Manchester City Half Their Loss But Not Their Financial Fair Play Problems

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Manchester City Half Their Loss But Not Their Financial Fair Play Problems Empty Manchester City Half Their Loss But Not Their Financial Fair Play Problems

Post by RedOranje Wed Dec 19, 2012 5:02 am

Bobby McMahon is one of my favourite footy analysts. He does a lot of writing on the sport for Forbes as well as some work for FSC, though that's tailed off quite a bit (unfortunately) in the last year or two. This is his latest piece for Forbes on ManCity's current status. It's pretty illuminating.

Last week Manchester City announced a loss of $157M for the year to May 2012. Most of the headlines focused on the reduction from last year’s record setting loss of $320M (exchange rate of 1.61 used for both).

Few articles pointed out that over the last four years of ownership by the Abu Dhabi United Group Manchester City has racked up cumulative losses of over $800M.

Even fewer pointed out that although the annual loss has been cut by 50% the club is even further from a sustainable business model than it was at the end of the 2009 financial year.

The spin from the Manchester City hierarchy was both predictable and echoed past years.

“A further step towards achieving the club’s objective of long-term sustainability…”

“The application of UEFA allowable reliefs for certain categories of expenditure and investment in 2011-12, position the club well for compliance with UEFA’s financial fair play regulations…”

“The amortization of player contracts and net impact of players trading on the club’s bottom line has decreased by 27% ($49M) over the previous year, consistent with our belief that the peak of the club’s investment in its playing squad has passed.”


All neatly crafted statements with a nod to UEFA and with perhaps a hope that they show mercy in the future.

The problem is of course that the City statements are high on intention but low on specifics.


UEFA Financial Fair Play Targets

Without UEFA Financial Fair Play regulations now in play Manchester City’s losses would just be another example of people with the equivalent of a blank cheque spending with no real consequences for their future.

But UEFA Financial Fair Play regulations are now a consideration and although the monitoring of clubs’ finances does not kick in until 2013/14 the two preceding years of 2012 and 2013 are taken into account.

Initially owners will be allowed to cover losses of up to $59M over these two years by injecting additional equity into the operation.

Clubs failing to meet the targets over 2012 and 2013 may suffer sanctions as early as the 2013/14 season.


“Weasel” Clauses

UEFA FFP details some adjustments that can impact on a club’s bottom line and offers a possible “get-out-of-jail card.”

FFP allows clubs investment in stadium improvement and youth development projects to be adjusted in the financial statements. So if a club shows a loss of $15M but $12M was on account of interest paid on building a new stadium and another $5M on training facilities and programming for young players then the club will be deemed to have operated at a profit of $2M for that year.

The “get-out-of-jail card” relates to a positive trend to break-even. But this trend is only considered if the deficit is due to player contracts in place prior to June, 2010. More on this later.

Wiggle Room

There seems to be very few corners left for Manchester City to cut to meet FFP.

Probably $15M can be shaved off the loss based on youth development costs.

Amortization of players contracts is as close to a set cost as you get and offers little solace.

Young players coming through the system – not in the next year or so that will make any difference.

The $60+M a year from the controversial Etihad sponsorship arrangement seems to have found a way into the 2012 financials even though the supposed cornerstone and rationale of the Etihad campus is far from completion. (It must be nice to have arms-length sponsors that pay full freight without receiving a full benefits package).

Salaries coming down? Dream on.


Have I got a deal for you

Back to the “get-out-of-jail card” and how it relates to players contracts signed by prior to June 2010. The Daily Mail reported that $128M of the Manchester City annual loss was on account of players with contracts signed before the UEFA FFP cut off point. The Daily Telegraph reported the number as $80M.

Both numbers beggars belief.

A check of the City squad list at June 2010 would limit high earners to probably no more than five players – Kolo Toure, Lescott, Kompany, Barry, and Tevez. For even the Telegraph numbers to be correct then these five would have to be pocketing an average of $16M a year.

However, it is widely acknowledged that Tevez is the club’s highest earner at $16M a year and nobody in their right mind would claim that the other four would have been offered a comparable salary 30 months ag0.

Or look at it another way. If the Daily Mail number is true then of 476 employees in 2012 these five (1% of staff) pocketed 40% of the entire payroll.

A more realistic estimate is more in the range of $40M. It mitigates around a quarter of the loss but the relief will not come into play because City are so far off with their other numbers.

The trend argument is going to be a tough sell. Manchester City are trying vainly to position the reduction in the loss as proof of the club’s positive trend.

It doesn’t take too much insight to realize that 2011 was the last year before financial fair play kicked in and every club with a chance to play in European competition took the opportunity clean up their balance sheets.

City certainly did – one look at the extraordinary items shows that to be the case. It is a disingenuous argument at best while others would consider it an insult to intelligence.

What is more an increase in salaries of over 50% in the last two years is hardly financial restraint.



