Wednesday, June 29, 2011

Palermo - Pretty In Pink?

After a promising start to the 2010/11 season, when their exciting young team appeared to be mounting a serious challenge for a Champions League place, Palermo hit the buffers in February, suffering what their irascible president Maurizio Zamparini called a “black-out”, as they lost six matches in a row, including a devastating 7-0 home defeat to a rampant Udinese. The campaign had been going so well with the youthful talents of the Argentine playmaker Javier Pastore and Slovenian midfielder Josip Ilicic to the fore, ably supported by the attacking full-backs Federico Balzaretti and Mattia Cassani.

Described as a “phenomenon” by no less an authority than Javier Zanetti, Pastore in particular elevated himself to genuine stardom with some world-class displays, enamouring himself to the fans by scoring a hat-trick against local rivals Catania. His former manager Delio Rossi said, “Javier is not the icing on the cake, he is the key ingredient”, after “El Flaco” (the skinny one) received the award for Serie A Young Footballer of the Year in 2010.

Nevertheless, the season finished on a high (of sorts), as the Rosanero defeated champions Milan to reach the Coppa Italia final, where they were unfortunate to lose 3-1 against Inter. Their disappointment was tempered by the fact that this was enough to secure qualification for the Europe League, as Inter already had a Champions League place. They also finished in a creditable eighth place in the league, though this left the fans feeling a little frustrated after the previous year, when the Sicilian club achieved its best ever position of fifth, only missing out on the Champions League by two points.

"Fabrizio Miccoli - captain courageous"

However, any displeasure from the fans was nothing compared to that expressed by the volcanic Zamparini, whose behaviour towards his managers last season was bizarre even by his own erratic standards. After the mauling by Udinese, he sacked Delio Rossi with a vicious parting shot, “He has ruined my Palermo. Rossi has destroyed this team.”

His replacement, the excitable Serse Cosmi, fared little better. He barely had time to adjust his baseball cap before being given the elbow after just four games, culminating in a 4-0 defeat in the derby match against Catania. Before that game, the president had told Cosmi not to pick the captain Fabrizio Miccoli, but Cosmi effectively sealed his fate by also not selecting Pastore.

In an abrupt volte face, Zamparini then brought back the humiliated Delio Rossi, commenting, “Rossi knows this team well and he’s the only one that can save us from this predicament.” If the fans thought that was the end to Zamparini’s eccentric deeds for the season, they would have been disillusioned when Palermo and Rossi parted company for the second time in four months, as former Chievo manager Stefano Pioli was appointed coach at the beginning of June in a bid to improve the team’s defence.

"Zamparini - listen to me"

Of course, Zamparini has few equals when it comes to hiring and firing managers. Given his penchant for granting managers more than one bite at the cherry, it is difficult to calculate exactly how many he has employed since he bought Palermo in 2002. By my calculations, the total now amounts to 20, though some names appear on the list more than once, including Francesco Guidolin, who held the coaching position no fewer than four times between 2004 and 2008. Yes, that would be the same Guidolin who has just led Udinese to the Champions League. As the inimitable James Richardson once put it, Zamparini is “a man responsible for producing more pink slips than Victoria’s Secret.”

There’s never a dull moment with El Presidente, but his outspoken, interfering approach has been a destabilising influence at the club, undermining managers and players alike. While the money he has put into Palermo undoubtedly gives him the right to have his say, it would surely be better for the club if his criticisms were made in private rather than in front of the TV cameras, as is his habit. In fairness, the “Venetian” is not completely blind to his ways, “I know I’m not an easy president. I have many faults and among these is the lack of patience.”

However, as the saying goes, there are two sides to every story. While the president may sometimes put his foot in his mouth, Palermo fans should be grateful to him for also putting his hand in his pocket. After he sold Venezia football club in 2002, Zamparini purchased Palermo from former Roma chairman Franco Sensi for a reported €20 million, discovering a club with shaky finances, low gate receipts and no sponsor.

"Josip Ilicic - plenty of heart"

Since those dark days, Zamparini has guided Palermo from the depths of Serie B to the upper reaches of Serie A, injecting further funds into the club. According to a letter that he sent to the fans earlier this year, he has invested €62.45 million, a figure backed up by the accounts. In fact, the total investment was actually higher, as €4.5 million has been repaid since 2006 when there was no further need for external funding to cover losses.

In total, Zamparini has therefore invested €82.45 million into Palermo, which might not be as much as, say, Massimo Moratti has spent on Inter, but it’s hardly an insignificant sum of money. Actually, as Zamparini has also provided a personal guarantee for the club’s debts of a further €21.65 million, you could say that he has risked well over €100 million on the Rosanero. In other words, he may well have a big mouth, but at least he’s put his money where his mouth is.

That said, his role as Palermo president has not exactly been harmful to the growth of his construction business in Sicily, which has focused on new commercial centres. In addition, it has provided a platform for his sizeable ego.

"Ezequiel Munoz - high five!"

In fairness, his achievements at Palermo do give him something to shout about, as the club has most definitely been on the rise since he took over. The club has not won any major honours in its history, though twice came close to victory in the Coppa Italia in the 70s. Indeed, in 1986 they were expelled by the football league due to financial problems, leading to a year without professional football in Palermo. The club then re-formed in Serie C2, immediately gaining promotion, though they spent most of the 90s between Serie C1 and Serie B.

However, a couple of years after Zamparini took control, Palermo were promoted to Serie A, 30 years after they had last played in the top tier. In their first season back they surprised many by finishing in an impressive sixth place, driven forward by Luca Toni’s goals, but since then they have regularly finished in the top ten, including fifth place three times (though one was due to the adjustments following the Calciopoli scandal).

In that period, not only have they managed to avoid relegation battles, but have qualified for Europe on five occasions. Their best run came in the UEFA Cup of 2005/06, when they lost in the last 16 to Schalke 04. The quality of that team was emphasised by Palermo providing no fewer than four players to Italy’s World Cup 2006 winning squad: Andrea Barzagli, Cristian Zaccardo, Simone Barone and Fabio Grosso, the man who scored the crucial first goal in the semi-final against Germany.

This is a pretty good record, considering Palermo’s relatively limited resources. In fact, Zamparini summed up the situation fairly well in the letter to the fans, “Palermo has in the last few years an equal balance between income and expenditure, despite the mounting expenses.” This is more or less true if we look at the profit and loss account of recent times. Although this show losses in four of the last six years, in the main they’re relatively small and the aggregate loss over the period is only €11 million, which is not too bad in the unforgiving world of football.

However, the last two years have highlighted a major issue for Palermo, namely the importance of player sales to the club’s business model. In 2009, they made a healthy profit of €18 million, which was entirely due to profit on player sales (“plusvalenze”) of €48 million. However, last season, when there was effectively no profit from player sales, the club swung to a loss of €17 million.

