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This paper will look at the effect that higher revenue generation in the Barclays Premier League has on the potential for football clubs to overspend but at the same time increase competitiveness across the league. The paper will begin with a look back at the history of the English Premier League and the rise of foreign investment in the Barclays Premier League. A stronger comprehension will be gained concerning the movement towards an increase in the financial power of the league leading to a rise in global popularity. The importance of broadcast rights cannot be underestimated as it has had an immense influence on the Barclays Premier League across the globe. The understanding of the broadcast rights will also aid in explaining the influx of financial capital into the league, making it one of the most watched leagues in the world. Following, there will be an assessment of the primary methods that are used for valuing football clubs such as the Forbes method and the recently developed multivariate method. These methods will provide better insight into the reason for the rise of financial difficulties caused by overspending in the Premier League and across other European leagues. The Union of European Football Associations (UEFA) as well as the English Football Association (FA) developed the Financial Fair Play rules in an attempt to curb the overspending and force clubs to “live within their means.” The paper will culminate with an analysis of how this has impacted the league over the past few years and the potential economic impacts that may occur when football clubs in the Barclays Premier League have a win maximization mentality.
Strong financial well-being allows the beholder to exhibit purchasing power. How does one ensure that the purchasing power remains constant or even grows over time? Investment. Investments can be made in the form of purchasing stocks, mutual funds, or, if the individual really wants to flex his or her muscles, a football club. Football is the world’s most popular sport, and its roots are deeply connected within each country the sport touches. Each year millions of fans flock to stadiums across the world to witness their favorite team compete in the most prestigious leagues. One of the most prestigious leagues in the world is the Barclays Premier League (BPL). The Barclays Premier League is made up of football clubs such as Arsenal, Burnley, Chelsea, and Manchester United. Investment in the BPL has been occurring during the past decade. Some clubs have gained access to more money than they know what to do with, while other clubs, those not as fortunate for such large investments, have gained financial capital through commercial success and money brought in through broadcasting rights. The impact of financial capital is seen all across the league and, with more money coming into the Barclays Premier League than ever before, it is necessary to assess the impact that the recent decade has had on the landscape of the league as well as the potential effect it will have in the future.
History of the Barclays Premier League and Recent Transactions
The Premier League was formed for the 1992/1993 football season and originally included twenty-two teams; however, today, the league has twenty teams in the top division. Turnover, or the amount of revenue generated per asset, in the Premier League has been on a steady rise since the league began. At the end of the 1992/1993 season, there was a turnover of £46m (Barclays Premier League). By the 2010/2011 football season, the now Barclays Premier League had a turnover of £1.202bn with approximately £165m being distributed outside the league for charitable causes and grassroots funding. The economic implications for smaller communities fielding football clubs in the BPL have been significant. Cities such as Stoke, Sunderland, and Blackpool have seen rises in economic standards thanks in part to the inclusion of their club in the highest division at some point since the inception of the Premier League. Prior to the Banking Crisis of 2008, debt in the Premier League was £3.1bn against assets totaling £2.5bn (Overview of the Structure…).
The impact that financial takeovers have had on the Barclays Premier League has created an influx of cash and brought the competitive nature of the league to new heights. During the summer of 2003, Roman Abramovich, a foreign investor from Russia, purchased Chelsea F.C. for £140m (BBC). Prior to the investor’s purchase, Chelsea was extremely close to defaulting on a £75m loan, which would have plunged the club into financial ruin and possible relegation. Over the span of just two months, Chelsea F.C. spent in excess of £100m on the purchasing of players. This purchase was widely considered to be one that dramatically changed the landscape of foreign investors pouring money into football clubs; however, there have been both positive and negative effects as a result of financial investment.
