Financial Consequences For Covid-19

It is hard to escape the potential consequences of the Covid-19 virus. I suspect things will get an awful lot worse until there is any recovery. From a football perspective much of the discussion is focusing upon what exactly to do in a situation that hasn’t really been seen since the outbreak of World War 2 (where the season would be annulled and voided, to be repeated from the start when the first opportunity arose). It’s hard to see any eventuality not leading to disappointment and legal challenges, though a repeat of the broader precedent that has been set would seem the least worst way to try to handle the difficulties. However quite what the PL/FA should do and why ought to be the topic of another discussion.

What is quite striking is the lack of serious discussion on what the potential consequences may be for football from a financial perspective. There is the occasional obligatory comment about the difficulties football will face, but not an enormous amount about how this may play out, and ultimately from an Everton perspective where this leaves the club.

My own starting point in evaluating the circumstances we face is that it we are going to be heading into a recession within football and quite a stark deflationary period. A deflationary period is one where money is less plentiful and ultimately heads out of an economy (or sector). There are always consequences, some unintended to this situation, and consequences that are likely to go far beyond what the wider discourse has us believe at this point.

The obvious area where this looks to be prevalent at present is around the TV deal. If the season is unable to be completed the TV companies (BT and Sky primarily, though the international broadcasters will likely follow suit) is to withhold up to ¼ of the revenue due (around £700million). In a lot of ways, given sporting events are being cancelled well into June, and our own some what hapless (and quite cautious in shutting down events) PM has said that we have 12 weeks to turn the tide on Covid-19 (again taking us to mid June) this could be seen as a best case scenario. There may be grounds for TV companies to argue that a cancelled season is invalid and ask for all of the money’s returned to them. Losing only ¼ may well be the PL’s best case scenario in this situation and allow for them to prioritise next season (and ultimately trying to fit a full season in to ensure a full payment package may be achieved). As the summer rumbles on, I would expect this to be an increasing focus of teams.

While there has been some discussions on the TV situation there are probably 2 other key areas where money will be getting sucked out of the system, namely a loss of gate receipts and sponsorship revenue either not being paid or being downgraded. Most teams have around 25% of their home fixtures to complete, though those who regularly play in Europe may be as much as 35% down on revenues from home gates. When you factor in clubs such as Arsenal make upwards of £2 million per home game, this is not an unsubstantial amount of money. Within the lower leagues, this is the major form of income and does have to be factored in when PL fans flippantly make remarks about halving the number of games next season in order to finish ¼ of this season (or even potentially cancelling next season altogether). It’s simply not a viable outcome for lower league sides to surrender ¼ to ¾ of their gate receipt revenues to finish a season that has substantially overran it’s previously accepted end point. 

The sponsorship revenue’s probably have a reverse dynamic. It will be sides at the very top end of the football pyramid. For the orthodox top 6 who’s sponsorship range from £111m (Arsenal) to £275m (Manchester United) the affect of even quite a modest decline in spending in this area would be very damaging. We are talking about potentially tens of millions of pounds being lost. With a prolonged period where the world economy will not be spending money, it seems highly unlikely that big sports brands are not going to be adversely affected. In such scenario’s opt out in sponsorships are likely to be explored and reductions quite likely to want to be negotiated. As with the TV revenue this becomes all the more likely as clubs are very unlikely to be able to meet their end of the contractual arrangement by fulfilling the fixtures within the allotted time frame (or at all).

There are also clubs within the top 6 who have a more aggressive policy on sponsorship, valuing incentivised targets over smaller but more secure deals. Even on a practical level, any deals that will rely upon mass shirt sales to make the larger figures in a worldwide recession are very likely to find they hit only the initial low tiers of the agreement. This would not even require litigation (or the threat of litigation). I would suggest, a cautious estimate on the impact over an 18 month period would be a 25-40% reduction in the value of sponsorships for most teams, particularly those at the top end of the league.

When you factor in the above 3 strands it is easy to see that major financial difficulties lay around the corner for Premier League sides (and English football more broadly). While it will affect Europe as a whole, the Premier League with the highest wages, highest TV and highest sponsorship deals is most exposed in this context. Because of the sponsorship situation (and also the potential of revenues from European competitions being withheld if the competition is declared null and void) it will affect all clubs, I would argue at a similar proportionate level.

To compound difficulties it seems difficult to see how clubs will be able to easily negotiate their way out of the situation through sales of key players. This would be one obvious way such a shock could be mitigated, help the losses by trading efficiently. Over recent years the PL have been increasingly unable to sell anyone other than the elite players back to Europe for any kind of fees. We have seen these difficulties ourselves, where numerous poor purchases have been left to see out their contracts and drain the club. This is not singularly an Everton problem either, look at most teams and you will see a number of players filling the benches of their squads as teams are unable to move them on.

The PL has increasingly fulfilled the role of a key motor for the transfer window, with many European clubs seeking to sell talent to the PL (in a similar way to how for a time in the EPL sides would seek to sell players to Chelsea, and then Manchester City to then recapitalise themselves for investment. With such an acute and seismic hit to PL clubs it’s hard to see where the money is going to come from to allow for clubs to trade their way out of financial difficulties.

The same will be true of Europe too. While the severity may not be the same, the other big 5 leagues are all affected by Covid-19 (and to date Spain & Italy number 2 and 3 spenders in Europe) are being hit far more acutely than England. However for the most part they have a lower cost base and less reliance on commercial/TV revenue. There is also an embedded culture within those leagues of the need to produce their own players and an acceptance of the need to move them on. Adapting to a deflationary period therefore should be easier for them to move to (at least in theory).

