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					Just a few weeks ago, everything looked wonderful at Barcelona. They had
won La Liga for the second season in a row, once again finishing ahead of
Real Madrid. Despite their bitter rivals breaking the world transfer record
twice last summer when buying Kaka and Cristiano Ronaldo, they could not
match the talents of Xavi, Iniesta and Lionel Messi, who was voted FIFA
World Player of the Year.

Although they could not repeat the previous season’s Champions League
triumph, being unable to find a way past the defensive wall built by Jose
Mourinho’s Inter in the semi finals, Barcelona did subsequently provide most
of the players for the Spanish team that won the World Cup in South Africa.

“Glory days”, as Springsteen once sang.

However, July was not so kind to the Catalan club – at least from the
financial perspective. Early in the month came the surprising news that the
club had been forced to seek a sizeable bank loan of €150 million in order to
overcome short-term problems with their cash flow. Incoming president
Sandro Rosell was quick to explain that the credit request had initially been
made by the previous Barcelona board under Joan Laporta’s presidency,
“knowing that there were insufficient resources.”

Rosell blamed the former regime for this sad state of affairs, “We have
taken over a club in debt and with liquidity problems, but we are resolving
them.” Worse still, he claimed that the money was needed “to pay the
important commitments such as the salaries of the players, coaching staff
and employees.” Failing to pay the players is serious stuff, which was
highlighted when the club sold defender Dmytro Chygrynskiy back to
Shakhtar Donetsk for €15 million, which was €10 million less than they had
paid for him only a year earlier, with Rosell confirming that the sale was
motivated by financial requirements as well as sporting considerations.
As if that were not bad enough, the club then shocked the sporting
community when they announced a major restatement to the accounts
previously published at the AGM for the year up to 30 June 2010. The new
vice-president for economic affairs, Javier Faus, said that an audit had
revealed a series of adjustments that turned the €9 million profit declared
by the former treasurer, Xavier Sala I Martin, into a massive loss of €80
million – that’s a huge difference of €89 million. The auditors’ proposed
changes reduced revenue from €446 million to a still impressive €409
million, while increasing costs from €429 million to an unprecedented €478

How can this be? What on earth is happening with Barcelona’s finances? This
is mes que un loss by anyone’s standards.

The first point to make is that even in an age where we have International
Financial Reporting Standards (IFRS), accounting is not quite as black-and-
white as people might imagine. There is a considerable degree of judgment
applied over which revenue and costs should be recognised in the accounts.
Even Faus admitted that the old accounts were not “fixed”, but the new
board had simply taken a far more conservative approach, “We opted for
                       "Laporta and Rosell - best of friends?"

One of the fundamental accounting conventions is prudence and it does look
like Laporta had a tendency to count his chickens before they hatched. On
the other hand, you can be too careful. As an analogy, if you believe that
it’s going to rain, you might take an umbrella with you when you go out, but
you probably wouldn’t refuse to leave the house just in case you get wet.

In fairness to the previous board, their results were unaudited. In fact, it’s a
great achievement for the club to release draft accounts just a few days
after the books closed. Most companies do not do this, as there are
invariably numerous discussions with the auditors before the final figures
are agreed. By the way, Deloittes are not new to the club, but have been
auditing the accounts for many years, so there’s nothing too sensational
about their role in the restatement.

There are three categories of adjustment to the accounts, which relate to
television (€56 million), player transfers (€12 million) and land (€21 million).
The largest is a €38 million provision for a legal dispute with TV company
Sogecable, which the new board has decided to fully cover, even though
they believe that they have a strong legal case. This is a long-running
dispute, but, interestingly, Deloittes did not require a full provision in last
year’s accounts.

