Revenues
Like all fascinating financial stories, this one begins with a chart. Or it would if I knew how to post it. So you’ll just have to follow the numbers.
EDIT - thanks @Dee for helping me sort this.
The chart is all about commercial revenue. With media revenues controlled centrally by UEFA / the Premier League, and matchday revenues largely static due to fan pressure on pricing and infrastructure / demand limitations on hospitality, commercial revenue is the key thing that can drive growth in revenues and which is in the control of individual clubs.
I’ve presented revenues for City, United and us. United were ahead of the game, and back in 2007 their revenues dwarfed City’s and significantly out-performed ours, although the relative numbers back in those days were much smaller than today’s.
City were taken over by ADUG in August 2008, so 2009 is the first year where their finances were substantially managed by their new owners.
From 2009 to 2022, City’s commercial revenues grew by £261m (from £48m to £309m), United by £188m (£70m - £208m), us by £187m (£60m - £247m). Or in percentage terms, 615%, 303% and 395%. Or effective annual growth of 15.4%, 10.6% and 11.4%.
Those figures wouldn’t stack up even if City were a storied club with major global reach and a worldwide network of fanatical supporters. Picture those scenes of fans in the Far East going all Beatlemania when we or United come to town. Have you ever seen those scenes where the predominant colour is sky blue? Of course you haven’t.
The fair value question
The argument against this unrealistic growth in City’s revenue is that the sponsorship is from friendly companies and should be reflected at fair value. The problems with this, in as much as they affect a panel enquiry are:
GEEK SECTION
In global taxation, there is a concept called transfer pricing. Most mainstream economies have rules in their tax legislation which essentially state that transactions between related companies have to be recorded for tax purposes at their open market value. If we take Amazon as an example here, they have companies operating around the world as fulfilment agents – they run the local websites and fulfil the orders. You’d expect them to make a decent profit, and they actually do, until Amazon Luxembourg charge them a royalty fee for using the Amazon brand and central platform. Suddenly a large chunk of the profit moves into Luxembourg where it is taxed at, approximately, 0%.
So at this point, the local tax authorities should jump in with their transfer pricing rules and challenge the fees that have been charged to shift profit back into their territory where it will be taxed. Simple, right? So why hasn’t everyone done that? Because Amazon has the work of the world’s top economists supporting their fee and is happy to litigate forever rather than concede it’s wrong. If you ask these economists what the appropriate fee is, they will likely ask you “What do you need it to be?”.
And in this world of fair value, the focus is on finding comparable transactions that support your position, and there will always be someone who did a bad deal and overpaid massively for what they got (Chevrolet, anyone?).
Amazon will ultimately pay a small settlement, pat the authorities on the head and move on.
City will try to take the same approach.
END OF GEEK SECTION
Because the thing about fair market value is that you can find any number of people who will review the most outrageous fee structures and find a way to justify them. And proving that those opinions are bollocks, which they so obviously are, is practically impossible. And that is where the independent panel would find themselves if they pursue a basic challenge to the other-worldly rise in City’s commercial revenue.
That’s point one in why this thing has been taking so long. It can’t be definitively proved, on externally available evidence, that there is a connection between the companies, and even if it could, the argument about value is shades of grey, not black and white. Economists will usually come up with a permissible range, not a hard number.
BUT….
Der Spiegel and Football Leaks
At this point, it is time to take a trip to the tremendous work done by Der Spiegel in late 2018 – over five years ago and this still hasn’t been brough to bear.
The article I am referencing can be found here:
https://www.spiegel.de/internationa...-rules-to-the-tune-of-millions-a-1236346.html
It’s worth a read, and contains links to others I will reference in subsequent posts in this thread.
Sponsorship values
To cut to the chase, Der Spiegel reviewed the cache of documents dumped on the web by the Football Leaks hacker. The key documents they found that are relevant here are internal memos and emails from key Man City executives. As far as their sponsorship revenues are concerned, the main revelation is that City’s key sponsors were only self-funding a small part of their sponsorships. An internal document details the investment of ADUG into City up to the end of May 2012. Included in the table is an item described as “Supplement to Abu Dhabi partnership deals” which is stated at £149.5m (this is approximately half of City’s commercial revenue between 2009 and 2012). In essence, the documents support the view that ADUG was channelling funds through City’s major sponsors to enable them to pay the full amount of their sponsorships, but they were only bearing a small amount as a cost themselves. And it’s fair to suggest that the amount they were happy to bear themselves, is their assessment of the actual value of the deal they were getting. In the case of Aabar, they were paying £15m per annum, but only £3m was coming from their own funds. For Etihad, the numbers quoted were £8m from Etihad, £59.5m from ADUG.