On September 23, 2008, The Abu Dhabi United Group backed by Sheikh Mansour announced the completion of negotiations to purchase Manchester City Football Club worth roughly £200 million (BBC). This takeover occurred after previous owner, Thaksin Shinawatra, was unable to receive his frozen assets in Thailand, and, after his wife was sentenced to jail for acquiring land for underpriced values, was forced to sell the club. Immediately following the purchase by the Abu Dhabi United Group, Manchester City F.C. broke the British transfer record for a second time by purchasing Robinho from Spanish club Real Madrid for £32.5 million. However, the last time that Manchester City F.C. won the English League prior to the 2011-2012 season was the 1967-1968 season.
Portsmouth F.C. is a club that perfectly encompasses the rise and fall of a once relatively strong powerhouse football club to a team competing in one of England’s lowest leagues. Alexandre Gaydamak purchased Portsmouth F.C. in 2006 and Portsmouth F.C. experienced immediate on field success as a large influx of players joined the club (Moxley). Portsmouth F.C. won the 2008 FA Cup and managed to qualify for the UEFA Cup. However during the 2009/2010 season, it was realized that the club was experiencing immense financial distress as both staff and players were not receiving payments. In 2012, Portsmouth F.C. had roughly £1.6m in unpaid taxes and £65m in debt. The club ultimately went into administration and was relegated into the lower leagues. As of September 2013, Portsmouth F.C. still owed £6.72m to players that currently did not play for the club (DailyMailUK).
Importance of Broadcast Rights
The exposure that the Barclays Premier League has experienced over the last decade is astounding. Prior to the rise of mass market broadcasting of sporting matches, a main contributor to a club’s financial success was the local community in which the club resided. This is especially true for smaller market teams that did not receive national attention. Match Day ticket sales and commercial sales were a huge contributor to how a club was able to fund its operations. In today’s society, television broadcasts have created a large reservoir of financial capital for all clubs in the Barclays Premier League.
Two months ago a broadcast deal was announced that would change the landscape of the Barclays Premier League for the foreseeable future. A deal between broadcasting networks, SKY and BTSports, and the BPL clubs was reached and is worth £5.14bn over the next three years (Chaudhary). The deal will begin in the 2016 season and go until the 2019 season. It has been estimated that each match televised is worth approximately £10m. This is a staggering number as the financial implication will not stop there. Football clubs that are in the mid to bottom table of the BPL will see a large increase in available funds.
The increase in television exposure will surely see a rise in the commercial success of the clubs by adding an extra source of income. The smaller clubs will also benefit in this category, as the rise of publicity through television broadcasting availability will arguably lead to a potentially larger fan base. In other words, these clubs have the opportunity to see a spike in commercial success. This deal will be split relatively evenly amongst the clubs with a difference of roughly £25m between the highest and lowest placed club at the end of each season (ESPN). Although the larger clubs will receive a large portion, the smaller clubs will still be receiving a large increase in financial capabilities. In comparison, with the new deal in place, the team that finishes last and is relegated in the Barclays Premier League will still earn three times as much as the club that wins the French Ligue 1 (Holyman). There will also be new international broadcasting rights up for sale during 2016, which has the potential to add an extra £3bn to the available funds to be split amongst the twenty Premier League clubs.
Methods of Valuations of Football Clubs in the Barclays Premier League
Since the rise of the financial prowess of football clubs in the Barclays Premier League, the clubs have been evaluated over the years by numerous valuation methods. Most notable and publicized is Forbes Magazine’s, “Most Valued Soccer Teams”, which determines the net worth of the football club based on numerous variables. However, due to the lack of necessary information pertaining to outside factors that affect how much a club is worth, it has been relatively difficult to determine the true nature of a teams worth on the market. There are four primary methods for the valuation of football clubs: Market Capitalization Model, Discounted Cash Flow Model, Forbes List Model, and the most recent is Tom Markham’s Multivariate Model.