Still on television, two adjustments were made for payments from current
TV rights holder Mediapro, totaling €18.5 million. The first one is for a €16
million bonus payment that Laporta booked, even though it comprises four
annual payments of €4 million until 2013. The auditors decided to only
include this year’s money, leading to a €12 million adjustment. This could
be argued either way, but given the long-term nature of the payments and
Mediapro’s well-publicised difficulties, this correction is probably fair
enough. Barcelona also have a legal dispute (another one) with Mediapro
worth €13 million, which the auditors have only included at 50%, as it is not
certain that the case will be won, leading to a €6.5 million adjustment.
Similarly, there are two adjustments for player transfers. In the case of
Thierry Henry, even though his free transfer to the New York Red Bulls was
only finalised in July, Faus claimed that the contract was signed before the
end of last season, meaning that the remaining €8 million amortisation
should be booked in the 2009/10 accounts. In yet another legal dispute (how
much do Barcelona spend on lawyers?), the club is owed €4 million from
Espanyol for the transfer of midfielder Raul Baena, which the auditors have
not included, again because payment is far from guaranteed.

                                 "Happy days"

Like animals boarding Noah’s Ark, the land adjustments also came in “two
by two”. Very little of the proceeds from the sale of the Sant Joan Despi
land has been received to date, despite the contract being completed, so
the auditors have reduced this income by €15 million. Unless they seriously
believe that the money will not be paid, this looks a bit too cautious to me.
Usually, you do not wait until the money is received before recognising the
income. In addition, two valuations were provided for the land at
Viladecans: Laporta’s expert suggested €17 million, while Rosell’s appraiser
estimated €5.7 million. Using the wisdom of Solomon, the auditors split the
difference, producing a €5.7 million adjustment.

Without examining all the details behind these adjustments, it is impossible
to say whether they are justified or not. My gut instinct is that they are
overly prudent. What we can say with confidence is that none of these
adjustments impact the club’s cash flow, as they are simply accounting
entries for provisions and revaluations.
Given the striking drop in profitability, you have to ask whether Barcelona
set a completely unrealistic budget for 2009/10.

On the face of it, looking at the projected growth from the 2008/09 results,
you would have to say no. Revenue was only budgeted to increase by €20
million from €385 million to €405 million and almost all of that growth was
due to €40 million profit on sales of assets (players €25 million, land €15
million). Yes, that’s the same land sale that the auditors adjusted this year.
All other revenue streams were largely unchanged with marketing revenue
actually forecast to decline, as they did not anticipate a repeat of the
previous season’s spectacular trophy wins.

They also forecast €13 million cost growth from €362 million to €375 million,
but this looks less reasonable. Player amortisation was budgeted to increase
by almost 30% (€16 million), reflecting the impact of new players, but
salaries were hardly increased at all. This never made sense to me and, as
we shall see, this proved to be hopelessly optimistic. There was also an
attempt at cost containment with other expenses cut by €6 million. All in
all, former economic vice-president Joan Boix described this as “a very
balanced and austere budget.”
So how did the actual 2009/10 results compare to this budget?

Using the figures after the audit adjustments, we can see that the revenue
was pretty much in line. In fact, it was actually €4 million better than
budget, as the negative variance due to the non-booked profit from the land
sale was more than compensated by the core revenue. Marketing revenue
was €7m above budget, thanks to more royalties from Nike and higher
merchandise sales, while television revenue, the source of so much concern,
ended up €16 million better than budget (11% higher than last year), mainly
due to more money from the Champions League, following the 30% increase
in the total pool. Although match day income was slightly lower than
budget, it rose by 3%, helped by a 7% increase in the number of members.

However, the stand-out variances against budget were in the costs, which
were an awful €103 million worse, coming in at a grand total of nearly half a
billion Euros. The audit provisions are the reason for the €66 million adverse
variance in other expenses, but the real damage is done in salaries. Adding
together all staff (sports and administration) produces a jaw-dropping figure
of €263 million, which is €36 million worse than budget. Put another way,
the budget was out by 16%, which is a hell of a lot in just 12 months. It’s not
as if they’re trying to forecast the lottery numbers, for heaven’s sake.

