Wednesday, December 14, 2011

Tottenham - Grounds For Optimism Or Concern?

In spite of their somewhat controversial defeat at Stoke City last weekend, Tottenham Hotspur have enjoyed a splendid season to date. Even though it did not get off to the most auspicious of starts with successive maulings at the hands of the two Manchester clubs, Spurs then embarked on a 12-match unbeaten run in the Premier League, comprising 11 victories and just one draw. The team has been in fine form, adding an unexpected consistency to their usual attacking flair.

This is all the more impressive, as it follows a difficult summer in the transfer market, traditionally a time when seasoned observers would expect manager Harry Redknapp to be heavily involved. Instead, it was dominated by the Luka Modric saga, a transfer that did not actually take place, even though the talented midfielder’s desire to move to Chelsea was made clear to all.

Chairman Daniel Levy’s staunch refusal to countenance the Croat’s departures could have had negative repercussions in the dressing room, but to his credit Modric has performed to his customary high levels so far. He has been greatly helped by the tenacious Scott Parker, who was signed from West Ham for a bargain fee of £5.5 million. In fact, very little money was spent, as the experienced goalkeeper Brad Friedel arrived on a free transfer and powerful striker Emmanuel Adebayor is on loan from Manchester City.

"Itching to leave?"

In contrast, many fringe players have been offloaded with Peter Crouch, Wilson Palacios and Jonathan Woodgate all heading to Stoke City, Alan Hutton moving to Aston Villa, Jamie O’Hara to Wolves and Robbie Keane taking his extravagant goal celebrations to LA Galaxy. In addition, Villa and West Ham have somehow been persuaded to take Jermaine Jenas and David Bentley on loan for the season.

Following the numerous departures and the lack of high-profile signings, it would have been legitimate for Spurs’ fans to lower their expectations this season, but Redknapp believes that this might be his best Spurs squad yet, capable of going further than the one that qualified for the Champions League two years ago. He said, “I think we’ve got the potential to be up there all year”, which might have sounded foolhardy a few weeks ago, but now does not seem so unrealistic, as Spurs currently sit in fourth place in the Premier League with a game in hand on the three teams above them.

Results have been equally encouraging off the pitch, as there was a solid improvement from last year’s £6.5 million loss before tax to a £0.4 million profit for the 2010/11 season. That was mainly due to the impressive run in the Champions League, which not only took Spurs to the quarter-finals before elimination by the mighty Real Madrid, but helped grow revenue by 36% (£44 million) from £120 million to £164 million, though this was largely offset by a 35% (£34 million) increase in operating expenses, primarily a booming wage bill. In addition, profit on player sales fell £7 million, though net interest payable also reduced by £4 million.

It should be noted that Spurs have a small property business segment, which made a small loss of £1 million, so the actual football profit was slightly higher at £1.4 million.

Tottenham are very profitable at the cash level with EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) of £40 million being one of the best in the Premier League, only behind Manchester United and Arsenal, though non-cash expenses like player amortisation and depreciation lead to operating losses before player sales usually save the day.

In fact, profit on player sales has been a strong factor in Tottenham’s financial prowess over the last few years. If money from this activity were to be excluded, then Spurs would have consistently reported losses. This is most obvious in 2009, when the hugely profitable sales of Dimitar Berbatov to Manchester United and Robbie Keane to Liverpool produced an incredible £57 million gain, leading to a £33 million pre-tax profit. Without these sales, the club would have reported a thumping great £23 million loss.

Last year’s loss would have been even higher without the sales of Darren Bent to Sunderland, Didier Zokora to Sevilla and Kevin-Prince Boateng to Portsmouth. On the other hand, the 2011 profit would have been even healthier if Spurs had repeated their usual £15+ million profit here. Instead, the profit was relatively low at £9 million with the club receiving only a small fee from QPR for Adel Taarabt plus contingent receipts from prior year sales.

You might be thinking, “So what? This is a fairly standard part of any football club’s business” and you would be right. However, it is worth making the point that without the boost of Champions League money, it is very likely that Spurs will have to sell players if they wish to make a profit.

Of course, very few football clubs actually do make money, as can be seen by looking at the financial results for Premier League clubs for 2009/10 (the last season for which we have published accounts for all clubs). Only four of those 20 clubs were profitable: Arsenal, Wolves, West Brom and Birmingham City. All the other 16 clubs lost money with ten of them reporting losses higher than £15 million.

Of the big clubs to report 2010/11 results, Manchester United have swung back to a £30 million profit, but Arsenal’s profit has significantly reduced from £56 million to £15 million, while Manchester City’s loss has further widened to an astonishing £197 million.

Tottenham are cut from a very different cloth, as they have reported pre-tax profits in six of the last seven years, which is a powerful testament to how well Daniel Levy runs the club. Even Harry Redknapp, who undoubtedly would wish that the chairman loosened the purse strings, was forced to admit, “He’s a businessman, a clever businessman, with a fantastic business brain.”

On the face of it, it should be no great surprise that Spurs are doing well financially. After all, their 2009/10 revenue of £120 million was enough to place them 12th in the Deloitte Money League for European clubs (up three places from the previous year). Furthermore, the increase in revenue to £164 million should take them into the top ten when the 2010/11 review is published, over-taking Manchester City (£153 million) and Juventus (no Champions League).

However, that first glance is a little misleading, as Spurs are still a long way behind the leading English clubs, e.g. Manchester United’s revenue has now increased to £331 million, which is more than twice as much as Spurs, while Arsenal still generate over £60 million more than their North London rivals. Furthermore, the Spanish giants are on an other planet, also reporting substantial gains in 2011: Real Madrid from £359 million to £420 million and Barcelona from £326 million to £392 million.

That said, Tottenham’s revenue is still the envy of many clubs, as it is considerably higher than the next tier of challengers, e.g. Aston Villa are around the £90 million level, while Everton have only just broken the £80 million barrier.

In terms of revenue growth, Spurs also look impressive. They have managed to increase revenue from £71 million to £164 million in the last six years with a cumulative growth rate of 132%, which is only bettered by Manchester City’s 152%. However, it has to be remembered that this is from a smaller base, so is a little misleading. As a famous investor once said, “Elephants don’t gallop.”

In fact, despite the notable growth in their revenue, Tottenham have hardly made any impression on the absolute gap against other clubs. The difference is virtually unchanged relative to Chelsea and Manchester City, while it has actually expanded against Arsenal and especially Manchester United (from £95 million in 2005 to £165 million in 2011). They have only managed to get closer to Liverpool, thanks to the Reds’ absence from the Champions League.

