Manchester City and Der Spiegel: Second Skin

The Der Spiegel allegations in relation to Manchester City seem to have tongues wagging at present, but are City’s activities illegal, deceptive or just pushing the boundaries of what is within the regulations?

Never mind that, the good news is that legendary City fan Eddie Large is making a comeback with Sid Little

What are the FFP rules?

The short version is that clubs are allowed to make an FFP loss (which is an accounting loss excluding infrastructure, academy, women’s football and community scheme costs) of €5 million over three years. These losses can be extended to €30 million if the club owner is willing to inject the difference into the club by buying shares.

The long version is 108 pages long and not recommended unless you are on a particularly long train journey or a masochist.

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What are the punishments for breaking the rules?

UEFA has a full schedule of punishments from finger wagging, fines, wage caps, reduction in squad sizes for UEFA competition to the ultimate sanction of being banned from UEFA competitions.

Are these punishments legal and within EU competition law?

UEFA is confident that the rules are watertight, but they’ve not been tested in court to date. As we’ve seen with the QPR case, which cost the EFL £3 million (and presumably QPR similar) and took four years to resolve, the objective of the legal and accounting professions is to delay and argue as long as possible to maximise their fees. Manchester City were by all accounts prepared to use whatever legal means possible to prevent a competition ban.

Are there weaknesses in the rules?

All rules have strengths, weaknesses and loopholes. The rules were partially created by two employees of Deloitte, Martyn Hawkins and Alex Byars, who were sent on secondment to UEFA. Byars was then recruited by Manchester City in January 2012 and spent three years there, and Hawkins was recruited by City at the same time and is now the club’s Finance Director.

The Independent

It’s common in all industries to recruit from those with expert knowledge, so no wrong doing here from a legal standpoint, but if anyone is going to know where the bodies lie in terms of the weaknesses of FFP it is likely to be someone who was involved in writing the rules.

Smart thinking by City or an attempt to dodge FFP? It depends on which football team you support.

How can the rules be abused?

UEFA did fine City £49 million for FFP breaches in 2013, as well as imposing transfer and wage caps for two seasons. City appear to have accepted and applied these rules, and as a result had a refund of two thirds of the fine in accordance with the terms of the initial punishment.

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If a club thinks it is going to exceed the allowed losses it could, if it so desired, do one of two things.

(a) Artificially inflate income

Clubs have three main sources of income, matchday, broadcast and commercial. The first two are difficult to inflate, but commercial income could be boosted in relation to deals signed with sponsors who are connected to the club owner.

This is what is alleged in the Der Spiegel leaks, in relation to commercial contracts, such as the one with Etihad Airways, where the claim is that of the £60m a year sponsorship from Etihad, £52 million of this was coming from Abu Dhabi United Group, owned by City’s owner, Sheik Mansour. These claims have been denied.

The other claim is in relation to the sale of image rights to another company, Fordham Sports Image Rights Limited. (FSIR)

FSIR had by 30 June 2017 accumulated losses of £74.6 million in five years, which is an achievement for a company with two employees. These losses have been mainly funded by the company issuing shares for £59 million.

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At this stage you might be wondering what is the link to Manchester City?

Fordham Sports Image Rights Limited used to be called Manchester City Football Club (Image Rights) Limited and its registered address was the Etihad Stadium in Manchester.

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A look at the list of officers of FSIR includes Simon Cliff and John Macbeath.  They both resigned in July 2013. Simon Cliff is presently the legal counsel at Manchester City and was appointed to the board in May 2013 and John Macbeath is a non-executive director of the club, former interim chief executive and was appointed in January 2010.

FSIR is presently controlled by David ‘Spotty’ Rowland, a former Conservative party treasurer and major donor. Rowland is notoriously camera shy and isn’t known to be a football fan, although he once tried to buy Hibernian in the 1980’s.

Why Rowland would bankroll the losses of a company involved in sports image rights is unclear.

The allegation appears to be that FSIR paid City for the player image rights in 2012/13 when FFP was first applied, as well as other sales to parts of the City group empire, as a means of reducing losses.

City sell image rights

What has happened to the image rights subsequent to the sale to FSIR is unclear, but it is odd that the company has made such huge losses since 2013.

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(b) Reduce FFP costs

Manchester City are a subsidiary company of City Football Group Limited, which also has interests in football clubs in New York, Melbourne, Tokyo and Uruguay. City’s critics believe that this allows the group to allocate central costs (marketing, IT, legal etc) to the other football clubs and reduce the costs borne by Manchester City, helping it comply with FFP losses in the process.

