Paris Saint Germain’s summer transfer activity came to an end in (Seine)sational style!

The facts speak for themselves:

• The two largest football transfer fees in history – £366M combined spending on Neymar da Silva Santos Junior and Kylian Mbappe;

• Combined wages of a reported £700k/week (both on 5 year contracts).

The signings of Neymar and Mbappe are an extraordinary statement for a club competing in Ligue 1; a league not considered to be the wealthiest of leagues comparative to its leading European competitors (Premier League, Bundesliga, La Liga, and Serie A).

This highlights the resources available to PSG’s Qatari owners and the expenditure that they are prepared to incur to put PSG at the head of European club football’s top table. PSG are owned by Oryx Qatar Sports Investments, an arm of Qatar’s sovereign wealth fund with access to £194 billion.  And the financial juggernaut shows no signs of easing up as recent reports suggest that PSG are lining up a £135M bid for Philippe Coutinho in the January transfer window.

But this has given some within football’s family reason for concern, particularly European football’s regulatory body, UEFA, who launched a formal investigation on 1 September 2017 into PSG over their compliance with UEFA’s break-even requirements.

UEFA’s Financial Fair Play Regulations (“FFP”)

Football has historically as a sector struggled to balance its finances, despite ever increasing levels of revenue.

Of those clubs currently competing in the Premier League, the richest football league by revenue in the world, 20% have been in administration at some point in time. That percentage rises to 29% in the Championship. In Spain, the EU had to intervene over huge unpaid tax liabilities of some clubs at a time when the Spanish government was seeking financial support from the EU. Italy has been no stranger to high profile football insolvencies with Parma and Fiorentina both going under, and the stories go on and on across Europe. In addition to the financial woes seen in football, there have also been concerns over the relatively recent dawn of the super-rich acquiring clubs and those clubs becoming dependent upon the finances of their owners to cover future commitments.

As a result, football’s regulatory bodies have in recent years introduced financial control regulations aimed at ensuring a sustainable financial footing for clubs operating within their competitions.

UEFA introduced the FFP Regulations in 2011 to improve the overall health of European club football. Since 2013, clubs that have qualified for UEFA competitions have been assessed against break-even requirements which require clubs to balance their spending with their revenues and restrict clubs from accumulating unsustainable debt. Each season an independent body assesses three years’ worth of club financial figures for all clubs in UEFA competitions. Clubs can spend up to €5M more than they earn per three year assessment. However, the acceptable deviation can exceed this by as much as €30M if this extra amount is entirely covered by a direct contribution/payment from the club’s owner or a related party. This is designed to prevent the build-up of unsustainable debt, although interestingly there is no bar on an owner injecting the excess amount into the club as debt. In PSG’s case, there are few suggesting that their spending is unsustainable given the resources of their owners. But the level of spending has asked questions as to whether PSG are complying with rules designed to apply to all clubs to preserve a stable financial environment for UEFA competitions.

UEFA have confirmed that “the investigation [into PSG] will focus on the compliance of the club with the break-even requirement, particularly in light of its recent transfer activity.” In response, PSG said they were “very confident in its ability to demonstrate that it will fully comply with Financial Fair Play rules for the fiscal year 2017/2018.”

As you would expect from a club of PSG’s stature, all appears to be in order. So why have UEFA launched an investigation?

The case against PSG

Regulatory Break-even requirements: 

PSG’s accounts for the last three available financial years are consolidated and summarised below:

The below table shows PSG’s transfer spending since the club was taken over by Oryx Qatar Sports Investments in 2011/12 (highlighted blue) and the prior year’s spending as a comparison. The 2014/15 season is highlighted yellow being the season when the break-even requirements came into force.

The above figures are not amortised but reflect the total transfer fees agreed in each season. Mbappe has not been included for 2017/18 because he is a loan for this season with an option to buy (some reports suggest this is a put option by Monaco to force PSG to buy at the agreed price). The amortisation of Mbappe’s transfer fee is over the life of his five year contract with the first payments commencing during the 2018/19 season.

As can be seen, PSG have generally been increasing their net transfer spending during the post break-even era (a 104% increase between the 2016/17 and 2017/18 seasons alone). Costs for stadiums, training facilities, youth development and women’s football are excluded from the break-even calculation. As such, it is not a simple calculation but all things being equal and noting that we still have the January 2018 transfer window to come, PSG’s net player spending has increased significantly and this increase would need to be matched by similar revenue increases in order to comply with FFP.

