David Kuo talks to Alan Switzer from Deloitte.
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David:
This is MoneyTalk, the weekly investing podcast from the Motley Fool. I'm David Kuo, and there was a time when the only sheets that football clubs were interested in was score sheets, but these days clean balance sheets are just as important as clean score sheets. So here to help me look at whether football clubs have scored a financial own goal in football, we have Alan Switzer, Director in the Sports Business Group from Deloitte, who is also co-author of Deloitte's Money League. Welcome to the Motley Fool, Alan.
Alan:
Thank you.
David:
And welcome, of course, to Money Talk. Now Alan, you are a Liverpool supporter, I've done some research on you, you are a Liverpool supporter.
Alan:
I am, I am guilty.
David:
Nothing to be embarrassed about, but it hasn't been a great season for you on the football pitch, but according to your latest Money League report, the Football League report, Liverpool has been promoted one position from eighth to seventh position?
Alan:
Yes.
David:
So that must please you, yes?
Alan:
It does please me, I mean effectively what we're looking at here is our Money League, which is the 20 biggest football clubs in the world, judged by revenue, and as you say, Liverpool have moved up to seventh from eighth the previous year, great to move up that, I would prefer a bit more on pitch success, sacrifice some financial success, but there you go.
David:
But it must pain you every time you go and watch Liverpool play, and just sort of wonder, exactly what financial position the club is in? On the one hand, you're interested in the club winning its games, but on the other hand, you must be thinking, how many people are here in the stadium, how much revenue are they generating?
Alan:
That is one of the quirks of working in the sports business, when you go to sporting events, particularly football's, you're thinking about not just a sporting occasion, but also your mind does wander sometimes into the financial aspects of what's playing out in front of you as well.
David:
So anyway, how does the Deloitte Money League work? How do you do the calculations on this?
Alan:
We look at the revenue generation of the European clubs, and the reason we look at revenue is because it is the most comparable, it's the most readily accessible, and actually ultimately, if a club generates the most revenue, what it chooses to do with that revenue is in its own control effectively, so we consider it the best measure, we do sometimes get challenged as to, well you haven't considered the debt levels, you haven't considered the profits, but that's harder to compare, so therefore we focus on revenue as a starting point, but you must look at other circumstances as well.
David:
But is revenue really the right thing to look at? – because if you think about it, the revenues generated in Barcelona, for instance, are in euros, whereas the revenue generated in the UK is in pounds, and we know that the pound at the moment is almost being flushed down the toilet, so consequently the pound that you're getting for people going to watch games here in the UK is not really quite the same as the euro that Barcelona generates?
Alan:
There is the forex complication, if you like, and interesting you talk about the demise of sterling, because that is the reason that Man United are not number one in the Money League, if the exchange rate had stayed the same as say two years ago, then Man United would be number one, Real Madrid would be number two.
David:
Right, so where are the main sources of revenues from these clubs? What do they generate in terms of revenue?
Alan:
We look at revenue in three broad streams: broadcasting revenue, match day revenue and commercial revenue, so that's sponsorship and advertising and merchandising and all the rest of the catch alls, commercial revenues. The balance of those will vary between country and between club.
David:
But you don't consider, for instance, revenue generated from the sale of players?
Alan:
We don't actually, no, that is because again that generally tends to be reinvested back in the players, and it's prone to wild swings in terms of profit and losses as well, so for instance, if you use the Manchester United example in the season just passed, the £80 million they reportedly made from Ronaldo would wildly distort their numbers, so we look at their core underlying revenue generation, match day, broadcast, commercial.
David:
Right, can we have a look now at football club business models, I mean some people might unkindly say that they don't have a business model – would you go along with that?
Alan:
I think they have a business model, the business model is sometimes somewhat different from other businesses, if you like. A couple of reasons for that, I suppose – the motives for owning a football club are not always about profit maximisation, there's a mixture of sometimes yes, wanting a financial return, balanced against the passion of having a football club, there's only so many of the major football clubs, brands in the world, own one of those, it's pretty prestigious, very exciting, so there's that element as well; you do get the real fans of clubs owning football clubs as well, so there's that kind of hearts and minds element as well. So it really is a mixture of the different factors, which is different from many other businesses.