The Market Capitalization Model is focused on companies that are floated on an exchange. The equation for determining the value of the club is based on multiplying the share price with the number of shares that are in issue. There are extremely strict exchange rules that must be adhered to on top of annual reporting requirements. There are specific needs that are required to attain the best possible valuations. This includes a company having liquid shares, being in an efficient market, and having a strong shareholder structure (Bell et al.). The problems with valuing this model are obvious from the onset. Most Barclays Premier League clubs are Limited Liability Companies and do not operate on a stock exchange. There are only two clubs in the BPL that are wholly or partially listed. The teams are Arsenal and Manchester United respectively. In the entirety of the major European leagues, only twelve percent of the clubs are listed on a stock exchange.
The Discounted Cash Flow models are based on estimating cash flows over a period of time that are then discounted based on cost of capital in order to get a Net Present Value. The primary requirement for successful valuation is having positive cash flows and being a profit making company. Unfortunately, most football clubs do not meet these requirements. Since football clubs are constantly buying and selling players, increasing and sometimes decreasing wages, and other external and internal factors, very few make consistent profits (Markham 6). It is for this reason that football clubs are considered to be loss-making entities. The Discount Dividends Model is another way to analyze a football clubs value but clubs do not usually pay out dividends.
The most popular and most widely publicized model is the Forbes Valuation Model. Forbes has been known for releasing numerous sporting valuations across the major sport competitions including the NBA, NFL, MLB, and World Football Clubs. The model is considered to incorporate each football club’s turnover, operating income, and revenue (Forbes). It also includes the three primary methods for revenue by football clubs: match day earnings, broadcasting earnings, and commercial earnings. The Forbes model does not depend on stable earnings estimates by football clubs, which allows it to provide a more accurate assessment.
Finally, the most recent model that has been incorporated to valuing a football club is Tom Markham’s Multivariate Model. It too takes into account the three primary revenue areas for the Barclay’s Premier League clubs. It also addresses the net asset figures and places an extreme importance on stadium capacity and player wages. The importance on player wages is crucial as over the past fifteen years player wages in the BPL has rose over 450% (Jones et al.). This is an astounding number considering that revenues over the same period increased roughly 210%. The equation for Tom Markham’s multivariate model is as follows:
(Revenue + Net Assets) * [(Net Profit +Revenue)/Revenue] * (Stadium Capacity %) /(Wage Ratio %)
It can be seen from this equation that the stadium capacity percentage and wage ratio is significant since in the case of stadium capacity, it takes into account the amount of spectators that can fit into each stadium relative to other clubs. Some clubs, such as Arsenal, can fit upwards of sixty thousand spectators, while smaller clubs such as Burnley, fit roughly twenty-five thousand. The wage ratio is included as to better determine how each individual club is spending on its staff and players relative to how much revenue it is bringing in. Table A1 in the Appendix, put together by Tom Markham, shows the differences amongst the top clubs’ valuations.
Valuation of football clubs is an integral part in determining how each club is able to perform in the Barclays Premier League. It shows the dramatic value that even the smallest clubs have and how much of a crucial part the clubs can have on the surrounding area. With that said there have been problems arising from the rise of the values of BPL clubs. With the surging revenue growth over the past few years, clubs are finding a much larger incentive to purchase better facilities, more marketing campaigns, and most notably higher skilled players to bring both on-field and off-field success to each club. This increase in expenditure leads to increase player transfer costs and higher player and staff wage bills, which can lead to unsustainable debt accumulation.
Financial Distress and Reform via Financial Fair Play (FFP)
According to BBC News in 2012, one in five football clubs in English league competitions were considered to be in poor financial health. In 2011, after Nyon completed a study on roughly seven hundred European football clubs, there was a forty-three percent increase on the amount spent on player wages during the previous five seasons (Telegraph Sport). Although this may not appear to be overwhelming, it is still a concern as top tier European clubs were spending more money than ever before. Liverpool F.C. was another top-flight club that almost experienced financial collapse in 2010, when the Royal Bank of Scotland was about to call for Liverpool to pay back a £237m loan (Bragg). The Royal Bank of Scotland ultimately sold the club to the Fenway Sports group to get the club out of the red. These examples show the dire need for regulation on the ridiculous spending by football clubs to ensure that financial collapse was not an option.