In a recent interview concerning the signings, Nasser AL-Khelaifa, the president of PSG, said:

“We now plan to continue to increase revenue from between 20 and 40 per cent. We have a year to meet FFP criteria. We have until June 30 2018. I tell everybody: relax and think about your project. We think about building our project … for the thousandth time I am very confident … It’s a good deal that they signed now, because players’ transfer costs, salaries as well as clubs’ revenues are increasing rapidly in the world of sports and specifically in football. So we are very confident and satisfied in our decisions.” 

PSG are clearly unfazed by criticisms from outside observers and remain positive and encouraged by their business model. In support of this statement, PSG’s revenue has increased from €90M to €450M during the Qatari’s ownership. However, these remain bold words from a president who has overseen net transfer spending of £675.53M during his tenure as PSG President, while seeking to build a team to win the UEFA Champions League. To date, he has not seen his team progress past the quarter-final stages of the pinnacle of European club competition; perhaps these new signings will change that.

Amortisation Costs

Whilst the above analysis of turnover and player spending may appear to cause some difficulties when trying to comply with FFP, they are of little use without considering the way in which transfer fees tend to be spread over the life time of a player’s contract and the amortisation of those liabilities.

The reported combined cost to PSG of signing Neymar and Mbappe is broken down as follows:

• Neymar Transfer Fee – £198M

• Mbappe Transfer Fee – £168m

• Neymar annual salary – £27M (life time of contract £135M)

• Mbappe annual salary – £10M (considerable variations in reports – life time of contract £50M)

• Total Liability over 5 year life time of player contracts – £551M

Assuming that no payments are made on Mbappe’s transfer fee until 2018/19 and those payments are amortised over the remaining 4 years of his contract and assuming no changes to the player contracts during their terms, this would mean that these two transfers alone have added approximately £76.6M in 2017/18 and £118.6M for 2018/19 onwards to the annual amortisation schedule that PSG are running for the next 5 years.

So how will PSG comply with FFP when considering the principal receivable incomes of the club?

TV Revenue

Ligue 1 is tied into a domestic TV deal running to 2020 and international rights are tied in until 2024.  As such, for the next few years at least, any serious increase in TV revenue can only be achieved from Champions League progress.

Commercial Contracts

PSG’s shirt supply deal with Nike is reported to run until 2022. There are reports that PSG are now looking to renegotiate the contract on the back of the signings of Neymar and Mbappe. The club may well be able to develop their commercial programme to bring in a considerable number of new sponsors and this would seem to be a necessity.

Ticket Sales

PSG’s ticket pricing is at the higher end of Ligue 1 and so the scope for sales to increase is limited without a stadium expansion policy but this will not help for the immediate purpose of FFP compliance.

Player Sales

As can be seen from the above, outside of the scope for exploitation of commercial contracts, receivables are essentially fixed for the foreseeable future. The only true asset that the club can liquidate and generate short term revenue from is player registrations. The European transfer window has now closed for 2017 and so no sales can be commenced before January 2018. However, a club looking to establish itself as a world force is unlikely to realise the type of figures they need to in order to comply with FFP from player sales alone. If PSG are to stick to their “project” they are unlikely to sell any of their star players. But this remains an option to increase revenue in the short term.

Whilst the transfer window is closed, the club do have the option to discount the player sale receivables that have already been agreed and advance payments due from other clubs via those funders operating in this sector.  As can be seen from the above table on player trading, PSG have agreed player sales totalling £112,320,000 over the last couple of seasons.  There will undoubtedly be receivables due to PSG within this figure and older transfer deals which will fall due in the coming seasons but could be advanced to improve the break-even position for the 2017/18 reporting period.

Expenditure

As discussed above, PSG have committed to a significant expenditure over the next 5 years in the signings of Neymar and Mbappe. Taking total annual salary costs together, PSG are committed to approximately £270M of wages, and £146M of transfer fee payment a year. As such, effectively player and staff spending alone totals £416M and exceeds total revenue of £402M to create a deficit against the latest accounts. Given the other associated costs with running a football club, the figures do appear to be challenging for the purposes of complying with FFP break even requirements. Even with dispensation to incur a break even deficit of €30M over three years, clearly when other operating costs are taken into account there is a significant revenue increase required in order to meet FFP requirements.

