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Tue 16 Aug 2011 02:14 PM

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Soccer's new goal: kicking the spending habit

Soccer’s finances and business deals rarely resemble reality. But things need  to change

Soccer's new goal: kicking the spending habit
Etihads 10-year, £400m sponsorship deal with Abu Dhabi-owned Manchester City was called "game-changing" by the club

Talk about inflation. In 1977, when English soccer club
Liverpool sold two-time European player of the year Kevin Keegan to Hamburg
they charged the German club a £500,000 transfer fee.

In 2009, as the world struggled to emerge from the worst
financial crisis in more than half a century, England's Manchester United sold
European player of the year Cristiano Ronaldo to Spanish club Real Madrid. The
fee: £80m.

Ronaldo may be a goal-scoring machine, but is he worth 160
times more than Keegan? That increase outstrips the UK inflation rate between
1977 and 2009 by a factor of 35. If costs in soccer had mirrored the real
world, Ronaldo's transfer fee would have been around £2.3m.

But soccer finances rarely resemble reality. While no
transfer has broken Ronaldo's record in the past two seasons, deals worth £30
or £40m ($49-65m) are now commonplace. Even a journeyman player can cost £20m.
And that's before player wages, which have also exploded. In the final year of
Ronaldo's 6-season contract with Madrid, the Portuguese superstar will make £556,000
a week.

European soccer's governing body UEFA wants to change that.
To end lavish spending it has devised new regulations to force clubs to pay out
no more than they earn.

The new rules, which UEFA calls Financial Fair Play (FFP),
begin this month with the start of the European season. Clubs will have two
years to begin balancing their books. If they don't meet FFP targets from the
2013/14 season, UEFA says it will expel them from club soccer's premier
Champions League competition. That would lose a club tens of millions of euros
in television revenue plus the global exposure that helps generate millions
more in merchandise sales.

UEFA General Secretary Gianni Infantino believes change is
vital. In an interview at UEFA headquarters in Nyon, Switzerland, Infantino
said the global financial crisis and years of losses in European soccer - €1.2bn
in 2009 alone - have convinced even club bosses that they can't go on spending
more and more.

"They were as worried as we were about the escalation
of finances in club football. We had to find a way to make sure that club
football was sustainable in the future," Infantino, 41, told Reuters.
"If this continues and nothing is done, the whole system will
collapse."

Despite the impending regulations, though, most of Europe's
biggest clubs - the likes of Manchester United, Chelsea, Barcelona, Real
Madrid, Inter Milan - have continued to spend. Sceptics think the top clubs
will find clever ways to sidestep the new regulations and doubt that UEFA will
ever stop a club like Barcelona or Manchester United playing in big
competitions, because it would alienate tens of millions of fans and hit UEFA's
own revenues.

"If I was a betting man I would say one of the rich
benefactor clubs will fail to meet the regulations first time around,"
said Neil Patey, a soccer industry adviser at global accountancy firm Ernst
& Young. "I think there's a high chance Chelsea, Man City and Inter
Milan will fail [to balance their books]. If Barcelona and Manchester United
failed, UEFA would find it difficult to not have them in European competition
and I think UEFA are praying that doesn't happen."

The driving force behind Financial Fair Play is former
French player Michel Platini, who is proving almost as influential in his
current role as UEFA President as when he inspired France to victory in the
1984 European Championships.

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Platini and Infantino say their aim is to loosen the link
between spending power and on-pitch success. The connection has become more
pronounced in recent years, especially in the English league, as wealthy owners
have poured hundreds of millions into clubs in an attempt to win silverware.
Russian oligarch Roman Abramovich, for instance, bought London club Chelsea in
2003 and spent £600m in his first five years as owner. Since his takeover the
club has won three Premier League titles and three FA Cups, and appeared in the
2008 Champions League final.

In the past couple of years, Abramovich's big spending has
been overshadowed by Manchester City owner Sheikh Mansour, half brother of the
ruler of Abu Dhabi. Mansour has forked out more than £600m since buying
Manchester's second club in 2009. Result: City won last season's FA Cup, the
club's first trophy since 1976.

