The Case Against Third-Party Ownership

Recently Soccerex published a post  by Marcos Motta, notably a board member of the European Football Agents Association and Neymar’s attorney, in which he defended the practice of Third Party Ownership (TPO) as not only legal but  instrumental to the survival of Brazilian soccer. While it is unsurprising that someone in the TPO industry would express support it is important to touch on each point.

Motta begins by casting TPO opponents as primarily engaged in an emotional argument conflating ‘ownership’ for ‘slavery’. He suggests that the false association has fueled much of the “populist intent” that has brought TPO into the limelight, whereas in Brazil ‘economic rights’ of a player is an understood and accepted concept. This is a straw man. Although there are inevitably individuals and fringe media outlets who delight in using inflammatory language to garner attention, most people understand that a soccer player’s economic rights are separate from their freedoms as a human and a club or entity may hold ownership over the former without the latter.

He then describes  at length the provisions which form the basis for TPO under Brazilian and Portuguese law. As with the supposed ‘slavery’ misunderstanding, the legality argument is misdirection. Certainly, there must be plenty in the law to support TPO activities, it would be surprisingly obtuse of Motta and other TPO beneficiaries to practice without legal backing. But what is legal is not necessarily beneficial to a market as a whole. Laws are formed through a constant battle between market participants and imbalances are not only possible but likely. We only need to look at the debate over High Frequency Trading to see a practice which is wholly legal but has profound and possibly severely negative effects on the whole markets.

The health of Brazilian soccer is offered up as the final leg of the TPO case. Motta points to the economic interest that Brazilian clubs have in seeing players command high interest and eventually find their way to the lucrative European markets. This is perhaps the only valid argument in the whole post. If TPO entities do in fact play a vital role in increasing the value of players (and subsequently the value that clubs receive in transfers) then it can be argued that they play a beneficial role in the transfer market. Whether that value comes in the form of marketing, player development, international relationships or some combination is largely irrelevant as long as the overall pie is expanded.

However, if investors are merely capital adding friction to transfers that would have happened anyway how is that beneficial to soccer? Are TPOs better at moving players internationally? Do selling clubs get substantially higher transfer fees? What is the distinction with agent services? Motta does not provide answers to these questions which are at the very heart of the ownership debate. 

Proponents must demonstrate the value added to the transfer market in order to make a positive case for TPO and differentiate themselves from mere middlemen. If the claim is that TPO benefits selling clubs does that not simply come at the cost of larger clubs with additional value taken out by investors? If TPO is for players how does it differ from traditional agency relationships? These questions and larger questions about the incentives and motivations of actors in the ownership industry are the real issue that should be driving the debate about TPO legality.

Beckham Exercises Option for MLS Expansion Team


American soccer continues to grow…

Originally posted on WORLD FOOTBALL WEEKLY:


David Beckham is returning to MLS, now as an owner. MLS Commissioner Don Garber announced that Beckham exercised his option to buy an expansion team with plans to play in Miami in a ceremony held in a Miami museum earlier today.

Beckham and his business partners Simon Fuller and Marcelo Claure will now continue to negotiate with Miami-Dade County Mayor Carlos Gimenez and city commissioners for a new purpose-built stadium to be built in downtown Miami. Claure said the team would not play in a temporary stadium during the interim.

As a result, there is currently no projected date as to when the team would begin playing. However, when it does begin play, it will be the 22nd team to join MLS after New York City FC and Orlando City SC begin play in 2015. Beckham said in a statement he is looking forward to continuing his involvement with MLS.


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Private Equity Giant KKR invests in Hertha BSC

Bundesliga club Hertha BSC announced that they have secured a €61.2m equity investment from private equity firm Kohlberg Kravis Roberts in exchange for a 9.7% ownership stake. Ingo Schiller, Hertha’s CFO, cited the benefits of “deleveraging, additional equity, less cost pressure, and a reliable foundation for long-term planning,” for the accepting the investment.

Additional details of the deal were not disclosed but both parties were keen to stress the long-term nature of the deal, with Managing Director Michael Preetz emphasizing full commitment to “our strategy of focusing on our superior youth development, and of integrating young, talented players.” The head of KKR Europe elaborated on the investment thesis stressing the club’s “large and loyal fan base, its unique development programme for young talents and the fact that it is the German capital’s leading football club”.

