A tale of two teams: financial fair play and the English Premier League landscape
English football's big winners show UEFA sense of fair play is misguided
The date is December 19, 2012.
Arsenal proudly announce that they have tied five young British players down to long-term contracts with the manager Arsene Wenger pledging to build a team around Jack Wilshere, Alex Oxlade-Chamberlain, Aaron Ramsey, Kieran Gibbs and Carl Jenkinson.
It is now 13 years since Arsenal won the English Premier League (EPL) title and even the brand new stadium built during this period cannot compensate for the absence of serious silverware. Oxlade-Chamberlain and Gibbs were both sold this summer while Jenkinson is out on loan and Wilshere looks set to leave on a free transfer when the aforementioned contract expires next year.
Wenger’s gamble on youth did not pay dividends - but to understand why the strategy backfired so badly one needs to put the club’s actions in the context of the Financial Fair Play (FFP) regulations. In 2012 this UEFA initiative had just been implemented and was supposed to rein in the excesses of Arsenal’s big spending rivals such as Chelsea, Manchester United and Manchester City.
That 2012 pre-season Chelsea spent the best part of £80 million (Dh388.1m) bringing in a batch of new players that included Eden Hazard, Oscar, Victor Moses and Cezar Azpilicueta. At the time it seemed like a lot of money but, in today’s market, Hazard alone could conceivably be worth at least twice as much.
Arsenal needed funds to finance the new stadium the club built but they also devised a transfer strategy on the basis that their rivals would eventually be handicapped by FFP. The club believed that eschewing a recruitment policy based on excessive spending in favour of a more frugal approach would pay dividends once the new regulations started to have an effect.
Arsenal are currently 11th in the Premier League after losing two of the first four matches this season. There have been demonstrations against both the manager and owner, the American Stan Kroenke, and the sense of anger and disappointment among a set of supporters with a particularly strong online presence is palpable.
Akhil Vyas sits on the board of the Arsenal Supporters Trust. He feels that the perceived failure of FFP has been a key factor behind the demise of a club that dominated the English game during the turn of the century,
“I think FFP was a dream for the club, it was everything they believed in and wanted. The club do feel very let down and I don't blame them. The rules haven't been enforced and that, of course, is a frustration to fans as well as the club. I think the club have accepted FFP hasn't worked and now do need to move on.”
The FFP regulations were implemented to prevent teams spending more than they earned in the pursuit of success. During an era in which former champions the Italian side Parma and Scottish team Glasgow Rangers were led into bankruptcy or administration, the new rules were supposed to ensure clubs could no longer get into the type of financial problems that would threaten their long-term financial survival.
Last summer EPL clubs collectively spent a record £1.4 billion on players. The biggest spenders were Manchester City who splashed out £220.5m while Chelsea had a total outlay of £187.5m and Manchester United and Everton invested £146m and £145m, respectively.
Only five EPL clubs turned a profit in the transfer window - and Arsenal were one of them. Across the channel The French club Paris Saint-Germain (PSG) shattered the world transfer record to buy Neymar for €222m (Dh0975.5m) while it used some creative accounting to sign €160m-rated Kylian Mbappe on a season-long loan deal which will eventually lead to a permanent move.
PSG will be the subject of a UEFA investigation, after registering a €343m loss in their pre-season transfer dealings. But there are currently no plans to do the same with Manchester United or Manchester City, who made losses of €176m and €173m, respectively.
However, as the global accountancy KPMG points out in its 2016 report titled Football clubs' valuation: The European Elite, the football business model is unlike those of other sectors.
"Although UEFA Club Licensing and Financial Fair Play regulations have forced major football clubs to maintain a certain degree of financial sustainability, clubs traditionally aim to gain prestige and success rather than to make a financial profit," it says.
"The need to obtain on-pitch success is strongly driven by short-term pressure placed by fans, sponsors and media. Football clubs that are successful on-pitch are capable of generating fans, media and sponsors' engagement."
A peculiarity of football clubs, in comparison to companies operating in other industries, it says, "is the lower correlation between direct investment in the club (ie input) and sporting success (ie output)".
