David Owen: How transfer spending is turbocharging European club profits

A new UEFA club benchmarking report has landed, studded with new illustrations of the still widening chasm between the wealthiest members of the European – and world – financial club football elite and the rest of the continent’s more than 700 top-flight teams.

  • The top 12 clubs’ share of overall sponsorship and commercial revenues has risen from 22% to 39% in a decade.
  • While those 12 clubs have added €1.6 billion in new sponsorship and commercial revenues, the other 700 European top-division clubs have added less than €1 billion.
  • The total domestic TV revenue of all 400 clubs outside the top 20 leagues (the report covers 54 leagues in all) is less than half of that of a single average Premier League club.
  • Only three non-English giants – Barcelona, Real Madrid and Juventus – received more TV money in 2017 than the 20thPremier League club.
  • Also in 2017, just 20 clubs generated 49% of all top-division gate receipts.
  • Oh and the three most expensive squads in 2017 – those assembled by the two big Manchester clubs and Real Madrid – cost 40-50% more than the fourth most expensive.

I could go on. No wonder UEFA President Aleksander Čeferin acknowledges in his foreword to the data-packed 118-page report, “Football will never be equal”.

The European football body nonetheless appears happy enough with the patterns delineated in its magnum opus. “European clubs’ current wage-to-revenue ratio of 61.3% is the lowest on record,” it says. “Clubs’ net equity quadrupled from €1.8 billion in 2008 to €7.7 billion in 2017.” “Losses have been cut every year since the introduction of financial fair play (FFP), with top-division clubs now reporting a combined profit of more than €600 million.”

At the same time, if, as UEFA has calculated, 28 leagues reported aggregate profits in 2017, that means that nearly as many – 26 – did not. Moreover, a single competition – yes, the Premier League, chipped in €549 million of bottom-line profit. The exact continent-wide figure was €615 million.

This was the first bottom-line profit recorded since UEFA began systematic benchmarking in this way. “Bottom-line result has improved by almost €2.3 billion since introduction of FFP,” it proclaims.

However, while 2017-18 Premier League profits will again be substantial, there seems a good chance, especially if sterling continues to depreciate, that the stellar financial performance of the top English clubs in 2016-17 will stand as the high water-mark for the foreseeable future. That suggests in turn either that fiscal 2017 will emerge as a peak year not just for England but for Europe as a whole, or that profitability in future years will be better spread around the continent. It will be interesting to see which of these alternatives ultimately applies.

I dealt at length with the gargantuan inequalities of European football, and the built-in advantage enjoyed by clubs which happen to be based in one of the five big national TV markets, last year: http://www.insideworldfootball.com/2018/01/19/david-owen-european-football-cash-magnet-pyramids-base-starting-erode/ .

This time, I thought it would be interesting to look at the link between spiralling transfer spending and improving bottom-line profitability.

In one of the most striking statistics in the entire report, it is estimated that transfer activity doubled between 2014-15 and 2017-18.

You might surmise that this was incompatible with the improved bottom-line profitability we have been witnessing. After all, while many of these deals would have involved both a buyer and a seller whose performance falls within the scope of the report, some of them would have involved the payment of money to clubs from lower divisions or in other continents.

In fact, the mercato is a powerful, indeed an increasingly potent, driver of bottom-line profitability, even for the giant, so-called “buying” clubs. This is because of the asymmetrical way in which transfer dealings are handled in club accounts. UEFA describes this diplomatically as “somewhat counterintuitive”.

If I tell you that it is theoretically possible for a club to sign five players for €20 million each, €100 million in total, offload one, also for €20 million, and yet register an impact of approximately zero on net profit, you may begin to appreciate what I mean.

The above example makes two assumptions: 1. that the five incoming players are given five-year contracts; 2. that the outgoing player is “home-grown” and is hence assigned a book value in the accounts of zero.

When they buy players – or, in accountant-speak, “intangible assets” – clubs are allowed to spread – “amortise” – the cost over the length of those players’ contracts. In this case, €100 million of spending would equate in the profit and loss account to €20 million of cost in each of the next five years.

When they sell players, by contrast, clubs can take account of any profit immediately. So with no value ascribed to our notional offloaded player in the accounts, his €20 million fee can go direct to net profit.

In the year of these six imaginary deals therefore, while the club would be €80 million out of pocket, the net impact on the bottom-line would be around zero.

To return to the real world, in that record year of 2016-17, the 20 Premier League clubs reported an aggregate profit on player sales of something like £560 million. Indeed, you might argue that the record bottom-line profit they ratcheted up was almost entirely due to transfers. Yet the net cash impact of their transfer activity appears to have been an aggregate spend of approximately £753 million.

The potential boost to profits is greatest at times, as has been the case in recent years, when strong top-line growth and moderate wage increases have left top clubs with plenty to spend, resulting in inflation carrying the market value of most players beyond their nominal book value.

In another particularly striking statistic, the UEFA report notes that “while the total value of players on clubs’ balance-sheets is €8.5 billion, the total transfer fees paid to assemble those squads stood at €16.1 billion at the end of the 2017 financial year”.

Or, still more tellingly, “the players sold in the 2017 financial year had a combined transfer fee of €4.3 billion, but were valued at just €1.1 billion at the time of their sale”. All else being equal then, those deals should have resulted in some €3.2 billion being added in to the selling clubs’ bottom-line profits.

If I might make one suggestion for improving what is already a mammoth undertaking, it would be for UEFA to start including analysis of the cash flow of the 700 top-tier clubs.

I am also curious as to whether the UEFA competition revenues that are said to account for more than 50% of club revenues in “many less wealthy leagues”, are distributed with a relatively even hand, or whether on the contrary these funds are concentrated in the hands of a small number of clubs to the detriment of national competitive balance.

David Owen worked for 20 years for the Financial Times in the United States, Canada, France and the UK. He ended his FT career as sports editor after the 2006 World Cup and is now freelancing, including covering the 2008 Beijing Olympics, the 2010 World Cup and London 2012. Owen’s Twitter feed can be accessed at www.twitter.com/dodo938. He can be contacted at moc.l1603540248labto1603540248ofdlr1603540248owedi1603540248sni@n1603540248ewo.d1603540248ivad1603540248