Monday, 19 September 2011

A look at Real Madrid's headline financial figures

Real Madrid is one of several major clubs (hello Chelsea) who publish a gushing press release summarising their financial results several weeks ahead of the full figures. This year's summary came out on 16th September, ahead of RM's AGM on 25th September. This post takes a look at what the figures say and makes a comparison with Manchester United (the only other major club to report 2010/11 figures so far).

Revenues - performance on the pitch drives growth
Despite finishing second in La Liga to Barcelona for the third successive season, 2010/11 was a better season for RM than 2009/10. The club won silverware in the Copa del Rey and perhaps more importantly  made it beyond the first knock-out round of the Champions League for the first time since 2003/04 (even if it was FCB that knocked them out in the semi-final).

The better on-pitch performance was the major factor behind the 8.6% (€37.9m) increase in revenue to €480.2m (£411m). The new three year Champions League TV deal and the club's progress to the semis increased RM's CL income from €26.8m in 2009/10 to €39.3m in 2010/11. The two cup runs meant Real Madrid played 29 home games in total, compared to 24 the previous season and this will largely account for the rest of the revenue increase. No split between Matchday, Media and Commercial revenues is given in the press statement.

Costs - wages up, other costs sharply lower
The 2010/11 season saw the start of the Mourinho era at the Bernebeu and with him came significant transfer spending and a large hike in the wage bill. 

Despite the increase in income, the ratio of wages to turnover increased to 45% from 43.5%, although this is still a very healthy performance compared to other clubs (FCB reported a ratio of 67% in 2009/10, Chelsea 84% and City 107%).

We can use the reported ratio to separately identify staff and non staff costs. Despite the departure of club legend Raul as well as Guti, Diarra, van der Vaart and others, the arrival of Carvalho, Di Maria, Ozil, Khedira etc  as well as Mourinho himself meant the wage bill rose a very punchy 12.4% year on year. It is reasonable to assume there was an increase in bonuses during the season to match the better playing performance.

With staff costs rising sharply, the club did very well to maintain virtually flat operating expenses (before depreciation and amortisation). With total costs only rising 0.5%, non-staff expenses must have fallen 15.9% year on year. This cost line has proved volatile in past years (non-staff expenses fell 12.7% in 2007/08 and then rebounded 24% in 2008/09) but this is still a very commendable performance. It appears Real Madrid have found significant economies at the club which has allowed them to spend more on the playing side.

EBITDA - up sharply but very low profit on player sales
With revenue up 8.6% and total operating expenses only up 0.5%, EBITDA (ex-player sales) rose very sharply in 2010/11, up almost a third to €147.7m. The EBITDA margin was a healthy 30.8%, a huge improvement on 2009/10's 25.2% and almost double the 16.9% the club made in 2004/05.

With only van der Vaart commanding any sort of proper sale fee, the club's "profit on player" sales (transfer proceeds compared to a player's book value) was sharply lower at €3.4m vs. €34.0m, leaving total EBITDA up 3.8% at €151.1m. Profit on player sales is a volatile figure for any club and I would not include it in any measures of fundamental profitability.

After EBITDA - small rise in amortisation
Between the €151.1m of EBITDA including player sales and Real Madrid's reported operating profit of €46.5m are charges for depreciation and player contract amortisation. Unhelpfully the club did not split out the two categories but depreciation is likely to be a very small element (Barcelona's depreciation charge in 2009/10 was only €8.1m for example). Player contract amortisation is how transfer spending is reflected in football club accounts. The value a club pays for the contract of a player is "amortised" or charged over the length of the contract.

The implied depreciation and amortisation charge for 2010/11 is €104.6m, up slightly from €101.7m in the previous year. This movement reflects around €50m of transfer spending (which assuming the new players were on five year contracts would add c. €10m to amortisation) less the sales of Diarra (whose original €26m cost was amortising at c. €5.2m pa) and van der Vaart (his €13m cost was amortising at c. €2.6m pa).

Real Madrid's amortisation charge is the highest in world football, reflecting years of big name signings at record breaking prices.