                         "Is the club down for the count?"
In fact, after all the audit adjustments, the total shortfall against budget is
a round €100 million. Ouch. The solid revenue growth of 6% has been
obliterated by terrifying cost growth of 32%. Granted, a considerable chunk
of this is the result of once-off provisions, but much of it is down to player
expenses – amortisation and salaries.

The wages were already very high, but €263 million is a scary figure. To
place that in context, big-spending Real Madrid “only” paid out €187 million
in staff costs last year (though it may have increased since then). The club
identifies three reasons for the increase: new signings, contract
improvements and variable compensation. The bonus payments were worth
around €40 million, so Barcelona are, to some extent, victims of their own

As you would expect, the wages to turnover ratio has been on a rising trend
and now stands at 68% (using Deloitte’s definition of revenue). This is by no
means terrible, being within UEFA’s suggested maximum of 70%, but must
be a concern. As a comparison, it’s about the same as Chelsea, though it is
much worse than Manchester United (44%) and Arsenal (46%). It’s also lower
than 13 clubs in the Premier League, though these clubs do not have
anything like a €400 million turnover. Whatever. But what is indisputable is
that the increase in salaries is the logical result of their (how shall we put
it?) “generous” transfer policy.

As indeed is the increase in player amortisation to €71 million, which is even
higher than Real Madrid (€64 million) and a lot more than even the most
profligate English club (Chelsea €59 million), though Manchester City (€47
million) might get close after their third summer spending spree in a row. Of
course, Barcelona have been no slouches in that department, splashing out
around €90m last summer on bringing new players to the Camp Nou,
including the unpredictable forward Zlatan Ibrahimovic, that man
Chygrynskiy and two Brazilians: the veteran full-back Maxwell and the
promising striker Keirrison. This year, they picked up Valencia’s prolific
striker David Villa for €40 million, but the amortisation on his transfer fee
will only be reflected in next year’s accounts.
Enough about the P&L, what about the balance sheet?

The major concern is obviously the debt, which Javier Faus said was “the
biggest in the club’s history.” We’ve not been given the full details yet, but
the adjusted figure released by the club was gross debt of €552 million (net
debt €442 million). However, we do know that this represents total
liabilities and is thus misleadingly high, as it includes trade creditors,
accruals and even provisions. In fact, Rosell and his cohorts should be
ashamed of this needless scaremongering, which is not consistent with
standard accounting practice – or, indeed, UEFA’s definition, which
explicitly states, “net debt does not include trade or other payables.”

As an example of how absurd the total liabilities definition is, just look at
how high other clubs’ gross debt would be using this measure: Real Madrid
€683 million, Liverpool €578 million and Manchester United €1.1 billion.
Even Arsenal, which is regarded as the template for financial sustainability,
would have “debt” of €767 million (though it’s come down a lot since the
last annual accounts). This places Barcelona’s €552 million firmly into
context. To use an old adage, you have to compare apples with apples.

Under UK accounting practice, net debt includes bank overdrafts and loans,
owner and/or related party loans and finance leases less cash and cash
equivalents. Under this definition, Barcelona’s net debt in last year’s
accounts was actually only €20 million, compared to Rosell’s total liabilities
of €489 million.

The truth is that Barcelona’s real debt lies somewhere between the narrow
UK accounting definition and the new board’s widest possible measure.
                            "Keep your eye on the ball"

In fact, UEFA’s definition of net debt also includes the net balance owed on
player transfers, which is probably the most reasonable approach to take, as
this is an important part of Barcelona’s business model. Again, we have no
way of knowing how much Barcelona owe to clubs for other players, though
last year’s books included just under €90 million. This is why Laporta could
truthfully claim last year that “the ultimate proof that Barca has a solid
economic base is that we didn’t have to make any new debts when signing
new players this summer”, as he was only referring to bank loans. However,
this is not the whole story if money is still owed to other clubs on those

Whichever way you look at this, what is very clear is that net debt has
increased by well over €100 million in a year, which is obviously not
something to be proud of. The previous board gave two reasons for this
significant increase: €65 million for outstanding taxes and €60 million for
the transfers of Ibrahimovic, Villa and Chygrynskiy.