None of this appears to establish that the sponsors were related to City, so they could still argue that the fair market value rules don’t apply. However, the Premier League’s rules (A.1.23) state that “in considering each possible Associated Party relationship, the League will direct its attention to the substance of the relationship and not merely the legal form” and goes on to talk about the ability to influence a party. So even if it can’t be shown there is common ownership or management, the fact that ADUG was able to persuade those companies to take part in the scheme should be enough.
From the Der Spiegel article: “When contacted for a response, Etihad said the financial obligations associated with the partnership with the club have always been and remain the airline's "sole liability and responsibility." You’ll note that they made no reference to whether they received money from ADUG or any other party to fund their “sole liability and responsibility”. It’s a carefully crafted statement that seems to say something it doesn’t actually say, like the £350m on that fucking bus.
City’s executives were quite happy to discuss this internally and via email because they thought those discussions would never come to light. Oops!
This is a virtual slam dunk for the panel. And it should be goodnight Vienna for City. And it should have been, 5 years ago, when it was first revealed.
Amending the agreements
There is further discussion of City encountering an FFP problem which they proposed to fix via retrospectively changing the, already over-priced, sponsorship deals to plug their earnings gap. Their problem arose because they had sacked Roberto Mankini (typo intended) on 14 May that year. They could have solved the problem by, checks notes, not sacking Mankini until the following financial year, but they weren’t bothered with that because they were happy to fix things however they wanted.
This is also a slam dunk for the panel, and proves that City’s sponsorship agreements were not worth the paper they were written on – totally uncommercial. Furthermore, from looking at the description in the Der Spiegel article, if the agreements were changed in the way they proposed, I think the accounting is questionable too.
The only slight caveat to all of this is that the documents Der Spiegel reports on don’t confirm that the changes to the agreement were ultimately made – this would need to be proved, but on the basis that City didn’t report an FFP failure, it seems likely that they did what they proposed, or else they found £10m down the back of the sofa in the CFO’s office.
It’s also likely that this issue in isolation wouldn’t cause a PSR problem for City because the concern about failing FFP was for UEFA’s rules, so they’d have been fine with the PL’s limits. The problem would be ethical, rather than financial.
However if we’re going to add back £75m+ per annum in over-valued sponsorship deals then they are well and truly shafted for PL rules.
Etihad are still their main sponsor, so this issue hasn’t gone away, and it’s still a problem for them.
The case for the defence
UEFA have been over some of this stuff, and initially booted City out of the Champions League, although they successfully appealed on technicalities, before ridiculously telling everyone they had been exonerated.
The basis of success of the appeal was that some of the issues were time-barred, covered by previous investigations (when City, presumably, didn’t make full disclosure of these issues, or managed to blind-side UEFA to their significance) and had only come to light as a result of a hack – the information on which UEFA needed to rely had been illegally obtained and was therefore inadmissible.
So why wouldn’t that apply to a PL investigation?
Firstly, the speculative bit. I’m going to assume that City have not volunteered the above information to the PL (they’ve been charged with failure to cooperate) and that they have provided financial information that did not make adjustments of their sponsorships to a fair value. They are required to do this, so the PL view will be that they have submitted false information.
Secondly, this information came to light via Der Spiegel in late 2018, and it looks like the Premier League commenced their investigations shortly afterwards. There’s a good chance that they will be able to bring charges to bear on the earlier years as they responded to information coming to light pretty quickly, so the Limitations Act might not apply to help City this time (and even if it does, some of these issues will be live within years that are not time-barred).
Thirdly, and this is my favourite bit, the Premier League’s rules state that normal rules on admissibility of evidence wouldn’t apply – evidence would not be struck out simply because it had been obtained illegally (via Football Leaks) provided it could be shown it was reliable. This wasn’t the case with the UEFA case.
The rule, W80, states “In the exercise of their powers under this Section of these Rules, a Commission or an Appeal Board shall not be bound by judicial rules governing the admissibility of evidence. Instead, facts relating to a breach of these Rules may be established by any reliable means.”
So City will need to prove that the Football Leaks information isn’t real or reliable. To date, they have stated that they consider the Football Leaks revelations to be a deliberate attempt to damage their reputation. But they have never stated that the documents aren’t genuine. I wonder why?
I’m sure there will be loads of other bits and bobs that I’m not aware of, or that haven’t come out yet, but those are the main points on over-statement of revenues.
Like all fascinating financial stories, this one begins with a chart. Or it would if I knew how to post it. So you’ll just have to follow the numbers.