David:
You just said that there's a limited number of brands out there, but I mean is that necessarily true? – because you could buy yourself a fourth division club, pump a lot of money into it, and watch it ascend up the League – isn't that what people were trying to do with Notts County, for instance, where they said, here's this football club that's not doing particularly well, it once had a very good brand, it's in the Midlands, so let's go and do something with it, and they try and turn it around.
Alan:
It was the intention, it didn't work out very well.
David:
No, it didn't, did it!
Alan:
It didn't, but it has been successful in the past, probably going back a while now, but obviously Blackburn, under Jack Walker, was a lower League club, invested quite significantly in it, went up into the Premier League, and won the Premier League ultimately, so it can happen, but even then, even if you do get to the top league, you can't create the history of the prestigious club like a Manchester United or a Liverpool or even a Chelsea.
David:
What do you mean, "even a Chelsea"?
Alan:
I know your loyalties.
David:
No, the thing is, I mean Chelsea is quite an interesting point, because when you look at Chelsea, prior to Roman Abramovich coming in and buying the club, it was on the verge of collapse, it was on the verge of bankruptcy, and thankfully somebody came along and bought it, but isn't that what most football owners, or most potential football owners, are thinking about when they come in, they think, I can do something with this club, I can do something really great with it, and see it ascend up the Money League?
Alan:
I think very few owners come into the club and think, I'm going to buy this, and I'll quite happily bump along in the Championship or mid table in the Premier League, they generally have aspirations above the current performance, and I think that's fine, as long as the business plan is set up so that it doesn't expose the club to risks if they then depart, then that's absolutely fine.
David:
Do they have an exit strategy, most of these potential owners?
Alan:
Again, I think it's a mixture in terms of the duration they want to be involved, some would be much more short term, but even then it generally tends to be at least the three, four, five year horizon before they would think of selling, and of course some owners have no intention of selling at all, it's all about owning their club and building that club. Maybe, a long way down the line, they might pass it on to someone else who'll look after the club, but apart from that they won't.
David:
So can we have a look at the recession now? I mean, in your opinion has the recession had any discernable effect on football clubs?
Alan:
It has had an effect, we said that football would be recession-resilient, not recession-proof. The reason for that was, you've got a huge swathe of passionate fans for which football is absolutely one of the most important things in their lives, often, so in terms of the match day revenues, yes, there's some sensitivity to prices, and we've seen that clubs have generally held prices, or even reduced prices.
Broadcasting revenues generally are longer term and in place, and again your Sky subscription, for instance, is one of the last things you'd give up, and actually it's interesting, in the recession, Sky subscriptions have actually gone up, and the commercial side, certainly the biggest clubs, the blue chip companies still want to be associated with those football clubs. Where we have seen some effect is the smaller football clubs who may be struggling on the commercial side, and the corporate hospitality has struggled across the board, because again it's harder to justify entertaining your staff and your clients in such tough times.
David:
I haven't received an invitation for a long time to go to any football games.
Alan:
You and me both.
David:
Now, the thing is, you just mentioned about football fans being fairly hardened as far as the recession is concerned, in other words they will try and find money to go and watch a football game, and at the same time the football clubs are holding down prices as best as they can, but one group of people are not holding down their wage demands, are they? – these are the football players themselves, they are asking for more and more money. I saw one report that came out that said Wayne Rooney may need a weekly salary of £200,000 to keep him at Manchester United, otherwise he could hot foot himself over to Spain. Isn't that a big danger, that so much of a club's revenue is being spent on players?
Alan:
It's natural that a large percentage of the revenue will be spent on the players, because they ultimately, they're what's drawing the fans in, they're what's drawing the sponsors, they're what's driving the viewing figures.
David:
But £200,000 a week?
Alan:
But there is a but, which is it's all about having the right balance between your revenues and your wages, about having flexibility in there, about making it performance-dependent, I think it's fair to say that what we're seeing is a greater difference between what the absolute star players, and Rooney is clearly one of those players, can earn, and say your more average squad, or even first team player, who doesn't have the same ability, and I think we're seeing wage inflation on that level has definitely dampened, but actually for the top stars, then they still command what they want really.
David:
But isn't the big danger there that Wayne Rooney says, I might be worth £200,000, then Didier Drogba comes along and says, you know, if Wayne Rooney's getting £200,000, and he scores 40 goals this season, I scored 41 – shouldn't I be getting £200,000 as well? And if Fernando Torres will say, I deserve that also, and suddenly you get this wage inflation coming back into the game again?
