Written as a chapter in the excellent Paul Tomkins book "They Dared to Dream" available here
With Liverpool qualifying for the Champions League for the first time since 2009/10 alongside a bumper increase in the latest Premier League broadcasting deal, this piece sets out what such additional revenue streams will mean to the club. In addition, with financial regulation very much in the headlines with the recent Manchester City and PSG sanctions for breaching the UEFA Financial Fair Play (FFP) rules, the question of compliance with UEFA and Premier League regulations is also important to consider.
This piece is split up into three sections in order to provide context for the subsequent analysis. The first section sets out the current UEFA and Premier League financial regulatory environment where clubs are required to live within their means. The second section sets out the broadcasting and prize monies on offer for participation in the Champions League and Premier League. The final section highlights the significance of these issues to Liverpool's bottom line for the coming 2014/15 season.
Financial Regulatory Environment
Over the course of the last few years, the football authorities have implemented a number of regulations in order to ensure that clubs, more or less, live within their means. For Liverpool, this incorporates the UEFA and Premier League FFP regulations. The below section briefly details the rules and provides context as to why they are important to Liverpool.
UEFA FFP and Premier League Cost Control and Sustainability Rules
The UEFA regulations not only ensure that clubs break-even. They cover a wide range of licensing conditions which are overseen initially by national football associations. Such requirements include ensuring clubs pay their debts in a timely manner. UEFA FFP relates only to Champions League and Europa League club participation, and not to domestic league participation. A wide variety of clubs (through the European Club Association) were consulted by UEFA over many months. The regulations have been drafted and implemented with the consent of the clubs.
All clubs wanting to play in UEFA competition must submit the required licensing documentation to the relevant national football association (and for break-even purposes to UEFA). UEFA, through its constituted Club Financial Control Body (CFCB) has the power to conduct club audits and ask further questions to ensure FFP compliance. If the Panel believes that the FFP rules have not been correctly followed, it has the disciplinary power to sanction clubs in breach.
From the 2013-14 season, the UEFA licence requirements will include adherence to the FFP break-even rules. Until the 2013-14 season, there are no sanctions for breaching the UEFA FFP break-even rules. The rules need to be borne in mind however from the 2011-12 season onwards because the 2011-12 and 2012-13 season accounts are used to determine a club's licence application in the 2013-14 season.
Acceptable deviation is the term used to describe break-even. Acceptable deviation allows clubs to pass the FFP break-even test without actually breaking even. The acceptable deviation provisions allow a club with some losses over a certain number of seasons to 'break even' and therefore pass the FFP regulations. The below table sets this out.
Explanation Table for Acceptable Deviation
The table shows that the acceptable deviations (i.e. losses) vary quite considerably. The first point to stress is that if an owner does not put any money into a club by way of cash for shares, each club's acceptable deviation (loss), by reference to the last column in the table, is a mere €5m over three years (i.e. €1.7m per season).
For the 2013/14 season when the FFP rules come into force, an owner can inject up to €45m over two seasons to cover the losses of the club. After the 2013-14 season an owner can on average exchange only €15m worth of cash for shares each year to spend on transfers and wages. That figure is reduced to €10m per season (€30m over three seasons) for the 2015-16 season. Should a club wish to pass the FFP break-even requirement, and it makes for example a €35m combined loss for the first monitoring period (13-14), the owners will have to inject €30m worth of equity and €5m worth of loans (totaling €35m) into the club. If they do not, that club will breach the rules.
The FFP rules promote investment in a club's stadium, training facility infrastructure and youth development schemes by excluding such costs from the break-even calculation.
The CFCB has the power to sanction clubs for breaches of the FFP rules. Such sanctions include a reprimand, a fine, withholding of prize monies, points deductions, refusal to register players for UEFA competition, reducing a club's permitted squad size, disqualification from competitions in progress and/or exclusion from future competitions. As has been seen lately, clubs like Manchester City and PSG among others have been severely sanctioned with salary freezes, transfer and squad size reductions as part of UEFA's settlement agreement with nine clubs.
As such, based on the above table, Liverpool will submit their 11-12, 12-13 and 13-14 accounts for the 14-15 monitoring period. The club will only be allowed to make a maximum loss of €45m over the three seasons. Should the club exceed that limit, UEFA has the power to sanction the club accordingly. As Liverpool were not in the 2013-14 Champions League or Europa League competition, they were not obliged to submit their accounts to UEFA. It is likely by January-February 2015, that UEFA will have received the three years' worth of club accounts and will then take a decision on whether to investigate the club further. It is worth noting that all three accounting years submitted to UEFA relate to periods the club was not in the Champions League. The benefit however of the 13-14 club accounts is that the latest 13-14 Premier League distributions have provided Liverpool with a £43m revenue boost when compared to its 12-13 Premier League distribution monies. This will be a significant bonus to all Premier League clubs waning to adhere to the UEFA rules.