EDIT - thanks @Dee for helping me sort this.
The chart is all about commercial revenue. With media revenues controlled centrally by UEFA / the Premier League, and matchday revenues largely static due to fan pressure on pricing and infrastructure / demand limitations on hospitality, commercial revenue is the key thing that can drive growth in revenues and which is in the control of individual clubs.
I’ve presented revenues for City, United and us. United were ahead of the game, and back in 2007 their revenues dwarfed City’s and significantly out-performed ours, although the relative numbers back in those days were much smaller than today’s.
City were taken over by ADUG in August 2008, so 2009 is the first year where their finances were substantially managed by their new owners.
From 2009 to 2022, City’s commercial revenues grew by £261m (from £48m to £309m), United by £188m (£70m - £208m), us by £187m (£60m - £247m). Or in percentage terms, 615%, 303% and 395%. Or effective annual growth of 15.4%, 10.6% and 11.4%.
Those figures wouldn’t stack up even if City were a storied club with major global reach and a worldwide network of fanatical supporters. Picture those scenes of fans in the Far East going all Beatlemania when we or United come to town. Have you ever seen those scenes where the predominant colour is sky blue? Of course you haven’t.
The fair value question
The argument against this unrealistic growth in City’s revenue is that the sponsorship is from friendly companies and should be reflected at fair value. The problems with this, in as much as they affect a panel enquiry are:
- City deny there is any connection between, for example, Etihad Airways (headquartered in Abu Dhabi, government owned until October 2022) and City (owned by prominent Abu Dhabi politician and businessman, Sheikh Mansour).
- City deny that the sponsorship agreement is overpriced.
GEEK SECTION
In global taxation, there is a concept called transfer pricing. Most mainstream economies have rules in their tax legislation which essentially state that transactions between related companies have to be recorded for tax purposes at their open market value. If we take Amazon as an example here, they have companies operating around the world as fulfilment agents – they run the local websites and fulfil the orders. You’d expect them to make a decent profit, and they actually do, until Amazon Luxembourg charge them a royalty fee for using the Amazon brand and central platform. Suddenly a large chunk of the profit moves into Luxembourg where it is taxed at, approximately, 0%.
So at this point, the local tax authorities should jump in with their transfer pricing rules and challenge the fees that have been charged to shift profit back into their territory where it will be taxed. Simple, right? So why hasn’t everyone done that? Because Amazon has the work of the world’s top economists supporting their fee and is happy to litigate forever rather than concede it’s wrong. If you ask these economists what the appropriate fee is, they will likely ask you “What do you need it to be?”.
And in this world of fair value, the focus is on finding comparable transactions that support your position, and there will always be someone who did a bad deal and overpaid massively for what they got (Chevrolet, anyone?).
Amazon will ultimately pay a small settlement, pat the authorities on the head and move on.
City will try to take the same approach.
END OF GEEK SECTION
Because the thing about fair market value is that you can find any number of people who will review the most outrageous fee structures and find a way to justify them. And proving that those opinions are bollocks, which they so obviously are, is practically impossible. And that is where the independent panel would find themselves if they pursue a basic challenge to the other-worldly rise in City’s commercial revenue.
That’s point one in why this thing has been taking so long. It can’t be definitively proved, on externally available evidence, that there is a connection between the companies, and even if it could, the argument about value is shades of grey, not black and white. Economists will usually come up with a permissible range, not a hard number.
BUT….
Der Spiegel and Football Leaks
At this point, it is time to take a trip to the tremendous work done by Der Spiegel in late 2018 – over five years ago and this still hasn’t been brough to bear.
The article I am referencing can be found here:
https://www.spiegel.de/internationa...-rules-to-the-tune-of-millions-a-1236346.html
It’s worth a read, and contains links to others I will reference in subsequent posts in this thread.
Sponsorship values
To cut to the chase, Der Spiegel reviewed the cache of documents dumped on the web by the Football Leaks hacker. The key documents they found that are relevant here are internal memos and emails from key Man City executives. As far as their sponsorship revenues are concerned, the main revelation is that City’s key sponsors were only self-funding a small part of their sponsorships. An internal document details the investment of ADUG into City up to the end of May 2012. Included in the table is an item described as “Supplement to Abu Dhabi partnership deals” which is stated at £149.5m (this is approximately half of City’s commercial revenue between 2009 and 2012). In essence, the documents support the view that ADUG was channelling funds through City’s major sponsors to enable them to pay the full amount of their sponsorships, but they were only bearing a small amount as a cost themselves. And it’s fair to suggest that the amount they were happy to bear themselves, is their assessment of the actual value of the deal they were getting. In the case of Aabar, they were paying £15m per annum, but only £3m was coming from their own funds. For Etihad, the numbers quoted were £8m from Etihad, £59.5m from ADUG.