Financial Fair Play Regulations is considered to be the answer to solving the problem of overspending by football clubs. The Union of European Football Associations and the English Football Association have developed these regulations over the past five years. The UEFA Financial Fair Play went into effect for the 2011/2012 season, while the FA Financial Fair Play went into effect for the 2013/2014 season. The ultimate goal of the Financial Fair Play Regulations is to force the competitors to exhibit financial discipline and financing amongst the clubs in the UEFA Champions League and Europe League as well as the Barclays Premier League. The restrictions under each association differ slightly but the main ideas are similar.
Under the UEFA Financial Fair Play rulings, teams wishing to compete in the two tournament competitions must abide by a series of laws. The maximum permitted loss is €45m over three seasons (Thompson). It allows teams some leeway in terms of experiencing some financial difficulties as long as it is not chronic. There is no wage restrictions placed on teams and the way to monitor the overspending by clubs is determined by the annual accounts of each individual team. The nine sanctions imposed by UEFA range from a warning to a complete ban from the competitions. Clubs must also stay up-to-date on tax payments and wage and transfer payments.
The English Football Administration (FA) Financial Fair Play restrictions primarily focuses on clubs reaching the Break Even point put forth by the FA. The maximum permitted loss that a club is able to experience over a three-season period is £105m, which is significantly more lenient than what is put forth by UEFA (Thompson). The most likely reason for this is the understanding that the Barclays Premier League involves lower quality teams that do not have as much capital available on hand compared to the much larger teams hoping to be involved in the UEFA competitions. The clubs are also monitored by annual accounts; however, the FA also requires annual projections in order to gain a better estimate as to the potential financial increase or decrease. The FA also includes a similar list of sanctions but also includes the possibility of relegation into the lower divisions of English football.
It is clearly the hope that the Financial Fair Play regulations will have a positive impact on curbing the outrageous spending that has plagued even the most lucrative football clubs. One primary concern is the potential for managers and staff members to become involved in earnings management as a way to stay within the financial boundaries of the regulations put forth. The definition of earnings management is the use of accounting practices to develop financial recordings that are overly optimistic, when compared to the actual financial standing of a particular club. It is not a simple matter that new regulations are coming into effect and clubs are changing their habits. It takes time and some clubs may find it extremely difficult to fall in line with the new changes.
A study done by Marcus R. Brooks of the University of Texas at San Antonio delves into the potential effects that the new regulations may have on earnings management, which could affect the financial viability of clubs and potentially the leagues over the years to come. His findings from this study show that European football clubs that have larger payrolls, as well as clubs attempting to avoid violation of the rules set for by the Financial Fair Play regulation, are going to be more likely involved in some form of earnings management. He ultimately puts the recommendation out that financial regulations cannot be the only source of monitoring football clubs financial capabilities. Dr. Brooks stresses the need for fiscal policies and procedures to look out for those who have ownership of these football clubs. He also found that variables such as institutional ownership, auditing quality, based on whom a football club is audited by, and wages made up of player’s transfer contracts are significant factors determining whether clubs are more likely to become involved with earnings management. Although this study looks at the UEFA Financial Fair Play regulations rather than the English FA FFP regulations, a sound source of information can still be gained to apply to the Premier League as a whole.
Possible Economic Implications
The economic implications of all the information presented in this paper can be seen primarily but not limited to the national attention and competitive strength of the Barclays Premier League. The increased potential for clubs to overspend is evident. Whether it is Manchester City spending hundreds of millions of pounds on players over the course of just a few years to the financial collapse of clubs similar to Portsmouth, there is a heavy need for a crackdown on the way football clubs manage money. If the spending is not curbed dramatically by the new regulations taking place within the league, then there is the potential for financial chaos down the road.