Zamparini went on to say that Palermo brought in “negative amounts of €10 million annually compared to revenue”, but it’s actually worse than that with the operating loss being even higher in the last four years: 2007 €19 million, 2008 €11 million, 2009 €26 million and 2010 €15 million. So, those who accuse the president of making money from the club are barking up the wrong tree. As he explained, “The club’s policy is not to make money, but to balance the budget, so it doesn’t fail.”

In fairness, if non-cash items are excluded, the EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) is invariably positive, so the club is not in desperate financial straits. In fact, in 2009 Palermo were the most profitable club in Serie A. Even with the large loss in 2010, the club still broke-even over the last two seasons with only four clubs performing better from a financial perspective: Catania, Napoli, Lazio and Livorno.

Palermo’s financial prudence was in stark contrast to many of the bigger clubs, who reported enormous losses. In the last two seasons, Inter led the way with an aggregate loss of €223 million, though this helped deliver the scudetto in 2009/10. The next highest loss came from their neighbours Milan, who finished third in the league, while the fourth highest loss of €24 million was from second placed Roma. With that backdrop, for Palermo to balance their books and still finish fifth in 2009/10 was a remarkable achievement.

However, as we have seen, the only way that Palermo can operate a self-sufficient model is through player sales. This has enabled them to restrict the club’s debt levels, while delivering enough profit to sustain their operations – also removing the need for Zamparini to further finance the club. In 2009, this was worth a massive €48 million, including the sales of prolific Brazilian striker Amauri to Juventus (profit €19 million), Barzagli (€9 million) and Zaccardo (€6 million) to Wolfsburg and Rinaudo to Napoli (€5 million).

In his letter to fans, Zamparini again stressed that the club had to rely on such activity to cover losses, citing the example of Edinson Cavani’s move to Napoli, which produced a juicy profit of €12 million (€17 million selling price less €5 million cost), though this was actually a paid loan (€5 million) with an option to buy (€12 million, payable over four years).

"Salvatore Sirigu - packs a punch"

It should be noted that the calculation of the profit made by Palermo will not always be as straightforward as selling price less cost, because sometimes the player’s previous club will also take a share of the gain, e.g. this was specifically noted in the accounts for the deal that took Danish defender Simon Kjaer to Wolfsburg in July 2010.

Nevertheless, this strategy clearly makes sense financially, not just for the profits made by selling the “assets”, but also because it keeps the wage bill at a reasonable level. This was explicitly mentioned in the club’s 2009 accounts, which outlined how they would sell the better known players, who were perhaps less motivated, and replace them with younger prospects – with lower wage expectations. Zamparini said that the idea was “to invest in youth with great quality”, a policy that means that Palermo has become “a factory of stars” according to La Repubblica with a production line of talent.

There is little doubt that the club’s scouting network has discovered some unpolished gems, such as the mercurial Pastore and the Slovenians Josip Ilicic and Armin Bacinovic. Ilicic was snapped up just four months after playing in the Slovenian second division following a brief interlude with Maribor and has made such a positive impression in Italy that La Gazzetta dello Sport was moved to describe him as “a ballerina with the physique of a boxer.” However, their signings have not always proved to be so successful with the likes of Jasmin Kurtic and Joao Pedro flattering to deceive.

"Abel Hernandez - canes it"

The main problem with this modus operandi is that it makes it very difficult for Palermo to progress to the next level. As Delio Rossi noted, “If Palermo want to build something truly important, they must keep players like Kjaer and Cavani.” Also, if a club opts for youth over experience, there will inevitably be dips in form. Youthful talent can be very exciting, but also inconsistent, as was seen last season when Palermo’s defence usually featured the 20-year-old Argentine Ezequiel Munoz.

If the players do flourish at Palermo, the club’s rigid wages policy means that it is virtually impossible to keep them, as they will find it very difficult to resist moving to clubs that can pay 3-4 times more salary. According to La Gazzetta’s annual survey of player wages, Pastore’s net salary is just €0.5 million, while Ilicic is on even less with €0.3 million.

Hence, it seems only a question of time before Palermo’s promising young players move on. As we have seen, this does fill the club’s coffers, but there is a risk that players might leave the club too soon, so they don’t receive top dollar for them. The profit made on Cavani was better than a smack in the face, but he is surely worth a lot more now than the €17 million Napoli paid for him.

Another question mark against Palermo’s buying and selling policy is how well it will work after the departure earlier this year of the much respected Sporting Director Walter Sabatini, who now holds a similar role at Roma.

If there were any doubts about the importance of player trading to Palermo’s business, they should be dispelled by the above graph. If profit on player sales is considered as “revenue”, its contribution has been striking in the past few years. In the financial annus mirabilis of 2009, the €48 million made on player sales was almost as much as the club’s entire turnover of €57 million. Put another way, in the four years between 2006 and 2009, the club’s profit from player sales of €92 million was more than the €91 million from gate receipts and commercial income combined.

The other striking point from the revenue trend is how little growth there has been over the past few years. In fact, since the television contract was improved in 2007, revenue has hardly grown at all, rising just 5% from €57 million to €60 million.

The reason why Palermo focus so much on making money from player sales is immediately apparent when you look at how small their revenue is. Although it is the eighth highest in Italy at €58 million (excluding player loans), it is miles behind the leading clubs. Last season, three clubs earned over €200 million (Inter €225 million, Milan €208 million and Juventus €205 million), which is at least €150 million more, while Roma generated €123 million. More worryingly for the Rosanero, their obvious competitors for European qualification (Fiorentina, Napoli and Lazio) all have significantly higher turnover.

This really places into perspective the magnitude of Palermo’s task in attempting to challenge the game’s elite. Back in 2007 Zamparini already bemoaned this fact, “The Champions League places will almost certainly go to the clubs taking the lion’s share of the TV rights like Milan, Inter, Juve and Roma. Every other club is an outsider who might just grab fourth place one time in five.”

This goes some way towards explaining Zamparini’s seemingly continual quest for a better coach, “I look for quality. This is necessary to keep Palermo at the current levels just behind the 3-4 big teams.” Whether this lack of stability is the best path to success is highly debatable, but the results have been better than might be expected considering Palermo’s budget.

Palermo’s revenue mix is fairly typical of the majority of Italian clubs with only 12% coming from match day income and an unduly high reliance on television money, though their 58% share is far from the highest in Serie A with ten other clubs having a bigger dependency. In fact, Palermo’s performance is remarkably consistent across all revenue streams: eighth best for TV and commercial income, ninth best for match day.