Since the accounts were closed, Barcelona have secured an additional €155
million loan from a group of banks led by La Caixa and Banco Santander, but
this is unlikely to have greatly increased their total debt, as my guess is that
this was largely used to pay off existing liabilities like the tax bill and some
transfer payables. It would make sense for them to pay off short-term
liabilities with longer-term debt. Often, when clubs have problems with
debt, it’s not so much the magnitude that’s the issue, but the timing of the
repayments. That’s why Arsenal’s long-term debt is not a concern, but
Liverpool’s short-term debt is.

Even with this new credit, Barcelona’s bank loans are relatively low.
Laporta’s AGM presentation gave a figure of €114 million, though for some
reason this included a €57 million tax credit, so presumably the real bank
loan was (coincidentally) €57 million. If the additional €155 million were to
be added to that, the total bank loans would be €212 million. This is all
speculative in the absence of a detailed balance sheet, but the point is that
such a bank loan is eminently serviceable with annual revenue of over €400
This has effectively been confirmed by Rosell, “The club is not bankrupt,
because it generates income. The banks know that we have a business plan
that will allow them to recover the money.” That confidence is supported
by the club’s recent record, as it made profits six years in a row before this
year’s loss. Faus confirmed that this is “not a dramatic issue”, as Barcelona
has hidden assets worth over €250 million that are not reflected in the
balance sheet, such as youth players and real estate. He also pointed out
that the club has on its books the best player in the world plus eight players
who have been world cup winners, so it’s not all doom and gloom.

The reality is that Barcelona can always tap into credit from Spanish banks.
You simply cannot imagine a scenario where a local financial institution
would be responsible for making the emblem of Catalonia bankrupt, given
that its customer base is largely made up of the club’s supporters. Indeed,
this loan has been given at a very low rate of interest (Euribor plus 2.5%, by
all accounts), which indicates the positive credit rating that the club still
enjoys with the banks, though this may well be a “friendly”, somewhat
political rate.

On the other hand, there has to be some concern that the club is
experiencing any financial problems at all after two years of fantastic
success on the pitch, especially as so many of the first-team has emerged
from their own academy (the famous La Masia). It makes you wonder what
would happen to their numbers if the team suddenly stopped performing.
Then, there are the generic economic difficulties in Spain, as the country
faces one of the worst recessions in Europe with spiraling unemployment
and a genuine credit crunch.
                           "Shout, shout, let it all out"

This is epitomised by the problems affecting Mediapro, who have a seven-
year deal, due to expire in 2013, worth over €1 billion for Barcelona’s TV
rights. These are so severe that the company has sought bankruptcy
protection over a dispute with Sogecable, who, you might remember, are
also in litigation with Barcelona. Last year, Laporta described the
agreement with Mediapro as “the best contract on the market” regarding TV
rights, but Rosell might well disagree. Although the new president said that
Barcelona had been given assurances that the money would be paid, this
was only a “verbal guarantee of payment”, unlike the bank guarantee
supporting Real Madrid’s contract with Mediapro. If that’s true, that’s
astonishingly inept.

However, in the event that Mediapro went under, “the cancelling of the
contract would be immediate” and it is difficult to believe that another
television channel would not want Barcelona’s broadcasting rights. They
might pay less, but it is extremely unlikely that the club’s TV revenue would
disappear altogether.

Of course, there’s a broader danger here, as the other clubs in La Liga
attempt to implement collective bargaining with the potential negative
implications for the business models of the “big two”. Clearly, both
Barcelona and Real Madrid will resist this with all their might, as it would
obviously mean a hefty reduction in their revenue, but such a change might
not be catastrophic.
                             "How do you spell DNA?"

