The English Premier League: Football in Recession

English Premier League football club Portsmouth went out of business last week and, unless a rescue plan can be agreed, it will go out of existence.

It seems the recession has finally caught up with one of the world’s richest sports leagues. The big names are not immune from financial disaster and some are asking whether the League as a whole could be in jeopardy.

Certainly the problems that brought down Portsmouth are common across the League: dangerously high debt burdens and ratios of salaries to revenues. The combined debts of all clubs are estimated to be £3.5 billion and clubs commonly pay out 60-70 per cent of their revenues in salaries.

A period of belt-tightening looks more likely than widespread carnage. Clubs have the cushion of a £1.8 billion TV rights deal that extends to 2013. By then clubs should be able to reduce their wage bills by letting players go or renegotiating expired contracts.

Portsmouth looks like a classic case of a small club getting overambitious. Paying top salaries to attract better players is sustainable only if they bring continued success. A similar story unfolded at a much bigger club, Leeds United, in 2002 which collapsed under its debt burden after a period of reckless expansion.

Most clubs heeded the warning and don’t budget above their station. The big clubs, who also play in the lucrative European Champions League, can recruit the top players. Most of the rest know they are just one bad season away from relegation and must exercise restraint. Relegated clubs receive a £30 million “parachute” payment from the League to further reduce the chances of more Portsmouths.

Only a few clubs like Bolton Wanderers and Wigan Athletic seem to have Portsmouth-type problems: fading fortunes on the pitch with similar levels of debt and salaries. These clubs will probably argue that they are safe because they have owners who support the club with loans.

Indeed it is remarkable just how many clubs depend on the largesse of their owners. Before the current season, fully 16 of the 20 clubs needed cash injections or loans from their shareholders to fund current operations. Perhaps a bigger risk to clubs than overambition or poor management is the sudden departure of the billionaires that bankroll them.

The limitations of relying on wealthy businessmen are amply illustrated by Portsmouth’s experiences. Abu Dhabi property developer Sulamain Al Fahim took over the club in August but stayed just a few weeks before selling his stake to a company controlled by Ali Al Faraj, a Saudi businessman.

Despite promises of “financial stability”, ground improvements and new players, Faraj presided over a chaotic 119 day tenure during which players were sold, salaries were paid late and taxes went unpaid. The fans dubbed him “al Mirage” puzzled as to why he took over the club when he lacked the means or the desire to materially improve its situation. He never even went to a game.

By contrast Manchester City have been blessed with a genuinely wealthy sport-loving backer, Sheikh Mansour of Abu Dhabi. Fans have been delighted by a string of expensive signings, and the club’s debts have been written off. But a nagging doubt remains: what happens if he loses interest?

Among the small band of clubs run purely as commercial enterprises are Liverpool and Manchester United. Between them they owe in excess of £1 billion on loans taken out to finance their respective takeovers by American businessmen.

The interest burden is clearly beginning to weigh on Manchester United who are not bringing in big new players despite signs that the squad needs strengthening.

Fans are restless and last week a consortium of wealthy supporters, nicknamed the Red Knights, discussed how they might wrest control of the club from its owners.

Liverpool’s debts are lower but their situation more serious. The team is struggling and looks likely to finish out of the League’s top four and qualify for next year’s Champions League. Revenues from the elite European trophy are essential for a big club and by missing out Liverpool could lose star striker Fernando Torres and begin a downward spiral reminiscent of Leeds.

The FA, football’s ruling body, are facing calls for a salary cap or restrictions on debt levels. Any restrictions would be unpopular with the clubs themselves and further reduce competition by preventing smaller teams expanding to mount a challenge to the big clubs.

A better approach would be to force clubs wishing to put more debt on their balance sheet to seek prior permission from the FA. Any increase in debt would only be allowed if demonstrably affordable, securely financed and for the benefit of the club rather than its owners.

Properly enforced such a review system would prevent owners abusing the balance sheets of the big profitable clubs and poorer clubs overreaching themselves. Billionaire benefactors would still be able to transform a club and challenge the established order so long as they did not attach strings to their largesse.

Whatever happens the future looks bright for the clubs like Manchester City who have no money worries. With at least three of England’s biggest four clubs unable to compete for top players there is a real possibility that they could challenge for the title in the next couple of years.

Perhaps the biggest legacy of football’s recession will be a long overdue shake-up of the established order on the pitch.

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