Grant Thornton - Focus on Football Finance UK

Focus on football finance

March 2012

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Contents

03 2020 Vision

04 Football finance fair play

08 Club versus country

09 Eastern mystery

10 Where does the money go?

14 Is the Sky falling in?

16 Investment in youth is changing

18 TV rights

21 About Grant Thornton

This is a game of two halves: the haves and the have nots. And the haves want more…

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Pulling together the different themes covered in this newsletter gives us a vision of the possible future for football, in England and beyond.

Picture the scene: Manchester United v Barcelona; the final of the World Champions League, played before a full house in the Beijing National Stadium in China. There are 100,000 fans, 50,000 each from Manchester United and Barcelona, watching the game live, and all are Chinese residents. The game is also being broadcast live around the world, with 750 million viewers paying $10 each on pay-per-view. It is football’s biggest game, producing revenues of $7.5 billion. Sounds unlikely? Let’s see how it could happen.

In this brochure we talk about UEFA’s Financial Fair Play Regulations. These will seek to bring stability to the game by restricting the spending of clubs to match their income. We support this initiative strongly as it will encourage clubs to develop young players rather than spending their way into financial trouble.

We consider FIFA’s increasing demands on the clubs to release their highly-paid players for international duties in an already fixture-packed season. These clubs are also required to take part in domestic cup competitions, such as England’s FA Cup and Carling Cup. The weakened sides fielded by the Premiership Clubs in the early rounds of these competitions already send a clear message about how they view them.

We look at the reasons behind Manchester United’s decision to seek to sell shares in Singapore, and conclude that the Glazers may actually see Asia as a major source of future revenues for the Club. We believe Chelsea, Liverpool, Manchester City and the top European clubs share this vision.

And we comment on the monies that the Premiership Clubs receive from the sale of media rights. Are the top clubs really happy with their share?

If we put all these factors together, we can see the background to what we think may be the next big contest in international football. Not Manchester United v Barcelona in China, but UEFA versus one of our top clubs. We wonder what would happen if one, or more, of the top European clubs were to fall foul of UEFA’s Financial Fair Play Regulations, prompting UEFA to exclude them from the Champions League. Would the clubs simply accept UEFA’s ruling and be content to pass up the prize of Champions League money?

We suggest that would be unlikely. Such a move by UEFA could therefore be the catalyst for something truly epoch-making: the break-up of the game in Europe as we know it. This might happen if a defaulting club tempted others to break away and form a European Super League, or a World Super League. This might eventually lead to a league of perhaps 16-20 teams from Spain, Italy, France, Germany, England, Argentina, Brazil, Asia and North America. Breakaway clubs, with the best brands and the biggest supporter bases, could demand a greater share of media rights, and

could generate increased income from sponsors and advertisers. Why play 60 matches each season if you could play just 50 but still generate more revenue? Why play in your home town every other week when you have millions of overseas fans, in Asia or the rest of the world, keen to pay premium prices to watch their favourite teams live?

For the bigger clubs the temptation of the additional monies that could be earned on a world stage must surely, at some point, become irresistible. But when? 2020? Is that a realistic timescale for the Manchester United v Barcelona vision sketched out above to become reality?

Certainly, if it did happen, it would give rise to a whole series of further questions. What would be the impact on those clubs left behind? What TV deal would these non-Super League clubs be able to command? And what sort of state would their finances be in? And who would want to lend to them? All points to ponder….

2020 Vision

For the bigger clubs the temptation

of the additional monies that could be earned on a world stage must surely, at some point, become

irresistible.


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It was in September 2009 that UEFA’s Executive Committee approved unanimously a concept called financial fair play. The background to its decision was as follows: many clubs were reporting financial losses in worsening market conditions in the 2009 financial year. Total revenues for top division clubs reached a record €11.7 billion but increased costs had created net losses of €1.2 billion, almost double the previous record. Many clubs were paying enormous bills for players’ wages.

More than one in eight club auditors expressed uncertainty about whether certain clubs could continue as going concerns. Those clubs with wealthy backers were able to out-spend their competitors, forcing transfer fees and wages into a spiral that risked the future of the clubs, and the very fabric of the sport.

UEFA decided that action was needed to level the playing field. The fair play concept was its answer: an attempt to force clubs to live within their means by limiting spending to the income they were generating. “Financial Fair Play is crucial in order to promote the long-term sustainability of European football and is entirely consistent with the

sporting values we have in Europe,” said UEFA President Michel Platini.

The financial fair play objectives are to:• improvetheeconomicandfinancial

capability of clubs, increasing transparency and credibility

• ensureclubssettletheirliabilitiesonatimely basis

• introducemoredisciplineandrationality in club football finances

• encouragelong-terminvestmentinthe youth sector and infrastructure

• encourageclubstooperateonthebasis of their own revenues

• protectthelong-termviabilityofEuropean club football.

At Grant Thornton we endorse and support the objectives of financial fair play as we have campaigned for some time for football clubs to be operated with the same level of financial discipline applied by other business models, rather than relying on the deep pockets of their chairmen and other directors. Introducing the new regime, UEFA general secretary Gianni Infantino summed up the situation rather memorably. “What kind of healthy business is it that waits for a white knight on a horse with lots of money to throw round and then, from one day or another, he could jump on his horse and ride away?”

UEFA’s Executive Committee approved the UEFA Club Licensing and Fair Play Regulations in 2010. The Regulations introduced the fair play

Football financial fair play

UEFA general secretaryGianni Infantino summed up

the situation rather memorably. ‘What kind of healthy business

is it that waits for a white knight on a horse with lots of money to throw round and then, from one day or another, he could

jump on his horse andride away?’

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measures that will be implemented over a three-year period, requiring clubs to operate on a break-even basis. The first season that a club could be excluded from European competition for non-compliance is 2014-15, but the first break-even assessment will be undertaken during 2013-14.