First, even with the Premier League’s collective model, the big clubs still
enjoy by far the highest share of the total pool, as the distribution model is
geared towards those finishing higher and the number of times a team is
shown live on television (inevitably the top clubs). Second, if the Spanish
league becomes more competitive, then it may become a more marketable
product globally, which would increase the fees paid for overseas rights.
Indeed, Real Madrid president, Florentino Perez, has already been pushing
for an earlier kick-off for some La Liga games, so that they are more
convenient for Asian TV audiences, “The change is vital if the Spanish
league is to compete with the English.”

But are Barcelona too dependent on TV revenue? Well, it’s definitely very
important, but it actually accounts for only 39% of their total income. As a
comparison, only three clubs in the Premier League have a better (lower)
proportion than that: Arsenal 34%, Manchester United 36% and Chelsea 38%.
In fact, Barcelona enjoy a very balanced mix of revenue: television €151
million, commercial €121 million and match day €116 million. So, even if
they were to lose 100% of their TV income (hardly a realistic assumption),
they would still receive €237 million, which is not much less than clubs like
Chelsea (€248 million) and Arsenal (€270 million).

The club’s revenue growth has been mightily impressive, up from €123
million in 2003 to €387 million in 2010. So their revenue has more than
tripled in seven years with Xavier Sala i Martin describing this year’s
revenue as “the largest income of any club in the world including the United
States.” However, as the old saying goes, “turnover is vanity, profit is
                            "Say hello, wave goodbye"

That’s absolutely correct, but another expression is even more important,
namely “cash is king”. The reason why companies fail is cash flow problems.
It does not matter how large your revenue (or profits are), if you do not
have the cash to pay suppliers, the tax man or your players, then you are
going to hit the rocks. In Barcelona’s case, the latest cash flow statement
we have is from the 2008/09 accounts and this did not indicate any
difficulties. There was a net cash inflow of €6 million, entirely consistent
with the €7m reported profit, with net financing of only €16 million (the €29
million bank loan less €13 million repayments).

It does not take a genius to realise that there must have been a degree of
financial mismanagement, if not downright incompetence, over the last 12
months, if you move so far from that healthy position that you need to take
out a loan in order to pay your players. OK, this was exacerbated by the fact
that Barcelona pay their players’ salaries twice a year, and this July’s
payment was inflated by the high bonus payments, but even so.

The club’s cash flow predicament may have been brought about by doubts
over when the Mediapro payments would be received (40% of the annual fee
is due at the beginning of the season), but frankly it could have been for any
number of reasons.
                        "Laporta warmly welcomes Rosell"

Some have speculated that Laporta only left Rosell enough funds to either
make the payroll or buy new players, but not both, thus forcing the new
president to not make any marquee signings in his first summer. Others have
attributed the shortfall to the purchase of David Villa, when Barcelona for
once had to pay the entire transfer fee upfront, due to Valencia’s own
financial travails. On the other hand, some have claimed that the liquidity
crisis was caused by Rosell’s decision to cancel the scheduled price rise in
season tickets, as the previous board’s (unpublicised) request for a bank
loan had assumed this additional revenue as part of their business plan. This
meant that Rosell had to re-submit a modified loan request.

It has surely become obvious by now that there is more than a hint of
politics in this whole mess with FC Barcelona caught in the middle of a
deeply personal battle between the incoming and outgoing presidents.
Although Laporta and Rosell were colleagues on the board between 2003
and 2005, they have famously fallen out and now only communicate through
lawyers. Rosell was elected on a platform of sorting out the financials, so he
is hardly going to say that everything is “hunky dory” once he’s put his feet
under the desk. Having said that, it is equally clear that Laporta would like
to go out with a bang: financial stability as well as sporting success.

                             "Yes! We've been paid!"
To my mind, the generous provisions made by Rosell smack of what the
Americans call “big bath” accounting, which is a very common occurrence in
the business world. What happens is the newly appointed CEO attempts to
get all the bad news out of the way in his early days, which has two
advantages. First, he can blame any problems on his predecessor; second, it
gives him a lot of flexibility to demonstrate future profit improvements, as
and when the provisions are released. We have seen many examples of this
in the banking sector, but we don’t have to go that far to see a precedent:
this is exactly what happened in 2003 the last time that there was a change
in Barcelona’s president. This may be overly cynical, but it would not
surprise me at all if Rosell painted a very different picture in 12 months
time (after the first glorious year of his presidency).