Over the last four years, the driving force behind Tottenham’s revenue growth is clearly television. In that period £41 million (84%) of the £49 million total revenue increase from £115 million to £164 million has come from TV, with only £6 million from the much vaunted commercial operations and £2 million from match day income.

Please note that Tottenham include corporate hospitality in their commercial income, so I have added an estimated £10 million to gate receipts to produce a revised match day figure of £42 million. This is based on a review of similar re-allocations performed by Deloitte in their Money League split for the last three years.

Of course, the main reason for the dazzling revenue growth in 2010/11 is the glorious run in the Champions League, which featured a number of exciting performances, notably when Spurs defeated the trophy holders Inter Milan at a packed White Hart Lane. The fans may remember Gareth Bale’s arrival on the world stage via a hat-trick in San Siro, but the club’s board will look equally fondly on the additional £37 million from prize money and gate receipts.

Around £27 million (€31.1 million) of that is included in TV revenue, comprising €7.2 million participation (awarded to every team that plays in the group stages), €9.5 million performance bonus for reaching the quarter-final and €14.4 million from the TV (market) pool. Not much to complain about there, though the allocation for the TV pool is lower than the other English clubs (Chelsea €27 million, Manchester United €25.9 million and Arsenal €16.6 million).

This is because of the methodology used to allocate this element, which is as follows: (a) Half depends on the position that the club finished in the previous season’s Premier League with the team coming first receiving 40%, second 30%, third 20% and fourth 10%. As Spurs came fourth in the 2009/10 Premier League, they receive much less than the others. (b) Half depends on the progress in the current season’s Champions League, which is based on the number of games played. So Spurs received more than Arsenal, as they got a round further, but less than Manchester United who reached the final.

The other problem for Spurs is that they missed out on qualification for the Champions League last season (by one place), so they will have a hole to fill in the 2011/12 accounts. Although they are competing in the Europe League, this is a lot less lucrative financially. Last season, Liverpool and Manchester City only received €6.1 million for their laborious efforts in Europe’s junior competition, while the highest prize money was the €9 million awarded to Villarreal.

Although Levy insisted, “We shall fully embrace the Europa League this season”, his manager did not seem so convinced. Towards the end of last season, Redknapp lamented, “Teams who get into the Europa League want to get out of it. Half of them put reserve teams out in the early stages and it’s difficult to play every Thursday and Sunday.” From a financial perspective, it does provide some compensation via additional gate receipts, but it really is the poor relation of the Champions League.

That can be seen by looking at the TV money received by the leading English clubs last season, where the advantage enjoyed by those teams participating in the Champions League is clearly evident. In contrast, there is not a huge difference between the payments from the Premier League, due to the equitable nature of the distribution methodology.

Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£17.9 million). However, facility fees (25% of domestic rights) depend on how many times each club is broadcast live with £9.2 million for Spurs. Finally, merit payments (25% of domestic rights) are worth £757,000 per place in the league table, giving £12.1 million to Spurs. In total, this added up to £53 million.

That represented a £3.6 million increase over the previous season, even though the merit payment was lower, based on league position of fifth compared to fourth, and the facility fees were lower, due to only being shown live 17 times compared to 20. However, this was the first year of the Premier League’s latest three-year TV rights deal, which was worth more thanks to much higher payments for overseas rights.

The massive growth in TV revenue can be appreciated when looking at the near doubling of the money Spurs received last season compared to 2007, when they also finished fifth.

Gate receipts are heavily influenced by the number of cup matches, as the underlying income from the Premier League is flat, hovering around £20 million for the last three seasons, which is to be expected as the stadium is filled to capacity for every home game. There’s not much scope to raise ticket prices, as these are already among the most expensive. According to a recent BBC survey, the most expensive tickets are the third highest in the Premier League (only behind Arsenal and Chelsea), while the cheapest tickets are the fifth highest.

"van der Vaart generator"

Given that the annual report states that total revenue from the Champions League was £37 million and we know that the prize money was £27 million, we can conclude that this tournament contributed £10 million in additional gate receipts for six home games. The reason that the revenue growth was not higher is that Spurs only played two domestic home cup games in 2010/11 compared to five the previous season.

Last season Tottenham introduced an innovative split of their shirt sponsorship between software company Autonomy (now Aurasma, one of their products) for the Premier League and asset management group Investec for all cup competitions. These are both two-year deals running until 2012, the former worth £10 million a year, the latter £2.5 million. The total of £12.5 million is much better than the previous £8.5 million deal with Mansion and is the fifth highest deal in England, only behind Manchester United (Aon), Liverpool (Standard Chartered), Manchester City (Etihad) and Chelsea (Samsung).

Similarly, Spurs have announced a “record breaking” five-year deal with kit supplier Under Armour from the 2012/13 season. This is reportedly worth £10 million a year, which is double the £5 million paid by current partner Puma. That’s good progress, but still a fair way below the £25 million paid to Manchester United and Liverpool by Nike and Warrior respectively.

Merchandising income rose an impressive 23% to £9.6 million, aided by (yes, you guessed it) the Champions League.

Progress has also been made with secondary sponsors, such as a four-year extension with travel partner Thomas Cook and a new agreement with, who become Tottenham’s official online betting partner, though there is a long way to go before they come close to emulating the success of clubs like Manchester United, described by commercial director Charlie Wijeratna as being “three to four years ahead of us in this.” He suggested that much more could be done to leverage global interest in the club’s “distinctive brand around the issues of flair, style and adventure”, especially in Asia.

On the cost side, wages have shot up by 36% from £67 million to £91 million, which the club attribute to “a large squad playing in both domestic and European competitions”, backed-up by the growth in headcount for players and football administration staff from 142 to 159. Although not separately analysed, some of the rise is surely also due to performance bonuses following Champions League success.

Although the size of the increase might well raise eyebrows, Spurs are “only” sixth in the English wages league, still a long way behind Manchester City £174 million, Chelsea £173 million (2009/10), Manchester United £153 million, Arsenal £124 million and Liverpool £114 million (2009/10). Funnily enough, the gap between Arsenal’s wage bill and Tottenham’s of £33 million is exactly the same as the difference in 2005. Go figure.

The problem for Spurs is that even after this substantial rise, their wage bill still pales into insignificance compared to Manchester City. As Redknapp complained, “I think the wages have gone crazy. It’s gone beyond all belief in the last little spell.”

"Clap Your Hands Say Yeah"

This has inevitably put pressure on Tottenham’s famously rigid wage structure, where the top salary is reportedly only £70,000 a week, though it can be increased with performance bonuses. You and I might just about get by on that, but it is peanuts for a world-class footballer. It means that the club struggles to attract the top talent, e.g. on-loan striker Adebayor has said that he would not accept a pay cut to make his move permanent. He can only ply his trade at White Hart Lane now, because Manchester City subsidise his £170,000 weekly wage to the tune of £100,000.