The period in which the assessment is made is termed the ‘monitoring period’, and the assessment is based on the aggregate results of the three previous reporting periods. For example, in monitoring period 2015-2016 the reporting periods will be those for the financial years ending in 2015 (T), 2014 (T-1) and 2013 (T-2). The exception to this rule will be for the 2013-14 monitoring period, which will assess the reporting periods ending in 2013 and 2012, (2012, of course, being the current season).

The Regulations are applicable only to those clubs with income and expenditure of over 5 million euros. The maximum deficit that such clubs will be allowed to incur will be 5 million euros for the aggregate of the three reporting periods (T, T-1 and T-2). This aggregate can be exceeded in the early years – but only if the excess is made good by equity injections. The allowable deficits will be 45 million euros for the combined seasons 2013-14 and 2014-15, falling to an aggregate 30 million euros for seasons 2015-16 to 2017-18. Where a club shows

aggregate losses in a monitoring period, it can use profits from the two years prior to T-2, (T-3 and T-4) to reduce the aggregate loss.

Whilst clubs are being challenged to ensure they do not spend more than they earn, they will be given some flexibility if the trend is moving in the right direction. Accordingly, in the 2013-14 and 2014-15 monitoring periods, if a club’s deficit arises because of over-spending on players’ wages in the 2012 reporting period, then the expenditure on players’ wages arising from contracts signed before 1 June 2010 can be excluded from the break-even calculation.

Clubs will still be able to spend on long-term ventures such as infrastructure or academy projects, and this spending will not count towards the break-even calculation. This is to ensure that the other aims of the Regulations, such as youth development and improving/upgrading sports installations, are not affected adversely by financial fair play.

Monitoring is the role of the Club Financial Control Panel, headed by the former Prime Minister of Belgium, Jean-Luc Dehaene. Its first task was to look at all transfer and employee payables in the summer of 2011. Transfer spending made over the summer of 2011 will impact on the break-even results of the financial years ending 2012 and 2013, the first financial years to be assessed under the break-even rule. All payments due on transfers, and to employees, will be assessed by the Panel. So, Mr Dehaene and his colleagues will have been watching with interest the summer 2011 transfer window business conducted by the Premiership Clubs, especially the big four net spenders, Manchester City (£52.5m), Manchester United (£42.9m), Chelsea (£41.75m) and Liverpool (£34.1m).

Consideration has also been given to the possibility of clubs attempting to circumvent the regulations by artificial means. Provision is made to adjust income and expenses from related parties


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to reflect the fair value of any such transactions. One deal, which is sure to be considered closely, is Manchester City’s 10-year sponsorship deal with Etihad Airways announced in July 2011, and said to be worth up to £400 million. City successfully increased its revenue from sponsors and partners by 400% to £32.4 million in 2009-10, thanks to the agreement with Etihad and other Abu Dhabi based companies, such as Etisalat, Aabar Investments PJSC and the Abu Dhabi Tourism Authority. This latest deal, the largest of its kind in sport, is certainly a huge step towards a return to profitability for Manchester City, which incurred a £194 million loss in 2010/11. And given that City does not even own its stadium, and that Etihad has never made a profit, the deal is even more extraordinary.

City, of course, is owned by Sheikh Mansour bin Zayed al-Nahyan of Abu Dhabi and Etihad Airways. The fact that this deal doubles the previous record of $300 million (£187 million) for the world-famous Madison Square Garden, and is way ahead of Arsenal’s £90 million, 15-year sponsorship deal with Emirates, has already been noted, not least by some of City’s competitors in the Premiership. The club has apparently already consulted UEFA over the arrangement, which includes financial backing for infrastructure and regeneration projects, both types of expenditure that do not count in the

break-even calculation for financial fair play. Arsenal manager, Arsene Wenger, has already suggested that if Manchester City’s sponsorship deal is accepted by UEFA, then the financial fair play rules will be blown apart. According to Wenger, “The credibility of Financial Fair Play is at stake. The sponsorship cannot be doubled, tripled or quadrupled because that means it is better if we leave everybody free. But if they bring the rules in they have to be respected.”

The spectre of the financial fair play regulations raises some key questions. What will be their effect if they work? And will UEFA really expel one or more big clubs out of European competition if they do not comply?

With regard to the first question, France gives a possible indication of the impact of financial fair play. The DNCG (Direction Nationale du Controle de Gestion) is in its third decade of monitoring that nation’s strict financial regulation regime. Clubs’ expenditure is tied to income. As a result Lyon is the only club to have finished in the top four in Le Championnat more than five times in the past 10 years. By contrast in the free-spending English Premiership, four clubs have achieved that goal. In France, if a team incurs a loss it has to make cutbacks, or generate compensating income by selling a key player. This is the financial model that Michel Platini is so keen to impose on the rest of

The spectre of the financial fair play regulations raises some key questions.

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Europe. In terms of the financial fair play objectives it will “introduce more discipline and rationality in club football finances” and will “encourage clubs to operate on the basis of their own revenues”. But how will it affect players denied pay rises, and talented managers who have worked tirelessly to build a winning team? Many of them may well look elsewhere, beyond UEFA’s reach.

Any club gambling on winning a Champions League spot and its resultant rewards, and failing, may well find itself caught out by financial fair play. Will that club be content to make the cutbacks necessary to ensure its expenditure falls back to meet the shortfall in revenue, as required by fair play?

That then leads us to the question of whether or not UEFA will act robustly and seek an expulsion of that club if it does not do so. UEFA president Michel Platini is on record as saying “We have worked on the financial fair play

concept hand-in-hand with the clubs, as our intention is not to punish them but to protect them.” But if it comes to the crunch and UEFA has to punish them what will happen? UEFA’s record on enforcement to date has not been exemplary. For a man who has been quoted as saying “our policy on racism is one of zero tolerance” we have seen no real effort from Mr Platini or UEFA to stamp out racism. That issue came to the fore again in the recent England v Bulgaria Euro qualifier. Will Mr Platini take fair play all the way, or will he back down and allow loss making clubs to remain in Europe if the trend of losses is heading in the right direction?