At this point, I should explain that the revenue figures used in my Serie A Money League are lower than those used in the club’s own books. The reason for the difference is that Italian accounts report gross revenue, while I have shown net income, as this is consistent with the approach used in other countries. Therefore, I have excluded the following: (a) gate receipts given to visiting clubs €1.3 million; (b) TV income given to visiting clubs €6.1 million; (c) revenue from player loans €1.4 million; (d) profit from player sales €1.2 million. Adding the €10 million adjustments to the €58.5 million in my analysis gives the €68.5 million reported in Italy.

As we were saying, television is very important to Palermo’s finances, contributing a net €34 million of revenue a season. In fact, the last time that the club’s revenue meaningfully rose was due to the introduction of the new TV contract in 2007, but even that was greeted with anger by Zamparini, as Palermo received a smaller percentage than before, only increasing their money because the total deal was higher: “They should be ashamed. Once again they want to favour the big clubs at the expense of the others.”

When you look at the €90-100 million that Juventus, Milan and Inter have been earning from their individual deals, you can see that he might have a point. These vast differences have meant that the playing field in Italy has been anything but level, but years of protest finally led to a new collective agreement being implemented at the beginning of this season. We know that the total money guaranteed by exclusive media rights partner Infront Sports will be approximately 20% higher than before at over €1 billion a year, but it is still not certain what the impact will be on each club’s revenue.

There is a complicated distribution formula, which should still favour the bigger clubs, though there is likely to be a reduction at the top end. Under the new regulations, 40% will be divided equally among the 20 Serie A clubs; 30% is based on past results (5% last season, 15% last 5 years, 10% from 1946 to the sixth season before last); and 30% is based on the population of the club’s city (5%) and the number of fans (25%).

"Armin Bacinovic - the other Slovenian"

So, the larger clubs will lose out from the new arrangement, but the mid-tier clubs like Palermo should benefit. There is still a question over how the number of fans (worth 25% of the deal) will be calculated, leading to a major dispute between the larger clubs (represented by Milan, Inter, Juventus, Roma and Napoli) and the smaller clubs (represented by Palermo, Udinese, Parma, Sampdoria and Catania), even over which market research companies to use.

This issue is specifically mentioned in the latest accounts as an important factor in Palermo’s future finances. The club has estimated that they will receive €34.5 million under the new arrangement, which would be a slight increase on the current €33.2 million (assuming that the allocations for away games have been excluded from this calculation). Although on the face of it that would not be too bad, it would hurt them relative to other mid-level clubs, as figures in La Repubblica suggest that the increase at other clubs would be much larger: Lazio €13 million, Udinese €10 million and Napoli €8.5 million.

Of course, the leading clubs’ TV money is also boosted by distributions from the Champions League. In the 2009/10 season Inter benefited to the tune of €49 million as winners of the competition, but the other three Italian qualifiers all received over €20 million. Palermo’s ventures into the far less lucrative UEFA Cup and Europa League have not produced similar riches, raising only €2.3 million for the three years 2006 to 2008, though they would also have received higher gate receipts (e.g. €0.8 million in 2007) and uplifts on sponsorship deals.

Even though Palermo’s match day income of €7 million is on the low side, they are a well supported club with their 2010/11 average attendance of 25,738 being the sixth highest in Italy, only behind Inter, Milan, Napoli, Roma and Lazio, teams from much larger cities.

That said, the crowds have fallen since the 2004/05 average of 33,000. In the same period, season ticket sales have declined from 24,900 to 16,900, leading to the inevitable comment from Zamparini, “I would have expected at least 23,000 after the money I have spent.”

The club attributes the decrease to a number of factors: initially, the old, uncomfortable stadium allied to the threat of violence, football scandals and the exponential growth in matches televised live. In recent times, the economic crisis has hit supporters’ disposable income, especially in a region that is far from wealthy. There’s also the interesting phenomenon that many Sicilians support Juventus, as they have relatives working for Fiat in Turin. For the same reason, Palermo always have a good following of away fans at games in the north of Italy.

"Tutto lo stadio"

Palermo currently play their homes games at the Stadio Renzo Barbera, named after the club’s legendary chairman of the 1970s, which has a capacity of 36,349. Like almost every other Italian club, Palermo do not own their ground, but instead pay rent to the local council (€0.5 million last year), which means among other things that they have been unwilling to invest in modernising the infrastructure. Similarly, very little has been spent by the council, which is not exactly flush with cash.

A few years ago, Zamparini announced plans to build a new stadium, which he described as “necessary” for the club’s future prospects, but nothing concrete has happened since. In fairness, Italy’s failure to win the bids for the Euros in 2012 and 2016 have put a spanner in the works, as this would have brought in much needed revenue and government subsidies. Nevertheless, the president maintains that he would like to “make a gift of a new stadium to the city of Palermo.”

In October 2010, he said that the project was ready to go, even on the financial level (estimated cost €70-100 million), but described the bureaucracy around the approval process as “exasperating”. Nevertheless, he believed that construction would start within two years, though the council thought that his timings were “optimistic”. The new stadium would actually have a lower capacity (around 30,000), but would be a modern facility in a new commercial centre, capable of hosting many other events like the Veltins Arena in Gelsenkirchen.

Palermo’s commercial revenue has been on a rising trend, more than doubling from €8.4 million in 2005 to €17.8 million in 2010. This is partly due to an innovative leaseback deal for the club’s brand made in 2006 with Locat SpA, which brought in a gain of €30 million, booked as €3.3 million revenue each year until 2015, when the club can re-acquire the brand for a nominal fee.

Following ten years with Lotto, in 2010 the club switched to Legea as their kit supplier in a two-year deal worth €0.95 million in the first year and €1.1 million in the second. Other Italian clubs receive higher sums than Palermo: Inter – Nike €18 million, Milan – Adidas €13 million, Juventus – Nike €12 million, Roma – Kappa €5 million and Napoli – Macron €4.7 million.

After two spells without a shirt sponsor (2006-08 and 2008-09), the club finally secured a deal with online gaming company Betshop, though the company broke the agreement after one of Palermo’s players failed a drug test, leading to them being replaced by Eurobet in 2010. It is not clear how much this deal is worth, though it is unlikely to be much more than €1 million a season, which would again be a lot less than other Italian clubs: Milan – Emirates €12 million, Inter – Pirelli €9 million, Juventus – BetClic €8 million, Roma – Wind €7 million, Napoli – Acqua Lete €5.5 million and Fiorentina – Mazda €4 million.

Given the club’s relatively low revenue, it is probably not too startling that they have strived to control their costs, especially the wage bill, which has only risen €3 million in the last two years to €38 million. The important wages to turnover ratio has been held in a narrow range of 55-65%, which might sound a bit too close to UEFA’s recommended maximum limit of 70% for comfort, but only six clubs in Serie A have a lower (better) ratio.

