The art of spending big and not making money

NAKED EYE

Over hyped EPL is a money losing exercise

It was a prank, but at the same time so apt. It summed up thesituation in the over hyped and high priced world of professionalEnglish football. Itis well documented that the situation at Portsmouth Football has beendire for some time. Finally it found a new buyer in Nepalese bornbusinessman Balram Chainrai. But wait, he only bought the club to hawkit to another owner. But things got comical when the club was put upfor sale on eBay. That is when one knew that things had got out ofhand. While the actual listing was a prank, as many as 80 bids came inwith the highest bid of £999,999.00. The auction was listed as“Portsmouth City Football Club Ltd.” on theBritish eBay site. The description says, “New owner desperately wantedfor financially-stricken south-coast football club. Previous andcurrent owner(s) have run this fantastic club into the ground and itis facing an uncertain future. Liars, crooks, asset-strippers and taxcheats are obviously NOT welcome. All bids considered but please get amove on as the electricity is about to be cut off moosh.”
Ha, ha, ha! Chainrai became the fourth owner of the club in a year.The Hong Kong businessman has taken over Ali al-Faraj's 90% stakeafetr the creditor had become frustrated at missed payments by club.The Guardian reported that, "Portsmouth's troubled season took anotherdramatic twist when Balram Chainrai seized control of the club fromAli al-Faraj, making the Hong Kong businessman the fourth owner atFratton Park this season, following Sacha Gaydamak, Sulaiman al-Fahimand Faraj. Chainrai has taken over the 90% shareholding in Portsmouththat was held by Faraj after becoming frustrated that the club hadmissed deadlines to repay money he was due for substantial loans hegave to them earlier this season. Chainrai had loaned at least £17m toFaraj to keep Portsmouth afloat through Portpin, the company he ownswith his Israeli business partner, Levi Kushnir, and their associates.Those loans were secured against the stadium, the club's futuretelevision revenue and Faraj's 90% share. Angered by Portsmouth'sfailure to make repayments on the finance, despite Portpin continuallyextending the deadlines, Chainrai's patience ran out yesterday, and heinstructed his lawyers to act. Under the terms of the loan Faraj's 90%shareholding in Portsmouth was frozen and passes to Chainrai. It isunderstood Faraj may have to instigate court proceedings if he wishesto challenge the move.
"Chainrai had expected to receive a sizeable repayment when thePremier League paid all of its 20 clubs a £7m instalment of televisionrevenue early last month. Portsmouth's, though, was withheld by thegoverning body as the club's dire financial predicament meant they hadbeen unable to pay transfer monies due to English and European clubs.A proportion of these were paid by the league using the televisionmoney. Chainrai travelled to England last month but was unable tosecure the repayments. It is thought that he informed Mark Jacob,Portsmouth's executive director, and Daniel Azougy, who overseePortsmouth in Faraj's continuing absence, of his disquiet then.Speaking to the Guardian Chainrai said: "Portpin have made substantialloans to Portsmouth to try and ensure the club's future. Portpin will[now] continue to work for the best interests of the club." He hopesto appoint two new members to the Portsmouth board today and is intenton stabilising the finances before looking to attract investors."
The irony is that while England plays host to this uber hypedprofessional league, its own national football team remains the pits.Every four years when the Euro Cup or the World Cup comes along,England players resplendant in their club avatars find the going toughat the highest level. England won its lone World Cup in 1966 at home,that too in extra time against Germany 4-2.. Yes, 1966. It reached thesemi finals in 1990 when it lost to Germany on penalties. In theEuropean Cup, it is still more galling; two semi final finishes in1968 and 1996. In the Olympics, it has won twice in 1908 and 1912. So,record busting attendances, gravity defying transfers andgangbuster hoopla notwithstanding, the English Premier League is adead loss. Its business model flawed. Maybe there is a lesson in allthis for the Indian Premier League where franchise owners aresimilarly making losses, despite claims made otherwise. Earlier inJanuary, EPL club Manchester City announced losses of $148M, for thelast financial year, the "second-biggest single-year loss for any clubin the history of English football," according to Sam Wallace of theLondon INDEPENDENT. Manchester City's "staggering losses are more thantwice" the $70.9M annual losses Chelsea announced last month. But thelosses are "still not as big as those" Chelsea disclosed four yearsago, when the club posted a deficit of $223.7M. Wallace notesManchester City's losses "do not even take into account the summer's"$199.6M spent on players, as the club's figures "only run to the endof May last year." Meanwhile, Manchester City Owner Sheikh Mansour binZayed Al Nahyan has converted loans of $487.2M "into equity andinvested another" $143.2M through the purchase of further shares inthe club. Wallace notes it is "thought that Sheikh Mansour hasearmarked around [$1.23B] for the entire investment, taking in theacquisition of the club, player transfer fees and wages.
The Premier League is the most lucrative football league in the world,with total club revenues rising 26% to £1.93 billion ($3.15bn) as of2007–08. Eleven of the twenty Premier League teams made anoperating profit in that year. Wage costs also reached €1.51 billionin 2007/08, considerably higher than that of the next highest-spendingleague, the Italian Serie A (at €972m). Individual salaries arerarely, if ever, confirmed in public, although a survey of players in2006, conducted in conjunction with the Professional Footballers'Association, showed the average basic wage in the Premier League was£676,000 per year, or £13,000 per week, before bonuses.