None of this appears to establish that the sponsors were related to City, so they could still argue that the fair market value rules don’t apply. However, the Premier League’s rules (A.1.23) state that “in considering each possible Associated Party relationship, the League will direct its attention to the substance of the relationship and not merely the legal form” and goes on to talk about the ability to influence a party. So even if it can’t be shown there is common ownership or management, the fact that ADUG was able to persuade those companies to take part in the scheme should be enough.
From the Der Spiegel article: “When contacted for a response, Etihad said the financial obligations associated with the partnership with the club have always been and remain the airline's "sole liability and responsibility." You’ll note that they made no reference to whether they received money from ADUG or any other party to fund their “sole liability and responsibility”. It’s a carefully crafted statement that seems to say something it doesn’t actually say, like the £350m on that fucking bus.
City’s executives were quite happy to discuss this internally and via email because they thought those discussions would never come to light. Oops!
This is a virtual slam dunk for the panel. And it should be goodnight Vienna for City. And it should have been, 5 years ago, when it was first revealed.
Amending the agreements
There is further discussion of City encountering an FFP problem which they proposed to fix via retrospectively changing the, already over-priced, sponsorship deals to plug their earnings gap. Their problem arose because they had sacked Roberto Mankini (typo intended) on 14 May that year. They could have solved the problem by, checks notes, not sacking Mankini until the following financial year, but they weren’t bothered with that because they were happy to fix things however they wanted.
This is also a slam dunk for the panel, and proves that City’s sponsorship agreements were not worth the paper they were written on – totally uncommercial. Furthermore, from looking at the description in the Der Spiegel article, if the agreements were changed in the way they proposed, I think the accounting is questionable too.
The only slight caveat to all of this is that the documents Der Spiegel reports on don’t confirm that the changes to the agreement were ultimately made – this would need to be proved, but on the basis that City didn’t report an FFP failure, it seems likely that they did what they proposed, or else they found £10m down the back of the sofa in the CFO’s office.
It’s also likely that this issue in isolation wouldn’t cause a PSR problem for City because the concern about failing FFP was for UEFA’s rules, so they’d have been fine with the PL’s limits. The problem would be ethical, rather than financial.
However if we’re going to add back £75m+ per annum in over-valued sponsorship deals then they are well and truly shafted for PL rules.
Etihad are still their main sponsor, so this issue hasn’t gone away, and it’s still a problem for them.
The case for the defence
UEFA have been over some of this stuff, and initially booted City out of the Champions League, although they successfully appealed on technicalities, before ridiculously telling everyone they had been exonerated.
The basis of success of the appeal was that some of the issues were time-barred, covered by previous investigations (when City, presumably, didn’t make full disclosure of these issues, or managed to blind-side UEFA to their significance) and had only come to light as a result of a hack – the information on which UEFA needed to rely had been illegally obtained and was therefore inadmissible.
So why wouldn’t that apply to a PL investigation?
Firstly, the speculative bit. I’m going to assume that City have not volunteered the above information to the PL (they’ve been charged with failure to cooperate) and that they have provided financial information that did not make adjustments of their sponsorships to a fair value. They are required to do this, so the PL view will be that they have submitted false information.
Secondly, this information came to light via Der Spiegel in late 2018, and it looks like the Premier League commenced their investigations shortly afterwards. There’s a good chance that they will be able to bring charges to bear on the earlier years as they responded to information coming to light pretty quickly, so the Limitations Act might not apply to help City this time (and even if it does, some of these issues will be live within years that are not time-barred).
Thirdly, and this is my favourite bit, the Premier League’s rules state that normal rules on admissibility of evidence wouldn’t apply – evidence would not be struck out simply because it had been obtained illegally (via Football Leaks) provided it could be shown it was reliable. This wasn’t the case with the UEFA case.
The rule, W80, states “In the exercise of their powers under this Section of these Rules, a Commission or an Appeal Board shall not be bound by judicial rules governing the admissibility of evidence. Instead, facts relating to a breach of these Rules may be established by any reliable means.”
So City will need to prove that the Football Leaks information isn’t real or reliable. To date, they have stated that they consider the Football Leaks revelations to be a deliberate attempt to damage their reputation. But they have never stated that the documents aren’t genuine. I wonder why?
I’m sure there will be loads of other bits and bobs that I’m not aware of, or that haven’t come out yet, but those are the main points on over-statement of revenues.
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