In the same way that Palermo have the eighth highest revenue in Italy, they also have the eight highest wage bill, though it looks utterly insignificant compared to those of the “big four”, who appear to be playing in a different league altogether: Inter €234 million, Milan €172 million, Juventus €138 million and Roma €101 million. However, the accounts did note that €1.9 million was included in other expenses for jobs that have been outsourced.

Only one Palermo player earns more than €1 million net, namely Miccoli, and he receives just €1.2 million. That is why Zamparini recently advised that there was no chance of Amauri returning to the club, as “his salary is too high for us.” Apparently, the Brazilian is now on more than €4 million, while Palermo could only afford €1 million.

In the past, Zamparini has argued against a salary cap, suggesting that this would only give rise to “under the table” deals, but he did propose to his fellow presidents that all clubs should cut salaries by at least 30%. Of course, he could probably reduce Palermo’s wage bill by a fair bit if he stopped firing managers…

Player amortisation has grown by 50% from €14 million in 2005 to €21 million in 2010, which is pretty high, considering that the revenue is only €60 million. For the non-accountants, I should explain that amortisation is the annual cost of writing-down a player’s purchase price, e.g. Kjaer was signed for €4 million on a five-year contract, but his transfer was only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, i.e. €0.8 million a year (€4 million divided by five years).

This increase implies that Palermo have been active in the transfer market, which is true, though that might surprise some. Although Palermo’s net transfer spend in the last eight years is only €34 million, due to the frequent player sales, the gross purchases have been relatively high at €178 million. In fact, Palermo have been a buying club in every year but 2008 and even then they splashed out €44 million on new players, which happened to be more than compensated by €62 million of sales.

Indeed, in the last two years, Palermo’s net spend of €16 million was only surpassed by five clubs in Serie A, though it is fair to say that this is partially due to a general slowing down of the transfer market, as the big guns became net sellers in an attempt to stem their losses.

In spite of this expenditure on new players, Palermo are in a very good debt position with only €4 million of bank loans and €8 million of loans from shareholders (essentially Zamparini). They have managed to more than halve gross debt from €25 million in 2005 to €12 million in 2010. This enviable position is a sign of the club’s self-sufficiency and is in marked contrast to Milan and Inter, who have large bank debts of €164 million and €71 million respectively.

Although they do owe other football clubs €28 million for outstanding transfer fees, this is almost entirely compensated by the €21 million owed to Palermo. Indeed, much of this represents transactions between the same clubs, e.g. Juventus owe Palermo €8 million, but Palermo also owe Juventus €4 million.

In fact, Palermo have one of the strongest balance sheets in Serie A with net assets of €22 million. Their position would be even better if a real values were to be applied to their players, who are shown at net book value of €56 million in the accounts, but are worth considerably more on the transfer market – probably around €150 million, if you consider that Pastore on his own might well fetch €50 million.

Palermo’s profits for the next couple of years seem assured. The 2010/11 accounts will benefit from the sales of Kjaer and Cavani, while the following financial year will almost certainly include the blockbuster sale of Pastore. All the usual suspects have made enquiries about the player that Zamparini called “the new Zidane”. In the last couple of days the president said that he had received an offer of €50 million and there was only a 10% chance that the Argentine magician would stay. Pastore cost Palermo less than €5 million, so this would produce a huge profit, but it should be noted that they reportedly have to give 50% of the sale price to his former club/agent.

All of Palermo’s players appear to be in the shop window. Tottenham apparently had a €10 million bid for Uruguayan forward Abel Hernandez turned down, but his agent hinted that €20 million would be enough to secure a move. Similarly, Zamparini has confirmed that he would sell Italian international Mattia Cassani to Lazio if he receives a concrete offer.

Of course, this must be a dilemma for Palermo, as such sales weaken the squad and reduce the team’s chances of achieving the stated aim of qualifying for the Champions League, which would bring its own financial benefits. This may seem ridiculously ambitious for a club of this size, but bear in mind that they only missed out on qualification two years ago by the smallest of margins, while Udinese succeeded this season and they have even less money. Granted, the revised UEFA coefficients that reduced the number of Champions League places available to Italy from four to three won’t make this assignment any easier, but the principle remains the same.

Qualifying for the Europa League is a praiseworthy feat, but it’s a double-edged sword for clubs Like Palermo with little strength in depth. As they need to prioritise their resources on maintaining a challenge in the league, they often field under-strength sides in Europe, which leads to underwhelming performances.

"Happy days are here again"

Quite frankly, it’s not an entirely straightforward exercise predicting the future of Palermo when the president is a man of so many contradictions. Last October, he was talking about meeting an Arab prince (a personal friend obviously) in order to invite more investment, but just a month later he put the club up for sale, claiming he was fed up with poor refereeing decisions.

Even when looking to attract investment, Zamparini managed to contradict himself. One moment, he was saying that he did not understand why everyone was drawn to England and Italy should be able to “involve important foreign investors in our football”. The next minute, he professed himself amazed that new Roma owner Thomas Di Benedetto would want to “invest here or rather lose (money) in Italy.”

The latter seems closer to his genuine view, as he has also commented that “you rarely get rich in football.” Indeed, even if he did manage to locate a buyer for Palermo, with the greatest of respect it is difficult to see that anyone would pay the €80 million required for Zamparini to get his money back. Of course, a billionaire might always decide to buy the club as an expensive hobby, but they are few and far between.

"The last word has to go to Zamparini"

The reality is that Palermo’s strategy of selling their best young players is unlikely to end any time soon, as it is the only way they can hope to balance their books. To be candid, it could be argued that the much maligned Zamparini has actually performed minor miracles in keeping his club in the upper echelons of Italian football on such a limited budget.

Of course, the president hasn’t helped matters by placing Palermo in an almost constant state of flux with his countless managerial changes. Nor does he endear himself to the fans with his frequent, ill-advised comments, but they should probably also acknowledge him for the things he gets right, even through gritted teeth.

Tuesday, June 21, 2011

Real Madrid And Financial Fair Play

So in his first season as Real Madrid manager José Mourinho justified his much vaunted reputation as a winning manager, but the problem is that his team only added the Copa del Rey to the trophy cabinet. This was just a consolation prize for the most successful club in Spanish history, especially as their eternal rivals Barcelona won the two competitions that really mattered, namely La Liga (for the third season in a row) and the Champions League, when they out-passed (and out-classed) Manchester United.

Of course, it is Mourinho’s misfortune to come up against a Barcelona side that is universally recognised as one of the greatest to ever play the beautiful game. Indeed, there is an argument that Madrid are the second best team in the world, but the nagging sense of disappointment among the Bernabéu faithful is almost palpable, as the club’s aspirations are to be number one.

Madrid have been champions of the Spanish league no fewer than 31 times, while they have been victorious in the European Cup (or Champions League) on nine occasions – more than any other club. However, they have not won Europe’s flagship competition since 2002, which is an eternity for a club of Madrid’s stature, aggravated by the fact that Barcelona have been triumphant three times in that period. Only this month Madrid’s flamboyant president Florentino Pérez said that he would not rest until the club had won a tenth European Cup.