Alan:
That is a risk, and that does happen, it happens at clubs, within clubs, it happens, players comparing each other. I would say that there is still probably a relatively small number of players who can do that, who are so valuable that actually they have that bargaining power. Once you then start going down to the squad player, and even the first team player, then I think the balance of power is much more towards the club.
David:
Do you know roughly what percentage of revenues are paid out in wages?
Alan:
If we look at the Premier League, then for the season 2007/08, it was about 63%, which would be total wages, so that would be players and your coaches and your admin staff and your marketing staff and all that as well. We will see, when we release the Annual Review of Football Finance in a couple of months, we'll see how that's moved in the year just passed, but I would expect it to have stayed about the same.
David:
So you say average, about 60 odd percent, so there are some clubs that are paying a higher proportion of their revenues as wages then?
Alan:
There are, and it tends to be, once you start getting north of 70, 80%, then that is very challenging for clubs to maintain. It's interesting, and not unrelated obviously, that at one point Portsmouth had a wages ratio of 100%.
David:
Now the thing is, can you think of any other business that pays such a high proportion of revenues to its staff?
Alan:
Well, it's right up there with some of the financial institutions, whether that be investments banks, and I suppose the movie business would be another one, where it's really where you've got a relatively small number of particularly talented, in an area, players, or staff that can really drive the revenue of the business, and hence can command such significant wages.
David:
But isn't the big difference between say an investment bank and a football club that in an investment bank, the wages are in some ways deserved, because these people are generating profits – if they don't generate a profit, they don't get the annual bonus at the end, but in the case of a footballer, right, you buy yourself a striker, somebody like Shevchenko, and he comes in, and he doesn't score any goals at all, and he still demands a wage bill of about £100,000?
Alan:
Well, putting aside the whole debate about investment bankers, and whether they surely do deserve what they earn, that's another debate, I think it's fair to say that we would like to see more performance-dependent pay for players, which is about performance, because you're right, there are lots of documented cases where players may not have performed, or sometimes not even motivated, and actually once you're at that sort of basic wage, there's very little the clubs can do, so absolutely, more performance-dependent pay, and the ambitious and the best players should be fine with that, because they're looking at winning things, rather than just picking up a pay cheque.
David:
But if you, for instance, get a club that's paying such a high proportion of the revenue as wages, where are they going to find the extra money to re-invest in the club itself?
Alan:
It's been a mixture, some clubs have been re-investing some of their operating profits, if you like. It tends to be, they have gone to the debt markets for their owners as well, if they're investing in new stadia or training facilities, or sometimes even players, so it is a balance, but I mean, like many businesses they often, where they're investing significantly in their business, then they do have to go to debt markets to get some external finance.
David:
So subsequently they're paying a huge amount of interest on the debts that they're borrowing in the first place? – a bit like Manchester United?
Alan:
And that does have a price, which is interest, absolutely, which is why you really should be, if you're going to significantly increase your debt, you would like to think that that was being used to increase ultimately the earning potential of the club, whether that's through stadia development, or even investment into the youth academy, or whatever, but where clubs have struggled in the past, I think, and Leeds United is the classic example, is where you borrow long-term and spend short-term, then that is a recipe for trouble, if the results don't go your way on the pitch.
David:
So one solution to the problem of high wages may be to have a wage cap – what are your feelings about having a wage cap?
Alan:
The thing is, it won't work in Europe, it won't work certainly in England if it's introduced on its own, it probably won't work as a fixed cap, full stop, because it's probably illegal. Maybe we might see, at some point, some sort of cap which is related to a percentage of turnover, but even then there's lots of things that would need to be worked through there, so it's not something I see happening in the near future, but it's something that you couldn't rule out in the longer term.
David:
But for a club like Portsmouth, for instance, they would have been delighted, had there been some kind of wage cap – it would have meant them not going into administration, but the point about a football club going into administration is, are you surprised that a Premiership club like Portsmouth has gone into administration?
Alan:
Portsmouth's an interesting case, they've been in the Premier League for seven years, they have won the FA Cup, they've been in Europe, they've generally been performing pretty well, there is no reason that Portsmouth should have gone into administration, it is down to poor cost management, and therefore ultimately it has to be down to poor management as well. So it's tough, because the Portsmouth fans deserve better, but hopefully, the next donor that invests in the club will have a more robust and sound business plan.