Although Laporta has not responded publicly to the accusations made by the
new board, perhaps mindful of his ambitions in regional politics, one of his
former deputies, Xavier Sala i Martin, has said plenty, including an ironic
analogy for the accounting adjustments where he thought that the new
board should take the credit for the 2009/10 La Liga triumph, as the trophy
had not yet been delivered. This is possibly a bit harsh on Rosell, who did
after all gain a resounding majority of members’ votes in the presidential
election, but the former treasurer went further, claiming that this might be
an elaborate plan for the new board to make excessive profits in their first
year, which would apparently allow them to get back the enormous bank
guarantees deposited as part of the presidential campaign. I have no idea
whether this is true, but it certainly demonstrates the level of antipathy
between the two sides.

In fact, there have been so many contradictory statements coming out of
Barcelona, that it’s almost impossible to distinguish the wheat from the
chaff. How can a club need a €150 million loan to pay its wages, but the
next minute also have a transfer budget of €50 million (sorry, €89 million
after player sales)? That’s some transfer pot for a club with cash flow
problems. Until we can examine the comprehensive financial statements,
it’s difficult to get to the bottom of this, but something doesn’t add up.

                             "I'm heading that way"
What is clear is that Barcelona need to somehow improve their financials.
The most immediate action should be to cut costs and they have plenty of
scope to do this with a couple of obvious targets. They have already started
the process of reducing the enormous wage bill by offloading Thierry Henry
and Rafael Marquez to the New York Red Bulls and selling Chygrynskiy to
Shakhtar and Yaya Toure to Manchester City. The latter two sales also
provided the double whammy of bringing in €39 million of sale proceeds.
There may be more to come here with Alex Hleb and Martin Caceres likely
to go on loan, though it now seems unlikely that the high-earning Ibra will
leave this summer.

It’s also surely not beyond the club to negotiate a bonus scheme that pays
out less than the additional revenue generated from any success.
Portsmouth also fell into the trap of losing money after their FA Cup win,
but you would hope that Barcelona’s executives were slightly more
competent than the miserable shower at "pay up" Pompey.

On the revenue side, they could re-introduce the idea to increase season
ticket prices, though this would admittedly be tricky in the current
economic climate, especially as the stadium is already not filled to

But there is a far more obvious opportunity in commercial revenue, where
the club has already agreed that there is “scope for future growth.” In
particular, they could sign a lucrative sponsorship deal. Barcelona have
famously never had a shirt sponsor, instead paying UNICEF for the privilege
of having their name on the kit, but Rosell has already raised this idea
during the election campaign. As a comparison, Real Madrid receive €20
million a year for shirt sponsorship, while Liverpool have secured a €24
million deal, despite their decline. I would think that Barcelona could
charge a premium for the privilege of being the first corporate name on the
blaugrana shirt, so this could be worth €25-30 million.

                           "We've got Cesc Fabregas"

Of course, there are many that would like to see Barcelona fail after their
unseemly pursuit of Arsenal captain, Cesc Fabregas, which has dominated
this summer’s transfer talk. This culminated in an extraordinary statement
last week, where they admitted that none of their bids “exceeded €40
million”, which is either massive disrespect to a player of Cesc’s talent or
demonstrated a new-found sense of financial prudence. Take your pick.

In a way, the desire for Barcelona’s future prospects to be hamstrung by
financial woes is perfectly understandable, as they have undoubtedly sullied
their saintly image with their constant tapping-up and inability to shut up
about Cesc’s Barcelona DNA, but it looks like reports of their demise might
be a little premature. After all, if things get really desperate, they could
always raise €100 million by selling Messi.

So are Barcelona going bankrupt? No way, José.

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