English Soccer Faces `Potentially Calamitous' Wage Problems, Deloitte Says

English soccer faces “potentially calamitous” problems if it doesn’t control soaring wages and reduce its dependence on rich benefactors, accountant Deloitte LLP said in its annual review of the sport’s finances.

A year after Deloitte said Premier League wages topped 1 billion pounds ($1.45 billion) for the first time, it found they’d risen a further 11 percent to 1.3 billion pounds, while revenue rose 3 percent. That’s more than halved operating profit and meant Germany’s Bundesliga has overtaken England’s top league as soccer’s most profitable championship.

Manchester City’s Abu Dhabi-based owners and Chelsea’s Roman Abramovich have poured more than 1.1 billion pounds into their clubs in recent years, Deloitte said. Meanwhile, Portsmouth in February became the first Premier League team to seek protection from creditors as it struggled with debt of more than 100 million pounds. “Unaffordable” expenditure on players and lack of financing were key causes, Deloitte said.

“Whilst some clubs seek to break even on a consistent basis, the emerging norm for many Premier League and Championship (second-tier) clubs appears to require significant ongoing benefactor support,” said Dan Jones, a partner with Deloitte’s Sports Business Group. “As such we appear to be seeing a continuing shift from a sustainable ‘not for profit’ model toward one with potentially calamitous consistent and significant loss-making characteristics.”

Wage Costs

Deloitte’s report on 2008-09 adds that even amid rising revenue, “in a classic example of competitive game theory, clubs are continually driven to maximize wages rather than profitability.” The challenge of controlling wages is becoming a “real threat,” it said.

Players such as City’s Emmanuel Adebayor and Chelsea’s John Terry and Michael Ballack make salaries in excess of 100,000 pounds a week, according to media reports. The Blues’ England midfielder Joe Cole is switching to Arsenal for 90,000 pounds a week, the People newspaper reported two days ago.

Comparing 2008-09 with the Premier League’s first season, 1992-93, 97 percent of annual incremental revenue has been swallowed up by wages and other costs, Deloitte said.

“Premier League operating profits fell by more than half to 79 million pounds, their lowest level since 1999-2000, primarily owing to wage inflation (132 million pounds) being greater than the 49 million-pound increase in revenue,” the report said. The wages/revenue ratio rose to a record 67 percent.

Champions League

Germany’s top division achieved operating profit of 172 million euros ($206 million), almost double the Premier League’s 93 million euros, even as the English competition generated 751 million more in revenue.

“With no sign of a reversal of this trend in 2009-10, in next year’s edition we are likely to report operating profitability dropping back to the aggregate levels we last saw in the early 1990s,” Jones said.

The English league is the richest in world soccer, with 2.3 billion euros in sales, and the sport seems “largely recession resistant,” Deloitte said.

Much of the increased salary cost can be attributed to clubs outside the so-called “big four” -- Manchester United, Chelsea, Arsenal and Liverpool -- trying to break into Europe’s elite Champions League or avoid relegation, the report said.

‘Deep Pockets’

Manchester City, owned by Sheikh Mansour bin Zayed Al Nahyan, reported a loss of 92.6 million pounds for the year ending May 31, 2009, on player trading and salary costs. The club spent around 200 million pounds on acquiring talent during the past two seasons, more than any other team.

Chelsea is trying to balance its books ahead of new financial controls being established by European soccer’s governing body, UEFA. The club in December announced its annual loss narrowed 32 percent to 44.4 million pounds.

Team benefactors need “very deep pockets,” Deloitte said, and there seem to be fewer potential investors in the current economic climate. Also, clubs face a harder stance from banks and tax authorities.

“The startling experience of Portsmouth is an example of how quickly things can unravel,” Deloitte said.

From 2015, clubs spending more than they earn face exclusion from the Champions League and the Europa League. UEFA’s moves haven’t met with universal support.

“Certainly it is intriguing to non-football people to see an industry’s participants skeptical about regulation aimed at increasing, not decreasing, their profitability,” Jones said.

TV Contract

The report highlighted the financial importance of the Champions League. Liverpool, Manchester United and Arsenal, three of the country’s four entrants in 2008-09, and the three newly promoted teams had operating profits of 196 million pounds. The remaining 14 teams recorded a combined loss of 117 million pounds.

Premier League clubs’ debt increased to 3.3 billion pounds from 3.2 billion although 40 percent was in non-interest bearing ‘‘soft loans,” Deloitte said.

The league will begin the first year of its record domestic and overseas broadcast contracts next season. Collectively, they are worth almost 3 billion pounds to the league’s 20 teams over three seasons.

Jones said the extra money is unlikely to go to improve teams’ balance sheets.

“We fear that history will repeat itself and once again the vast majority of those revenues will quickly flow into the hands of players and their agents. We hope football can prove us wrong,” he said.

To contact the reporter on this story: Tariq Panja in London on tpanja@bloomberg.net

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