David:
But if you were a Portsmouth fan, I know you're a Liverpool fan, but if you were a Portsmouth fan, wouldn't you want your club to continue to pour money into the club, so that your club could turn up at Wembley and play in the FA Cup final, or play in the Carling Cup final, or be one of the clubs in contention for Europe? You want your club to continue to pump money in there, don't you?
Alan:
It's a trade off, you're right, fans do want to see their team invested in. However, if you were to ask them, what would you rather have had? – pumping all that money into the squad, and you're risking your long-term security; if you could go back now, would you not have entered into some of those contracts, does that give you security, your club would be there next season, I'm sure you'll find that that most of them would say, yes, we would have sacrificed a bit of success for some long-term security. So it's a balance, absolutely.
David:
I know you must have trawled through the whole of the Premiership, and also through many of the clubs in Europe itself. Can you foresee another club facing financial problems of the scale that Portsmouth is in at the moment?
Alan:
There shouldn't be another Premier League club going into administration, because of the record revenues in the Premier League, the new broadcasting deals, the overseas broadcasting deals, which have been concluded, have very significant increases, from £700 million to £1.2 billion, just to show the global appeal of the Premier League. So there is no reason, with proper management, good management, balance of cost and revenues, that any Premier League club should go into administration.
Not to say it might not happen, you never know, but it shouldn't. If we look further down the football pyramid, then we've had on average probably two to three, maybe even four, Football League clubs going into administration each season in the last five years, and we would certainly see that, probably that ratio, if you like, might well continue, and that tends to be sometimes due to legacy debts, and basically clubs struggling to get over those legacy debts.
David:
Now, you mentioned broadcasting revenues there, and some people will say that it doesn't seem entirely fair that here in the UK we have collective bargaining as far as broadcasting is concerned, whereas over in Spain clubs like Real Madrid and Barcelona negotiate on their own behalf?
Alan:
Yep.
David:
So aren't they actually in a better position than UK Premiership clubs?
Alan:
In terms of Real Madrid and Barcelona, then yes, they are in a better position than the top English clubs, because they get more revenue than the top English clubs from broadcasting. However, that comes with a price, in terms of the rest of the Spanish clubs get significantly less, so it really does affect the competitiveness of the Spanish sides.
David:
Do they care?
Alan:
Yes, they care, because they struggle to compete with Real Madrid and Barcelona, so in our view, we think that collective selling is the best way of looking after the League and looking after the long-term prosperity of the League, and interestingly, in Serie A in Italy, we have been selling individually for a long number of years, they are moving back to collective selling, so the top clubs' revenue will almost certainly go down, but the total revenue from broadcasting is likely to go up, so there's going to be a painful adjustment for those top clubs, but it is the right thing to do for the prosperity of the Italian League.
David:
Can you see the possibility of consolidation within the Premiership? – and by consolidation I mean two clubs joining together to form one, so your beloved Liverpool joining forces with Everton, if the two of you were in some kind of financial problems? And an obvious one would be Southampton and Portsmouth joining forces together and say, look, here we are, two tiny clubs, not doing particularly well, why don't we just join together and call ourselves Southmouth, or whatever; or Chelsea and Fulham joining up and forming a new club called Chelham – can you see that happening in football?
Alan:
No, it's just not going to happen.
David:
It has happened in the past though, hasn't it? I mean, in the case of Paris St Germain, that was the formation of two clubs, there was Paris FC and also Stade Saint-Germain that were formed together to form Paris St Germain. People there seem quite happy, don't they?
Alan:
Well, they've got a good club there, it's almost impossible to see that happening in England, just the history's too much, you can imagine the uproar if it was even suggested. So if you look at ...
David:
What about ground sharing then?
Alan:
I was going to say, if you just look how much debate there is over ground sharing, I mean Liverpool and Everton being the classic example there. So if it's that difficult to even get the clubs to consider sharing a stadium, imagine what it would be like to try and get the clubs to merge.
David:
But the thing is, when you think about it, the stadium is only used one or two days a week, isn't it? – which means that there are five other days when the stadium is not being used. Wouldn't it make sense for two clubs to join forces, and say, as in the case of Inter Milan and AC Milan – right, you play one day, I play another day – it seems to work perfectly well for two big Milan clubs?