The case for PSG

Whilst the information publicly available does appear to cause PSG difficulties in terms of their FFP requirements, there is also a logical reasoning to their policy and it (and eventually UEFA) will be the two parties who know if the outside criticism is well founded or not.

Neymar is unique in world football. Whilst he has not yet won FIFA’s Ballon d’Or (renamed Best Men’s Player), to many he is seen as the best player in the world. At 25 years old he is at the peak of his career and an exceptional talent. Off the pitch with followers numbering 60 million on Facebook; 33 million on Twitter; and 82 million on Instagram, Neymar represents a new era of the Social Media Galaticos. Players have long been acquired for both their on and off pitch returns but with the increasing digitisation of sport, an element to take account of in any transfer fee are direct off pitch revenues that a player can generate. Neymar has demigod like status in his home country of Brazil and carries a global recognition which the types of sponsors that PSG want to attract look for. In terms of putting PSG on the world stage, walking into a club like Barcelona and taking one of their star players from under them was a huge coup.

It is interesting to see the comments of Andrea Radrizzani, the new owner of Leeds United, an Italian national who made his fortune selling the rights to broadcast football, especially the Premier League, all over the world. His expertise is in the future value of football TV rights which he believes will continue to grow. He says “because of the digitisation, I think what we could see in the next few years is a huge change in the consumption of media. It’s started already. Try to imagine if all the Premier League games were now available, easily accessed by match or by season or by team via Amazon or Netflix. The audience could be much bigger. The single price per client could be lower; the total amount would still be bigger … Netflix has broken the market on pay-TV with entertainment. Can this happen with sport? I think so.”

With someone of Radrizzani’s expertise, these are interesting comments suggesting that there is no sign of the influx of cash into football slowing and PSG’s insistence that the Neymar deal is “a great deal” and that “it’s a good deal that they [Neymar and Mbappe] signed now, because players’ transfer costs, salaries as well as clubs’ revenues are increasing rapidly” could well ring true.

“The consequences of Neymar”

When asked whether football as an industry should be concerned by the quantum of the €222M (£198M) transfer fee paid by PSG to Barcelona for the player registration of Neymar, Jose Mourinho commented:

“I think the problem is not Neymar, I think the problem is the consequences of Neymar.”

Mourinho was making the point that in his view, Neymar was worth the money but that the consequences could be inflationary pressure on an already heated player transfer market. However, the “consequences of Neymar” have been seen by various parties to spread much further than this.

UEFA have, at the very least, concerns over compliance with their break-even requirements which has in part instigated their investigation.

In contrast, PSG anticipate that “the consequences of Neymar” will be to trigger such a significant uplift in turnover that his signing (along with that of Mbappe) will rectify any potential regulatory issues. Nasser AL-Khelaifa, the President of PSG, has stated on a number of occasions that PSG are part of a “project” and to truly appreciate the reasoning behind the Neymar and Mbappe transfers, you have to understand the ownership of PSG and what they are looking to achieve. The Qatar state has identified sport as a sector in which it wishes to invest heavily in recent years. This has included sponsorship of the Qatar Goodwood festival; Qatar Airways becoming an official sponsor of FIFA; and hosting the Qatar World Cup in 2022. There have been issues along the way but the ownership is resolute on its policy. In 2014, UEFA found PSG to be in breach of FFP as their €200M Qatari Tourism sponsorship deal was not deemed to be a fair market value. The repercussions were a fine and other sanctions from UEFA, albeit the team was permitted to keep competing in the competition.   This time around, can the football community be confident that the club will be able to execute their business plan and ensure compliance with FFP?

The La Liga President certainly expressed his concerns when he described PSG’s transfer policy as “financial doping”.

Ultimately, UEFA will determine whether their rules have been complied with and will act accordingly whilst the world watches on as the “consequences of Neymar” play out.

But for the football community and those involved with the financing of player transfers, the determination of this case is likely to provide helpful commentary and assist with mitigation of regulatory risks when dealing with football clubs and their financial matters.  For any party looking to finance football related receivables, FFP is an important consideration which is becoming increasingly important given the significance of the UEFA competitions to many clubs and the implications which sanctions can have on a club who is a party to a receivables transaction.

This post was written by James Moore.