To understand the value of a club, KPMG uses a mechanism that employs a range of values. The enterprise value (EV) of a company is calculated as the sum of the market value of the owners’ equity, plus total debt, less cash and cash equivalents. It indicates what the business is worth regardless of the capital structure used to finance its operations.
"EV is a capital structure-neutral metric which allows to compare companies (in our case football clubs) with different debt and equity structures," KPMG says. Such It adds that peculiarities "make the valuation of a football club particularly challenging".
Under KPMG's system, Real Madrid and Manchester United tied for first place in its EV range, from €2.84bn to €2.99bn. Arsenal came in fifth, between €1.59bn and €1.73bn while Manchester City were sixth with an EV range between €1.53bn and €1.71bn for 2016.
Arsenal fans might feel FFP has been a failure but the regulations have, in many respects, been nullified by an unprecedented influx of cash into the English game. In 2012 the EPL was in the middle of a three-year cycle in which global broadcasting rights were worth £1.8bn, with much of this money making its way into the hands of the teams.
The current three-year cycle, which came into effect last year, is worth a staggering £5.1bn. It means clubs such as Manchester United can operate at a huge loss in the transfer market without fear of FFP-related repercussions, because their overall revenue has increased exponentially.
When the Abu Dhabi United Group purchased Manchester City in 2008 the spending was seen as huge. Robinho was immediately signed for £32.5m while the transfer activity became even more frenetic the following summer with Emmanuel Adebayor costing £26m and Carlos Tevez arriving in a deal rumoured to have cost the club £47m.
In the wake of the latest transfer window that saw Liverpool laugh off a £130m approach from Barcelona for Phillip Coutinho these figures seem almost quaint. In hindsight the new Manchester City owners were very astute in realising that investing in the best players in the market would translate into success of both a footballing and a financial nature.
City have won the league title and League Cup twice and the FA Cup once since the Abu Dhabi outfit purchased a controlling stake from Thaksin Shinawatra. It is testament to the extent of the owner’s ambitions that they are disappointed with this trophy haul, having parted company with several managers as a result.
But for City supporters this represents a level of success that would have seemed completely unobtainable when the side was playing in the third tier of English football. As a result Lloyd Scragg, who runs www.mcfcwatch.com, has no qualms about seeing the club in the stewardship of a Middle East consortium,
“As long as the fabric of the football club is the same, which it is, then I don’t see a problem. In fact, the ownership have actually done a great deal to help reinforce this by building the magnificent academy/training facilities and helping develop east Manchester [housing and community facilities]. Football is a fickle game after all so it’s very difficult to argue with the club’s recent success.”
At Arsenal "change" is the watchword for supporters growing increasingly antagonistic over what they perceive to be a lack of ambition. Mr Vyas is nowhere near as vocal as many of the critics but he is not exactly enthusiastic about the club’s current direction.
“We finished fifth last season and our best two players look set to leave on free transfers next summer. So I don't think anyone will be happy with the way the club is run,” he says.
Mr Kroenke has a 67 per cent majority stake in Arsenal which is valued at US$1.34 billion but he has been accused of being over frugal after repeatedly ignoring calls to make a statement of intent in the transfer market and match the ambitious investments of EPL rivals.
Unfortunately for Arsenal, football clubs are judged according to their trophy cabinets not their balance sheets. There is no indication that FFP will alter the transfer landscape in anything like the manner Wenger had anticipated and the venerable manager said as much in a recent interview: “Do I want to get rid of Financial Fair Play? I think so because there are too many legal ways to get around it.”
But KPMG points out that clubs can and do succeed without investing mega sums, albeit rarely. "The success of in 2016/16 of Leicester City FC in the Premier League is an excellent example of this and proof that - fortunately - sporting success cannot be always bought," it says.
In some respects it is football’s financial success that has rendered FFP surplus to requirements. The £149.4m in prize money that Manchester City received from the EPL last year was enough to finance the manager Pep Guardiola’s entire expenditure on new players without any concerns about complying with the new regulations.
City’s ambitious expansion was based on lavish spending but it has brought them two EPL titles and a place among the European elite.
Arsenal’s strategy of investing in young local talent while waiting for the FFP regulations to come into effect has backfired badly and left the club languishing behind their big spending rivals. Something of an own goal, really.