"José Mourinho - still special"

Madrid have not held back from attempting to spend their way to success, splashing out around a billion Euros in the last decade in a fruitless attempt to emulate former glories. Pérez’s original Galácticos project failed to deliver sustained success on the pitch, despite shelling out vast sums for superstars like Zinedine Zidane, Ronaldo and David Beckham, leading to the president’s resignation in 2006.

However, he was back just three years later and wasted little time in making his presence felt, as huge amounts were once again invested in new talent, including Cristiano Ronaldo, Kaká, Xabi Alonso, Karim Benzema and Raúl Albiol with Pérez somewhat superfluously commenting, “Real Madrid’s philosophy is to have the best players in the world.”

Nevertheless, that 2009/10 season ended in another ignominious exit from the Champions League, when Lyon eliminated Los Merengues at the last 16 stage. This meant that Madrid had not won a Champions League knock-out tie for six years, leading the local media to conclude that their “stratospheric spending” was nothing more than a colossal waste of money. Even the conservative daily ABC was moved to describe it as “more than 250 million Euros down the drain.”

"Florentino Pérez - the minute you walked in the joint..."

This has lead to a fine-tuning of the big spending policy during Mourinho’s reign. Yes, Madrid have still bought more than their fair share of players, including Mesut Özil, Sami Khedira, Nuri Şahin and Hamit Altintop from the Bundesliga, but by their own prodigious standards the sums involved were relatively restrained with only the tricky Argentine winger Ángel di Maria costing more than €20 million.

Although this subtle change in direction might imply that Pérez’s strategy of recruiting world-class players has not worked, it has to be acknowledged that their presence in the Madrid team has helped facilitate a transformation in the club’s financial performance. Many people not unreasonably assume that Madrid’s spendthrift ways must inevitably lead to financial disaster, but that is not necessarily the case. Indeed, there has already been talk this summer of the club reverting to type, as they are reportedly wiling to splurge €45 million on the mercurial Brazilian Neymar or a similar amount on the exciting Argentine striker Sergio Agüero.

UEFA’s President, Michel Platini, has condemned Madrid’s “excessive transfers as representing a serious challenge to the idea of fair play and the concept of financial balance”, leading to the obvious assumption that Real Madrid would not be able to meet UEFA’s forthcoming Financial Fair Play (FFP) regulations that encourage football clubs to live within their means.

"Mesut Özil - the eyes have it"

Eminent academics appear to be in some disagreement whether Madrid’s business model is viable. Barcelona University’s José Maria Gay did not hesitate to put the boot in, “Real’s most important revenue streams won’t be enough to offset their spending. The costs have soared and they need to increase income by about 20 per cent to balance the accounts. It’s a very risky investment.”

However, while Simon Chadwick, professor of Sport Business Strategy and Marketing at Coventry University, largely concurred with this pessimistic view, he also pointed out that Madrid had “made a very simple and obvious investment decision that many businesses across the world make on a daily basis”, namely to spend generously in the hope of achieving “a level of success that generates revenue in excess of the costs incurred.”

And that’s the crux of the matter, as Madrid are in fact doing exactly that. In spite of their massive spending, the club is not only profitable, but is making large profits year after year: 2007 €44 million, 2008 €51 million, 2009 €25 million and 2010 €31 million. That works out to over €150 million of profit in just four seasons.

Not only did profit before tax increase by 24% from €25 million to €31 million in 2009/10, but EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) also rose 20% from €93 million to €112 million, which is 25% of revenue of €442 million. In other words, for every €100 of income earned, there is a surplus of €25 after covering expenses. This is important, because this is the main source of funds available to make investment in players and facilities after meeting the club’s financial commitments.

In fact, it’s actually even better if you include the profit on player sales of €34 million, mainly derived from the sale of the Dutch contingent (Arjen Robben, Wesley Sneijder and Klaas-Jan Huntelaar) in August 2009, which increased EBITDA to a very healthy €146 million.

"There must be an Angel (playing with my heart)"

Of course, that excludes the impact of cash spent on purchasing new players, which is only reflected in the profit and loss account via player amortisation. As you might expect, this has been on the rise and the combined player amortisation and depreciation figure now stands at €102 million, reducing operating profit (excluding player sales) from €17 million to €10 million.

It should be noted that Madrid have been accused of some fancy footwork in their accounts as well as on the pitch, which can be seen by the large number of exceptional items between 2005 and 2008, mostly relating to the purchase of players. During the first Pérez regime, the club decided to write-off the cost of new players in the period of acquisition instead of capitalising the cost as an asset and then amortising it over the length of the player’s contract.

However, this policy was not in line with international (or even Spanish) accounting standards, so was reversed in 2008, resulting in a large credit for the accelerated amortisation previously booked to the accounts. Only a cynic would suggest that the previous treatment lowered the exceptional profits made from selling the club’s training ground, thus reducing the tax payable to the authorities. Hopefully, that sort of creative accounting is a thing of the past and the last two sets of accounts look a lot cleaner, though this opinion is only based on a high-level inspection.

In any case, Real Madrid’s 2009/10 pre-tax profit of €31 million is very good compared to other leading European clubs, only surpassed by Arsenal’s €67 million, which was boosted by property sales. Perhaps surprisingly, it’s a fair way ahead of Bayern Munich, often held up as a paragon of virtue in the football world, whose profit was “only” €6 million.

However, it really shines when you look at the magnitude of losses made by some of Europe’s other big boys. Those made at Inter €68 million, Chelsea €84 million and new kids on the block Manchester City €146 million were covered by wealthy owners, while Barcelona €83 million were hit by a series of audit adjustments and Manchester United €146 million suffered from the mountain of debt placed on the club by the Glazers.

Essentially, Madrid’s profits are due to their astonishing ability to generate revenue. They are the only club to generate more than €400 million and have topped the Deloitte Money League for six years in a row. Although Deloitte’s revenue figure of €439 million is slightly lower than the €442 million reported in the club’s accounts, it is still over €40 million ahead of Barcelona’s €398 million and €89 higher than Manchester United’s €350 million.

To place Madrid’s revenue superiority into context, their annual turnover is more than €100 million higher than Bayern Munich, €150 million higher than Arsenal and an incredible €200 million more than Milan, Inter and Liverpool. From another perspective, Madrid earn the highest match day income and have the second highest television and commercial revenues streams.