The Premier League's gross revenue is the fourth highest of any sportsleague worldwide, behind the annual revenues of the three most popularNorth American major sports leagues (the National Football League,Major League Baseball and the National Basketball Association), butahead of the National Hockey League. On a per club basis, the averagerevenues of the 20 Premier League teams are thought to be close thoseof the 30-team NBA. However, there is much greater financial disparityamong Premier League clubs when compared to the members of any of the"Big Four" North American leagues.
Something surely stinks to high heaven. Cost efficiencies are adistant dream for the club owners. Paul Kelso writing the other day inThe Telegraph said that a study of the finances of football clubsacross Europe is ringing alarm bells. Kelso's artiucle is a must read.His hypothesis is even more scary. He argues that half of all Europeanfootball clubs are running at a loss. So, this is not merely a problemin England, but has spread across to the mainland as well. I amreproducing parts of it here: "Half of all European professionalfootball clubs are running at a loss, with more than 20 percentrecording ''huge'' deficits in the past year despite the gamegenerating record revenues. The shocking figures, compiled by Europeanfootball's governing body UEFA and due to be published next month,reveal the full scale of the financial excesses in club footballacross the continent. UEFA's general secretary Gianni Infantino saidthe financial plight of clubs in England and across Europedemonstrated the need for new regulations. UEFA, fearing a spiral ofwage inflation across the continent, is pressing ahead with new rulesrequiring clubs to live within their means rather than relying onwealthy owners or bank debt to underwrite player wages and transferfees.
"The intention is to prevent a repeat of the difficulties being feltat English Premier League clubs Portsmouth and West Ham United, aswell as limit the ability of benefactors such as Sheikh Mansour binZayed al Nahyan at Manchester City to fast-track success withshort-term spending that the clubs could not otherwise sustain. UEFApresident Michel Platini's ''financial fair play'' initiative willrequire clubs competing in European competition to break even or turna profit, relying only on what they earn from football revenues. Clubsrepeatedly making a loss over a three-year cycle could be barred fromthe Europa League and Champions League. The new rules, which will bewelcomed by those concerned at the financial extremes of the PremierLeague, will be published in the summer and introduced from the2012-13 season. They will not limit the amount of debt that clubs cancarry, but interest payments will have to be covered by income. Clubswill be able to record losses as a result of long-term footballinvestment such as stadium improvements. Short-term spending will haveto be funded from club earnings, and heavily leveraged models such asthat imposed on Manchester United by the Glazer family, will beimperilled.
"The implications for English football are serious. In the 2007-08season, 14 of the 20 Premier League clubs made a loss, includingManchester United, Chelsea and Liverpool. Major European clubs such asInter Milan, AC Milan and Real Madrid will also be affected. Infantinosaid: ''What we are doing, with the support of all the stakeholders inthe game, including the major professional clubs, is to try andimprove the long-term stability of European club football byencouraging clubs to live within the revenues that they generate. ''Weare concerned, and many of the clubs and owners are concerned, aboutthe sustainability of the game. ''We surveyed more than 650 clubs allover Europe, and found that 50 per cent of those clubs are makinglosses every year, and 20 per cent of them are making huge losses,spending 120 per cent of their revenue every year.''
So, what is at the kernel of this problem? Well for starters, it isthe absurd wages that are paid. Actually, they can hardly becategorised as wages.Infantino has said the primary reason for the losses was wage andtransfer inflation driven by clubs relying on owner finance or debt.''Around one-third of the clubs are spending 70 per cent or more oftheir revenues on wages. Revenues across European football grew by 10per cent last year, but the salaries of players and coaches have goneup by around 18 per cent. It is clear that if we continue like this itwill end up with a spiral of inflation, so we need to bring a morerational and reasonable approach to this crazy game.'' It is clearlyeconomics, stupid. Revenue shortfalls like this cannot be sustained bythe whims and fancies of bulge bracket owners. Rich men with sport astheir hobby horse is not a sustainable business model. Sheikh MansourofManchester City has coughed up $199 million just to acquire players.It is bizarre. At least in the IPL there is a cap on the amount thatcan be spent on player auctions. Otherwise, we would have similar sumsof money beind bandied about. When the news telly wallahs andsubsequently ToI went ballistic on the sum of money paid for KieronPollard, I asked IPL Commissioner Lalit Modi and he denied theexorbitant sums of money outright. One can argue that the cap for theJanuary 19 auction was $750,000 and in the event of a tie breakerinstalled for the very first time in IPL history, the surplus over the$750,000 amount was to go to the IPL kitty and given thesecircumstances, Modi would have preferred not to divulge the realfigure. But even then, look at what happened last year - both KevinPietersen and Andrew Flintoff went for $1.5 million and change.Freddie Flintoff broke down, while Pietersen was a pale shadow of hisusual self before he flew back to London for his England commitments.Subsequently it was discovered that his achilles heel problem flaredup during the IPL. Paul Collingwood and Owais Shah were acquired byDelhi Daredevils andall they did was warm the bench since IPL has a cap of four foreignplayers per match. And mind you they were paid.
Some semblance of profit and loss has to be imbibed by the people whorun city based franchises. Otherwise, they will discover very quicklythat while it is fashionable to own a sporting franchise, it can wellend up as a no brainer. And of course burn a very deep hole in theirpocket.