Modric is looking to increase his weekly wage up to £100,000, aided and abetted by that old spendthrift Redknapp, “You can’t say he is worth £40 million and want to pay him the wages of someone who is worth £5 million. You have to look after the boy.” The trouble is that if the club accedes to his claims, then others will not be far behind in seeking a pay rise.

Daniel Levy is at pains to emphasise the club’s tight financial control, “We continue to work on driving revenues to ensure that the wages to revenue percentages remain within our key performance targets.” In fairness, Tottenham have managed to do that to date, maintaining the important wages to turnover ratio in a narrow range of 54-56%, which is very respectable. Furthermore the wages growth of 124% since 2006 is almost exactly in line with the revenue growth of 121% over the same period.

The quandary facing Spurs in the next set of accounts is that they will no longer have the benefit of £37 million of Champions League revenue and the Europa League is not likely to provide more than £10 million compensation. Ceteris paribus that would increase the wages to turnover ratio to 67%, which is by no means disastrous (Manchester City’s is 114%), but is probably higher than Levy would feel comfortable with.

That is one reason why so many players left in the summer, either permanently or on loan, as the club attempted to follow Levy’s edict to “streamline the squad where appropriate.” On the other hand, the annual report states that “core players” have been given new, longer-term deals on “higher, competitive salaries”, so the wage bill might not come down by as much as some people might expect.

"Fast company"

My guess is that the club is still keen to trim the fat, especially as Levy has noted the other challenge facing Spurs in terms of players, “We currently have one of the largest squads in the Premier League and given the 25-man squad rule, it is no longer practical to retain players who are unlikely to qualify within that limit.” It would therefore be no great surprise if the exodus continued with many players poised to leave, including Heurelho Gomes, Niko Kranjcar, Roman Pavlyuchenko, Sebastien Bassong, Giovani dos Santos and William Gallas, though that may be easier said than done, given their decent wages.

So Levy has done a fine job in keeping wages down, but he has proved equally adept at negotiating his own remuneration, which has increased from £250,000 in 2004 to £1.8 million in 2011 (up from £1.35 million the previous year), though, in fairness, this is not an outrageous sum when compared to the money earned by some of his peers (Garry Cook, David Gill and Ivan Gazidis).

The other aspect of player costs, namely amortisation, rose steeply in 2008 from £19 million to £37 million, but has barely increased in the last three years. To explain this, when a new player is bought, football clubs do not expense the cost immediately, but instead book it onto the balance sheet as an intangible asset and write it off over the length of the contract. As an example, Rafael van der Vaart was bought for £8 million on a four-year contract, so the annual amortisation charge is £2 million.

The sudden increase in amortisation, followed by little movement, suggests that Tottenham’s spending in the transfer market first rose, then slowed down, and this is indeed the case. If we split the last nine years into three equal periods of three years, we can see that the net spend was £37 million up to 2006, it then increased to £77 million up to 2009, but has fallen dramatically to net sales of £1 million in the last three years. Redknapp is a renowned big spender, but it looks as if he has more than met his match in Levy.

Of course, it would have been difficult to keep spending at the rate of a few years ago without getting rid of some of the dead wood. If we look at the last six years, Tottenham have actually still outspent Manchester United (£57 million) and Arsenal (net sales of £46 million), while they have spent about the same as Liverpool (£84 million). They are way behind Manchester City (£437 million) and Chelsea (£145 million), but that is only to be expected.

Another intriguing point to emerge recently was that Tottenham were the second highest spenders on agents’ fees in 2010 with £7.6 million, only surpassed by Manchester City £9.7 million.

The reduced activity in the transfer market has helped the club reduce its net debt (for the first time in many years) from £64 million to £57 million, despite continued investment in capital projects. There is no longer any classification issue with the Convertible Redeemable Preference Shares, as these have were all converted to ordinary shares or redeemed last year.

The debt comprises £52 million of bank loans, including a £15 million short-term revolving loan from HSBC, a £30 million facility with the Bank of Scotland at a floating rate linked to LIBOR and a new £7 million facility from Investec specifically for funding the new training ground; plus £25 million of loan notes at an interest rate of 7.29% repayable in equal installments by September 2023; less £21 million of cash.

In addition, trade creditors include £21 million for outstanding transfer fees, though this is partially offset by £3 million transfer fees owed to the club in trade debtors, while there are contingent liabilities (depending on success of the team and individual players) of £24 million with contingent assets of £11 million.

Nevertheless, the balance sheet remains strong. In fact, thanks to the reduction in liabilities, net assets have increased from £71 million to £81 million, including tangible assets of £150 million, comprising White Hart Lane and current training ground £39 million, new stadium project £83 million and the new training ground in Enfield £28 million, and intangible assets (players) of £101 million. Of course, the market value of the players in the books is far higher than the carrying value in the accounts with the respected Transfermarkt website estimating a value of £240 million.

However, as the accounts say, “This huge investment over the last six years has been funded through profits, equity contributions and long-term debt financing.” Although the club generates a lot of cash from its operating activities (£163 million in the last five years), this has not been enough to cover player purchases (£112 million) and property investments (£117 million), which has required £72 million of additional funding, either via new loans or additional share capital. Even then, most years have seen a net cash outflow, though last season again benefited from the Champions League.

This is a mere drop in the ocean compared to the funding that would be required to build the proposed new stadium. Although there are many risks involved in such a project, Levy is adamant that an increased capacity stadium is “critical to our continued success” and “central to delivering our ambitions for this club.”

White Hart Lane’s limited capacity of 36,000 cannot compete financially with Old Trafford’s 76,000 or The Emirates’ 60,000 and is a source of frustration for the 35,000 Spurs fans on the season ticket waiting list. Manchester United and Arsenal earn £3.7 million and £3.3 million every match, which is more than twice the £1.6 million generated by Spurs, leading to a revenue shortfall of £50-60 million a season. Without this additional revenue, it would be virtually impossible for Tottenham to match their wage bills.

The club has been pursuing two options: (a) the Northumberland Development Project (NDP) in the area around White Hart Lane; (b) relocation to the Olympic Stadium in Stratford.

Although Spurs’ interest in the Olympic Stadium initially appeared to be little more than a negotiating tactic, it became clear that this was in fact the club’s preferred alternative, as it would have been significantly cheaper (around £200 million less than redeveloping White Hart Lane) and there are excellent transport links already in place. So Tottenham prepared a comprehensive bid along with their partner AEG, the operator of the O2, which included plans to host major concerts and other events in a stadium purpose built for football plus a healthy return to the taxpayer.