The Future

The new Premier League TV deal will kick in for the 2013/14 season and could be worth an extra $50M a year to City. But that doesn’t help in the next 12 months.

Failure to negotiate the group stage of the UEFA Champions League for a second straight season means little if any in the way of extra money is coming from the Champions League pool. A good run deep into the competition could have generated another $25M to $35M for the club this season.

The “relief” based on pre-June 2010 contracts is a bit of a red herring and is at best temporary. At some point City will have to renew contracts (at the same or higher rate) or release the player and sign someone as a replacement – that also comes with a cost.

City can, and do, point at substantial growth in commercial revenue and claim it indicates City’s increasing global exposure.

But take out “friendly” sponsorships and City’s growth is suddenly not quite so staggering.

Any future growth outside of the oil and gas states of the Middle East is unlikely to outstrip City’s domestic and European rivals.

And sponsorship projections need to take into consideration the old adage that “no tree grows to the sky.”



Conclusion

Manchester City needs to be very nice to UEFA.


LINK TO ARTICLE



There are a couple of charts in his article that make things a lot clearer but I'm too lazy to copy them over and format them properly, so you'll have to follow the link if you want to see them. In any case, things don't look great for City in terms of FFP. No matter how you cook the numbers there are some real issues that will need to be addressed. That is, of course, assuming that UEFA actually try to enforce the rules and big spenders get punished (there you go, Art).
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Manchester City Half Their Loss But Not Their Financial Fair Play Problems Empty Re: Manchester City Half Their Loss But Not Their Financial Fair Play Problems

Post by fatman123 Wed Dec 19, 2012 5:31 am

Ive said it a thousand times before, these types of results are just as good as posting a profit, why? Becasue City have shown "significant imrpovments towards achieving financial independence" (i dont remember the exact phrasing but tis something like that)

untill a club increased their losses by some drastic amount like 30% in a one year period UEFA dont have to do anything
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Manchester City Half Their Loss But Not Their Financial Fair Play Problems Empty Re: Manchester City Half Their Loss But Not Their Financial Fair Play Problems

Post by RedOranje Wed Dec 19, 2012 5:38 am

fatman123 wrote:Ive said it a thousand times before, these types of results are just as good as posting a profit, why? Becasue City have shown "significant imrpovments towards achieving financial independence" (i dont remember the exact phrasing but tis something like that)

untill a club increased their losses by some drastic amount like 30% in a one year period UEFA dont have to do anything

Did you actually READ the article? It clearly demonstrates how that phrasing does NOT mean that City are in a financially stable, nor FFP compliant, position at the moment... unless UEFA purposefully apply the most lenient of judgements possible (which is certainly possible since this is UEFA we're talking about). Still, a wee bit of reading comprehension and effort goes a long way.
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Manchester City Half Their Loss But Not Their Financial Fair Play Problems Empty Re: Manchester City Half Their Loss But Not Their Financial Fair Play Problems

Post by chinomaster182 Wed Dec 19, 2012 6:21 am

I didn't like the article, it has a lot of speculation.

I'll wait until the official accounts come out.
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Manchester City Half Their Loss But Not Their Financial Fair Play Problems Empty Re: Manchester City Half Their Loss But Not Their Financial Fair Play Problems

Post by fatman123 Wed Dec 19, 2012 10:10 am

RedOranje wrote:
fatman123 wrote:Ive said it a thousand times before, these types of results are just as good as posting a profit, why? Becasue City have shown "significant imrpovments towards achieving financial independence" (i dont remember the exact phrasing but tis something like that)

untill a club increased their losses by some drastic amount like 30% in a one year period UEFA dont have to do anything

Did you actually READ the article? It clearly demonstrates how that phrasing does NOT mean that City are in a financially stable, nor FFP compliant, position at the moment... unless UEFA purposefully apply the most lenient of judgements possible (which is certainly possible since this is UEFA we're talking about). Still, a wee bit of reading comprehension and effort goes a long way.

I did read the article, did you read what I wrote, because your comment pretty much compliments what you did. To spell it out for you, the phrase "significant improvement" is fully subjective so it gives UEFA the breathing room to interpret it as leniately as they like (which they will) which will let city and QSG off the hook
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Post by Lex Wed Dec 19, 2012 10:31 am

Spend, spend, spend, Arsenal Rolling Eyes

£800 million losses......My God
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Manchester City Half Their Loss But Not Their Financial Fair Play Problems Empty Re: Manchester City Half Their Loss But Not Their Financial Fair Play Problems

Post by Art Morte Wed Dec 19, 2012 10:32 am

You don't have to know that much about the subject to realize that a club with Manc City's spending was always going to struggle to meet the Financial Fair Play rules. If City pass with flying colours then almost every club has a case to argue that they can't be punished either if City were not.

When the FFP becomes effective from 13/14 season (with finances from previous two seasons taken in account), I think it will come down to whether UEFA will blink or not. And what would be their punishment on City. Until that it's mostly guess work.
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