accounts (compared to a £1.7m loss on player trading in the newly published results, and a profit of over £40m the previous year).

Although the club debt has grown from £65m to £87m, for the purposes of passing the FFP Break-Even test, debt is largely irrelevant. The Break-Even test just looks at whether the club has balanced incomings and outgoings. Having large debt will affect a club’s interest payments (and therefore have some bearing on the ability to Break Even) – however debt in itself is not a component of the UEFA test. I should point out that Liverpool will now have no problem passing the FFP test in the First Monitoring Period as shown in this table.

The important thing to remember for Liverpool is that the Warrior deal commenced in 2012/13 and will be in the next accounts – this will considerably help raise their commercial income. In future years, Liverpool, like all clubs will also benefit from the new TV deal (from 2013/14 for three years) which will raise income by around £20m-£30m. However, this new income would be partially offset by a loss of around £5m should the club fail to qualify for the Europa League. Overall, the club finances are beginning to look much healthier. In the long-term however, as the club directors continue to point out in the accounts, on-field performance is the key driver of off-field financial success.

Paris St-Germain 'find' €125m to help them Break Even

Fri, 08 Mar 2013 07:15:56 +0100

If UEFA wanted to find one club to illustrate the concept of ‘financial doping’ it would probably point to Paris St-Germain.

Although the club hasn’t posted formal accounts for two years* they have had to provide figures to the DNCG [the organisation that oversees club accounting on behalf of the Ligue de Football Professionel (LFP)]. DNCG publishes the account information and I have attached the relevant page for PSG for the year ending June 2012 (with my highlights and translation of the key items):

Although the club made a loss of €5.5m, the line to look at is the red highlighted item ‘Other’ for €125m. Without this mysterious item, the club would have made a staggering loss of €130m in the first season of the FFP Monitoring Period. So, what was this €125m?

In January 2013, PSG announced that it had signed a huge deal with the Qatar Tourist Authority (QTA). The precise amount of the deal was a little vague but it appears the revenue may be around €200m a year. When the deal was announced the club advised that it would be backdated – at the time many believed this meant to the beginning of the 2012/13 season. However Le Parisien reported that the deal would actually be backdated to the previous season. Now that we see figures, it is apparent that this is exactly what the club has done – a deal agreed in January 2013 for promoting the Qatar Tourist Authority has been backdated to the year before the deal actually existed!

It is interesting to note that for all that money, the QTA don’t even get their names on the club shirts (that honour goes to Emirates airline). All QTA receive for their money is the rather nebulous benefit of association with the club (plus promotion within the ground). Even if the stories about renaming the 'Parc de princes' as 'Parc de Qatar' ultimately turn out to true, it’s hardly a decent return for the €325m that they have already paid to the club.

Fortunately, this outrageous deal will be assessed by UEFA’s CFCB panel. It is very likely that QTA would be considered to be ‘related’ to the PSG owners (both have the same beneficial owners - the Qatari government). Under UEFA FFP rules, all ‘related party transactions’ will have to be assessed by the CFCB and a ‘fair value’ assigned to the deal. Determining a ‘fair-value’ won’t be easy but the panel will look at precedents such as the Azerbaijan Tourist Board’s €20m a year shirt sponsorship of Atletico Madrid. The CFCB panel are actually independent from UEFA and, as we saw with their decision to ban Malaga from the UEFA competition for having ‘overdue payables’, they are prepared to take tough decisions. The writing appears to be on the wall for PSG - in January UEFA General Secretary Infantino warned PSG that they could not ‘cheat’ the rules.

For me, all the indications point to PSG being banned from UEFA competitions from 2014/15 as a result of failing the FFP Break Even test. However, the position is actually potentially more serious (and interesting) for PSG.

During 2012, UEFA decided to introduce a new punishment for clubs that fail to meet the FFP criteria. Without any great fanfare, UEFA introduced a sanction enabling them to strip a club of their UEFA title if they ultimately fail the FFP test. Perhaps the punishment was added as a deterrent, but it seems more likely that UEFA would use it strip Paris St-Germain (or Malaga) of their title if they were to win the Champions League. There is also every chance that prize money may also be withheld (another of UEFA's available sanctions).

We therefore need to ponder the interesting scenario whereby David Beckham end ups winning the Champions League with PSG, only to be asked to return his medal six months later!

*French law allows a company to pay a fine (between €1500 and €3000) if it doesn’t wish to log accounts with France’s Companies House (Greffe). Companies often prefer to pay the fine.

For an analysis of Paris St-Germain’s finances (and those of other clubs), visit Luca Marotta's excellent Italian site http://luckmar.blogspot.it/ (google translate works well).

Time to call clubs to account

Wed, 06 Mar 2013 21:51:54 +0100

Premier League clubs are resorting to increasingly devious actions to bury bad financial bad news. Comparatively few fans are skilled at analysing club accounts so rely on journalists to interpret their team's financial results for them. However, clubs realise that if there is bad news to presented in the accounts, they can avoid the unwelcome glare of media and fan attention by timing their release so the news is not fully reported.

Recently Aston Villa released their annual accounts (another set of shockingly bad figures) at 4.30 on a Friday afternoon. The club chose this time deliberately – it knew that many journalists had pretty-much packed up work for the day (and in any event the next-days paper lay-outs had already been produced). David Conn of the Guardian was at his desk until after 6.30pm on the Friday writing up the review of the accounts. However, for practical reasons most other the newspapers didn’t manage to report Villa’s figures. The ploy worked - newspapers reported on the weekend football action on the Sunday and by the following week it was ‘old news’ and they had escaped media scrutiny. Somewhere at Villa Towers, a Media Relations Manager is receiving a pat on the back for the way they handled the release.