"My wage packet is this big"

Crucially, they did not agree to retain the running track, even though they offered to fund a much improved athletics facility at Crystal Palace that would be available 365 days a year, so West Ham were selected as the preferred bidder. Given that Tottenham were encouraged to bid, they must have felt that, ahem, the goalposts had been moved.

Even though a club survey showed that very little of its support actually comes from the Tottenham catchment area with the vast majority coming from Hertfordshire and North Essex, many Spurs fans were understandably against Stratford. In addition, there was the small matter of Premier League rules, which stated that any move should not adversely affect clubs in the immediate vicinity, which was surely the case with Leyton Orient.

Although Tottenham mounted a legal challenge against the decision, they have now formally said that the Olympic Stadium “has ceased to be an option”, though ironically the deal for West Ham to move there has now collapsed.

"The light pours out of me"

So Spurs are now “totally committed” to the NDP development that Levy described as unviable earlier in the year on account of its prohibitive expense. Development restrictions have increased costs and reduced the amount of residential property that could be built to help fund the construction cost of the proposed 56,250 capacity stadium.

Beyond saying that it would require “hundreds of millions”, the club has not confirmed the total cost, though they have already invested £60 million in buying land and £26 million on the planning process. Incidentally, the latter fees have been capitalised and would have to be written-off if this project were to be abandoned.

Planning permission was granted in September 2011, but the summer riots in Tottenham that caused the opening match of the season to be cancelled have made investment less appealing. Indeed, the club stressed that public money must be spent on improving the infrastructure of the area before the club will be convinced to invest themselves. They have been offered £17 million of public money from the Greater London Authority and Haringey Council in order to help persuade them to stay in the area, though Orient’s ebullient chairman Barry Hearn has described this as a “bung”.

"Hey, Heurelho, you're now No. 2"

The club has announced that they will de-list from AIM to help the prospects of raising funds. Apparently potential investors said that this would be easier if the club were privately held, though this seems dubious to say the least and it is more likely that the club’s owners are just fed up with the exchange’s compliance requirements.

Although interest rates for bank loans are at historic lows, Tottenham have explored other ways to finance the construction, including stadium naming rights, where the cash could be front-loaded like Arsenal did with the Emirates, ten-year premium seating packages along the lines of Club Wembley and a supermarket. The objective is to reduce the amount of debt that the club would have to take on.

However, some fans might ask why the club is enduring such contortions when it is owned (via ENIC) by one of the world’s wealthiest men, Joe Lewis, who is worth an estimated £2.8 billion. Surely he could put his hand in his pocket in the same way as Sheikh Mansour or Roman Abramovich instead of scrambling for public money?

Whatever mix of funding they secure, it will take at least four years before the new stadium is completed.

"Everybody's happy nowadays"

UEFA’s new Financial Fair Play (FFP) rules, which mean that clubs can only spend the income they generate through the activities of the football club, provide an added incentive to build a new stadium. As Levy has pointed out, “If you look at the stadium capacities of the top 20 clubs in Europe, they all exceed ours.” Not only that, but UEFA’s new regulations actively encourage such investment, as any costs incurred for a new ground, such as interest on loans, is excluded from their break-even calculation.

This is important for Spurs, because, although the club has publicly welcomed UEFA’s attempts to “level the playing field”, as this should vindicate their prudent approach, it will not be easy for them to break-even without the infusion of Champions League money – or selling players.

Furthermore, FFP underlines Tottenham’s focus on investing in young talent, as youth development costs are also excluded from the break-even calculation. Last season four academy graduate played for the first team: Jake Livermore, Steven Caulker, Danny Rose and Andros Townsend. In addition, Spurs are scouting for talent overseas, such as Souleymane Coulibaly, the Ivory Coast forward who won the Golden Boot at this summer’s U-17 World Cup.

"Miss me blind"

The new training centre in Enfield, due for completion in summer 2012, is designed to “help us attract, develop and retain the highest quality talent.” Even before that is ready, Tottenham’s youngsters are progressing well, as seen by them winning their group in the NextGen Series, thrashing Inter Milan and PSV Eindhoven en route.

In the short-term, it is likely that Tottenham will make a loss in 2011/12, as they are now in the unfortunate position of having a squad on Champions League wages without actually gracing the tournament with their presence. Although they have removed quite a few players from the payroll, this is almost certainly insufficient to cover the revenue loss. There will also be profit on these player sales, but my calculations suggest that this will not be a great deal more than last season unless more leave in January.

In other words, it is very important that Spurs qualify for next season’s Champions League, but as Redknapp himself said, “It’s very hard to get into that top four… very, very difficult.” The likely elimination from the Europa League should help, as it removes that distraction, and the team certainly looks a good bet at the minute. However, it’s a funny old game and Spurs suffered a terrible drop-off last season, following an injury to the dominant Bale and van der Vaart’s loss of form.

"King without a crown"

If they don’t make it, then the smart money has to be on a series of player departures, including the aforementioned Bale and Modric for starters. Although Levy has argued against this, “We have a great squad with exceptional talent and none of the main players will be leaving in January”, that does not rule out next summer and there have been many precedents in the past for such big money sales when there was a need to balance the books.

Furthermore, there are weaknesses in the Spurs side that need to be addressed sooner rather than later, most notably in defence where Ledley King and Michael Dawson are increasingly injury-prone, William Gallas is too old and Sebastien Bassong is not trusted by the manager.

If only Spurs had a wheeler dealer in charge who knew how to work the transfer market…

Speaking of which, there are a couple of whispers about ‘Arry that might just slow down the positive momentum that Tottenham have enjoyed for a while. He is an obvious candidate to succeed Fabio Capello as England manager after next summer’s Euros, while he might also be prompted to leave by health problems (he underwent minor heart surgery recently) or by legal issues, as he faces trial in January on charges of tax evasion. Although Redknapp has his critics (including this writer), his achievements in establishing Tottenham in the elite should not be under-estimated, so his departure would be damaging.

"Reasons to be cheerful, part 3"

The other threat to Spurs’ stability is the possibility that the current owners might look to sell the club, especially if they put together a credible plan to build a new stadium. Levy denied this, “We haven’t put this amount of effort into building up Tottenham with the intention of moving it onto someone else. We want to see this project through.” That’s fairly unequivocal, though nagging doubts remain.

In the wonderful film “In Bruges”, the character played by Colin Farrell muses, “Purgatory's kind of like the in-betweeny one. You weren't really shit, but you weren't all that great either. Like Tottenham.” Spurs appear determined to challenge that stereotype and this season it looks like they just might succeed in doing so.

In any case, they have done very well to compete at the highest levels without compromising the financial future of the club. Going forward, whether they can manage to address the twin challenges of regularly qualifying for the Champions League and building a new stadium is a whole new ball game.