Premier League Summary
The Premier League's 2013-14 handbook added two important new financial regulations. The Premier League does not use the term FFP to characterise their new rules but they bear some of the hallmarks of break-even which are prominent in the UEFA and Football League FFP provisions.
Not many are aware that a soft wage cap exists in the Premier League. Rule E.18 states that:
"If in any of Contract Years 2013/14, 2014/15 and 2015/16 a Club's aggregated Player Services Costs and Image Contract Payments:
E.18.1. exceed £52m, £56m, or £60m respectively; and
E.18.2. have increased by more than £4m when compared with the previous Contract Year or by more than £4m, £8m or £12m respectively when compared with Season 2012/13;
then the Club must satisfy the Board that such excess increase as is referred to in E.18.2 arises as a result of contractual commitments entered into on or before 31 January 2013, and/or that it has been funded only by Club Own Revenue Uplift and/or profit from player trading as disclosed in the Club's Annual Accounts for that Contract Year."
The definition of "Club Own Revenue Uplift" is set out at A.1.32 of the Premier League rules and means "any increase in a Club's revenue... when compared with its revenue in ... 2012/13 (excluding Central Funds fee payments."
The practical effect of the above is that only a £4m increase in the wage bill for Premier League clubs per season will be permitted. If a Premier League club spends more than an additional £4m on wages from the previous season, the additional wage cost can only be funded by increased commercial revenues that the club has made during that same season. The below table sets out the defined amounts:
By way of practical example, if Liverpool's 2012/13 wage bill was around £125m and for the 2013/14 season it increased to £130m, the club would have spent £1m more than was permitted under Rule E.18. Liverpool would have to demonstrate to the Premier League that, in the same year of the wage cost increase, the £1m additional wage cost arises either from:
- contracts entered into before 31 January 2013;
- its own revenues excluding centrally distributed Premier League monies; or
- profit from player transfers.
For the 2014-15 season, this regulation could provide the club with a real competitive advantage as Liverpool will be able to generate greater match day revenues from Champions League participation and importantly, participation prize money from UEFA. As will be set out below, a deep run into the competition can be worth between €30-€50m. If Liverpool are able to receive £30m in additional revenues from their Champions League participation, they will be able to spend, if everything else remains equal, an additional £34m on wages (i.e £30m in additional revenue plus £4m permitted under the regulations) because the additional £30m would be deemed the club's "Own Revenue Uplift".
Profitability and Sustainability
In addition, Premier League clubs can make a £15m loss over a three year rolling accounting period. This means that a £5m per season loss can be covered by owner loans. Clubs can make a cumulative £35m loss per season over a three year rolling accounting period (i.e. the first being 2013/14, 2014/15 and 2015/16) I.e. a total loss of £105m with certain conditions attached (set out below).
Importantly, Rules E.52-E.58 will only come into effect from the 2015/16 season.
By 1 March 2016, Premier League clubs will have to submit three years' worth of accounts. For losses up to £15m over the three year period, no owner guarantee will be required. If a club's losses exceed £15m for the three year period, the club in the relevant season has to provide:
- future financial information to the Premier League; and
- evidence of sufficient Secure Funding (as defined in Rule A.1.143) of up to £90m injected into the club by way of shares (Rule E57 and E.58).
If a club breaches the £105m limit, the Premier League board has the power to compel a club to adhere to a defined budget (Rule E.15.1) and/or refuse to register any new or existing player contract (Rule E.15.3). Rule E.58.2 appears to give a Regulatory Commission the power to further sanction a club for breaching these provisions. The outcomes of such reporting requirements may thus result in breaches which could lead to sanctions like points deductions though a sanctioning tariff has not yet been published.
Therefore for Premier League purposes, Liverpool can spend more than they earn (up to the £105m mark) so long as FSG are willing to provide secured funding. Practically however, as the club will want to participate in UEFA Champions League competition, they will be required to adhere to more stringent rules (i.e. €45m loss over three years).
Prize Money and TV Distributions
This next section deals with the additional money that Liverpool earned during the 2013-14 domestic season and the prize money that UEFA will distribute to the club for playing in the 2014-15 Champions League competition.
The Context: The Latest Premier League and UEFA Deals
Sky and BT won the latest domestic live Premier League broadcasting tender, providing the Premier League with a record £3bn+ in revenue for the UK market. Such a figure is a huge increase on the previous deal agreed with Sky and ESPN. The total global revenue figure is believed to be around £5.5bn.
The average overall price per match paid by the UK broadcasters has risen from £4.7m to £6.6m. Sky secured five of the seven packages on offer (116 matches per season from the 2013-14 season for three seasons) after paying £2.3bn. BT won two packages worth 38 games per season for three years from the 2013-14 season, after bidding £738m.
