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Analysis of Manchester City's financial statements

After a slow start to the 20/21 season, Manchester City's (City) recent form (inclusive of a 23-game unbeaten run) means they can potentially clinch a Domestic and European quadruple of trophies. However, for the first time in 6 years, City reported a financial loss. A massive loss at that. Is this a cost of success or a one-off event caused by covid-19? Does this spell financial fair play (FFP) trouble for City? Let's dive in!


Profit/Loss

The 2020 loss of £125m (profit of £10m in 2019) is attributable to City's ambition to be the most successful club in Manchester, England, and Europe. By winning the most trophies over the past five years (7 out of 15), it is hard to deny that City is on track to achieve its goal.

Of the top-6 clubs to publish their 2020 accounts, City's EBITDA and loss are the worst. It begs the question, can a football club sustain footballing and financial success concurrently and consistently? Well, the objective of UEFA's FFP rules (discussed below) is to promote the sustainability of football clubs.

Revenue

City ranks 3rd as the EPL's highest earners - behind Manchester United and Liverpool - even though revenue fell by £56m (11%). Matchday and broadcast for 2020 decreased by 24% and 25%, respectively, because 6 (out of 19) EPL games were played behind closed doors – due to government protocols on Covid-19.

The Etihad (City's 55,000 capacity stadium) is pejoratively nicknamed "emptihad" by rival fans. Pictures of empty seats at the Etihad regularly make the rounds on social media. However, contrary to popular opinion, City's 2019/2020 average EPL attendance (98.6%) is second only to Arsenal's. UCL matches are a different story, though.

The demography of the club's supporters might explain the difference in UCL and EPL attendance. At £42m, City's matchday revenue is the lowest of the top-6 clubs even though the Etihad's capacity is ~10,000 and ~1,000 more than Stamford Bridge and Anfield, respectively. City charges the lower ticket prices compared to other top-6 clubs.


City's 2020 commercial revenue is £246m (9% increase) and now represents 51% of total revenue. City now ranks 2nd in the commercial revenue table.

Increased sponsorship and advertising agreements are not a surprise due to City's on-field performances. For example, City is the only EPL team to qualify for the past eight UCL competitions. Also, winning the EPL (3 of 8) and Carabao Cup (5 of 8) attracts sponsors. The owners' network is also an additional factor responsible for growth in commercial revenue.


Manchester United receives criticism for amplifying and reporting social media metrics; however, social media engagement and follower count have become essential in sponsorship negotiations. It is not a surprise that City now includes social media performance in the financial reports.


Player wages

City's 2020 wage bill is £351m, an 11% increase from 2019. Contract renewals and the signing of new players are responsible for the increase (2020 summer signings wages not included).

The fall in wages between 2014-2016 was due to a UEFA-imposed wage cap for breach of FFP rules. With Kevin De Bruyne signing a new contract this week with a reported pay rise and Raheem Sterling negotiating a new contract, the wage bill is set for another increase.

City's wage bill is the highest in the EPL. Liverpool's 2020 financial statements are yet to be published; however, it is unlikely that the wage bill would exceed City's. At 73%, City is spending the highest percentage of its revenue on wages for a top-6 club.


Player transfers

The 2008 purchase of City by Sheikh Mansour ushered in significant financial outlay for the transfer of players. In 2020, City spent £180m (£110m net) on purchasing new players. The figures do not include £140m (£88m net) spent in the summer of 2020.

City has spent £1.87bn (£1.38bn net) on the purchase of players between 2005 and 2020. Surprisingly, the club's record transfer fee spent on a single player is £65m for Ruben Dias' acquisition in 2020.

In comparison, Manchester United broke their transfer records with Di Maria's signing for £60m in 2014. The most expensive players at United are Paul Pogba (£89m in 2016), Harry Maguire (£78m in 2019), and Romelu Lukaku (£75m in 2017). City's strategy has been to sign high-potential young talents typically aged 22-26, with the odd signing of players above this age range.


UEFA vs. Manchester City

In 2011, UEFA introduced the break-even requirement (BER) – the hallmark of FFP – which stipulates that a club's losses should not exceed €30m over three years. City's V-shaped BER between 2005 and 2016 signalled an improvement in profitability, which is the desired effect UEFA had envisioned. Of course, the progress must be within the ambit of the rules.

UEFA sanctioned (€30m fine and two seasons ban) City in 2020 for allegedly breaching the BER rules. UEFA alleged that City had inflated commercial contracts in 2012 and 2013 to ensure FFP compliance. The Court of Arbitration for Sports quashed the ban and reduced the fine to €10m stating that UEFA’s allegations were either not substantiated or "time-barred". ( click the link for an in-depth analysis of the UEFA vs Manchester City case).


City's wage to revenue percentage also improved post-FFP's introduction from an all-time high of 113% in 2011.

Debt

City's £315m debt is the lowest in the top-6. The club owes £72m to other football clubs for players purchased while expecting to receive £66m for players sold. This means City tends to pay most of the transfer fees upfront, as opposed to structured instalments.


Conclusion

City is the most successful EPL team in the past decade. The noisy neighbors – a nickname given by Manchester United legend Sir Alex Ferguson – have changed the narrative in Manchester and England. The elusive UCL trophy is seen as the missing piece that will establish City as a European superclub. With a high wage bill, substantial investment in player acquisition, and Pep Guardiola as Manager, it is evident that City is not relenting on the quest for UCL glory. The £125m loss and FFP restrictions might curtail City's future investment in players. As such, this season's UCL campaign might be the club's best chance of securing the UCL title - I believe City might curtail investment in players.


UEFA shortened the next BER assessment to cover only two years (2020 and 2021) because of Covid-19. City believes they'd still comply with FFP despite the hefty loss in 2020. If the FFP rules are still in force – it is rumored it might be scrapped – time would tell if City complies or if UEFA would impose another sanction.



Written by Bolaji Alabi