All in all, it’s fair to say that the relatively modest performance on the pitch has not exactly hindered Madrid’s money-making machine. In fact, it’s the exact opposite, as they have grown revenue at a faster rate than all their peers with the exception of Barcelona. In 2003, Madrid were in fourth place in the Money League behind Manchester United, Juventus and Milan with revenue of €193 million, but they have managed to increase this by a very tidy €249 million (or 129%) to leave them comfortably ahead of the pack today. Only Barcelona’s revenue growth of €275 million (or 224%) has been higher than Madrid’s, but they started from a lower base €123 million, and the other clubs have all lost ground in relative terms.

Going back a little further, Madrid’s accounts reveal that revenue has grown at an average annual rate of 14% since the €118 million reported at the turn of the millennium in 2000. Much of that growth came in the early years, but Madrid still managed to increase revenue by an impressive 9% last season. Even more striking is the club’s claim that their income of €442 million is the highest in the sports industry anywhere in the world.

The other notable aspect to Madrid’s revenue is how balanced it is between the three revenue streams with about a third being sourced from match day, television and commercial. This diversified structure gives the club economic stability, providing some protection against future fluctuations in income.

A few years ago Madrid were unduly reliant on their marketing expertise, but, while this remains a very important element in their strategy, the other aspects of their revenue have grown much more, so that the split is now as follows: television €159 million, match day €149 million and commercial €135 million. Amazingly, each of those revenue streams on their own provide more income than the total revenue at every club except the top 16 in the money league.

Even though Madrid have been remarkably successful in producing a balanced revenue model, broadcasting revenue still provides them (and Barcelona) with a key competitive advantage over their foreign counterparts, thanks to their lucrative domestic deal. For example, Manchester United generated €31 million less than Madrid, even though they received €19 million more in Champions League distributions.

Unlike all the other major European leagues which employ a form of collective selling, Spanish clubs uniquely market their broadcast rights on an individual basis, so Madrid’s seven-year contract with Mediapro is worth a guaranteed €1.1 billion. According to the respected website Futebol Finance, this was worth €140 million in 2009/10, the same as Barcelona, and more than three times as much as the nearest competitors, Valencia and Atletico Madrid, with €42 million, followed by Villarreal €25 million and Sevilla €24 million.

In other words, Madrid and Barcelona on their own received around half of the total TV money in La Liga or 12 times as much as the €12 million given to the last clubs on the list (Malaga, Sporting Gijon, Tenerife and Xerez). This produces the most uneven playing field in Europe and compares unfavourably to the 1.5 multiple in the Premier League between first and last clubs.

Looked at another way, both Madrid and Barcelona received about twice as much from their domestic deal as Premier League champions Manchester United, even after a significant increase in the latest English deal. However, in stark contrast, West Ham, the team that finished bottom of the Premier League, received more money than Valencia, who finished third in the Spanish league. The logical result of such a disparity is a distinct lack of competition and a need by clubs such as Valencia to sell their best players, e.g. David Villa and David Silva last summer, which further reduces the chances of other clubs providing a stern test to the big two.

Such a revenue disadvantage is bad enough for one season, but it makes a gargantuan difference over time. As Sevilla president José Maria del Nido complained, “The two giants have earned €1,500 million more than the next club in the last ten years.”

One potential problem for Madrid’s TV revenue is the much publicised difficulties experienced by rights holder Mediapro, which are so severe that the company has sought bankruptcy protection over a dispute with Sogecable. However, they do have a bank guarantee supporting the contract, unlike Barcelona who have strangely only been given a “verbal guarantee of payment.”

"Xabi Alonso - far from shabby"

However, the strongest threat to this revenue stream is the proposal to move the current revenue distribution model towards a collective structure. Tentative agreement has been reached whereby Madrid and Barcelona’s share would be reduced to 35% (still more than a third), which would imply a reduction in TV revenue of around €34 million to €106 million. While this will clearly hurt their financials, it could have been a lot worse, especially as their nearest challengers Valencia and Atletico Madrid also had their share cut to 11%. As most clubs have contracts in place until 2013 or 2014, the new system will only be introduced in 2015.

There is a feeling that this might not be the end of the story, as two clubs have still not signed the deal: Villarreal and Sevilla. Although Madrid and Barcelona are by some distance the most popular clubs in Spain, it is equally true that there would be no league without the other clubs. In an echo of the threats that were used to persuade the leading clubs in Italy to accept a return to a collective deal in 2010/11, Espanyol director Joan Collett said, “Maybe we should play our youth team against Madrid and Barcelona.”

If that comes to pass, Madrid will have to make up the revenue shortfall somewhere, but they might just be able to do it from television – by taking a smaller slice of a larger pie. For that plan to work, the new revenue agreement would obviously have to be worth more in total, which does not seem completely unrealistic, given that the television revenue in La Liga is currently lower than the Premier League, Serie A and Ligue 1. The Premier League is the “daddy” when it comes to generating television revenue, so this is the one that the Spanish are examining for growth opportunities.

"Sergio Ramos - Madrid's heart and soul"

The current English deal is worth around €1.3 billion a year, which is more than twice as much as the €0.6 billion received by La Liga, the main reason for the difference being the hefty €575 million that the Premier League receives for foreign rights. According to an estimate by Sporting Intelligence, La Liga only gets €160 million for overseas rights, so the Premier League’s deal is worth almost four times as much.

That is a huge prize to go after, which is the reason why so many in Spanish football are now actively pushing to make the “product” more attractive to viewers abroad, as articulated by former Real Madrid legend Emilio Butragueño, “We want … a brand like the Premier League. The best players in the world are here in Spain and we have to profit from it.” Madrid’s own president, Florentino Pérez has also argued for an earlier kick-off for some games, so that they are more convenient for Asian TV audiences, “The change is vital if the Spanish league is to compete with the English.”

Another opportunity to increase broadcasting income is the Champions League. Although Mourinho’s men reached the semi-finals last season, where they were defeated by Barcelona (again), the last time they got beyond the last 16 before that was back in 2004, which has cost them millions in prize money – as well as gate receipts and sponsorship uplifts.

This is highlighted by the figures released for 2009/10, which show that Madrid only received €27 million compared to the €49 million awarded to the winners Inter. It was even worse before that, as the disappointing performances in the previous six seasons resulted in an average of just €19 million. OK, such amounts would be gratefully received by most clubs, but it’s no great shakes for Madrid.

There are two more interesting financial points arising from the Champions League for Madrid: on the one hand, it’s virtually a guaranteed source of revenue, given the lack of competition in La Liga; but, on the other hand, the money allocated from the market pool is much lower than for English clubs, as the TV deals in Spain have a lower value than England.

More impressively, Madrid’s match day revenue has more than doubled in the last five years from €71 million in 2005 to €149 million in 2010, though that was boosted by the hosting of the Champions League final at the Santiago Bernabéu.

The club’s accounts state that they have spent €184 million in the last decade on modernising facilities in the stadium, which has included the reconfiguration of certain areas to grow corporate hospitality revenue, such as three new restaurants and larger VIP boxes. As an example of how much money this can bring in, Bloomberg reported that Madrid sold 4,500 premium tickets, some costing as much as €1,652, for the Champions League semi-final against Barcelona.