In addition, in November 2013, BT won the exclusive rights to show 350 live Champions League and Europa League matches in the UK for three seasons from the 2015-16 season. BT paid around £900m to UEFA for the live rights. Previously, Sky and ITV (who are the current incumbents) paid just under £400m. This deal is different to past agreements with UEFA who had previously split the exclusive rights between two broadcasters. This time, BT won all the available packages with the consequence that for the first time, no live Champions League or Europa League action will be available on UK terrestrial TV. It has been reported however that each UK club, once a season, will be screened free of charge on the BT platform including both Champions League and Europa League finals too.
Prize Money for Champions League Participation
The Champions League prize money is split between a fixed amount for set performance thresholds (as set out in the second below table) and a TV pool allocation. At the time of writing, the revenue figures for the 2013-14 have just been published. The top ten earning Champions League clubs in the 2013-14 season are set out below:
The below table demonstrates the fixed amounts that each Champions League participating team earns throughout the various stages.
The second part of the revenue distribution is the important part for the new BT deal. In addition to the above fixed performance amounts, the clubs who qualify for the Champions League receive a proportion of the TV money paid by the national broadcaster. Therefore the size of the revenue pool is linked to the value of the country's TV market.
The revenue pool distribution is split between where a club finished in its previous season and how successful it is in the current competition. The Premier League champions receive 40% of the TV revenue pool, second place receives 30%, third place 20% and fourth place 10%. Where a team finished in its domestic league is important for its UEFA revenues. With the increased BT deal from 2015-16 season, clubs qualifying for Champions League competition will share in the increase of the TV pool money. It is not inconceivable that UEFA's distribution could reach over £60m if the 2014-15 Premier League champions then win the Champions League competition in the following season and the other Premier League clubs (who qualified for the Champions League) fail to make the later rounds (which gives a club a larger share of the TV pool monies). In any event, Premier League clubs participating in the Champions League will reap the rewards of a larger TV revenue pool. As such, qualification for the 2015-16 Champions League competition with the huge TV pool uplift will have a large revenue impact and will be of significance to Liverpool.
The 2013-14 market pool figures for English clubs were as follows:
Liverpool's absence from Champions League competition has been a significant revenue black hole for a number of years. Manchester United chief executive Edward Woodward claimed non-qualification would cost United in the region of £35m. That would appear be a conservative estimate based on additional match day revenues and prize money. From looking at last year's distributions, the second placed finisher in the Premier League received 30% of monies from the TV pool. Should Liverpool qualify from the Champions League group stage, it is likely to be worth around €37m in total UEFA distributions2. That does not include match day and additional commercial revenues.
Prize Money for Premier League Participation
The Premier League distributes its UK broadcasting monies to its member clubs in the following way: 50% is split equally, 25% is based on the number of television appearances with a stipulated minimum amount (called facility fees) and 25% based on where that club finishes in the league (called merit payment). The overseas broadcasting monies received from broadcasters outside the UK is distributed equally amongst the clubs too.
The table below sets out the distributions for the 13-14 season.
Despite finishing second, Liverpool received the highest total payment any club has ever received in a Premier League season with £97.5m. This is because the club was picked the most (28 games) for live broadcasts in the UK. As mentioned previously, the club received £43m more than they did in the previous season with over £1.5 billion being distributed to the 20 Premier League clubs.
On a more general level, every place in the Premier League is now worth £1.2m with the bottom club guaranteed £62m. This means that any clubs promoted to the Premier League will receive over £120m based on their year in the league and four years' worth of parachute payments worth over £60.
Conclusion and the Upside for Liverpool
As explained above, Liverpool will benefit strongly from a number of TV deals both centrally negotiated by UEFA and the Premier League. It should also be noted that the club has entered into lucrative individual commercial deals with Warrior (£25m per year), Standard Chartered (£20m per season), Subway (£1-2m), Garuda and Dunkin Donuts. That is without taking into account the commercial significance of the Anfield development. It is likely that there may also be contractual bonuses in existing deals with, for example, Standard Chartered and Warrior for additional Champions League exposure.
As such, the club's revenues (performance depending) from Premier League and Champions League participation distributions alone in the 2014-15 season may be an eye-watering £130m. That figure does not include the latest BT broadcasting deal uplift that starts from the 2015 season. This could potentially add an additional £10m+ to the UEFA distribution.
All of this filters back to FFP compliance. The more revenue generated, the greater the permitted expenditure on transfers, wages and infrastructure. Sporting success translates into financial success and it is now for Liverpool to take advantage of their on-field exposure to continue the upward spiral.
1 Note that the % revenues for the market pool will not be exact as some clubs went further in the competition. i.e. Chelsea would have been entitled to £14.34m from the market pool (20% of £71m) but because they went further than any other English team, they benefitted from an extra share of the market pool revenue.
2 Calculation: Performance Prize Money €8.6m+ €3.5m (assumption of 3 wins, 1 draw and 2 losses) + €3.5 (for last 16) + €21.6 (30% of €72m TV pool which may vary depending on how the other clubs progress) = €37.2m
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