On paper, the new rules will hit such clubs hard, forcing
their deep-pocketed benefactors to stop injecting their private cash and
instead rely on what the club earns.

But some soccer finance experts say owners may bypass the
rules by pumping cash into a club and declaring it as income. One way to do
this would be through inflated sponsorship deals.

"Theoretically, a club's owner could get a 'friendly
company' to pay well over the odds, whether it's for shirt sponsorship or
stadium naming rights, which would allow them to grow revenues in a big
way," said Ernst & Young's Patey.

Even before the rules take effect, rival clubs in the
English Premier League have pointed at Manchester City, who posted a loss of £123m
last year. City recently agreed a 10-year, £400m deal with Etihad Airways - part-owned
by Abu Dhabi's government and founded by Sheikh Mansour's half brother. The
club's ground will be renamed Etihad Stadium, Etihad will be on signs at a new
training facility and a shirt sponsorship deal will be extended.

The deal - City described it as "game-changing" - is
the biggest stadium naming rights agreement ever, topping the £360m Citigroup
paid to put its name on the stadium of US baseball team the New York Mets. But
given that City has struggled to stay in England's top division over the past
decade, is such sponsorship based in reality?

Arsene Wenger, manager of London club Arsenal, which in 2004
struck a £90m stadium and shirt sponsorship deal over 15 years with Emirates
Airline, responded with a hint of sarcasm that his club "must have done a
bad deal".

Speaking to Reuters from a pre-season tour in Norway,
Liverpool's commercial director Ian Ayre said it was critical that UEFA applied
the FFP criteria rigorously to all clubs.

"It will be potentially devastating to clubs that fall
into line if others take advantage of it and are allowed to," he said.
"That would create a very uneven playing field and would just be a
disaster for everyone."

City declined to comment on criticism of the deal, but chief
executive Garry Cook said the club has been talking with UEFA about the issue.

"We have had several meetings with UEFA about our plans
and they are very supportive of Manchester City's ambition," he told
reporters at a news conference to announce the Etihad agreement.

Infantino, who previously worked as an adviser to the
Italian and Spanish leagues, insists the rules will apply to everyone.

"The train has left the station and is not
stopping," he said, sitting in a conference room with a view across Lake
Geneva to Mont Blanc. "We have rules and we apply them to all in the same
way. The clubs know the rules. They know what they have to do."

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UEFA says it is looking at City's Etihad sponsorship deal to
decide if it has been artificially inflated. Valuations will be assessed by the
federation's Financial Control panel, chaired by ex-Belgium Prime Minister
Jean-Luc Dehaene and made up of accountants, auditors and lawyers.

"If I'm telling you that the shirt sponsor[ship] of
Wigan is 10 times higher than the shirt sponsor[ship] of Manchester United then
I think even a non-expert would say 'OK, you don't bull**** me'," said
Infantino. "A fake sponsorship deal would certainly be analyzed and would
not be accepted by the panel."

To prevent manipulation of the rules, UEFA will examine an
investor's connection to a club, while transactions between club and sponsor
will be compared with the wider market.

Still, lawyers believe there are grey areas.

"If a company says 'We're genuinely trying to build a
global brand, this is a global club and we think this is what this deal is
worth,' it becomes quite difficult for UEFA," said Daniel Hall, a partner
at global law firm Eversheds. "It's something that is very much open to
subjective opinion and that is where there may be legal disputes."

Even the rules themselves have some built-in wiggle-room - at
least at first. Though clubs are meant to ensure they break even, they will be
allowed an "acceptable deviation" of €45m in the first few years.
That will fall to €30m over three years before a UEFA committee decides on
further reductions.

In another hint that UEFA will be flexible, Infantino
suggests any guaranteed money from sponsors should outweigh concerns about
market value.

"From a pragmatic point of view it's still better to
have a sponsorship contract with a committed amount even if it's too
high," he said days before the City deal. "At least it's a contract,
it's black and white, you will receive the money, and the financial situation
is safer than it is today where you just have a loan by an owner or a
promise."