We believe that excluding a major club from European competition on grounds of financial fair play will threaten the continuation of the game as we know it in Europe. It could threaten UEFA itself. If the excluded club were able to persuade other clubs that their future lay outside UEFA, in some form

of elite European League, or even a World Super League, then would others follow? Liverpool, as we note elsewhere in this brochure, is one club apparently unhappy with its current allocation of European TV monies. How many others from Europe and the rest of the world could be tempted to share in the inevitable riches that could be generated from such a league? And where would that leave the others, and the financial institutions lending to them?

Will Mr Platini take fair play allthe way, or will he back down and allow loss making clubs to remain in Europe if the trend of losses is heading in the right direction?

We believethat excluding a major

club from European competition on grounds of financial fair play will

threaten the continuation of the game as we know it

in Europe. It couldthreaten UEFA itself.

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European clubs were told by FIFA that they must release their players for 13 international dates in 2011. They included the 10 August clash between England and Holland that was cancelled due to the rioting in London. That game would have been played just three days before the start of the English Premier League season – a state of affairs that was not exactly popular with Premier League managers. In 2013, FIFA has plans for an unprecedented 15 international dates. No wonder clubs, under pressure to cut losses, question the commercial sense of being forced to allow highly-paid players to participate in international games for little or no payback.

Europe’s leading clubs in England, Germany, Italy and Spain dream of the profits they could make from a European Super League. This, plus the increasing demands of FIFA for international games, mean the current status quo is unsustainable.

The memorandum of understanding between FIFA and the clubs expires in July 2014. The memorandum creates a legal requirement for the top European clubs to play in UEFA’s Champions League and to release players for international friendlies, or tournaments, including the World Cup.

It seems unlikely that it will be renewed on the same terms. Umberto Gandini, of AC Milan, and the European Club Association suggested in July 2011 that a “refusal of co-operation” in respect of international football was a possibility. The potential riches that a Super League could generate are best illustrated by the FIFA World Cup. A total of $3.7billion of income was generated from the 2010 World Cup. Yet the 400 clubs providing the players shared a total of only £25.3million in compensation. Barcelona, which released 13 players, received the highest amount at £557,000. English clubs, the best rewarded in the scheme, shared a combined £3.8 million. These clubs will be wondering how much they could have earned had they been in control of the revenues of a world club competition.

The English Premier League was formed over 20 years ago when leading clubs broke away from the Football League. The commercial success of the Premiership sets an example that could be replicated by the top European clubs. Bayern Munich, Real Madrid, Internazionale, Milan, Manchester United, Liverpool and Barcelona have won 36 European Cup and Champions League titles between them. They would be the natural choice for any

elite European Super League, and approaches would surely be made to other clubs that demonstrate an ability to generate revenue from their international fan-bases. These might include Arsenal, Chelsea, Manchester City, Juventus, Roma, Ajax, Porto, Marseille, Celtic, Rangers and others.

And why stop at Europe? Clubs, after all, are increasingly focusing their attention on Asia. Taking into account the major teams in Argentina and Brazil, which enjoy substantial support, as well as the growing commercial interests of American owners, surely a World Super League is the logical conclusion for elite clubs seeking to maximise their revenue potential?

Club versus country:a memorandum of misunderstanding

No wonder clubs, under pressure to

cut losses, question the commercial sense in being forced to allow highly-paid players to participate in international games for

little or no payback.

The English Premier League was formed over 20 years ago when leading clubs broke away from the Football League. The commercial success of the Premiership sets an example that could be replicated by the top European clubs.

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The growth in the economic power of

the East and the resultant increase in disposable

incomes have combined to attract the interest

of western brands.

It is seven years since the Glazers took Manchester United private for a purchase price of £790 million, provoking fury amongst supporters.

It looks like they are now moving to offload 25% of their shares at more than double the purchase price, leaving themselves with a healthy capital gain and the fans more outraged than ever. In June 2010 the Glazer family held talks with several investment banks with a view to listing Manchester United on the Hong Kong stock exchange. This followed a number of recent high-profile flotations in Hong Kong. Clearly the Glazers and their advisers were attracted by suggestions that a listing could value the club at £1.7 billion.

Hong Kong has been the world’s biggest Initial Public Offering (IPO) market for the past two years, raising $57.4bn (£35.6bn) in 2010. Recent listings include luggage manufacturer Samsonite, Macau casino operator MGM China and, in June 2011, Prada. After four previously unsuccessful flotation attempts, Prada recognised the importance of Asia as a consumer of luxury goods and decided to list in Hong Kong.

However, it is Singapore, and not Hong Kong, that is expected to see the launch of Manchester United shares, slightly later than planned due to volatility in the world financial markets. No explanation has been provided for the change of venue to Singapore, but indications are that 25% of the shares will be offered for sale and the listing is expected to raise £600 million,

although there are suggestions that the valuation of the club is too high. Despite 2010 revenues of £286m, and an operating profit of £91m (the highest in the Premiership), the club reported a £79m loss after interest costs). The high interest costs reflect the fact that the Glazers financed their 2005 purchase with £600 million of loans.

The growth in the economic power of the East and the resultant increase in disposable incomes have combined to attract the interest of western brands. These brands now include some of the top European football clubs. The places clubs visit on their pre-season tours give a clear indication of where they expect growth to come from. Liverpool toured in China, Malaysia and Singapore, Chelsea in Kuala Lumpur, Bangkok and Hong Kong, and Arsenal in Malaysia and China. Did they go there for the weather, or to raise their profiles amongst their growing Asian supporter bases? Manchester United has an estimated 333 million fans, of whom 190 million live in Asia.

