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| Kanika Datta: Moral hazard comes to football finance |
| Kanika Datta / New Delhi Mar 04, 2010, 00:29 IST |
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Goldman Sachs’ chief economist Jim O’Neill is an unlikely name to figure in discussions among football’s TV pundits and bloggers. But that’s just where you can spot his name these days. That’s because he’s at the centre of a hostile takeover attempt on Manchester United, one of the world’s richest and most successful football clubs.
Part of a team of 50 high net worth individuals (i.e., rich fans) who call themselves the Red Knights (Man U’s team is called the Red Devils), he’s trying to rescue the club from the deeply unpopular Glazer family, the Americans who bought it in 2005. The idea is to make Man U a supporter-owned club like Spain’s Barcelona.
The situation is almost comical because (a) the Glazers have categorically said they don’t want to sell and (b) until they do, neither the Red Knights nor anyone else can buy since the club delisted from the stock exchange some years ago.
Also, the Red Knights have to raise about £1 billion to buy out the Glazers, an unlikely situation given the new-found risk aversion of bankers and the parlous state of European football in general and English football in particular.
Till the 2009-10 season, European football could have been considered the ultimate demonstration of the marvels of the unregulated free market, seemingly impervious to global crises. Over the past two decades, a surging worldwide fan following has seen the sport dribble its way past two major global downturns — the Asian currency crisis in the late 90s and the dotcom bust in the early 2000s.
In industry after industry, companies folded and people lost jobs, but football stars continued to command dizzying salaries, stratospheric transfer prices, not to speak of the endorsement deal et al that inevitably followed.
In the 2008-2009 season, just as the global economy was melting under the sub-prime crisis, Man U sold its hot Portuguese striker Christiano Ronaldo to Real Madrid for £81 million. Now, however, there are signs of hubris, as the Man U buyout imbroglio shows. The Glazers’ appearances at Red Devils’ matches are routinely greeted by boos because their £810 million deal to buy the club included raising £716 million of debt raised on Man U’s holding company, some of it to hedge funds at extortionate interest rates of 14.5 per cent.
Earlier this year, this debt mountain prompted the club to ask its first team to take a salary cut (they refused). A £500 million bond issue followed to cut borrowing costs, but at least half of that will go straight to the Glazers’ pockets. Incredibly, the Red Knights are now trying to buy bonds from the market as a means of creating some sort of hold over the Glazers.
The interesting point about the Man U imbroglio plus what’s going on elsewhere in European football is that moral hazard has suddenly become an issue in the huckstering, roller-coaster world of football finance, just as it has on Wall Street.
And that’s because of the financial state of European football clubs. A report released by UEFA, the governing body for European football, late last month showed that more than a third of the clubs have debt greater than their assets. Almost half reported net losses and almost 60 per cent spent more than 100 per cent of their income on wages.
Wages, the bulk of it being players’ salaries, have been at the centre of the moral hazard debate for some years now. In the 2008-09 season, stars like Lionel Messi and John Terry were able to command weekly wages of £156,000 and £140,000, respectively — and those numbers have risen since. Some pundits tut-tutted over such largesse at the cost of the clubs’ financial well-being. Most, however, were all for laissez faire on the assumption that the dizzying growth in TV viewership and merchandise sales plus lenders with no inclination for due diligence would tide over the problem.
This year, however, UEFA has introduced the Financial Fair Play rule, in which it will delicense clubs from its competitions if they did not meet certain financial criteria. One bankrupt English Premier League club, Portsmouth, has already lost its licence on this new rule.
As Michael Platini observed in his Foreword, “There are many clubs that continue to operate on a sustainable basis (and)… are finding it difficult to coexist and compete with clubs that incur costs… beyond their means.”
Meaning, is it okay for, say, Real Madrid to buy high-priced stars, consistently stay in the red and win competitions year in and out when other rivals with stronger profit and loss accounts don’t do so? But in the end, the restriction is likely to be a mild one. Just as the US government is hard put to put restraints on the bonuses of Wall Street banks that it has bailed out, UEFA will not be able to restrict players’ wages and transfer fees, the biggest causes of financial stress.
If football clubs do reform, it will be at the demand of the fans. In this context, it is worth noting that English football’s administrators are examining a proposal for a franchise-based competition that will combine meritocracy with financial staying power. Shades of our own IPL here?
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