The club has also raised membership fees and ticket prices, which may have contributed to crowds falling below 70,000 in recent years. Nevertheless, according to the Soccerway statistical website, Real Madrid’s average attendance in 2010/11 of 68,295 was still the fifth best in Europe, only behind Barcelona (yes, them again), Borussia Dortmund, Manchester United and Bayern Munich.

However, Madrid’s commercial philosophy is perhaps most interesting. The club’s stated strategy is to strengthen its brand through investment in top players, which it then monitises via merchandising, licensing and sponsorship. It’s a little bit like a Hollywood movie studio, which means that they need the best “actors” for their “show” that can then be leveraged into higher sales.

There are clearly risks associated with such a strategy, but in fairness it seems to have worked to date, judging by the revenue (and profit) figures. Madrid’s popularity has remained undiminished, which has helped drive the astounding commercial revenue of €151 million (after re-classifying membership fees), second only to Bayern Munich’s almost unbelievable €173 million in the money league. The only other club with commercial income approaching that was Barcelona with €122 million, which will rise to much the same level as Madrid’s once their first shirt sponsorship deal is included.

Madrid benefit from long-term sponsorship agreements with key partners. Their partnership with Adidas commenced in 1998, but that did not stop Pérez from negotiating a substantial increase after signing Ronaldo and Kaka, and it is now believed that Adidas pay €30-40 million a year for the privilege of being associated with the Les Merengues.

Similarly, the club’s shirt sponsor, online betting company Bwin, extended its agreement by three years until 2013 for €15-20 million a season. That’s pretty good, but recent sponsorship deals have raised the bar, such as Barcelona €30 million (Qatar Foundation) and Liverpool €24 million (Standard Chartered), so Madrid will undoubtedly be looking for an increase when the deal is up for negotiation. The club also has other high profile partners including Coca Cola, Audi and Spanish beer company Mahou (producers of San Miguel).

According to a report from Sport + Markt, Madrid earn more from merchandising than any other club, increasingly from sales abroad, boosted by frequent tours to other regions like the Far East. Along with Manchester United, they sell more shirts worldwide than any other club (1.2 to 1.5 million a season).

In the past, Madrid have maintained that they covered the transfer fees for players like Zidane and Beckham through shirt sales, though others like the former Barcelona economics director, Xavier Sala I Martin, have poured scorn on these claims, pointing out that you would have to sell tens of millions of shirts to recoup the money, given the low profit margin on each shirt.

"Welcome to the Pleasuredome"

That said, a player’s star quality can also help in other areas, e.g. Madrid take half of a player’s image rights, which can generate considerable money for the club. Furthermore, big name players could also help boost television income in the future. As Nigel Currie of Brand Rapport explained, “They are looking to make money from these signings by maximising their future overseas TV rights. The team that has the most marketable players will get the best TV deals.” There has even been some talk of building a theme park at the club’s training facilities.

However, it will be fascinating to see whether a team formed in Mourinho’s dour image is as appealing to sponsors as the previous star-studded elevens. Even the loyalist Madrid newspaper Marca described one of the displays as “defensive, ugly and rough”, while Barcelona president Sandro Rosell claimed that “this season Real Madrid have gone beyond all the limits of the necessary sports rivalry.” This may seem unconnected to Madrid’s financial prospects, but for a club so focused on its brand, this is a pertinent question.

So, there’s no doubt that Real Madrid have the highest revenue of a football club at €442 million, but they also have just about the highest costs at €432 million (including depreciation and amortisation), which is only surpassed by Barcelona €470 million.

Their wage bill of €192 million is actually only the fourth highest, behind Barcelona €235 million, Inter €234 million and Chelsea €207 million, but interestingly they have the best (lowest) wages to turnover ratio of 43%, which is a long way below UEFA’s recommended maximum limit of 70% and is actually within their “threshold of excellence” of 50%. Not only does this put into the shade other big spending clubs like Manchester City 107%, Inter 104%, Chelsea 82% and Barcelona 59%, but is also better than more frugal clubs like Manchester United 46%, Bayern Munich 47% and Arsenal 50%.

Moreover, Madrid’s wage bill is inflated by the inclusion of salaries for their basketball team. We don’t have the split for this figure in the latest accounts, but in 2008/09 this amounted to €23 million. If we assume that this was a similar figure in 2009/10, the football wage bill would reduce to €169 million.

That said, Madrid clearly pays top dollar to attract big stars, as reflected in the latest Futebol Finance list of the world’s top 50 footballer salaries, which includes nine players from Real Madrid – more than any other club (Barcelona 7, Manchester City 7, Chelsea 6). At the top of the pile is Cristiano Ronaldo €12 million, followed by Kaká €9 million, Emmanuel Adebayor (on loan from Manchester City) €8.5 million and then Iker Casillas, Karim Benzema and Gonzalo Higuain, all on €6 million.

Although the wages are clearly high at Madrid, the overall situation has been steadily improving in the past years. Back in 2002, the wage bill was €137 million, compared to a turnover of €152 million, leading to a very high wages to turnover ratio of 90%. Since then, wages have grown 40%, but that has been considerably outpaced by revenue growth of 190%, leading to the important wages to turnover ratio being halved.

However, Madrid’s budget for 2010/11 highlights an 8% increase in the wage bill to €208 million, which would reverse this trend, though still producing a very healthy wages to turnover ratio of 46%.

Similarly, the budget assumes that amortisation further rises from €102 million to €109 million, after rising by more than a third in 2009/10 from €76 million. Although Madrid now book transfer fees as intangible assets, the expenditure is reflected in the profit and loss account through player amortisation. As an example, Nuri Şahin was bought for a fee of €10 million on a six-year contract, adding €1.7 million of amortisation a year to the expenses.

In other words, although the full cost of a transfer does not hit a club’s costs immediately, it will catch up sooner or later, which is exactly what is happening to Madrid. The 2008/09 accounts revealed that the amortisation figure included €12 million of general depreciation. Assuming this was unchanged for 2009/10 gives player amortisation of €90 million, which is higher than any other club. The closest challengers for this unwanted title are Manchester City €85 million, Barcelona €71 million and Inter €65 million.

In the last ten years Madrid have spent €957 million on purchasing new players, though they have managed to partially offset this by €309 million of sales, giving a net spend of €648 million. Interestingly, their spending has been on a rising trend with net spend of €432 million in the last five years being exactly twice as much as the €216 million laid out in the previous five years.