A look at the income and costs of both Manchester City and City Football Group shows the following

Again, the conclusion is likely to be dependent upon your confirmation bias. A City fan would say that Manchester City generates 92% of income due to participation in lucrative competitions and that many overhead costs, such as rent, are fixed, and so would be borne to a greater extent by other members of the City group to a greater extent. Those who think there has been foul play will point out that Manchester City only bear 80.7% of the wage bill, and that the club would surely pay far higher wages than those in the MSL and A-League.

Conclusion

No one comes out of this with reputation intact. For those who are against City and their owners there is plenty of circumstantial evidence that there have been strange relationships and transactions taking place, but in the three days of reporting from Der Spiegel to date, no smoking gun. Some of the activities would be seen as good business practice in other industries, and football has a moral code of convenience whenever deeds are undertaken by a club to which one has a particular dislike.

City themselves, with the effective riposte of ‘Fake News’ to the allegations, give the impression of a club that does not want a light shone on it in terms of transparency and governance. If transactions have been undertaken with third parties that are unusual then the best thing, if innocent, is to show the evidence and the club could come out of this smelling of rose.

Der Spiegel’s allegations, whilst containing a few new snippets, doesn’t reveal any slam dunk information (although at the time of this being blogged only three days out of four of the story have been published).

Football is a grubby industry, and every time you hear about stories such as these which paint the game in a poor light (which apply to many, many clubs) it’s inevitable that you fall a little more out of love with the game, but not enough to stop watching, subscribing, discussing and consuming, and clubs, along with the likes of the Premier League, UEFA and FIFA, are fully aware of this.

 

Manchester City and Etihad Airways: Economy plus?

History

The 2007/8 Premier League season could not finish fast enough for Manchester City. The final match under Sven-Göran Eriksson was a nine-goal thriller at Middlesbrough, where unfortunately City conceded eight of them.

The club’s reputation at the time was that of the Keystone Cops of English football, a bunch of mavericks in blue where the wheels were always on the brink of falling off.

In those days their hated local rivals at Old Trafford looked upon City with mocking contempt rather than as an enemy, saving their true loathing for Liverpool and Leeds United.

Behind the scenes things were even worse. Whilst City fans were excited at the start of 2007/08 at the prospect of new Thai owner Thaksin Shiniwatra’s promises of big spending and success, an investment in the likes of Rolando Bianchi, Felipe Caicedo and Elano didn’t prove to be successful, and the money from the new owner came from unreliable sources.

City borrowed £46 million in the one year of Shiniwatra’s ownership. Whilst borrowing money has some benefits, these loans came at a price, as City’s interest costs more than doubled to £10.7 million.

The acquisition of the club by Sheik Mansour in September 2008 saved City in more ways than one, as by this stage Shiniwatra had more pressing issues to deal with in the form of corruption charges from his homeland, and he disappeared from the scene with few regrets from City fans.

Mansour transformed City, with an initial scattergun spending policy on marquee signings such as Robinho and an audacious attempt to sign Kaka. At this time transfer fees and wages were an irrelevance to the owners.

This impacted upon City’s financial performance, which moved from a profit of £17 million in 2006 to a loss of £190 million in 2011.

These losses were sustainable because Sheik Mansour was willing to underwrite the losses through a combination of interest free loans and shares. Had FFP rules been in existence at the time then the investment would not have been possible. This allowed the Abu Dhabi owners to pump nearly £1.2 billion of cash into the club.

The threat to the Elite

The owner’s huge investment startled the existing elite of European football, who now saw City as a potential threat to their cartel at the top table of UEFA competitions.

These established clubs put pressure on Michel Platini, the UEFA president, to introduce some method of reducing the rise of ‘new money’ clubs such as Chelsea, City and PSG.

After much internal haggling and huge amounts of money being spent on accounting and legal fees by UEFA, Financial Fair Play rules relating to non-payment of transfer fees were introduced in 2011-12, and then extended in the 2013/14 season in the form of a breakeven model.

The rules are now so complex that the latest version takes up 116 pages of legal and accounting pontification and windbaggery.

UEFA claim that FFP can be summarised in one sentence “Financial fair play is about improving the overall financial health of European club football”.

We would describe that one sentence in one word, and that word is ‘Bollocks’. Businesses go bankrupt due to a lack of cash, not profit, which is an arbitrary accounting concept open to sleight of hand, estimates and manipulation.

