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Jaume Llopis, Professor, IESE, University of Navarra

The bankruptcy of soccer

Tue, 09 Feb 2010 09:02:21 +0000 Published in El Periódico de Catalunya

Immersed in a deep economic crisis for more than two years, we have been seeing and hearing daily news about a growing issue of companies in insolvency proceedings, regulation files employment, factory closures, difficulties in accessing bank financing, layoffs, cuts in expenses and investments, etc. However, nobody or very few dare to expose the scandal of almost all the Spanish and European football clubs. However, nobody or very few dare to expose the scandal of the economic and financial status of almost all Spanish and European soccer clubs. Is topic taboo? Is it the new opium of the people? Are there too many vested interests? Is it too high an electoral cost for politicians to be inflexible and rigorous with the financial and tax obligations of the clubs as they are with companies?

The status is serious. The debt of the Spanish First Division clubs exceeds 4,000 million euros. According to the balance sheets published by the entities, on June 30, 2009, Real Madrid's debt was 683 million euros; Valencia's, 550; Atlético de Madrid's, 511; Barcelona's, 489; Deportivo de A Coruña's, 292; Villarreal's, 240; Espanyol's, 165; Racing de Santander's, 137, and so on. If we go to teams of lower categories, the status in many cases is dramatic, with news of players locked in the locker rooms because they do not get paid and cannot support their families. The outstanding and overdue payments to the Spanish Treasury and Social Security also amount to billions of euros.

The inability of clubs to pay their debts is, in many cases, evident. If a club owes 600 and only earns 400, and from this income all expenses must be deducted, and from these expenses the interest on the debt adds up to 35 or 40 million a year, in the end the profits, if any, are so small that it is not possible to refund the principal of the debt. The solution only lies in selling assets with capital gains, whether they are players, stadiums, land or facilities, transforming into public limited companies for those that are not, or contributing capital from the members. There are a few clubs that have this possibility, but most do not.

In the rest of Europe, status is similar. Manchester United made a profit in 2009 thanks to the 88 million euros it obtained from the sale of Cristiano Ronaldo. Even so, the club has just launched a £500 million bond issue to refinance its debt. The club's advisors will meet with the world's leading financial institutions and Asian, European and American investors to sell the bonds. It should be recalled that Manchester no longer belongs to its shareholders, but was acquired by an American investor group . Inter had losses of 148 million euros; Chelsea, 88 million euros; and Milan, 67 million euros, among many other clubs. In the management business, practically all the clubs have losses; and those that make a profit are due to capital gains from the sale of players or land.

Futbol Club Barcelona made a profit in 2008 thanks to the sale of Deco on the last day of the year, to the sale of assets and to the fiscal credit that was still left over from the losses of the Gaspart era. In the year ended 2009 there were also atypical results due to capital gains on the sale of assets. Now, and looking to the future, a new requalification of the Miniestadi may be a solution.

Real Madrid is not economically viable if we base it solely on the management business. The accumulated debt and the few profits generated by the club have only two long-term solutions deadline: either the requalification and sale of the Bernabéu (an exceptional "pelotazo") or the transformation into a public limited company. In both cases, Florentino Pérez and ACS would play a fundamental role in the operations.

In sports newspapers, especially, but also in some economic and general information newspapers, people make the mistake of confusing income with wealth. We read that Real Madrid or Manchester United are the richest clubs in the world because they have the highest income, but to say which clubs are the richest we should not look at their income, but analyze their balance sheet, seeing what their assets, assets, debts and liabilities are. And even analyzing their balance sheets we should update the market value today of their players and facilities, as we should probably devalue most of them. And, on the other hand, no matter how high their value is stipulated, who is in a position to acquire them? Who would pay 88 million for Cristiano Ronaldo or 60 million for Kaka today? I assure you, no one.

At final, a better corporate management of the soccer clubs, most of which are managed by people who are not very competent and whose salaries, in many cases, are much higher than the usual ones among the managers of business. In any case, the Government has to intervene with the same rigor and the same exigency as it does with companies and individuals. But if it does so, soccer will come to an end, and this would mean a social chaos of great importance.