Wednesday, December 7, 2011

Money's Too Tight To Mention At Inter

It’s fair to say that Inter have had better starts to the season. Although they qualified from the Champions League group stage with a game to spare, they currently languish in 16th place in Serie A. Admittedly they have a game in hand, but they are still a colossal 14 points behind league leaders Juventus with a third of the season gone.

The triumphant 2009/10 season when the nerazzurri became the first Italian team to win the treble of the scudetto, the Coppa Italia and the Champions League in a single year under the guidance of José Mourinho seems a distant memory. Inter fans have become accustomed to success, as that triumph meant that their team had won five league titles in a row (including the one awarded to them for 2005/06 by the courts after the calciopoli scandal).

There are many reasons behind this decline, not least an aging squad, but most of the problems are off the pitch. The board’s lack of a long-term strategy is evidenced by the rapid turnover in coaches since the “special one” moved to Real Madrid in the summer of 2010. Rafael Benitez’s miserable six-month reign did not reach Christmas, while past Brazilian international Leonardo lasted little longer, as he joined Paris Saint-Germain in June 2011.

His replacement, the former Genoa boss Gian Piero Gasperini, fared no better, as he was unceremoniously sacked after four defeats in five games, notable only for a plethora of formations that confused his own team rather more than the opposition. The current incumbent, Claudio Ranieri, brings vast experience to the role, but he is Inter’s fifth manager in less than two years.

"Should I stay or should I go?"

The club’s confusion is further highlighted by the names of the other managers that they approached for the position, including the likes of Fabio Capello, Guus Hiddink, André Villas-Boas and Marcelo Bielsa. If you can discern any similarities in their tactical approaches, then you’re a better man than me. Unsurprisingly, they all rejected the poisoned chalice.

The other explanation for Inter’s woes is financial, namely that the club no longer splashes out the vast sums on recruiting players that it has done in the past. Their modus operandi under long-serving president Massimo Moratti has been to run the business at a huge loss ever year, which has only been made possible by the owner covering the deficit with continual capital injections.

In fact, in the 16 years since Moratti took over, the club has accumulated losses of around €1.3 billion with the president personally putting in over €750 million. Moratti has been criticised by many Inter fans, but he can hardly be accused of not putting his money where his mouth is. Even if his decisions have not always been the best, the reality is that the president’s financial support has been an absolutely essential part of the club’s success.

However, this approach will not work in the future, as Inter are faced with the new challenge of UEFA’s Financial Fair Play (FFP) Regulations, which will ultimately exclude from European competitions those clubs that fail to live within their means, i.e. make a profit.

The first season that UEFA will start monitoring clubs’ financials is 2013/14, but this will take into account losses made in the two preceding years, namely 2011/12 and 2012/13, so Inter’s accounts need to rapidly improve.

However, they don’t need to be absolutely perfect, as wealthy 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).

This effectively means that Inter need to slash their spending, especially transfer fees and wages. Although the new rules have destroyed Inter’s traditional business model, they were initially welcomed by Moratti, ”Some thought that FFP was against owners like me, but I say that at last it means that I can stop putting money into football every day. Inter are so expensive that I wouldn’t recommend it to anyone. I hope that FFP allows us to experience football in a different way.”

The impact on Inter’s activity in the transfer market has been dramatic. In the 12 years up to the end of the 2009 season, their net spend was €473 million (with staggering gross spend of €831 million), while the last three seasons has seen net sales of €24 million. Even when Mourinho spent big on the likes of Samuel Eto’o, Diego Milito and Wesley Sneijder, this was more than covered by the amazing fee received from Barcelona for Zlatan Ibrahimovic.

The new regime was explained this summer by chief executive officer Ernesto Paolillo, “We have to sell, then after we have sold we will see what Inter will buy. Absolutely, we are thinking of FFP.” His views were echoed by sporting director Marco Branca, when explaining that the club could no longer afford the fees commanded for top talent like Alexis Sanchez, “We have to organise our finances for the financial fair play rules in the next two years. We are looking for younger players now with great talent, who we can develop.”

That policy has meant the arrival of youngsters like Ricardo Alvarez, Yuto Nagatomo and Philippe Coutinho, but the reluctance to spend also contributed to the departure of Rafael Benitez, who had issued the club with a “back me or sack me” threat.

This belt tightening is clearly evident when looking at the net spend in Serie A over the last three seasons with Inter’s net sales of €24 million only exceeded by Udinese, a famous selling club. Although it is true that most clubs have reduced their transfer expenditure, it is noticeable that in the same period two of Inter’s main rivals, Juventus and Napoli, lead the way with over €100 million apiece. Juventus currently lead the league, while Napoli are going great guns in the Champions League…

Of course, that is the downside of turning the taps off, as there is a good chance that the team will become less competitive, at least in the short-term. There has clearly been a diminution in Inter’s offensive capacity with Ibra and Eto’o (21 goals in Serie A last season) being followed by Mauro Zarate and Diego Forlan, especially as the Uruguayan is ineligible for the Champions League group stages.

The fundamental reason that the club needs to address its finances is, of course, its massive losses. Over the last five years, these have amounted to a shocking €665 million. Eat your heart out, Manchester City. A couple of years ago, Moratti attempted to explain this, “The considerable loss is justified to keep our team at the top level worldwide.” In other words, it’s the price of success.

There are a couple of ways of looking at the trend. On the one hand, the losses have been largely reducing since the €207 million reported in 2007, but on the other hand there was certainly plenty of room for improvement. The best result in recent years was the €69 million loss in 2010, though that was heavily influenced by the Champions League success and the sale of Ibrahimovic.

What is quite worrying is the deterioration last season to an €87 million loss, especially as the word on the street was that the deficit would be “only” €60 million, thus raising grave concerns that the plan to be in line with FFP was already in tatters.

Of course, Inter are by no means alone among Italian teams in making losses. If we look at a schedule of the profit and loss accounts of Serie A teams over the last two (fully reported) seasons, it’s a sea of red ink with only six clubs profitable over that period. However, it’s the magnitude of Inter’s losses that is striking with the club recording the largest losses in each of those seasons. Their cumulative loss of €223 million was far higher than the next worst club, Milan with €77 million.

The other negative point to note is Inter’s high reliance on player sales. In fact, if we exclude profit from this activity plus the largely positive impact of exceptional items, then the situation becomes even more stark, as the underlying loss has averaged around €150 million over the last four years.