Demand for live Premiership action led to a fierce bidding war amongst Asian broadcasters for the 2010-2013 broadcast rights. In Singapore, an island with a population of only 4.8 million people, the rights are held by SingTel, which paid £200 million - more than three times the amount paid by the previous holder. In Hong Kong, i-Cable paid £150 million, again a significant increase on the previous arrangement.

The football-hungry younger fans in Asia are very IT literate, and eager for the latest computer and telephone gadgets. This growing market offers new opportunities for streaming and

downloading of football matches. With UK fans currently having

to watch their spending, it is no surprise that European clubs should see Asia as a key growth area. So a listing in Singapore for Manchester United should similarly occasion no surprise. United, after all, does have a number of advantages over its rivals. On the playing field, United is the most successful team in the history of English football, although, of course, Liverpool has won a greater number of European trophies, making it the most successful English team in Europe. The Manchester United brand was rated second most valuable in 2010 by Forbes magazine behind the New York Yankees, and the club is one of the best supported in the world.

We believe that if its IPO does succeed, Manchester United will progress to another level that very few others will be able to replicate. Yes, others may be tempted to follow United’s example. But, while Asia has a real and increasing hunger for football, appetite can be quickly sated. The most successful clubs are likely to be those first to market with attractive offerings.

Eastern mystery

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Premiership Football Clubs ought to be among the most profitable businesses in Britain. They have a quality product for which there is a seemingly insatiable demand. Ticket prices increase year on year, and the Premier League has delivered significant and incremental increases in TV monies with every new deal. Our football clubs should be awash with cash. But in 2009/10 only three Premiership clubs reported profits, and one of those (Arsenal) would have incurred a significant loss had it not been the for one-off sales of £156 million worth of apartments in its Highbury residential development. Premiership winners, Manchester United posted losses before taxation of £79 million. The combined net debt of the 20 Premier League clubs in 2010 was £2.5 billion. So the questions are: How can this be? Where does the money go? Let’s focus on the TV monies.

According to the Office of National Statistics figures, the average UK worker earns £24,076 per year, and 10.26 million people in the UK subscribe to Sky, paying an average of £535 each year. Approximately half of these subscribers take some sport

content and some Sky subscribers are also amongst the estimated 1.2 million ESPN subscribers, paying another £108 each year (or £144 for non- Sky subscribers).

Sky and ESPN are paying circa £1.7 billion over 3 years to the Premiership for TV rights, equating to £567million each year.

The Premier League distributed at least £19.6 million from domestic broadcast rights (£13.8 million equal share plus a minimum of £5.8 million facility fees) to each of the 20 Premier League Clubs in 2010-2011. Additional appearance monies were paid to the clubs, depending on the number of times they featured on TV. And, of course, the Premier League does make parachute payments to relegated clubs and solidarity payments to the Football League for distribution to its clubs, as well as financing youth development programmes and making various charitable donations.

So the clubs collect the TV monies, along with their other incomes from ticket sales, merchandising, sponsorship and overseas broadcasting rights and use them to defray their expenses, the biggest of which is the players’ wage

Where does the money go?

The economics of the mad house

clubsmillion

players,managerial, coaching

and support staff

millionsubscribers paying

PremierLeague

According to the Office of National Statistics, the average UK worker earns £24,076 per year, and 10.26 million of them subscribe to Sky, paying an average of £535 each year. Approximately half of these subscribers take somesport content.

costs. Each club has a squad of 25 first team players, earning an average basic salary of £1.2 million. With bonuses and appearance money this could rise to between £1.8 million and £2.4 million. In addition, the clubs have Under 21 players and the associated managerial, coaching and support staff. Manchester City’s wage bill in 2010-11 was £174 million, £21 million more than its total income of £153 million!

In effect then, the hard-earned money of the estimated 5 million Sky sports fans ends up helping to line the pockets of circa 800 players and

support staff. Rather than using the increasing TV monies to repay debt, it seems that the clubs have preferred to pay higher wages to their players and staff. In 1992-93, the first year of the Premiership, the average Premiership basic annual pay was £77,000, over four times the average UK wage. Ten years later in 2002-03 the average player’s pay had increased by nearly 800% to £611,000, but the average UK wage was only 53% higher. By 2009-10, players’ pay had virtually doubled again, to an average £1.2 million, against a 20% increase for the average worker.

The gulf between the Premier League and the rest of football has also widened significantly. The average Premiership wage is now 5 times more than the average in the Championship, and 30 times more than the average League Two wage. Back in 1992-93 those figures were 1.9 and 4.6 respectively. Why has the gap widened so much? Look no further than the level of TV monies in the lower leagues.

What is more, this cash does not stay in the Premiership footballers’ pockets for long. Despite the massive increase in players’ wages, in some cases it is

What is surprising is that despite the massive increase in players’ wages, it still isn’t enough for some players to avoid financial problems. In 1992-93, the first year of the Premiership, the average Premiership basic annual pay was £77,000, over four times the average UK wage. Ten years later in 2002-03 the average player’s pay had increased by nearly 800% to £611,000, but the average UK wage was only 53% higher. By 2009-10, players’ pay had virtually doubled again, to an average £1.2 million, against a 20% increase for the average worker.

1992-93

2009-10

2002-03

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still not enough and the number of ex-Premiership players experiencing insolvency continues to rise.

The pressure of paying such unsustainably high wages has resulted in many clubs likewise succumbing to insolvency. The ranks of the Football League include a long list of clubs that have entered Administration - some of them shortly after having been relegated from the Premiership. (These include Leeds, Ipswich, Leicester and Wimbledon.) Portsmouth became the first club to enter Administration whilst actually in the Premier League.