Debt and interest
The Real Madrid press release trumpets a 30.6% fall in debt to €169.7m from €244.6m the previous year. The club's own definition of debt is very wide, including football creditors and stadium debt. There is no breakdown of bank debt, transfer fees due and other creditors in the release.

The €75m fall in debt looks entirely consistent with EBITDA (ex-profit on player sales) of €148m, net (cash) transfers of c. €40m, interest of around €10m (my estimate based on lower average debt and the interest paid in 2009/10), tax and capex.

The Real Madrid balance sheet is pretty strong and at only 1.1x EBITDA debt is not a major concern for the club.

A quick comparison with MUFC
Manchester United is the only other major European club to have published 2010/11 results so far. I have converted the Real Madrid figures to £ (at the average rate between 1st July 2010 and 30th June 2011 of €1 = 85.65p).

Real Madrid's turnover continues to exceed United's, but the gap closed in the last twelve months as United reached the CL final and saw very strong growth on the commercial side. Both clubs have seen an enormous increase in income over the last five years, but the very significant price increases at United mean it has grown revenue faster (+13.9% CAGR 2006-2011 vs. 10.4% CAGR at Real).

There remain several structural reasons for the gap in turnover between the clubs including;

a) The membership fees Real's Socios pay (c. 60,000 people paying a total of c. £7m pa)
b) A higher proportion of executive facilities at the Bernabeu compared to Old Trafford and
c) The hugely unbalanced La Liga TV deal which brings FCB and Real Madrid around £110m each per annum (vs. the £60m United earned from the Premier League).

In addition to these factors, Real Madrid has for many years been one of the most effective drivers of commercial income in football earning over £116m from this source in 2009/10.

The two clubs have virtually identical wages/income ratios (45% for RM and 46.1% for MUFC). With Real's higher income base this means the Spanish club spend £33m more than United on wages. It should be noted however that the Real figure include around £20m for the club's basketball team and that the United number includes bonuses for winning the league and reaching the Champions League final (which RM did not of course have to pay) of £9.7m. Taking these into account, we can see that Real spend around 15% more than United on "normal" football wages.

United's other operating expenses are significantly lower than Real's, but the two numbers are converging rapidly. United has long had higher margins than Real due to lower wage costs, but the gap is now as close as it has been in recent years at only 2.7%.

It is after the EBITDA line that the major differences between the two club's business models is evident. 

United's depreciation and amortisation charges are almost half Real Madrid's reflecting the far lower reliance on expensive transfers at United in the last five years. 

Of the eighteen players who appeared more than 20 times for Real Madrid in 2010/11, only one (Casillas) came through the club's youth system, one was a loanee (Adebayor) and sixteen were players bought in at an average cost of £19m per player.

By contrast at United, there were also 18 players who made more than 20 appearances last season but four were youth products and those who were not cost an average of only £12m each.

The money saved by United on transfers goes on interest. Real Madrid reported an interest charge of £11m in 2009/10 and I estimate it will have fallen (as the debt has fallen) to around £8m in 2010/11. At United of course, interest on the bonds soaks up around £44m per annum, purely for the honour of being owned by the Glazer family. In previous years the Glazer's financial structure has involved other major costs for United. In 2009/10, swap losses, FX losses and other charges cost an additional £40m. In 2010/11 there was a small net gain of £5m on such items.

Putting the two clubs side by side, we can see two very profitable football clubs putting their resources to very different uses. Neither will struggle under the new Financial Fair Play regulations.

Real Madrid would benefit from having United's youth set-up of course, but United would benefit from having Real's balance sheet. Both need to find a way to beat Barcelona....



James Crawford said...

More quality from Andersred. I still think you should do a blog post looking at the fair play directive. Which clubs are screwed and which ones will be able to spend the most, given that you can only spend based upon your income (or is it turnover).

From where I am sat Real Madrid would be able to spend the most, followed by United then Barca et al. No?

JIM said...