Another economic implication of the rise in popularity and influx of large capital into the Barclays Premier League is the rising cost of viewership, whether it is a product of television subscription costs or the rise of ticket prices. The rise of ticket prices for fans to watch their favorite club play is the most disconcerting. Ticket prices are increasing at three times the rate of inflation (Sheen). The most likely cause is that clubs believe it is more valuable to watch games more than ever, since they are attempting to bring in the best talent and offer the best experiences. However, the ticket prices should be covered by rise in revenue each club is receiving. The problem again becomes the overspending of clubs and the fans are the ones that must pay for it. Also due to the rise of popularity of watching live football events, attendance continues to rise. As a result, the demand is rising while the supply is staying the same causing an increase in the price per ticket. Arsenal F.C. charges the highest season ticket prices with the most expensive costing around £2013 (Cryer).
Transfer costs and wage costs are continuing to rise every year. Premier League clubs are not only forced to compete amongst teams in the Barclays Premier League, but also with teams all across Europe for the signatures of players. There has been a significant rise in the correlation between television revenues and the average wage played per player. This is only natural but clubs tend to see it as a way to increase the spending immediately. This is no fault of their own as it is the only way for clubs to consistently stay competitive over time.
The most interesting question to ask is, “what will the effect be on the smaller market clubs in the BPL?” This is a question that is very difficult to answer, as it is expected that the smaller clubs will see a rise in the ability to spend money on player wages and transfers. However, with the massive exposure that the Barclays Premier League is experiencing, and will continue to experience over the coming years, big name players will continue to be attracted to the Premier League’s top clubs. The talent will not be drawn to such clubs as Stoke City, Newcastle, and Sunderland. These are relatively small market teams and when competing against cities such as London and Manchester it will be extremely difficult to persuade them to come when they cannot offer the same amount of money.
There will need to be a continued push by the smaller clubs in the Barclays Premier League to develop stronger youth academies with the funds gained through the new broadcast deal. Clubs such as Southampton have been known for building strong youth academies, which has vaulted them to the upper mid table of the Premier League. There is an immense potential for the teams to make the Barclays Premier League even more competitive than it is now. One potential issue facing the league is the relegation aspect that plagues the bottom three clubs every year. The Championship League does not bring near as much financial capital as the Premier League, and as a result clubs are faced with the difficult task of remaining competitive in the top flight when clubs are promoted.
One important concept that is best used to understand the reason for the higher valuations and increase in financial troubles is that, according to a study performed by Pedro Garcia-del-Barro and Stefan Szymanski, football clubs are considered to have a win maximization mentality instead of a profit maximization mentality. This is because football clubs are not incentivized to retain profits that they receive from sources because it does not lead to winning competitions Barro et al.). Therefore, football clubs find it much better to put all the money that is earned into purchasing players and paying the wages to see on-field performance rise as well as off-field. According to the study, the strategy win maximization is not only for the short-run but also for the long run. Appendix A2 shows the results from their test, and the authors concluded that the positions based on a win maximization strategy is more closely correlated to the actual average position than the profit maximization strategy would be.
Now that valuations of football clubs are becoming more accurate, the world is gaining a much better understanding as to how these football clubs are spending their resources back into the club. The increasing number of investments in clubs within the Barclays Premier League coupled with the increasing supply of financial capital through broadcast rights and commercial success, has seen financial spending rise to dramatic levels. This is directly reflected in the sharp increase in player wages and transfer costs. Although teams in the BPL are beginning to return to the black, overspending must be curtailed for clubs that have not reached this level. It is the continued hope that the Financial Fair Play regulations will be the way to stop this overspending, however it must be kept in mind that these regulations can cause new problems that may not currently be known to the community. Having a win maximization mentality is not a poor strategy to have, but there must be balances between win maximizing strategies and profit maximizing strategies in order to ensure future success for all football clubs in the Barclays Premier League.
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A1: 2012 EPL Club Valuations, Tom Markham’s Multivariate Model
|8||West Bromwich Albion||126.9|
|12||West Ham United||104.3|
|17||Queens Park Rangers||59.9|
A2: Table from Garcia and Syzmanski’s Calculations based on each club’s decision regarding strategy.