Profit on player sales was worth an impressive €72 million in 2010 (largely Ibrahimovic €54 million, Biabiany to Parma €5 million and Maxwell to Barcelona €4 million) and a net €31 million in 2011 (mainly Balotelli to Manchester City €22 million, Burdisso to Roma €8 million and Destro to Genoa €5 million). The latter sum would have been even higher if Inter had not had to write-off an incredible €21 million on some player sales, notably Quaresma to Besiktas (€13 million) and Mancini to Atletico Mineiro (€5 million).

Both 2006 and 2007 were adversely impacted by a change in the accounting treatment for the amortisation of transfer fees, while 2006 was boosted by the sale of Inter’s brand to a subsidiary. In the last couple of years, profits have been enhanced by €16 million compensation paid by Real Madrid to secure Mourinho’s services and a €13 million payment by RAI for the right to use the image library.

It’s not as if Inter’s revenue is too shabby. In fact, for 2009/10 (the last season when all Italian clubs have published their accounts), their revenue of €225 million was the largest in Serie A with only Milan and Juventus anywhere near them. Roma were the only other club with revenue above €100 million, while the others were miles behind the nerazzurri.

Inter’s revenue also places them 9th in Deloitte’s European Money League, which on the face of it is pretty good, though problems begin to emerge when we take a closer look, as they are a long way short of their peers abroad. Real Madrid and Barcelona, generate around €400 million, which is around twice as much as Inter. As well as benefiting from substantial individual TV deals, the Spanish giants are also allowed to count membership fees as income (instead of capital increases).

Both Manchester United and Bayer Munich earn around €100 million more, the English taking advantage of significantly higher match day revenue, while the Germans’ commercial expertise puts Inter to shame. This vast revenue discrepancy makes it difficult to compete, especially when that shortfall in turnover occurs every year.

Those of you who take a keen interest in football finances may be wondering why the revenue figures used in the Money League are lower than those reported in Italy. The reason for the difference is that Italian accounts report gross revenue, while Deloitte uses net income, as this is consistent with the approach used in other countries. Therefore, for 2009/10 this excludes the following: (a) gate receipts given to visiting clubs €3 million; (b) TV income given to visiting clubs €18.4 million; (c) revenue from player loans €1.1 million; (d) change in asset values €3.4 million. Adding the €25.8 million adjustments to the €224.8 million in my analysis gives the €250.6 million reported in Italy.

Inter’s challenge is made all the more difficult by the underlying problems in Italian football. This year a report form the Italian Football Federation (FIGC) concluded, “The current business model is difficult to sustain and not very competitive.” Its president, Giancarlo Abate, noted that in particular match day income, sponsorships and merchandising were in need of urgent attention to reduce the reliance on TV money.

Ten years ago the total revenue of clubs in Serie A of €0.9 billion was only just behind the Premier League’s €1.1 billion and practically double the other major leagues (Bundesliga, La Liga and Ligue 1), who all earned around €0.5 billion. Last year, the picture looked very different with the Premier League’s revenue surging to €2.4 billion, while the Bundesliga and La Liga had both caught up with Serie A at €1.5 billion with Ligue 1 trailing at €1.2 billion.

This is reflected in the revenue growth of leading European clubs. Although Inter’s growth looks pretty good against other Italian teams, it pales into insignificance compared to top teams in Spain, England and Germany. Two examples will illustrate that: first, Arsenal’s revenue in 2005 was €28 million less than Inter’s, but is now €48 million more; second, Barcelona’s revenue was only €47 million higher six years ago, so just about within striking distance, but is now far over the horizon at €234 million higher. As Milan’s CEO, Adriano Galliani said, “Twenty years ago Milan invoiced more than Real Madrid, today only half. That’s the real problem.”

Overall, Inter’s revenue has only grown by 13% in the last five years from €188 million to €213 million. Like all the big Italian clubs, the majority of Inter’s revenue (59%) comes from television with €124 million. According to the FIGC report, Serie A has the highest dependency on TV income of any of the leading five leagues at 65%, compared to France 60%, England 50%, Spain 38% and Germany 32%.

The flaws in Inter’s business model are clear with only 25% generated by commercial operations (€54 million) and 15% from match day (€33 million). In the last two years, these last two revenue streams have barely increased at all and only television has contributed any meaningful growth, largely due to a more lucrative Champions League contract.

In 2009/10, Inter earned an impressive €138 million from television, which was the highest in Italy, thanks to a combination of an attractive domestic individual deal and those Champions League millions. Only Juventus and Milan were in the same ballpark (for identical reasons), while all other Italian clubs received considerably less money, e.g. Napoli, Lazio and Fiorentina got less than half those sums at around €40 million.

Years of protest at this lack of a level playing field finally led to a new collective agreement being implemented at the beginning of last season. There is a complicated distribution formula, which still favours the bigger clubs, though the result is a small reduction at the top end. Under the new regulations, 40% will be divided equally among the 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%).

So, the larger clubs will lose out from the new arrangement, but mid-tier clubs should benefit. There has been much discussion over how the number of fans (worth 25% of the deal) will be calculated, leading to a major dispute between the larger clubs and the smaller clubs, but this now looks to have been resolved.

An article in La Repubblica suggested that Inter would lose €8 million, but the reduction reported in the accounts is far smaller with the domestic TV money falling just €3 million from €89 million to €86 million, though it is not clear whether this is a final figure or just an estimate while negotiations continued.

One reason that the decrease might be lower than anticipated is that the total money guaranteed in the new collective deal by media rights partner Infront Sports is approximately 20% higher than before at around €1 billion a year, which cements Italy’s position as the second highest TV rights deal in Europe, only behind the Premier League, but significantly ahead of Ligue 1 and La Liga. In fact, Italy’s deal is worth twice as much as the Bundesliga.

That’s particularly impressive, given how little is received for foreign rights, though there is some optimism that this will increase in the next round of contract negotiations. On the other hand, it is not completely clear what will happen with the 2013-15 deal for domestic rights. Although €2.5 billion has been secured from Sky/RTI for 12 of the 20 Serie A clubs, the league is still to determine how to handle rights for the eight clubs not included.

Somewhat puzzlingly, I can find no trace in Inter’s accounts of prize money for the UEFA Super Cup (runners-up €1.2 million) and the FIFA Club World Cup (winners $5 million) that were both disputed in 2010, so it might be the case that this money will only be booked in the 2011/12 accounts.

The Champions League has been kind to Inter financially with over €115 million received in the last three years in participation and prize money alone, though Europe’s flagship competition can be something of a double-edged sword, as their revenue declined by €11 million in 2011 from €49 million to €38 million, due to Inter only reaching the quarter-finals compared to winning the trophy the previous season. Those are just the television distributions, but there are also be additional gate receipts and bonus clauses in various sponsorship deals.

The Europa League's TV distribution is very low in comparison, so last season the four Italian representatives only earned around €2 million each. Although none of them progressed further than the last 32, the highest pay-out was still only €9 million. However, at least this tournament still delivers additional gate receipts.