At the moment, television rights are the biggest source of
income for most top clubs. That's especially true in Spain where Europe's two
richest clubs, Real Madrid and Barcelona, are able to sell their broadcasting
rights individually, in contrast to England's Premier League and most other
European leagues, where rights are sold collectively and revenues shared out.
Both Barcelona and Real Madrid make around 150 million euros a year from
television - well above the £60m English Premier League champions Manchester
United earned last season.

Financial Fair Play is meant to push clubs to look at other
ways to expand their revenue streams. The new rules will not count any spending
on infrastructure improvements, for instance. That should encourage owners to copy
clubs like Germany's Bayern Munich, which moved to its state-of-the-art,
69,000-seat Allianz Arena in 2005, and is now the fourth richest club in Europe
with revenues of €323m in 2010.

Bayern Munich earn €67m a year in matchday revenues. Compare
that with Italy's AC Milan and Inter Milan, which share the 85,000 seat San Siro
stadium - constructed in 1925 and in desperate need of renovation - and bring
in revenue of about half that.

In fact, Europe's top clubs could do worse than follow the
example of their German rivals, most of whom make money. The German soccer
federation requires its clubs to have a community-based ownership structure - fans
control 50 percent of shares plus one - to avoid the financial instability and
overspending the sometimes comes with rich owners.

"We did not need to do anything to prepare for these
rules because we already meet the criteria by 150 percent," said
Hans-Joachim Watzke, chief executive of current Bundesliga champions Borussia
Dortmund. "We have been having positive results and reducing our debt for
years and do not have any outside money flowing in."

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Clubs might also do more to develop their brands globally.
Chelsea Chief Executive Ron Gourlay said the club wanted to make more money
overseas, because increasing revenue at home would be tough.

"The opportunity we have is very much through our
sponsors. That's where we expand the brand in America and the marketplace in
Asia. We need to be in the marketplace as much as possible," he said in
Asia in June.

Of course, the biggest single way for clubs to balance their
books would be to cut player wages, which account for around two-thirds of
clubs' total spending across Europe's biggest five leagues.

Barcelona has the biggest wage bill of all European clubs,
spending €235m in the 2009/10 season, according to a report by the University
of Barcelona entitled "Spanish Football in the Throes of Crisis".
Thanks to its lucrative broadcasting deal, though, the share of its income that
went on player wages was relatively low at 59 percent.

In contrast, clubs supported by benefactors sometimes end up
paying more for players than total club turnover. Manchester City spent 107
percent of revenue on wages last season, Inter Milan 104 percent.

To encourage clubs to slow wage growth and start training
more local talent instead of buying in expensive players, any spending on youth
will also be exempt from the new rules.

Talk of a breakaway league, that would be formed by big
clubs disgruntled with the way soccer is run, cropped up again last month. But
Arsenal's Chief Executive Ivan Gazidis dismisses this. "I think there are
major teams that wouldn't be a part of that. There is so much sentiment in
favor of these regulations, so I don't see a credible threat there."

Gazidis, who sits on the European Club Association (ECA)
board, helped fine-tune the FFP proposals and acknowledges that any system
which effectively restricts soccer's free market will have flaws.

"It is not a perfect system - in fact it may be the
worst possible system, except for all the others," said Gazidis, who spent
14 years working for U.S. Major League Soccer before joining Arsenal in 2009.

UEFA's Infantino is equally dismissive of a rival league,
chuckling at the suggestion. "Break away to what?" he asked.
"They have already the best competition. It's called the Champions
League."

As the new rules bite, though, tensions between Europe's
governing body and the game's biggest clubs could rise. Much will depend the
rule-makers retaining credibility.

"I think UEFA will lose face for generations if they
don't enforce these rules," said Ernst & Young's Patey.

Infantino said the issue is simple: at some point reality
has to kick in.

"Football is somewhat irrational. Those who are
involved in football in their ordinary businesses are very sound businessman.
In football sometimes they seem to go mad. We need to bring a bit of
rationality back."

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