Financial Fair Play is incompatible with business

Gary Tipper_PalatineGary Tipper, managing partner at Palatine Private Equity, discusses the business of football, and how the new Financial Fair Play rules are incompatible.

 

 

 

Almost every business in every sector is built upon the idea of competitive advantage. Firms will do whatever it takes to find a gap in the market, including accepting losses for the first few years. Sadly, it seems that one of the UK’s most lucrative industries, and one Manchester is particularly good at, seems not to agree.

I am, of course, talking about football. Having seen Manchester City spend and lose millions over the first few years after being taken over by Sheikh Mansour, UEFA decided to solve a problem that never existed by creating the Financial Fair Play (FFP) regulations. As a hardened City fan, the words Financial Fair Play are enough to make my blood boil, especially when considering the fair aspect.

Before the regulations were announced, I think most football fans thought the idea of FFP was to make sure clubs were not taken over by disreputable owners. The likes of Leeds and Portsmouth have experienced this in recent years, with mis-management leaving the clubs debt-ridden and ultimately heading for administration. No one wants to see this happen again, as in the end it is the fans that really suffer.

However, what UEFA have come up with is a system that effectively means that the clubs with the largest turnovers are the ones that can spend big in the transfer market, protecting the old order of European football. No other industry in the world blocks new money being invested in it, which is essentially what UEFA is effectively doing to European football. Whether fans like it or not football is now a huge global industry and should be dictated by market forces not by an industry body trying to protect the old order.

Imagine if this sort of protectionism had happened in the technology sector, which in the 1960s and 1970s was dominated by the big hardware players like IBM. Had rules stopping businesses losing money been in place, companies like Apple, Google, Amazon and Facebook would not exist. Each of these household names lost millions if not billions in their development years, enabling them to become the large organisations that ultimately transformed an industry and broke up the old monopolies that existed.

Why should football be different? If money hadn’t come into the likes of City, Chelsea, PSG and others, European football would be an oligopoly for the foreseeable future – making it incompatible with business.

Here football can learn a few lessons from business. Instead of the current rules, make any new owner put up to two years running costs in a blocked account that is used if they decide to remove their support, ensuring clubs avoid administration. This would also have the effect of keeping away the buyers without any real financial substance.

When looking at sustainability, it is also important for the rules to focus on debt levels. In the past too much debt has led to the downfall of many clubs, but under FFP, it is currently seen as acceptable for United to have £500m of debt and Real €600m of debt while City are punished despite being debt free. The £50m fine handed to the Blues is another clear example of the real aim of FFP – further establishing the status quo.

As a global industry, the rules governing football should be along the lines of the rules that govern businesses. With the current rules being incompatible, they should be challenged as I think it is best for business. Manchester has had a great footballing history and with the emergence of City in the last five years should have an even better future, dictated not by UEFA, but by market forces

The search for the Holy Grail!

The Red Knights!

You have to admire the ‘Red Knights’. Their charge to the rescue of the damsel in distress has been of epic proportions, so too the publicity it has generated.

We all know the story by now. The Glazers took over Man Utd in 2005, they saddled the club with more that £700m of debt in the leveraged buy out. Some fans disapproved so much that they split from the club and FC United of Manchester was born. After a series of ticket price rises and the revelations that the club was struggling to service the debt including an emergency £500m bond issue, the fans spoke out once again. Then a group of wealthy Man Utd fans headed by Keith Harris and Jim O’Neill came along and created the Red Knights with a plan to buy the Glazers out for an estimated £1.25bn.

But it all seems a bit Monty Python and the search for the Holy Grail to me!

After being subjected to a torrent of abuse aimed in their general direction, our hapless King, Arthur and his Knights of the Round Table try a number of times to storm a castle occupied by the French. However, their epic attempt comes to an abrupt end when the ‘Trojan Rabbit’ they were supposed to be hiding in is fired back over the castle wall towards them to the collective shouts of “Run away!”

It’s all very amusing and the French have the upper hand.

But how does this relate to the Man Utd story? Well, the Red Knights have a justifiable cause, but what must be remembered is that the Glazers bought a public limited company and apparently they don’t come cheap! This is their castle and they are up for the fight.

Now I’m not suggesting that Keith Harris is as hapless as our King, but the tale of his attempts to storm the Old Trafford board room have to be taken with a pinch of salt.

The whole anti-Glazer jamboree has gathered remarkable momentum with so many groups voicing their discontent to the backdrop of the Green & Gold campaign.

They are all making the right noises, but I just can’t help feeling that it all seems a bit empty and will ultimately fall flat. And if the Knights do gain control of the club will they be any better than the Glazers?

The debt is there now and unless the new owners are going to turn this into equity then it will remain a burden. What is also overlooked is the £500m bond issue will make up part of this bid, the very thing that caused the whole uproar.

I’m not for one minute suggesting that I support the Glazers. My stance on this is that the Premier League and the previous Man Utd board failed in their foresight to protect the club from the leveraging of debt onto the club. The business plan has some serious flaws that make it hard to believe it was agreed, but then on the other hand the club has acquired record sponsorship deals and turnover is at an all time high.

I just can’t help feeling that when the Red Knights finally think they’ve found their Holy Grail, they will be told to “go away we already have one!”