One glaring weakness for Inter is match day revenue, which is very low at €33 million, down from €39 million the previous year, largely due to a reduction in Champions League gate receipts from €17 million to €7 million.

Although this is the highest in Italy, it is tiny compared to leading clubs abroad. This is perhaps best illustrated by a comparison with Manchester United and Arsenal, who earn €126 million and €108 million respectively. This works out to around €4 million revenue a match, which is over three times as much as Inter (€1.3 million), even though their stadiums are smaller.

Inter’s average attendance of 58,000 in 2010/11 is impressive (again the highest in Italy) and was actually the eighth best in Europe, but San Siro suffers from having hardly any premium seats or corporate boxes, which are the money spinners elsewhere.

This is why Inter have been exploring opportunities for moving to a new stadium that could maximise their revenue earning potential, including naming rights, as explained by Paolillo, “In Europe the stadium makes money seven days out of seven.” Not only that, but Inter have to pay €4.3 million rent a year to the local council, who own the stadium.

Unfortunately for Italian clubs, Italy failed in their bids to host either the 2012 or 2016 Euros, which would have been a catalyst to upgrade. Juventus are the only top club that owns its own stadium, which they hope will double their match day income. Even that project was beset with bureaucratic delays, which is why Paolillo hopes that new laws will be introduced to facilitate the construction of new stadiums. Patience will still be required, as Moratti recently explained that it would not be possible to move “in the short-term”.

Even after a €6 million rise in commercial revenue in 2011 from €48 million to €54 million, this is still fairly low for a club of Inter’s history. Perhaps understandably it’s less than Milan and Juventus, but it’s only just higher than Roma and Napoli. More pertinently, it’s significantly lower than Bayern Munich, who earn an astonishing €173 million.

Inter have enjoyed very long-term relationships with commercial partners, but this may have prevented them from taking up more lucrative opportunities elsewhere. Pirelli have been Inter’s shirt sponsor since 1995, but only pay €12 million a year. Similarly, kit supplier Nike have been partners since 1998, also paying €12 million a year.

To be fair, this compares favourably with deals at other Italian clubs: (a) shirt sponsors: Milan – Emirates €12 million, Juventus – BetClic €8 million, Napoli – Lete €5.5 million and Roma – Wind €5 million; (b) kit suppliers: Milan – Adidas €13 million, Juventus – Nike €12 million, Roma – Kappa €5 million and Napoli – Macron €4.7 million.

The issue is that these deals are much lower than leading clubs abroad. For example, the following clubs all have shirt sponsorships worth more than €20 million a season: Barcelona, Bayern Munich, Manchester United, Liverpool, Manchester City and Real Madrid.

Belatedly, they are looking to make more from global opportunities, hence playing the Italian Super Cup match against Milan in the Bird’s Nest stadium in Beijing, but they have a lot of ground to make up.

The other factor damaging Inter is one facing all Italian clubs, namely a problem with fake merchandising. They can seemingly do little to prevent this, but have asked the state to tackle the issue. That’s a generic issue, but one specific to Inter is the annual €16 million payment for use of the brand after the earlier operation to sell this to one of its subsidiaries.

However, the most important challenge for Inter is their wage bill. The good news is that they managed to cut this by €44 million in 2011 from a frightening €234 million to €190 million, thus reducing the important wages to turnover ratio from 104% to 89%, so it now comprises player salaries €149 million, coaching staff €16 million, bonus payments €13 million, other staff €6 million and social security €6 million.

On the face of it, this is a notable achievement, but it masks some worrying factors. The main reasons for the decrease were a €38 million cut in bonuses, due to the Champions League payments the prior year, and a €9 million reduction in coaching salaries, following the departure of Mourinho. The player salaries actually rose by €3 million, which was not in the plans, probably due to the number of “senior citizens” still on the books.

In addition, this is still a very high wage bill by anybody’s standards. As a comparison, it’s only €10 million below big-spending Manchester City’s €200 million (the highest wage bill ever reported by an English club). It’s also more than a third higher than the €142 million paid by Inter as recently as 2006.

Furthermore, it remains one of the largest wage bills in Italy, e.g. in 2009/10 Inter’s wages were about the same as Juventus and Roma combined. An analysis by La Gazzetta dello Sport this summer suggested that Milan had overtaken Inter in the wages stakes (at least for the first team squad) with €160 million compared to €145 million, but it’s far from certain that their figures are accurate. In any case, a wage to turnover ratio of just under 90% is nothing to write home about and is much worse than UEFA’s recommended maximum limit of 70%.

The other element of player costs, namely amortisation has also been reduced in 2011 from €61 million to €53 million, though it is still two thirds higher than it was in 2008, and is higher than other leading Italian clubs with Milan, Juventus and Napoli the closest at around €40 million.

For non-accountants, amortisation is the annual cost of writing-down a player’s purchase price, e.g. Gianpaolo Pazzini was signed for €19 million on a 4½ year contract, but his transfer is only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, i.e. €4.2 million a year (€19 million divided by 4.5 years).

"Old man river keeps rolling along"

Despite Inter’s history of large losses, they have publicly welcomed FFP. Paolillo said that the initiative was the right one for the football industry in order to avoid the collapse of clubs, likening the state of the sport’s finances to the sub-prime banking crisis. More specifically, he added that Inter was up for the fight, “We will be ready to meet all the standards set by UEFA and we are working on various fronts. That means cutting costs and increasing revenues.”

All of the losses made to date are not considered for FFP, as the first accounts to be included in the calculation are those for 2011/12. Inter seem quite optimistic about their ability to meet the targets with talk of reducing the loss to €30 million this season and reaching break-even in two years, which would be within UEFA’s acceptable deviation of €45 million for the first two years.

However, that is by no means a done deal, especially as Inter’s track record for financial planning is not the best, as seen by last year’s figures where the loss widened to €87 million, much worse than the forecast improvement to €60 million.

"Me and Julio down by the school yard"

So let’s try to project Inter’s loss for 2011/12, based on the information we already have. This is accompanied by a health warning that this type of analysis will never be 100% accurate, as some of the reported figures are not certain, e.g. transfer fees, wages and contract extensions. Nevertheless this exercise should give us a strong indication of whether Inter are at all close to achieving their objectives.

1. Exceptional Items

By definition, the 2010/11 once-off €13 million payment for use of the image archive should not be repeated every year, so this should be excluded.

2. Financial Fair Play Adjustments

It is not generally appreciated that UEFA’s break-even calculation is not the same as a club’s statutory accounts, as it excludes certain expenses that are considered to represent positive investment, such as expenditure on youth development (€10 million) and community (€2 million) plus depreciation on tangible fixed assets (€4 million), which gives a total of €16 million to be deducted.