HM Revenue and Customs (HMRC) is often blamed for forcing clubs into insolvency. But clubs deducting income tax and national insurance contributions from the unsustainable wages paid to their players can hardly expect HMRC (and the taxpayer) to foot the bill. Any club that has spent the tax it has deducted from its employees on higher wages and transfer fees deserves no sympathy from the hard-pressed taxpayer.

There will always be football. The present model, however, is not sustainable. The paying public who subscribe to satellite TV are encountering real financial pressures, and those in work find themselves obliged to make sacrifices, faced with a

reduction in disposable income as wages fail to keep pace with inflationary price rises. Can the football industry expect the public to continue paying more and more each year to finance the increased wage demands of such a limited number of individuals? Clubs cannot afford to continue to operate the same way, relying on the ongoing support of their fans digging ever deeper into their pockets.

We call upon the clubs to demonstrate a greater sense of morality and show some empathy with their supporters, who are under increasing financial pressures. We call upon all the directors of our football clubs to live up to the fair play ethos that Monsieur Platini and his colleagues at UEFA are eager to impose, and to ensure that their clubs live within their means. We call upon the football authorities to show the leadership required to ensure that clubs do attain the breakeven financial fair play standards demanded by UEFA. That will require the clubs to be brave enough to deny the increased wage demands from players, to resist the inevitable pressure of the fans – however hard-up they themselves might be - to spend those extra millions in the transfer windows, and use their income to reduce debts. We say: so what if the clubs don’t sign the expensive players that their fans want? Many of the clubs that did gamble on spending their way to footballing success have entered insolvency and fallen out of sight of the upper leagues. Spending does not guarantee footballing success. We urge the clubs to look realistically, and

We call upon the clubs to demonstrate a

greater sense of morality and show some understanding to their supporters, who are

under increasing financial pressures.

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modestly, at their ambitions, and follow the fair play protocols. Operating within their means will allow clubs to find their true economic level in the league. That may well be less glamorous than living the dream, but club directors and supporters must decide what they want from their teams: one gigantic gamble that is more than likely to fail and risk the very existence of the club they love so dearly, or a long-term sustainable future.

So we say the economic model has to change. It represents the economics of the madhouse, and cannot continue. Surely everyone can see why UEFA is so keen on financial fair play.

Key financials for Premier League clubs at June 2010

Turnover Wages

Wages as% of

turnover

Profit/(loss)

before tax Net debt

£ million £ million £ million £ million

Arsenal 382 110 29 56 136

Aston Villa 91 80 88 (38) 110

Birmingham 56 38 68 0 16

Blackburn 58 47 81 (2) 21

Blackpool 9 13 144 (7) 4.3

Bolton 62 46 74 (35) 93

Chelsea 213 174 82 (78) 734

Everton 79 54 69 (3) 45

Fulham 77 49 63 (19) 190

Liverpool 185 121 65 (20) 123

Man City 125 133 106 (121) 41

Man Utd 286 131 46 (79) 590

Newcastle 52 47 90 (17) 150

Stoke 59 45 76 (5) 8

Sunderland 65 54 83 (28) 66

Tottenham 119 67 56 (7) 65

West Brom 28 23 82 1 10

West Ham 72 54 75 (21) 34

Wigan 43 39 91 (4) 73

Wolves 61 30 49 9 0

Total Net Debt at June 2010 = £2.5 billion

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It could be argued that Premier League footballers and BSkyB are the only players in the football market who have fared well in the recession up to this point.

Even though the credit crisis has forced UK consumers to make cutbacks in their spending, it seems that many are reluctant to cancel or downgrade their Sky TV subscription. Sky customers now spend an average of £535 each year, quite an increase from the average of £452 they were paying three years ago. Increased take-up of high definition services and broadband and fixed line telephones have been the main reasons for the uplift. Despite an increase of 10% in revenue over last year, the recession does finally seem to be catching up with Sky. Estimates indicate that the number of new subscribers in the September quarter is down over 80% on the same period last year.

Meanwhile, footballers’ wage demands seem to go forever onwards and upwards. One wonders how much more Sky customers, some of whom are unemployed, will be asked to pay to keep Premiership footballers living in the manner to which they have become accustomed.

There may be trouble ahead for the pay-TV broadcaster, however. And trouble for Sky could mean difficulties for football clubs that depend so heavily on their share of the seemingly ever-increasing bonanza that TV rights have turned out to be.

BSkyB is considering carefully the decision of the European Court of Justice (ECJ), Europe’s highest court,

in the Karen Murphy case. Ms Murphy is the Portsmouth pub landlady who appealed against her conviction for broadcasting illegally live Premiership matches by using a Greek TV signal decoder. The Football Association Premier League Limited (the private company which represents the broadcasting interests of the 20 English Premier League clubs), brought the prosecution arguing that only Sky TV had exclusive rights to show its games in the UK.

Ms Murphy considered that BskyB’s charges for commercial premises in the UK, which can be over £1,000 per

month, were too high and opted for a much cheaper Greek service until stopped by the English courts. Having paid nearly £8,000 in fines and costs Ms Murphy took the issue all the way to the ECJ.

In essence, the legal case was about whether or not a rights holder such as the Premier League can license its content on a country-by-country basis. Licensing in this way has allowed the League to maximise fully the value of its rights.

The Premier League and Sky were given a strong indication as to what the decision of the ECJ would be in

Is the Sky falling in?

Despite an increase of 10% in revenue over last year, the recession does finally seem to be catching up with Sky.

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February 2011 when the court was advised by one of its Advocate Generals, Professor Dr Juliane Kokott, to rule that EU law does not prohibit pubs showing live Premier League matches from foreign broadcasters. Advocate General Kokott’ s opinion was that the idea of selling on a territorial exclusivity basis was ‘tantamount to profiting from the elimination of the internal market’ and that ‘there is ... no specific right to charge different prices for a work in each member state.’

