The Premier League of Debt

Dividing the spoils

The Premier League table for 2009-10 shows that Chelsea, the
oligarch’s club, claimed the championship by one point from
loan-soaked Manchester United, but the season’s uniqueness will
forever be recorded at the bottom.

Portsmouth, 2008 FA Cup winners and a member of the world’s
richest league since 2003, became the first Premier League club to collapse
into insolvency in February. An asterisk by the club’s name denotes
that it was deducted nine points for failing to pay its debts, and was relegated.

The Premier League, formed in 1992, was originally a
breakaway, by the clubs in the First Division of the Football League who did
not want to share the forthcoming satellite TV bonanza with the clubs in the other
three divisions.

Since then the Premier League clubs have secured remarkably
lucrative deals, principally from selling the live match rights exclusively to
BSkyB and from the commercial fruits of the game’s subsequent boom.

A yawning inequality opened up between the clubs which rolled
in those riches, and those left behind as the top clubs pulled up the distribution
drawbridge. Among the 72 clubs in the Football League’s remaining
three divisions, there have, since then, been 53 insolvencies.

Waging wars

All have resulted from paying players too much in the
attempt to compete with richer clubs, “living the dream,”
in the famous lament of Leeds United’s former chairman, Peter
Ridsdale, after its borrowings unravelled.

Yet the spectacle of a Premier League club falling into
adminstration was almost surreal. Even as Portsmouth were plummeting into inexorable
descent, the Premier League’s chief executive, Richard Scudamore, was
notching up the next round of record-breaking overseas TV deals, booming on the
English league’s popularity in more than 200 countries worldwide.

Scudamore and his consultants sold the overseas rights for £1.2bn. Add this to £1.9bn contracts for the domestic live rights with Sky and
ESPN, and highlights with the BBC and that’s a total £3.1bn the 20
clubs will earn from television alone in the three years from this August until
2013.

The fact that a Premier League club had gone bankrupt even
as such a deal was brokered demonstrated that all was not well with English
football’s finances, and has exposed the curious moral compass with
which the sport negotiates the wider world.

The Premier League operates a ‘football creditors’
rule’ for clubs that fall insolvent. If a club is to be bought out of
administration by a new owner, any money owed to a footballer, or to another football
club, must be paid in full. The leagues say this is to preserve competition, to
stop clubs signing players they cannot afford, then laying them off when the
money runs out.

Yet that principle doesn’t apply to ‘ordinary’
creditors, who have to settle for a fraction of what they’re owed. Portsmouth’s
list of creditors include the familiar ranks of local businesses, HMRC, the
local authority, police and ambulance services and the charity St John Ambulance, which asks only for expenses.

Over-leveraged and over here

In the face of all this, the question remains: how, in a
league brimming with money like never before, has a club fallen insolvent, and
the 20 clubs in total loaded themselves with £3bn of debt?

The answer varies between clubs. Two clubs — Manchester
United and Liverpool — have had 1bn of debt loaded on to them by the leveraged
buy-outs of North American business owners, who have made the clubs responsible
for paying their own borrowings.

Despite clamour from the clubs’ fans, outgoing
chairmen, the former Labour government and the former chairman and chief
executive of the Football Association, Lord Triesman and Ian Watmore, there are
no rules preventing the leveraged takeovers. The Premier League has always
accepted the argument that leveraged buy-outs are, in general commerce, legal
— even common.

Almost all the other clubs’ debts are owed to
owners, usually in interest-free loans, who fund their clubs beyond the clubs’
true means in order to compete. At Chelsea, the Russian oligarch Roman
Abramovich has paid in £726m, mostly to fund transfer fees and wages for players
who could win the Premier League, since he took the club over in 2003.

At Manchester City, Sheikh Mansour of Abu Dhabi has spent £400m on his project to launch the club into the European elite. At Portsmouth,
successive owners loaned in £52m. When one — Sacha Gaydamak — ran out of
money, the club collapsed.

In 2008-09, the most recent period for which clubs’
accounts are published, Deloitte’s Sports Business Group reported the
Premier League overall increased its revenue by £100m to more than £2.5bn, yet
operating profits more than halved to £79m and the proportion of turnover paid
to players increased to 67 percent, a record. Those total wage costs ‘ £1.3bn
‘ are by far the largest expense football clubs have, and without regulation
of any kind to restrain them, the players and their agents have successfully
bid them up every time the league’s TV deal has increased.

Alan Switzer, a director of Sports
Business Group, believes it’s vital for the clubs to find a way to
restrain this inflation.

The SBG expects wages growth to outstrip revenue increases
again in 2009-10, making the business model for clubs potentially untenable.
Says Switzer: “This will further reduce operating profitability, a
decline that cannot continue indefinitely. Clubs have the opportunity, via the
revenue uplift from the new broadcast deals, to get wage levels down to a more
sustainable share of revenue. It remains to be seen whether they grasp it.”

The Premier League’s planned measures to make its clubs
more financially responsible have been eclipsed by UEFA, European football’s
governing body. Its ‘financial fair play regulations’,
introduced in May, require clubs to break even from 2012-13.

UEFA president Michel Platini has been warning against financial
excess for years. This is leadership aimed at stopping European football, in
its richest ever boom, drowning under its addiction to ‘living the
dream.’