THE NEW BUSINESS OF FOOTBALL

THE NEW BUSINESS OF FOOTBALL

The New Business of Football Accountability and Finance in Football Stephen Morrow Heriot- Watt University, Edinburgh ~!\;1ACMILLAN Business

Stephen Morrow 1999 Softcover reprint of the hardcover 1st edition 1999 978-0-333-72308-1 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 1999 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world ISBN 978-1-349-40532-9 DOI 10.1057/9780230371743 A catalogue record for this book is available from the British Library. This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. 10 9 8 7 6 5 4 3 2 1 08 07 06 05 04 03 02 01 00 99 ISBN 978-0-230-37174-3 (ebook)

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Contents List of Tables and Figures Preface and Acknowledgements xi xiii Introduction 1 1 The New Economics of Football 4 Television - Football's Economic Driver 4 Football's Peculiar Economics 8 The demand for football 8 Television and the supply of football 11 Regulatory capture 14 Redistribution and competition 15 The Scottish dimension 25 Reaching for the Sky 27 2 Rich Man, Poor Man - Players in the New Business of Football 30 The Historical Role of Players 30 The transfer market 30 Salaries 34 Bosman - Football's Cost Driver? 36 The Bosman case 36 Uncertainty of outcome and redistribution? 37 Implications for salaries 41 Implications for the transfer market 50 Compensation for training and development 52 3 The Capital Structure of Football Clubs 58 Introduction 58 Equity Finance 60 Role of the Stock Exchange 62 The primary market 63 Ownership Framework in Football Clubs 75 An ownership classification 77 Corporate control issues 87 Paper prophets? 88 vii

viii Contents The Secondary Market 90 Valuing football club shares 90 Liquidity in football club shares 98 Role of Bank Funding 107 Analysis of club positions 110 Security for borrowing 116 The lending decision 118 Efficiency of borrowing 119 4 Accounting in the Football Industry 121 The Objectives of Financial Reporting 121 Accounting for Intangible Fixed Assets 124 Accounting for players 124 Accounting implications of FRS 10 126 Brand accounting 132 Accounting for Tangible Fixed Assets 135 Accounting treatment 136 Revaluations 136 Depreciation 140 Grants for stadium developments 141 Foreign Exchange Risk 145 Football - A Cash Business? 147 Football's cash inflows 147 Conclusion 152 Disclosure - Role of the Operating and Financial Review 152 Player valuation 154 Training and development 155 Conclusion 156 5 Accountability within the Football Industry 157 Introduction 157 Financial Accountability 158 Investors 159 Employees 162 Supporters and the community 163 Stakeholder Conflicts 164 Club versus company 164 Community accountability 171

Contents A New Framework for Tomorrow's Club? Tomorrow's company? Tomorrow's club? Regulation in the football industry The inclusive approach in practice Conclusion Conclusion Appendixes 1 Index of Company Names 2 Draft Football Association Code of Conduct Notes References Index ix 180 181 183 187 197 198 202 203 205 216 223

List of Tables and Figures Tables 1.1 Broadcasting history of live televised football 1983-2001 5 1.2 FA Premier League television payments 1996/97 6 1.3 Gate receipts and turnover (FA Premier League) 11 1.4 Record gate receipts 19 2.1 Net transfer fees (payable)/receivable - by division 39 2.2 Flow of transfer fees in 1995/96 40 2.3 Wages and salary costs (related to turnover) 42 2.4 Wages and salaries costs by club- 1996/97 43 2.5 Transfer fees paid (between English clubs) 50 3.1 Sources of capital funds of industrial and commercial companies 59 3.2 Assets compared with equity funding, FA Premier League and Scottish Premier Division clubs (1997 accounting year ends) 61 3.3 Listed football clubs 64 3.4 Methods of listing and proceeds of offer 68 3.5 Money raised by new listed UK companies 69 3.6 Market capitalisation: Official List, Leisure and Hotels sector 73 3.7 Market capitalisation: Alternative Investment Market 74 3.8 Ownership framework in listed Premier League clubs (1997 year ends) 78 3.9 Ownership framework in unlisted Premier League clubs (1997 year ends) 79 3.10 Ownership framework in listed Scottish Premier Division clubs (1997 year ends) 80 3.11 Ownership framework in unlisted Scottish Premier Division clubs (1997 year ends) 81 3.12 Ownership framework in other listed clubs (1997 year ends) 82 3.13 Classification of football companies by ownership type 83 3.14 Ordinary shareholdings in Scottish & Newcastle pic at 27 April 1997 84 3.15 Return on football club shares (period to 31 December 1997) 92 xi

