The Covid-19 Impact Series: European Club Profitability

By Julian Knowles, Head of Football - 23 Capital, June 2021

The COVID-19 pandemic has had a profound impact on the global economy and football has not been immune. 23 Capital’s ‘COVID-19 Impact Series’ examines how the pandemic has affected key areas of the sport. Ranging from its impact on broadcast rights and commercial revenue to wage costs, player transfers and match day revenue, the first in the series examines how COVID-19 has impacted on European club profitability.

Set against a backdrop of increasing revenues and the introduction of UEFA’s financial fair play (FFP) regulations in 2011, European clubs assessed by UEFA had achieved six consecutive years of significant combined operating profits between 2013 and 2018 at an average of €780m per year. The fact that Europe’s clubs had generated more than €4.7bn in operating profits during those six years and bottom-line figures had improved by more than €1.8bn, demonstrated the fundamental profitability and sustainability of clubs. 

This sharp improvement in net profits had been primarily driven by increased revenues and underlying profits on operating activities, but also by improved transfer results. Whilst this positive trend had already begun to wane somewhat in 2018/19 (particularly in the Premier League), the focus for all clubs quickly shifted to maintaining liquidity as the COVID-19 pandemic began to unfold across Europe. The suspension and extension to the 2019/20 season saw clubs' operating cash flows interrupted and usual end-of-season proceeds deferred into the 2021 financial year. According to KMPG, six of Europe’s biggest leagues lost a combined £4.5billion in operating revenues through 2020. It is no surprise then that clubs are reporting negative EBITDAs before player trading and an even greater number are reporting net losses.

The fact that 46% of clubs assessed by 23 Capital, which includes 46 clubs that competed in the ‘Big Five’ leagues in 2019/20 and whose 2020 accounts were publicly available at the time of writing, had a positive EBITDA before player trading in 2020, does provide confidence in the underlying strength and financial management of clubs. However, with clubs likely to see virtually zero matchday income in 2021, these numbers are likely to decrease. 

Of the remaining 54% of clubs that reported a negative EBITDA before player trading in 2020 (25 of 46 clubs assessed), 15 generated sufficient profit on player sales to record a positive EBITDA after player trading, demonstrating the importance of player sales profit in offsetting operational losses. The transfer windows affecting the 2020 numbers did however come prior to the outbreak of the pandemic. Clubs’ ability to offset operating losses from player trading in 2021 will be further challenged by the decline in transfer market activity seen this season and we could see a significant rise in negative EBITDAs after player trading. This will be somewhat offset by the partial transference of 2019/20 broadcasting income between financial years, which further complicates the assessment of a club’s profitability in comparison to previous seasons. 

At home, 12 of the 14 Premier League clubs assessed by 23 Capital reported post-tax losses in 2020, with an aggregate net loss of €869m. The pandemic has certainly contributed to such losses; however, it isn’t solely to blame. As reported by Deloitte, Premier League clubs reported aggregate pre-tax losses of £165m prior to the pandemic in 2018/19 (only the second cumulative pre-tax loss in the previous six seasons). The predominant driver was the combination of a significant reduction in profit from the sale of players and increased amortisation of player registrations. 

These factors once again highlight the significance of player trading, both as a tool to managing liquidity, but equally as to how clubs’ account for the value of any particular player year-on-year alongside any profits/losses on player sales. The accounting value of player registrations amortise straight-line over the life of a player’s contract, whereas their market value could conceivably increase considerably. As such, any profits or losses from a player sale is marked against this book value (and not market value) as at the time of sale. Pre-COVID, player trading was typically driven by liquidity needs of a club alongside a sporting player strategy. Since the outbreak of the pandemic, clubs are having to balance the above with heightened scrutiny of their financial accounts and thus additional pressures of managing the nuances of these accounting treatments.

As clubs look to recoup their losses, they will be buoyed by the steady financial management which underpinned their pre-pandemic business performance. The effectiveness of financial regulations across Europe will continue to add value as clubs look to restore their pre COVID-19 fiscal achievements. But it will be the vaccination roll out and subsequent easing of lockdown restrictions which provides the strongest hope that clubs can maximise the potential of all their income streams and restore profitability to pre COVID-19 levels. The outstanding challenge will be to understand how much damage has been done to club’s respective Balance Sheets. 

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