The more you owe to the bank the safer you are - as Cork City football club could tell you, writes Richard Gillis
CORK CITY'S current financial plight highlights one of the new rules of the football business: better to owe €200 million than €2 million.
The very existence of small clubs like Cork and others in the Scottish and lower English leagues is in serious jeopardy as banks and other investors come down hard to recover unpaid loans and other forms of debt.
Cork have been placed into examinership due to debts of €800,000 while, paradoxically, a glance at the balance sheets of many top English Premier League clubs shows that several are carrying levels of borrowing running into hundreds of millions of euros.
The showpiece event of the last European season, the Uefa Champions League final between Chelsea and Manchester United, illustrates this point. The two clubs owe a collective £1.5 billion, (€1.9 billion), prompting an outburst from Uefa president, Michel Platini, who described both clubs as "cheats" whose aim was "not to win titles, but to pay back debts".
Champions League success is built around who has the most money, says the former French captain turned soccer administrator.
"It is run on credit now and it annoys me. We have to find ways to help other clubs sort out their problems. Defeat must no longer mean financial disaster. We have to find the means to help clubs sort out their financial problems."
Fine words, but it is likely that the tightening of the money markets will have an impact before the legislators get a chance to act.
Until now the top clubs have existed in a bubble, protected from the economic realities of life by a series of enormous television rights deals, most notably with Sky and Setanta, worth £1.3 billion (€1.63 billion) and £392 million (€491.2 million) respectively.
This money, added to international rights sales, has sustained a spending boom in transfer fees and wages.
Since its inception in 1992, the total wage bills of Premier League clubs have risen from £75 million to more than £1 billion and now account for 63 per cent of turnover.
This summer, Liverpool bought Robbie Keane for £20 million from Spurs, a deal that sees Ireland's 28-year-old captain take home an estimated £4 million a year in wages for the next three years.
While Keane's presence at Anfield may boost the club's firepower, he arrives just as a refinancing arrangement by the club's American owners is set to plunge the club £500 million into debt.
George Gillett and Tom Hicks bought the club in March this year aided by a £298 million Royal Bank of Scotland loan. The pair are currently in negotiation with American bank Wachovia to fund the cost of the debt and to pay for the long-promised new stadium, which they hope will raise their revenue-generation potential.
However, there are signs that this type of deal may become a thing of the recent past.
Since 2005 there has been a series of takeovers, with Manchester City, Newcastle, Liverpool, West Ham United, Manchester United, Portsmouth and Aston Villa changing hands.
This summer has seen no such change in ownership in the Premier League and a new report published by financial consultancy PKF suggests that the credit crunch is finally hitting even the wealthiest clubs.
Charles Barnett, head of PKF's football industry group, told The Irish Times that such highly leveraged takeovers would not take place in the current climate.
"There is no appetite in the financial markets for that sort of deal. For example, it is very unlikely that anyone would finance anything like the amounts of money paid for United," said Barnett, referring to the Glazer family's buy-out of Manchester United, which saddled the club with £660 million of debt.
The shift in market conditions means the new owners are being forced to recalibrate their expectations in terms of investment return.
Niall Quinn's Drumaville consortium of mainly Irish businessmen paid €12.65 million for Sunderland in 2006; the club was then at the bottom of the Football League Championship.
The consortium cleared the club's existing €40 million debt, a deal put together using loans from Anglo Irish Bank and Barclays, and installed Roy Keane as manager, who inspired a remarkable promotion-winning turnaround.
Last season, Keane's team survived a fierce relegation battle and has spent big in the transfer market this summer, courtesy of further funds from Drumaville. The stakes for the owners are now much higher though, according to Barnett.
"This is a game for billionaires not millionaires," he says. "The Drumaville consortium are looking at a valuation that is a multiple of the money they paid for the club, but the big money that was swirling around a year ago is not there any more."
PKF's research was based on a sample of club financial directors, which revealed that the number of Premier League clubs that anticipate making a loss this season is rising, as is the number intending to use their full overdraft facility, up from 46 per cent in 2007 to 89 per cent this year.
Revealingly, more than two-thirds of Premier League clubs intend to reduce their first-team squads this year, compared with only 15 per cent in 2007, while many have admitted that their relationship with the banks is under pressure.
Other indicators point to a dramatic fall in confidence among this seemingly bullet-proof industry. For example, despite Robbie Keane's transfer and the probable move of Dimitar Berbatov from Spurs to Man Utd, the amount of money spent in the player market by Premier League clubs has fallen for the first time in a decade.
The clubs enjoy an annual 5 per cent increase in revenue from the centralised television deal, which can form over half of total income, a figure that rises sharply for the smaller clubs. However, Barnett says, the harsh economic outlook has affected non-media income streams, such as match-day tickets, merchandising and corporate hospitality.
"Season ticket sales have tended to hold up quite well, probably because fans have planned for that expenditure, but the tickets bought at the turnstile on match day are hit, which is the gap between season tickets and capacity."
Likewise, he says, clubs fear that sales of replica shirts will suffer over the coming year, with many choosing to pay for the home kit only. Of the 20 Premier League clubs only two, Newcastle and Manchester United, have not brought out a new first-team kit for this season and many have brought out a third kit in addition to home and away strips.
Despite this unease in the boardrooms, it is too early to talk of bubbles bursting while television remains so in thrall to the live game.
In the last round of TV rights negotiations, Richard Scudamore, the Premier League's chief executive, took advantage of a competitive auction to ramp up the price in the domestic British market.
It remains to be seen whether Scudamore can rely on Setanta to play their part to the same degree next time. The Irish pay TV company has yet to reach its break even point of 1.5 million direct subscribers, despite massive outlay on rights from FA Cup and England internationals to PGA golf.
Analysts suggest that a buyer for Setanta, once thought to be Disney or Virgin Media, is unlikely to come forward in the present climate. Although the company professes to be able to self-finance, there are doubts over its ability to keep its place at the top table in the brutally competitive sports television business.
Without Setanta, Sky may have a clearer run next time the rights for top-flight football come up in 2010, with implications on the price they are prepared to pay.
Even then the potential for growth from international rights may keep the Premier League gravy train running, a luxury not afforded clubs like Cork City and others, for whom the bite of the credit crunch this winter may yet be terminal.