Youth development and community investment are not separately disclosed in the accounts, so these values are estimates based on similar reviews of other clubs.

"Two Diegos for the price of one"

3. Revenue

Even though there is much potential for growing revenue in the long-term, Inter have limited scope for increases next year. Nothing will happen on the stadium front, the TV deal is unchanged and the club is locked in to its main sponsorship agreements. The only wild card is how far Inter progress in the Champions League – though there is also the issue of what happened to the €5 million revenue from the UEFA Super Cup and the FIFA Club World Cup.

All in all, I have assumed that revenue remains flat.

4. Profit on Player Sales

The post-balance sheet events section in Inter’s accounts inform us that they have already made €25 million profit on player sales, largely due to Eto’o going to Anzi Makhachkala and Davide Santon to Newcastle United. Unless further sales are made in the January transfer window, this means a €6 million reduction year-on-year, as 2010/11 included €31 million profit here.

The problem for Inter is that they would need to maintain this level of player sales each year (unless they can compensate for €25 million elsewhere), so their fans can expect at least one star, such as Sneijder, Maicon or Julio Cesar, to be sold next summer. Indeed, Sneijder has already admitted, “Inter need money and I’m for sale if the right offer comes in.”

Of course, a strategy of “selling the family silver” is finite (and potentially counter-productive), unless Inter acquire an ability to develop players for sale, maybe through their academy. What’s for sure is that Inter will never repeat the mega profits made from the Ibrahimovic coup.

5. Wages

Inter are attacking their wage bill on a number of fronts: (a) a “salary cap” of €3 million for a first team player, unless he is a superstar; (b) the future remuneration package will have a lower basic salary with a higher bonus element geared to success; (c) contracts for older players will extended at a lower salary; (d) expensive, fringe players will be offloaded when possible, e.g. Sulley Muntari; (e) high earners like Eto’o, Mancini and Suazo will be allowed to leave; (f) and replaced with younger, cheaper players.

This all sounds very logical, though some strange decisions have still been taken, such as the recent contract extension for Lucio, who has been a great player, but whose best days are clearly behind him.

Using the salaries published in La Gazzetta, the impact of new signings in 2011 is estimated to increase the wage bill by €22 million. Note that Pazzini, Ranocchia and Nagatomo were all recruited in January 2011, so the cost impact for 2011/12 is only six months.

"Ricky, don't lose that number"

For the departures, I have taken the net salaries from La Gazzetta and uplifted them by 50% to calculate the gross cost with the exception of Eto’o whose cost has been widely reported as €20 million. That produces savings of €39 million in 2011/12.

Similarly, the net impact of loan deals (Zarate and Poli in, Pandev and Mariga out) is a €1 million saving.

In total, the wage bill should come down by €18 million – though there will obviously also be the impact of Primavera moves, any new contracts and bonus payments.

There is talk of slashing the wage bill to around €120 million, but that is a long way off.

6. Player Amortisation

Although the 2011 signings have relatively low salaries, they also increase the costs via the amortisation of their transfer fees, which I have estimated as €18 million per annum, though the impact in 2011/12 will be only €14 million, due to some costs being booked last year for players purchased in January.

The €12 million forecast reduction in amortisation should be fairly accurate, as these figures are taken directly from Inter’s accounts. There is no improvement shown for some departures, as the players were either home-grown (so no amortisation) or have been fully amortised in the accounts, e.g. Marco Materazzi.

The net impact is a small increase of €2 million, though I would expect Inter’s frugal policy in the transfer market to eventually bear fruit, leading to a sizeable reduction in a few years.

Adding up all of the factors above (1 to 6) would produce a 2011/12 loss of €88 million for Inter, though this falls to €72 million once the FFP adjustments are excluded. Little wonder that Moratti warned, “We are not yet able to balance the books. I don’t know how Italian clubs will play in the Champions League in future, if UEFA’s fair play is confirmed.”

Looking at the projected figures, his recent pessimism is perfectly understandable, but there is a clause in the small print of the FFP regulations (Annex XI) that states that clubs will not be sanctioned in the first two monitoring periods, so long as: (a) the club is reporting a positive trend in the annual break-even results; and (b) the aggregate break-even deficit is only due to the 2011/12 deficit, which in turn is due to player contracts undertaken prior to 1 June 2010.

In other words, Inter would be allowed to exceed the “acceptable deviation” of €45 million by the costs of pre-June 2010 signings, so long as the 2011/12 deficit was only due to this factor.

Assuming that this clause refers purely to wages (and does not include player amortisation), I have calculated this exclusion for “big name” players to be €66 million. Note that players whose contracts have been extended since 1 June 2010 are not counted (as explicitly noted in the regulations), so I have not included Milito, Zanetti, Sneijder and Lucio.

This would reduce the FFP result for the break-even calculation to just €6 million, which I am sure UEFA would look on favourably.

So it seems that Inter’s old boys might have saved them once again. Although this is a temporary factor, it does at least buy Inter more time to get their house in order, though, as we have seen, that effectively means more work (a lot more work) on the wage bill.

Of course, the greatest threat to Inter’s bottom line next year is if they fail to qualify for the Champions League (for the first time in 10 years). Given their awful start, that is no longer a formality, especially as Italy now only has three places following the loss of one to Germany this season, though it should be remembered that their form in the second half of last season was superlative and they should be helped by the return of some of their stars from injury.

"King Money"

Some have suggested that UEFA would never apply the ultimate sanction of throwing a leading club out of their competitions, but Moratti is not so sure, “I do believe they will go ahead with it, so you can’t pretend it’s not happening.” His view are supported by UEFA’s General Secretary, Gianni Infantino, “We will apply these rules strictly in order to safeguard the future of our game.”

In the meantime, Inter are pushing ahead with their plans, including a focus on youth, not just in terms of buying less experienced players, but also their own academy. Even if their youngsters do not progress to the first team, they can be sold profitably or used as makeweights in deals, as Biabiany was when buying Pazzini from Sampdoria.

From the perspective of FFP, it would make little sense for Moratti to step aside, as benefactors are no longer allowed to support losses by putting in money. That said, it is possible that a Sheikh or Russian billionaire might be better placed to secure “friendly” sponsorship deals, as Manchester City have done with Etihad.

For the time being, it looks like Inter will have to continue on their path of austerity, echoing the philosophy of the new Italian government. In truth, they are caught between a rock and a hard place, as they need to rapidly cut costs, but at the same time their squad is in urgent need of rejuvenation. It’s a tricky problem, but they somehow need to resolve it if they wish to once again compete at the highest levels.

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