When the judgement was delivered on 4 October the ECJ, as expected, followed the guidance of its Advocate General, deciding that the TV rights deal breached EU competition law. Any ban on the use of overseas decoders, said the ECJ, could not “be justified either in light of the objective of protecting intellectual property rights or by the objective of encouraging the public to attend football stadiums”. The decision of the ECJ must now be considered by the High Court in London, which had sought guidance from the ECJ. It is rare for a national court to take a different view from the ECJ.

It appears from the ECJ decision that individuals will be able to watch live TV matches using a decoder card from anywhere in the European

Union. The situation for viewers in pubs and clubs is less clear. The ECJ found that the Premier League could not claim copyright over live football matches as they are not an author’s own ‘intellectual creation’, and hence ‘works’ as defined in EU copyright law. ‘Works’ do, however, include logos, the Premier League anthem and recorded highlights, transmission of which would need the permission of the Premier League, as they are protected by copyright. So, whilst pubs and clubs seem to be free to purchase a decoder from anywhere, transmission to the public appears to be prevented unless the transmission can exclude ‘works’. Consequently, the High Court will need to interpret the ECJ decision and rule on its implications.

This decision could potentially revolutionise the way media rights are sold across Europe, and not only in the sports sector : the film industry has also sold rights to its products on a country-by-country basis.

Sky has around 44,000 pub, club and office subscribers in the UK and revenues from such subscriptions are thought to be about £200m a year. Exactly how much of this will be at risk is unclear.

So what are the potential implications if the High Court follows the ECJ decision?

• Skymaylosecustomersandrevenueto foreign broadcasters of Premier League football if UK fans are prepared to accept foreign language commentaries. Fewer subscribers would probably mean Sky offering less when the Premier League auctions its TV rights this year. Loss of exclusivity would almost certainly mean that bidders would not be prepared to offer as much for UK rights as they have in the past. Less money for the Premier League would mean a smaller payout for the football clubs.

• Foreignbroadcastersdonotfacethe same restrictions on showing live football that have been imposed on BskyB by the Premier League. Matches kicking off on Saturday at 3pm would be widely available to watch on TV. How many empty seats will we see in the stands as fans are tempted to watch their team on high-definition TV from the comfort of their armchairs? More armchair fans would mean less money through the turnstiles for the clubs. Would clubs seek to raise the cost of tickets in these economically difficult times? Or would they reduce their budgets for salaries to players?

Is the sky about to fall in on football’s spiralling TV rights valuations? Watch this space…

This decision could potentially revolutionise the way

media rights are sold across Europe, and not only in the sports sector: the film industry has also sold rights to its products on a

country-by-country basis.

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Investment in youth is changing

On 20 October 2011 the 72 Football League clubs voted in favour of plans for radical reform of the structure of youth development in England.One aspect of the Elite Player Performance Plan (EPPP) will be a significant change in the mechanism by which clubs are compensated for the transfer of their talented youngsters to other clubs.

Under EPPP, clubs’ academies will be graded. The better their youth development set-up is deemed to be, the more money they can expect to receive in the form of grants in the coming years. This theoretically incentivises clubs to develop their youth operations. However, the EPPP will also bring an end to the tribunal system for valuing the transfer of young players. Some fear that this could reduce substantially a potentially lucrative income stream for many clubs: the sale of young players to bigger clubs.

EPPP sets out a formulaic approach to value young players based upon the time the selling club has invested in their development. It does not factor in their potential. This could put an end to any prospect of major windfalls from the sale of the next potential star player. It is important to note, however, that, should the player go on to play for the acquiring club’s first team, the EPPP rules would trigger further compensation payments. These could possibly be in excess of £1 million.

Not surprisingly, given that a recent ballot produced only a 46-22 vote in favour of reform, the financial implications of EPPP have already triggered much debate. Will the changes

be good for the game? This is likely to depend upon the structure within individual clubs. At present there are significant variations between clubs in terms of the time and money they invest in their youth development initiatives. Consequently, the importance of developing players for promotion into the first team or resale to other teams tends to differ from club to club.

Investment in young talentWhat one can say – based on the monitoring of transfer activity in English football’s top three divisions by Grant Thornton’s Sports Advisory Group over recent transfer windows – is that the reform comes at a time when Premier League clubs have been raising the proportion of their transfer expenditure spent on young players very substantially.

This trend is detailed in the table below

In the summer 2011 transfer window this increasing investment in young players would appear to be influenced, as suggested in our Football Transfer Tracker, by the Premier League’s squad composition rules, which provide an incentive for investment in youth. With players such as Jordan Henderson, Phil Jones, Romelu Lukaku and David de Gea costing upwards of £15 million each, the prospect of being able to sign the best prospects from around the country for, say, £150,000 under EPPP might be very attractive for the financial powerhouses of the Premier League. Indeed, at such levels, big clubs may be happy to speculate on a few promising teenagers, in expectation that one or two of them will appreciate in value very considerably.

2009 2010 2011

Age at transfer £m £m £m

Under 21 years 21.2 59.7 130.0Proportion of total spend 5% 17% 27%

21 years and above 428.2 296.5 344.8Proportion of total spend 95% 83% 73%

Summer transfer window

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What may be the financial impact on the lower league clubs?What has happened in practice in recent transfer windows? Our Football Transfer Tracker also looks at the cascading funds from the Premier League to the lower divisions. (It must be noted that the data is an estimate based upon available information. Transfer fees are less widely reported the further down the football pyramid one examines.)