The discussion at PL, FA and UEFA levels you hope would be reflexive of this reality. At this stage I think it would be foolhardy to discuss how do we prevent an initial shock, but rather we ought to be debating how do we prevent an initial turning into a prolonged and deep crisis. Recessions spiral into depressions if there is a complacency and too great an orthodoxy in the powers in control. These need to be the discussions they are having now as the situation may have moved radically forward by the summer and football could be left reacting to events rather than leading them.

One stand out point to me must now be the issue of FFP. In the likely scenario of incomes declining from 20-30% (a very feasible and ultimately quite conservative estimate) it’s hard to see how any team would be able to avoid losses. In lieu of a the ability to trade out of the situation through sales it would seem immoral to punish clubs on the basis of a global pandemic. Not only this, but a panic for clubs to start selling players to try and comply with the regulations is likely to spiral an already dangerous situation where prices are falling. In such a scenario none of us can truly guess how far prices will fall, or what the consequences of such an occurrence would be.

Aside from the ethical point, there is a practical one too. While there has been talk about FFP being about fairness (an odd descriptor for it’s advocates to take, as it fundamentally enshrines inequality and thus unfairness) the more practical consequence of the legislation was to seek to combat inflation. While in general I am cautious of measures aimed at tackling inflation (I think the far bigger threat currently are deflationary pressures) it’s hard to ignore the essence of the argument, when PL spending shot from £533million in 2010 to £1.5 billion in 2017. This represented an inflation increase of over 280% during the initial design and implementation of FFP and it’s reasonable to deduce why measures were designed to put a stop to this. Ostensibly forces on the market who cared little for conventional profit and loss were ultimately distorting the market for the entirety of the system and an argument could be put the legislation has been successful in slowing this inflation.

However how does such an argument fit in an industry and period that is going to be characterised by money being withdrawn from it? Is it sensible, or economically viable to want to limit the spend of money in such scenarios? In terms of policy, curbs on spending in such periods would be about the opposite approach as any orthodox economist would advocate. In that context it seems remiss for UEFA not to consult on FFP rules with either a temporary suspension being brought in, or removing the approach completely as an answer to a question that is no longer posed.

There must not be an arrogance within football that it is immune from the wider financial pressures of the world. The reality is the only period of a decline or a steadying of the flow of money came into football over the last 15 years came following the financial crash. In the season before 2008 there was a seismic jump of 70% spent from English clubs on transfers (from £490m up to £840 million) yet within two years this had declined back to £530 in 2009/10. It would take until 2013/14 to get close to the pre 2008 crash spend (£830 million spent in 2013/14) and only in 2014/15 would it be eclipsed (£1.1 billion spent on transfers). The take out from that recession was a decline of 40% over 2 seasons and spending standing not recovering anywhere close to the previous figures for 6 seasons. Any equivalent hit (and it could be substantially deeper, as no TV money was ever withheld) could be deeper and longer for the PL.

While this largely presents an apocalyptic vision of what is to come it is important to note that ultimately there are always winner sand losers within any situation. The Premier League clubs who will emerge positively out of this process will likely be the ones who are able to make the best decisions, even if they are difficult ones when placed under the most pressure.

To prevent an initial shock turning into a rout the hope is going to have to be that PL clubs don’t resort to panic selling. That being said, the likely outcome of the above (namely a sharp decrease in the prices of players being sold from the PL) does open up opportunities. When you factor in the likely devaluation of the pound (which will continue to drop, even in comparison to the Euro) it means there is the potential for players who were previously well out of price point for European teams to potentially be viable. A 50% hit on player values allied to a 10% decline in the pound could make players salaries and packages approach half of what they currently earn. Suddenly packages for players such as Schneiderlin or Sigurdsson may become more viable for suitors from Europe, depending on the hit on their own economies.

While there are enormous challenges there are also opportunities. They are currently bankrolled by the 4^th biggest benefactor in English football history (and this will surely soon become the third)? I have often remarked that he is unfortunate that he invested probably 5-10 years too late to make the immediate and sizeable impact we had all wanted. The investment was substantial but the vast period of inflation that had occurred 4 years prior to him joining (seeing spending go from £680million to 1.49 billion in his first summer) greatly reduced the effectiveness of the cash he wanted to invest. However it is not a wholly unrealistic possibility that the spending will be cut to pre 2008 levels of £840m if the crisis is more severe than first estimated. A replica decrease in spending to 2008 (a 40% drop) would see spending decline to £1bn (the lowest it had been since Roberto Martinez’s first season).

For Moshiri it would be hard not to see potential opportunities in this. Everton’s balance sheet remains difficult and will not be in the positive for some time to come, but prudent investment if sustained could now begin to make a substantial difference. How far his desire to continue to keep the tap turning will be open to debate, but with a manager like Ancelotti and a DOF like Brands he has thus far shown no indication of wanting to halt the expansive plans.

Brands has shown within the market he is adept at negotiating prices down. The hope had to be now that he is being given clear instruction from above of what is possible, and he is fully understanding the new situation we may be heading into. The reality of a 40% fall in prices very simplistically means anyone’s valuation you currently have of x you can then factor in a new cost of 60% of. Cash may well be king over the forthcoming period, and opportunities for astute purchases could open Everton a window of opportunity that seemed to have shut just 6 months ago.