By my reckoning, they have bought ten players in that period for a fee above €30 million. Although reported transfer fees are notoriously unreliable, the list includes: Cristiano Ronaldo €96 million, Zinedine Zidane €75 million, Kaká €67 million, Luis Figo €60 million, “Brazilian” Ronaldo €45 million, Arjen Robben €36 million, David Beckham €35 million, Karim Benzema €35 million, Xavi Alonso €30 million and Pepe €30 million.

However, Madrid have also spent smaller sums (relatively speaking) on recruiting players who have starred for other Spanish clubs, but are destined to only have bit part roles at Madrid, such as Sergio Canales, Pedro Léon and Esteban Granero. It’s difficult to say whether this is a gamble on young potential or an attempt to prevent other clubs from keeping their talents.

Over the last five years, Madrid’s net transfer spend of €432 million is only beaten by Manchester City with €460 million, but is over €200 million more than Barcelona €225 million and Chelsea €176 million. At the other extreme, we have thrifty clubs like French champions Lille and Arsenal generating net sales. Amusingly, Milan are also in the black, largely due to selling Kaká to Madrid.

There is talk this summer that Madrid will try to offload some players in order to recoup some funds, including Kaká, Lassana Diarra, Fernando Gago and Ezequiel Garay. However, when Madrid sell, it is traditionally a buyer’s market, as other clubs are keenly aware that they are looking to offload players who are no longer wanted.

One logical result of Madrid’s high transfer spending is high debt levels, which is true, but not to the extent that has been reported by the media. This is going to be a bit tricky to follow, but the basic point is that there are several definitions of debt.

At its simplest, Madrid have gross bank debt of €167 million, which is not too bad in light of their vast revenue, though for many years before 2009 they had no bank debt at all. The loans are split evenly between Caja Madrid and Banco Santander and were mainly used to finance the signings that summer. The interest rate is relatively low, but the loans do have to be repaid by 2015, though even here Madrid were given some leeway with lower payments in the first three years.

Furthermore, Madrid have cash balances of €93 million, so the net bank debt, the figure reported by English clubs, is only €74 million. Madrid say that this cash (along with the 2010/11 cash flow) will “allow us to comfortably handle payment obligations next year.”

However, what is very striking about Madrid’s balance sheet is the enormous amount owed to other clubs for transfer fees of €176 million (net €111 million after including €65 million owed to Madrid by other clubs). This appears to be Madrid’s principal method of financing transfers, a policy followed by many other clubs, but not to the same degree. In fairness, this has fallen by €100 million this year.

Adding the transfer fees payable to the bank debt gives net debt of €185 million, which is the definition used by UEFA in their FFP regulations. However, Madrid’s own definition of net debt also includes stadium debt, resulting in a balance of €245 million, an impressive 25% reduction from the prior year’s €327 million, though not quite as low as the €210 million forecast by Pérez at the AGM.

"Kaká - on his way?"

Other commentators have opted to use total liabilities of €660 million for the “debt”, but that includes trade creditors, provisions, accruals and deferred tax, all of which are explicitly excluded by FFP. If this measure were applied to other clubs to assess their debt, the headline figures would be equally shocking, e.g. Manchester United €1.2 billion, Barcelona €552 million. Even Arsenal, which is regarded as the poster child for sustainability, would have “debt” of over €500 million. To use an old adage, you have to compare apples with apples.

Of course, Madrid have got into serious financial difficulties in the past, which they only resolved by selling their training ground in 2001, a controversial move that effectively amounted to a state subsidy, as the city authorities reclassified the area as development land, thus significantly increasing its value.

However, as it stands, Madrid would comfortably meet UEFA’s guideline that net debt should be less than total revenue. Madrid themselves review the tougher solvency ratio of net debt/EBITDA, which improved from 3.1 to 1.7 last season. FFP also focuses on payables not being overdue, which might impact Madrid, though this is unlikely, as it is defined as “not paid according to the agreed terms.”

"Nuri Sahin - a sign of things to come?"

If Madrid required more cash, this would not be a problem. Although the club’s constitution does not allow Pérez to fund the club, his position as one of the wealthiest men in Europe with wide-ranging business interests clearly helps Madrid’s relationship with banks and sponsors, as he has a huge network of influential friends and contacts, maybe best demonstrated by the fact that a Catalan bank provided the €57 million guarantee that he needed to stand for the presidency.

Also, if financial matters deteriorated, would any bank ever dare to call in their debts? In many ways, Real Madrid are viewed as the establishment club in Spain with immense cultural and political significance, so are almost certainly “too big to fail.” Stefan Szymanski, co-author of “Soccernomics”, agreed, “Real’s really too big to disappear, whatever debt they incur. No bank would ever be allowed to be the one that sank Real Madrid.”

In fact, Madrid’s balance sheet shows net assets of €220 million, up €24 million from the previous year, even though the players are only included at net book value of €353 million, which is much lower than their true worth in the transfer market, which is estimated at €515 million by Transfermarkt.

To summarise, Madrid will be in line with UEFA’s break-even target for the simple reason that they make profits, but even if their financial situation were to worsen, there would be plenty of room to manoeuvre. For example, owners will be allowed to absorb aggregate losses (“acceptable deviations”) of €45 million, initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions. The maximum permitted loss then falls to €30 million from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

Furthermore, clubs can exclude certain expenses, including depreciation on tangible fixed assets and expenditure on youth development and community activities, which would be worth at least €20 million for Madrid. On top of that, Madrid might argue that the loss made by the basketball team (€23 million in 2008/09) should also be ignored, though the FFP guidelines suggest that “other sports teams” should be included.

Perhaps the biggest threat to Madrid’s financial strength is the desperate situation of Spanish football in general. The 20 clubs in La Liga made a combined loss of €100 million in 2009/10, while many have large debts and are behind on wage payments. All this is exacerbated by the prevailing economic conditions in Spain with unemployment running at around 20% (and youth unemployment at 30-40%).

"Casillas thanks the crowd - the feeling's mutual, Iker"

The Sevilla vice-president warned, “There are six or seven of the 20 clubs in La Liga who are in bankruptcy or administration through difficulties with social security and the tax authorities.” That said, Spanish clubs appear to have become more attractive to foreign investors recently, as overseas money has bought into Malaga, Getafe and (less successfully) Racing Santander in the last 12 months.

While Real Madrid’s policy of buying the best players has clearly not guaranteed success on the pitch, it has been very good from a financial perspective. UEFA themselves pointed out, “The financial fair play rules do not prevent clubs from spending money on transfers, but require them to balance their books at the end of the season.”

The fact is that Real Madrid will pass the FFP test as easily as Cristiano Ronaldo goes past a tiring full-back. In fact, their remarkable ability to generate revenue will stand them in very good stead in the fair play era, providing them with a strong competitive advantage. As long as they can resist the urge to constantly change their manager and players, that financial strength could help them return to winning ways. If that happens, then it might be another case of the rich getting richer, as that is likely to translate into even more commercial success.

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