The initial rules restricted clubs’ losses to €45 million over three years ending in that period, and then €30 million from 2015/16.

How does it work?

A breakeven model calculates losses as income less expenses. Clubs have three main sources of income, matchday, broadcasting and commercial.

It’s difficult (but not impossible) to manipulate matchday income, which is the number of tickets sold multiplied by the ticket price, and the same is true for broadcast income, which is negotiated and distributed centrally by individual leagues and UEFA itself.

Commercial income is different as represents deals signed by clubs and their business partners. The prices for these deals are open to negotiation.

In the years prior to the Abu Dhabi takeover City’s commercial income was far less than their rivals from Old Trafford, whose ability to negotiate deals on the back of the popularity and success brought by Sir Alex Ferguson was ruthlessly exploited by United’s American owners.

This is where eyebrows have been raised in relation to Manchester City. Etihad Airways, the national airline of Abu Dhabi, replaced Thomas Cook as shirt sponsor in 2009. This had an immediate impact on City’s commercial revenues, which increased by 126%.

In 2011 the Etihad deal was expanded to include naming rights for what had been previously known as the City of Manchester stadium, (less affectionately called the Council stadium by United fans, due to City renting it from the local government authority) which became the Etihad stadium, along with surrounding training facilities called the Etihad campus.

The agreement was for ten years, at an estimated value of £400 million, which included shirt sponsorship as well as the naming rights.

At the time the largest fee for naming rights was £2.8 million a year by Arsenal for the Etihad. Other clubs had tried and failed to secure high value sums from sponsors. Newcastle United had to accept two dozen pairs of Donnay socks and a signed Dennis Wise photograph as St James’ Park was briefly renamed the Sports Direct Arena, the main company controlled by owner Mike Ashley.

The accusation levelled at City is that the Etihad deal has been used to reduce the club’s losses and help it in satisfying FFP rules.

Because of the Etihad deal City’s commercial income initially matched that of United but has subsequently fallen behind as their rivals have managed to partner themselves with everyone from Japanese Tractor partner Yanmar to mattress partner Milly, although the latter may prove useful as Jose Mourinho’s tactics send United’s global fanbase to sleep.

City’s partnership with Etihad does however mean they have the second highest amount of commercial income in the Premier League, and the fifth largest of any football team globally.

 

Such was the extent of the Etihad deal that there were accusations of ‘financial doping’ from the likes of Arsene Wenger.

UEFA had tried to minimise the impact of deals signed by clubs with organisations connected to the owners through ‘related party transaction’ rules. A related party is one that is controlled by the club owner or a close relative.

In addition, UEFA have set up a Club Financial Control Body (‘CFCB’), the Supermen and Superwomen of financial investigations, effectively a group of accountants so powerful they wear their underpants over their trousers, to ensure that clubs do not overstate the value of commercial deals.

City tried to set up their deal with Etihad in such a way that it complied with the FFP rules, but such were their losses were put on the FFP naughty step in 2014, with the following penalties

  • A £49 million fine, part of which was conditional on improving the club’s business model. City duly received a rebate of two thirds of this sum.
  • An agreement to not increase the wage bill (excluding bonuses) for two seasons
  • A squad reduction for UEFA competitions from 25 to 21 players
  • A reduction in the amount spent on player signings, limited to a net £49 million spend.

City managed to comply with the sanctions and kept their wage bill, which had been £36 million before Shiniwatra in 2007 and zoomed to £233 million by 2014, in check until UEFA were satisfied that the breakeven target was being achieved. This coincided with Pep Guardiola’s arrival and gave City more wiggle room.

PSG were given a similar fine, in what was seen as a victory for the existing elite of European clubs.

Clubs can however dispute any rulings by the CFCB, and this is likely to trigger a long and expensive legal action, where the winners will be the accountants and lawyers.

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In 2015, under pressure from, you guess, a series of lawsuits from unhappy club owners, UEFA relaxed the FFP rules, allowing clubs to negotiate a voluntary deal althgouh this does involve an eventual breakeven target

Summary

The City and Etihad partnership was borne to an extent out of necessity on the part of the club, to satisfy UEFA FFP rules. If the value of the deal initially was excessive given the global position and reputation of City in 2011, then today, with the club having won the Premier League three times since Sheik Mansour acquired the club, the £400 million deal, which has been renegotiated since its original signing, is probably about right, and some even claim it is below the market rate, for Pep Guardiola’s team in the current market.