Alan:
There's absolutely some sense in it, if you're building a new stadium, and people do look at that. I would say that the Inter Milan and AC Milan is not always quite as rosy, the picture's not quite as rosy as people would believe, and I'm sure they would like to have their own stadia and are looking at doing developments themselves. But it's definitely something that clubs should look at, and in terms of using the stadium, you're right, at the minute it's a home game every couple of weeks, or a bit less than that.
Clubs are really looking to try and use facilities day-in, day-out, through the conference and banqueting and whatever else, and for instance Emirates is a very busy stadium, and generates a lot of revenue, and on match day as well. So it can have revenue generation outside match days, but in the scheme of things it's relatively small.
David:
So really, is the future for football clubs to try and build bigger and bigger stadiums, so that they can utilise that for other things, or things other than football itself?
Alan:
It's important to build a football stadium which is first and foremost a football stadium, it sounds obvious, but it's true. Then if you can build in facilities which are right for that market, which are non-football related, then absolutely that's the right thing to do. In terms of the size of the stadium, we're always advising our clients, it's always very important to do your market research, to understand the size of the market you're going for, whether that's your general fans, or quite often importantly your corporate fans, because sometimes an even bigger stadium is not the right answer, because you need to have that competition for the ticket, you need to have a good atmosphere, so it's important to properly do your research before you actually put a spade in the ground.
David:
Now, one other thing, and that is concerning the raising of finance to keep these clubs going, I would have thought that one of the best places for any business to raise finance must be the stock market itself. Now there was a time when there were loads of football clubs peppering the stock market, Manchester United being a good example, Chelsea another one. So can you see clubs going back into the stock market again as a means of raising revenues?
Alan:
I find it difficult to see circumstances where that would happen, just because it wasn't a particularly positive experience from either side last time, from the City and from football clubs themselves. I think the City have realised now that football clubs are not there to make year-on-year profits, that doesn't necessarily sit well with investment, and also in many cases, the football clubs are, in the scheme of things, relatively small compared to other businesses on the stock market, so the economy of scale doesn't quite work for football.
David:
Man U wasn't particularly small, were they?
Alan:
No, it wasn't, and there are a couple of exceptions, absolutely, but generally, the stock market is not something most clubs would go down. Interestingly one or two German clubs might look to do that, just as they change their ownership model, but in the UK I'd be very surprised.
David:
So what about the ones that are there already, like Tottenham Hotspur? Is it likely that they'll just stay in the stock market? – or will they just say, well, let's call it a day and let's bring us back into private hands again?
Alan:
That depends on there being various parties linked to buying Tottenham Hotspur over the last number of years, so it's possible, if one of those to go ahead, that they would be bought private again, but let's see.
David:
So what do you think the future of football is going to be then? Are you positive?
Alan:
Yeah, we're positive, I mean the fundamentals are strong in terms of revenue generation. The key challenge, which everybody's aware of, is just realigning the cost base with the revenues.
David:
That's easier said than done, isn't it?
Alan:
It is easier said than done, but it can be done, for instance, player contracts are generally three, four years long, so that means every year about a third of your contracts are expiring, you have the opportunity to renegotiate those, sign new players at lower wages, whatever, so there is the flexibility there, it won't be easy, but we are positive. Ultimately it is still generating more revenue than it ever has, and we continue to see revenue growth.
David:
Right, two more questions for you: the first one is, can Gerrard and Lampard play together?
Alan:
Er, no! – certainly not at Chelsea.
David:
And the second question is, will England win the World Cup?
Alan:
I fear another semi-final/quarter-final disappointment, but we shall see.
David:
A penalty shoot out that we miss.
Alan:
With probably sudden death penalty shoot outs, yes.
David:
And John Terry missing it.
Alan:
The script is probably written, isn't it?
David:
Well thank you very much for coming in today Alan, and the best of luck to you and Liverpool.
Alan:
OK, thank you very much.
David:
For the rest of the season. Now, I end each podcast with a quote, and I try and find a quote that I think sums up the podcast, and today's quote comes up from Kevin Keegan, who said: "I know what is around the corner, I just don't know where the corner is" – one of Kevin's better ones.
Now, this has been Money Talk, I have been David Kuo, and my guest has been Alan Switzer of Deloitte. If you have a comment about today's show, you can post it on the Money Talk blog, which you can find at www.fool.co.uk/podcast. If you have a suggestion for future shows, you can email me at moneytalk@fool.co.uk. Until next week Alan, have a great week.
Alan:
Thank you.
David:
Come on, you Blues!