Other clubs have done something similar. Man City also released their figures (another poor set of results) on a Friday afternoon. However City’s approach was, if anything, even more cynical. As with Villa, journalists were not aware in advance that the figures would be released that day (clubs rarely do). However, on the Friday morning, the club released two stories to the press (one about Dzeko was particularly thin and had some journalists scratching their heads about its relevance). The aim was to get newspapers to fill their lay-outs with City pieces so that when the accounts were released, they would be either ignored completely or else reported as a post script. When the figures were released in the afternoon, they were accompanied with a press briefing –key sections were repeated verbatim and unchallenged. This included a seemingly incorrect/ misleading piece about the wages paid to players signed to players pre-June 2010.

Ultimately City’s plan also worked – the Saturday newspapers carried little in-depth analysis of their figures. One piece of interesting information –the fact that the owners paid £12m to the club for ‘intellectual property and know-how’ slipped under the radar almost entirely.

Chelsea and Fulham’s approach was also particularly interesting. Both clubs made a detail-lacking upbeat Press Release to announce their figures, some weeks in advance of the release of the full figures. Fulham’s approach was probably the more cynical of the two. The club announced that it had made an ‘Operating Profit’ of £1.2m. However when the results were actually filed at Companies' House, it was clear that the club had not made any Operating Profit - the accounts report a £900k Operating Loss.

Frustratingly, the term ‘Operating Profit/Loss’ has no fixed definition. The accounts revealed that Fulham had used an extraordinarily generous definition of Operating Proff/Loss - one that excluded any amortisation of player transfer fees! To Fulham, it seems purchasing and utilising players is not part of their ordinary business.

Fulham's accounts - extract of P&L:

Clearly all top-flight clubs routinely purchase players from other clubs so Fulham’s definition was disingenuous at best.

The figures were actually considerably worse than the club portrayed them be. After expenses, it transpired that Fulham’s triumphant ‘Operating Profit’ was actually a loss for the season of £18.8m! However you won’t find any discussion of this figure in any newspaper – by the time the news filtered out, Fulham’s results were considered old news and went unreported.

Chelsea made a similar detail-lacking press release. Much to everyone’s surprise they declared that they had made a £1.4m profit over the 2011/12 season. This claim was reported unchallenged by most papers. To his credit Steve Tongue in the Independent on Sunday ran a piece questioning how the club had managed to achieve a seemingly impossible profit; ‘Winds of change blowing for Chelsea but do the accounts add up?’ When the accounts were filed in January we found that around £18.5m was cancellation of some preference shares. The share transaction has yet to be explained by the club and it is not clear if this can be counted as ‘relevant income’ for the purpose of FFP or if the timing has been artificially manipulated to help them pass the FFP test.

Clubs are technically free to release their figures whenever and however they like (as long as the accounts are filed at Companies House on time). Some clubs, like Liverpool, understand that they have a moral duty and relationship with their fans – Liverpool released their uncomfortably poor results on a Monday morning. Other clubs like Chelsea, City, Fulham and Villa will take a little longer to realise the world has moved and the zeitgeist is with’sustainability’ rather than insularity and evasion.

Wage and the Premier League scaled table

Sun, 10 Feb 2013 22:12:10 +0100

Recently, the www.sportingintelligence.com website produced a Premier League table drawn to a scale where every point was given the same vertical scale. This type of graph is know as a Cann Table and a website dedicated to them can be found here. The website www.experimental361.com also produced some very attractive charts showing the tables in this visual format.

The spending constraints recently voted in by Premier League clubs are essentially designed prevent club debts by tackling escalating wage costs. Against this background it is interesting to combine the Cann Table with a scaled table of wage costs. The result is the attached chart:

The right two columns represent the current league table drawn to scale. The wage costs (shown in the two left columns) are based on either, recently published wage costs for the 2011/12 season, or, where not available, an estimate of the wage bill.

The wage costs are highly polarised with Man City spending £200m on wages, whereas clubs like Swansea spend only around £35m. Manchester City's (and Chelsea's) spending generates a stretched table with only a few high wage-paying clubs at the top, but most of the clubs paying broadly similar wages around the lower part of the table.

The green and red lines show the clubs that have significantly over-performed (green line) or under-performed (red line) against their wages expenditure. Looking at the clubs who have most over-performed, we see:

Man Utd, Tottenham, Swansea, Everton, West Brom, Stoke, Norwich and Southampton

The stretching of the wages table has the effect of somewhat over-emphasising the achievements of the lower teams in the league table - however by any standards, these teams have all had a rather good season.

There are six teams that the table suggests have under-performed given the resources at their disposal:

Man City, Chelsea, Arsenal, Liverpool, Villa and QPR

Interestingly, these are the teams where the managers have probably been under most pressure this season.

It is not a perfect model by any means but does articulate the concept that performance expectation is driven by the amount of money a club spends on wages - when a club's league performance falls below this level, the sack-race odds shorten. When the team over-performs compared to their wage-bill, they are often the ones where the managers receive the media plaudits (e.g. Moyes, Laudrup, Villas-Boas and even Ferguson).

We can expect City and Chelsea's spending to be reigned-in as FFP and the PL spending constraints bite. We should start to see the wages element of the chart become less stretched. One of the risks of the new rules is that Manchester United might take over Manchester City's role as the high spenders in the division. A high wage budget in the hands of a manager who can consistently get the maximum performance from the expenditure, could result in a Premier League procession.

But as the chart shows, there is a distinct difference between having a high wage bill and having a manager who knows what to do with the funds.