Great stuff, Anders. Very informative.
Why do RM and Barcelona include other obligations (creditors) in their debt figure? I had assumed that it was a media reporting bias but you seem to indicate that they adopt this policy themselves?
DO you have an estimate for the interest bearing debt (or bond equivalent) at Barcelona and RM; or if MUFC adopted their debt definition what would be the comparable figure for United?

I wouldn't have expected RM to show such a strong EBITDA margin trend; has that coincided with debt reduction over that same time span? They have of course spent massively on transfers in that period too.
Profitability comparisons between RM (or Barcelona for that matter) and United would, in the normal course of events, do a disservice to RM. They aim to maximise internal investment (with greater costs) and minimise disinvestment; United aim to maximise shareholder (Glazer) value and potential disinvestment.
For RM, Profitability is a means to an end, the end being spectacle and glory on the park. For the Glazers, profitability is the spectacle and the glory.

Nils K. Skare (Norway) said...

Interesting stuff. Shows that both clubs are financially sound and healthy.
I sincerely hope that the aim Singapore IPO is to reduce or even get rid of United`s debt. I beleive this is mandatory to keep up with our noisy neighbours (and others)in the long run.

Nils K. Skare (Norway) said...

...the aim "of the" Singapore IPO...

william of ollerton said...

what a brilliant unbiased report.totaly illuminating and transparent.this report shows the true business side of major sport that the average supporter would never dream of searching out...

Dave said...

Andy, the Real Madrid insight is the big one as they set the benchmark financially. Great stuff! The interesting revenue line is "commercial", as you point out.

Do you have any detail as to why Real's commercial revenue is so much higher than ours at Utd and also what is driving Bayern's remarkable commercial revenue line?

Is this something to do with the way merchandising revenue is accounted for versus our outsourced deal with Nike (which drops straight to the bottom line), rather than Utd drastically underperforming Real and Bayern?

Many thanks, Dave

Anonymous said...

To Dave
(sorry for any possible grammar mistakes, english is only my third language, I use it rarely in written)

Bayern: Famous german companies puts lot of money into the club. Allianz, Deutsche Telekom, Adidas, Continental, Lufthansa, Audi, Siemens etc. I think just the Telekom deal worth €20 million a year and the Audi deal €10 million. And of course they have other big names in the category of non-german sponsors as well like Coca-Cola, Burger King, Lego, Samsung etc. Bavaria is one of the largest economies in Europe. (GDP per capita) With 1860 Munich is currently in the second divison, FC Bayern is the only Bundesliga club in this big region. 10-12 million people, the club make a lot of money from the sales of shirts. In the case of Real Madrid I think yes, it is something to do with the indoor merchandising (but this means they have much higher op. costs than United) and maybe the different is due to the image rights agrements with the star players. And there are rumours when a new president is elected, his first job is to renegotiate the contracts with the sponsors. "Dear sponsor X, with my cheap bank loans I signed these galacticos if you want advertising your company with their face, pay more money or I will go to company Y."

Of course I think andersred will give you a more accurate answer.


Anonymous said...

Interesting article until your obligatory swing at the Glazers: "In 2009/10, swap losses, FX losses and other charges cost an additional £40m. In 2010/11 there was a small net gain of £5m on such items." These figures don't appear to jibe with the numbers you present just below in the blog. (And that's before we consider the non-cash nature of the discount amortisation and the unrealised FX losses/gains.) Seems a little sloppy.

Apart from this, isn't part of the difference in commercial revenues due to United only including their share of MUML's net profit rather than showing the revenues generated by Nike's management of their merchandising. Means that commercial revenues are considerably understated compared to clubs with different merchandising arrangements.

IMerc said...

Dont beleive in any figures published by RM
They lost money/lands/other RE all the time under Perez.
2 years ago they declared NET debts of £296m ( ) and had most of the players being ammortized.
They never published full picture and never give audited accounts.

Last year Barca ordered Deloitte audit which discovered 69m euro EXTRA losses (78m in full).
So why RM with worse sport results can be considered as profitable?

walia said...

DO you have an estimate for the interest bearing debt (or bond equivalent) at Barcelona and RM; or if MUFC adopted their debt definition what would be the comparable figure for United............
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