As shown by the table, summer 2011 saw some exceptional expenditure by Premier League clubs acquiring players from clubs in the Championship. However, despite receiving large sums for players such as Alex Oxlade-Chamberlain, Connor Wickham and

Charlie Adam, Championship clubs reinvested only one-tenth of these monies with lower league clubs. Unless this situation changes, the impact of EPPP on League 1 and League 2 clubs may be relatively slight, simply because little money has been flowing down to them under the old system. For Championship clubs, the impact of the new rules will bear careful scrutiny.

No doubt there will be examples of players whose transfer fees under EPPP will be lower than they might have been under the tribunal system. In these instances the selling club could miss out on a lucrative windfall. This will cause problems for clubs which rely on transfer income to balance the books. Then again, it could be argued that it

would be no bad thing if clubs were deterred from engaging in this risky practice.

Under EPPP it will be easier for clubs to work out how much income might be generated from the sale of youth team players. Initially, the level of such income is not great. But the formulaic methodology will allow more accurate prediction of the cash set to be generated each year. And if a club’s former player becomes a Premier League regular, it will receive a bonus of additional monies in years to come.

2010 2011

£m £m

27.7 75.1

Championship 24.6 72.0League 1 2.8 3.1League 2 and below 0.3 0.0

Premier League to lower leagues

2010 2011

£m £m

6.5 7.2

League 1 4.4 6.3League 2 and below 2.1 0.9

Championship to lower leagues


TV rights

With the next round of Premiership TV rights to be presented to the market in 2012, (for the years 2013-2015), and clubs looking to break even to meet financial fair play rules, what levels of broadcasting income can the clubs expect to factor into their forecasts and budgets?

The current SKY/ESPN three-year deal netted £1.782 billion and overseas deals produced a further £1.4 billion for the Premier League. The resultant TV

rights income reported by Premiership clubs in 2009-10 was £952 million in total. Six clubs earned more than £50 million each, with the highest being £60 million and the lowest £39 million. Each round of bidding for TV rights has seen an increase in the money received by the Premiership. In 1992-1997 the average TV income per Premiership game was £633,000. It leapt to £2.79 million in 1997-2001 and after steady increases is currently £4.3 million per

game. Will the increase continue? The trend in the Football League,

embracing the three divisions of English football below the Premier League, gives a possible indication of the future direction of Premiership TV monies. The bad news is that its new three-year deal with Sky Sports is worth £69 million less than the current contract. This appears to be because the BBC will not be providing any live coverage. Instead, Sky Sports has agreed to pay £195 million for the rights to screen 75 matches from the Npower Football League, the play-offs, the Carling Cup and the Johnstone’s Paint Trophy. The 2009– 2011 joint deal with Sky and the BBC yielded £264 million for the TV rights. This time around, however, the BBC decided it was unable to make a competitive bid following its strategic review of budgets. Whilst the new deal does show a significant reduction for the Football League, Sky’s bid is still well ahead of the £109.5m it paid for the 2006-2009 rights.

In the most recent bids for the English Premiership TV rights, EU competition law prevented Sky from securing all six of the packages, and Setanta beat rival ESPN to win the sixth package. Setanta of course, subsequently failed and ESPN was invited to take its place. Owned by Disney, ESPN is a much larger operator than Setanta ever was. Indeed Disney - which owns ABC, one of America’s biggest networks and operates in dozens of countries - out-sizes News Corporation, which effectively controls BSkyB.

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ESPN depended heavily on Sky when it launched its UK business, as it had neither the infrastructure nor the expertise to create its own UK subscription business. It has now established itself, and has a UK football offering that includes:• PremierLeague-23livegames• ScottishPremierLeague-30live

games, covering all 12 teams• FACup-25livematchesincluding

one exclusively live FA Cup Semi- Final and live coverage of the FA Cup Final from Wembley

The question now, is whether this taste of UK football has given ESPN the appetite to mount a challenge to Sky in the next round of Premier League bidding. Having just acquired rights for Europa League games from 2012-13 to 2014-15 in conjunction with ITV, ESPN has increased its football line-up. If ESPN decides to expand further with more Premiership games, the competition may force Sky to increase its offer to maintain its market position.

On the other hand, if ESPN is content with its current presence, it may simply submit a low offer for one of the six packages, and rely on Sky again being prevented by the EU from winning all six packages. Last time, Setanta secured Package D, (comprising mainly Saturday games at 5.15pm), for just £159 million, beating ESPN in the process. This equated to £2.3 million per game, which was less than half of the Sky bid. Obviously, ESPN as the under-bidder offered less than Setanta. If ESPN is not prepared to

bid significantly more than it did last time, Sky would be able to retain its TV offering by submitting a similar, or possibly a lower bid. That could mean no increase, or even a decrease, in TV income for football clubs.

There is certainly profit to be earned from broadcasting TV matches. BskyB has founded its business on football. ESPN and other broadcasters can see the potential, but are they prepared to challenge Sky’s dominant market position, and at what cost?

Potential bidders must also take into account the impact of the Karen Murphy case, considered elsewhere in this brochure, in which the European Court of Justice (ECJ) ruled that the Premier League’s approach to selling exclusive TV rights breaches EC competition law. That decision will certainly change the way the rights are sold next time around, as it is exclusivity within national boundaries that has driven the price up to the

current level. The Premier League will be anxious to make sure it continues to maximise its potential income. The High Court has still to give its judgement on the Karen Murphy case. It remains to be seen, therefore, whether the Premier League will seek to sell UK rights across Europe next time around, and whether this will tempt overseas broadcasters into the UK market.

Al Jazeera, owned by the Qatari royal family, is one overseas broadcaster which could pose a challenge to Sky. Qatar’s interest in football has increased since it won the right to stage the 2022 World Cup finals. Qatar is the Barcelona shirt sponsor, and a Qatari investment firm acquired Paris St Germain, a leading French club. Al Jazeera has already demonstrated its interest in televised sports by purchasing some of the domestic rights to screen matches from France’s top division, Ligue 1, as well as regional TV

The trend in theFootball League, embracing the three divisions of English football below the Premier League, gives a possible indication of the future

direction of PremiershipTV monies.