Xll List of Tables and Figures 3.16 Abnormal return on Sunderland plc shares 95 3.17 Abnormal return on Manchester United plc shares 96 3.18 Trading volumes (period ending 31 December 1997) 99 3.19 Trading volumes (period 1 January 1996 to 31 December 1997) 100 3.20 Bid-ask spreads, September 1997 102 3.21 Changes in significant holdings at Manchester United and Tottenham Hotspur, 1991-7 106 3.22 Indebtedness to the banks: all clubs (number of clubs) 108 3.23 Indebtedness to the banks: clubs in deficit only (number or clubs) 109 3.24 Individual club indebtedness and interest cover ratios 111 4.1 Accounting policies in respect of player registrations 126 4.2 Average season ticket holder merchandise spend 1996/97 134 4.3 Branded income 1996/97 135 4.4 Freehold properties/land and buildings (1997 accounting year ends) 137 4.5 Pre-tax profit/(loss): Premier League clubs 140 4.6 Gate receipts and season ticket sales 149 5.1 Users and their information needs 160 5.2 Relocated clubs: average home league attendance Figures (division) 173 2.1 Average Football League attendance 1946/47 to 1960/61 35 5.1 Tomorrow's club: factors influencing its licence to operate 182

Preface and Acknowledgements This book is an academic study into the new business of football. It is aimed at those who have a background, a knowledge and an interest in Association Football, as well as in business, particularly in the areas of accountancy and finance. It draws on contemporary literature on professional football in the disciplines of accounting, finance and economics and, to a lesser extent, sociology. It will be relevant to anyone who seeks a more rigorous discussion of the issues arising from the business than that which newspapers and other popular media have space for. It is also hoped that the book will interest those who have the responsibility of running today's football clubs, dealing with conflicts which arise out of the incorporation of football and wrestling with the new financial regime in the game. Thanks are due to all those who have assisted me in writing this book and in my earlier research into accounting issues in football, in particular to those representatives of clubs, banks and fund managers who have willingly met with me on various occasions. My thanks to those clubs in England and Scotland which provided me with copies of their annual reports and provided information requested; to Gerry Boon of Deloitte & Touche for kindly providing me with a copy of the Deloitte & Touche Annual Reviews of Football Finance since its inception; to the Professional Footballers' Association, the Scottish Professional Footballers' Association, the Football Association Premier League, the Scottish Football Association, the Scottish League and UEFA for responding to my requests for information requested and also to those European clubs (Juventus, Ajax, PSV Eindhoven, Strasbourg, Borussia Dortmund, Karlsruher, TSV Munchen, FC Shalke 04, VBV De Graafschap, VfB Stuttgart, Werder Bremen) and to Edwin Gerretson of the KNVB (Dutch FA) for responding to my letters and for sending me information about their respective clubs or associations. Unfortunately the poor response from other European clubs and administrators made it impossible to widen the scope of the book to comment meaningfully on issues relating to the business of football in other European countries. The book draws on published literature in a number of areas and I Xlll

xiv Preface and Acknowledgements am indebted to all those authors referred to in the text. On the subject of literature, thanks are also due to David Rennie for some valuable literature searching carried out in the course of writing his own undergraduate dissertation. A very special debt is owed to my colleague, Frank McMahon, for taking the time and trouble to read over my earlier drafts, and for providing me with many insightful comments and suggestions. The judgements, mistakes and gaps that remain are, of course, entirely my own. Finally, much thanks is owed to my wife Jill for her love and support throughout the research and the writing of this book. STEPHEN MoRRow The author and publishers are grateful to the following companies and organisations for permission to reproduce copyright material: Extracts from Annual Reviews of Football Finance, Surveys of Football Club Accounts and the report England's Premier Clubs are reproduced with the kind permission of Deloitte & Touche, Manchester. Information on share price returns, trading volume, daily number of trades, average bid and ask prices and return on share price indices is reproduced with the kind permission of Datastream/ICV. Table 1.1 adapted from Baimbridge, M., Cameron, S. and Dawson, P. (1996), 'Satellite Television and the Demand for Football: A Whole New Ball Game?', Scottish Journal of Political Economy. Copyright Scottish Economic Society. Extract from Section D, Broadcasting and Finance, Rules of the Football Association Premier League, from the FA Premier League Handbook 1997-98, The FA Premier League Limited 1997. Table 1.2 The FA Premier League Limited 1997. Table 1.4, Figure 2.1 and Table 4.6, 'Stadium Capacities', reproduced with kind permission of Headline Book Publishing Ltd.

Preface and Acknowledgements XV Part XIII. Financial Provisions. Article 18, Paragraph 9 of the Regulations of the UEFA Champions League 1998/99, is reproduced with the kind permission ofuefa. Table 3.1 'Financial Statistics', Office for National Statistics, Crown Copyright 1998. Table 3.5 reproduced with kind permission of the London Stock Exchange. Table 5.1, 'The Traditional Club', reproduced with permission of Barmarick Publications, 'Companies', reproduced with permission of the Accounting Standards Board. Figure 5.1 adapted from Tomorrow's Company: The Role of Business in a Changing World, The Royal Society for the Encouragement of Arts, Manufactures and Commerce, 1995. Reproduced with kind permission of the Royal Society for the Encouragement of Arts, Manufactures and Commerce. Appendix 2 is reproduced with the kind permission of the Football Association.