If ESPN decides to expand further with more Premiership games, the competition may force Sky to increase its offer to maintain its market position. On the other hand, if ESPN is content with its current presence, it may simply submit a low offer for one of the six packages, and rely on Sky again being prevented by the EU from winning all six packages.


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rights for the next three World Cups and the Champions League, with Gary Lineker fronting such coverage.

Because of all this, it is difficult to assess whether the price for Premier League rights will be driven down by the lack of exclusivity, or up by increased competition.

It is also possible there may be a change in the allocation of TV monies between the clubs. Last year, the Premiership’s top club earned 1.54 times as much in TV monies as the bottom club. In Spain, where clubs negotiate deals separately, Real Madrid and Barcelona, Spain’s Big Two, earned 12.5 times more than the smallest La Liga clubs. The discrepancy is explained by the fact that, while TV monies in the Premiership are distributed partly on League performance, the bulk is distributed equally amongst the clubs.

Liverpool managing director, Ian Ayre, has recently been voicing his dissatisfaction that, in his view, clubs such as Real Madrid and Barcelona have an advantage over Liverpool because they are able to negotiate their own TV rights deals separately from their rivals in the Spanish league. The Premiership clubs share international TV monies equally, as the Premiership negotiates a collective deal on behalf of all the clubs. Liverpool is clearly unhappy about this position. However, others such as Arsenal and Manchester City have indicated that they are happy with the status quo. Any move to change the arrangement would require the approval of 14 of the 20 Premiership clubs. It seems unlikely that those clubs

which would benefit from individual negotiation of TV monies will be able to persuade enough of the others to abandon the collective principle. Those opposing any change have highlighted the expanding revenue gap between the top clubs and the others in the Premiership. Allowing the bigger clubs to take a larger share of TV monies will only widen that gap, and jeopardise the unpredictability and competitiveness of the Premiership, that is at the root of its popularity.

One final point to consider is whether UEFA’s financial fair play regulations will force clubs to consider for the first time allowing live broadcasts of matches kicking off at 3 o’clock on Saturday afternoons – the traditional start-time of all UK football matches before the age of pay-TV. The Premier League has fought shy of allowing 3pm live broadcasts for fear of the damage that might be caused to attendances in the lower leagues. Given the option, many fans might indeed prefer to sit at home in front of their HD TV watching a top-flight match, rather than travel to sit in a draughty stand with a distant view of the game. For clubs desperate to increase revenue, the chance to earn additional income from broadcasting 3pm kick-offs on Sky, their own TV channels or the internet, may just be too tempting.

So the stage is set for the next round of bidding for Premiership TV rights. Karen Murphy and the ECJ have moved the goalposts. The impact of the recession is further distorting the picture. When the whistle is blown

to start the contest, will we see the same players participating, following the same game-plan? Or are the broadcasters’ tactics about to change?

And for the clubs, concerned about the financial fair play regulations, will they receive more or less from broadcasting rights for their games? Time will tell. It’s football, it could go either way!

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About Grant Thornton

Football focus

Grant Thornton is a leading business and financial adviser to football clubs and recognises the priorities of key stakeholders in the sector including club management, bankers, sports agents, management companies and regulatory bodies.

We also have extensive experience working with distressed football clubs and their lenders. This means that we are well placed to find the right restructuring solution for clubs facing financial difficulties. Our football sector team is committed to the delivery of first-class advice encompassing restructuring, corporate finance, taxation and forensic investigation services. Our geographic spread and network of offices across the UK allows us to deliver the strength of a national practice through local contacts with the expertise as required by our clients.

Recovery & Reorganisation

Grant Thornton Recovery & Reorganisation is one of the UK’s top five advisers for corporate recovery, turnaround and restructuring assignments to mid-size, large and global businesses and their financial stakeholders. Grant Thornton Recovery & Reorganisation comprises over 50 partners and directors and over 600 professional staff.

We supply a wide range of services to underperforming businesses and their stakeholders. This is focused on identifying and resolving issues affecting profitability, protecting enterprise value and, where necessary, recovering value for stakeholders. Our team in the UK regularly leads complex and multi-jurisdictional assignments and we continually make investments in our international network to allow us to deliver on the most complex cases. Amongst others, recent assignments for our UK team include some of the largest retail, care home and hotel group restructurings. Our last 14 international and complex assignments alone involve Grant Thornton handling debts of over US$25 billion.

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Grant Thornton is an organisation of independently owned and managed accounting and consulting firms. Combined, these firms have over 2,500 partners and 28,000 personnel based in more than 500 offices in 112 countries.Member firms in 52 countries are authorised by Grant Thornton International to undertake Recovery & Reorganisation assignments. These firms have 113 specialist Recovery & Reorganisation partners and over 1,500 dedicated personnel.

We have invested heavily in training, systems and infrastructure designed to deliver consistent methodology and processes across this network. This means that our teams are closely aligned and, where legally possible, follow the same processes and methodologies allowing us to avoid the legal and regulatory pitfalls of complex international restructurings.

Countries with a Recovery & Reorganisation accredited member firm within Grant Thornton International

Countries with a member firm within Grant Thornton International

Countries with a correspondent firm of Grant Thornton International

The international reach of our Recovery & Reorganisation practice

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Identifying and resolving issues affecting profitability, protecting enterprise value and, where necessary, recovering value for stakeholders.

© 2012 Grant Thornton UK LLP. All rights reserved.

‘Grant Thornton’ means Grant Thornton UK LLP, a limited liability partnership.

Grant Thornton UK LLP is a member firm within Grant Thornton International Ltd (‘Grant Thornton International’). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently.

This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occassioned to any person acting or refraining from acting as a result of any material in this publication.

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