The financing will help Hertha BSC supporters breathe a bit easier as the club looks to compete more effectively and escape its recent relegation woes. It could not have come sooner as der Bayern’s expanding economic dominance continues to cast a long shadow over the prospects of competitors for the Bundesliga throne.

Source: KKR Investor Relations


Who’s doing the buying in the 2013-14 transfer window?

Silly season is especially silly this year with big name signings flying fast and thick; Cavani,  Falcao, and Neymar were just the icing on the cake  with over 20 players worth €20m or more changing hands already this summer. Even Major League Soccer got in on the action bringing American superstar Clint Dempsey home to the States for a (large for the MLS) fee of £6m.

So it seems like activity in the 2013-14 window has been particularly intense compared to previous summers. Is this true? And if so who has done the most spending?

There are still a good 20 or so days to go in the window but one league is already a clear standout for ‘Spender of the Year’.

Hey Big Spender

EPL 2013-14 - Net Spend 10 Ten

Chairmen in the EPL have clearly gotten their new checkbooks in and are not afraid to use them. Spending activity in the EPL is also more evenly distributed, with all clubs (except for Arsenal) having a net spend so far this summer. Contrast that with Ligue 1 and you can see that the vast majority of the spending was done by PSG and Monaco (for once the headline count was actually proportional to the activity).

EPL 2013-14 - EPL v Ligue1

You can see the drastic distribution difference in spending in the different standard deviations between leagues. I have also removed the top 2 spenders from each league to show how much of an impact PSG and Monaco have on Ligue 1 statistics.

But back to our original question, has this window been more active than previous ones? To compare let’s look at a few metrics: players in/out, gross expenditure and the average buying and selling prices per player.

Quality not quantity?

EPL 2013-14 - Player movement

Player movement is down quite a bit with the numbers of players in decreasing by 403 (-71%) and players out down by 258 (-54%). Again there are still several weeks left in the window and there is always a burst of late activity but the trend looks like a decrease from previous seasons. A metric that seems right in line with the past several years is the league net spend:

EPL 2013-14 - Net Spend

€332m has been spent so far this summer on a much smaller number of net players which would suggest a certain outcome for the average buy/sell price of players…

EPL 2013-14 - Avg Prices

While the number of players moving is down the average price spent for them is higher. At the lowest €1.06m was spent per player into the league in 2011-12, so far this summer €2.58m per player has been spent. Players are also moving out of the league for less money with an EPL player costing an average of €410k to move on, down from €980k in 2009-10. In comparison to last year the increase/decrease is smaller but still as dramatic with average buying price increasing by €1.21m (+88%) and average selling price decreasing by €350k (-46%).

It is tempting to interpret this data as proof that Premier League clubs are drastically increasing squad quality by importing proven talent (higher avg prices) and selling fewer high quality players (less league exits, lower selling prices). And that maybe the case, but keep in mind  stats may change after the burst of late August activity especially as more free transfers move.

I will post an update of these stats after the window closes and numbers are more comparable.

Capitalizing for Financial Fair Play

I thought I would take this blog to answer one of the questions I receive most often. How is it possible for Premier League clubs to spend exorbitant amounts on new players and still remain compliant with the Financial Fair Play rules now in effect? Don’t the millions they spend violate the rules on maintaining breakeven incomes? There are a number of reasons the clubs expect to remain FFP compliant, but the most vital one is based on a core accounting principle.

Accounting 101

Source: Wikipedia

When a club incurs a cost it is treated one of two ways depending on the source. If the cost is related to a benefit that is only applicable to the current year (ex. buying medical tape for the squad) it is treated as an expense . If the cost is incurred for a benefit that is realized over multiple years (ex. improving the stadium) it is capitalized. A cost incurred for a benefit never realized is called a ‘Bebe‘. I kid because I love.

A capitalized cost is then divided over the usable lifetime of the asset. In the case of a player the usable lifetime is the length of his contract. For example, Chelsea have signed André Schürrle to a 5 year contract for £18m. The cash cost is likely to be £18m paid out immediately to Bayer Leverkusen, however the cost of the transfer for accounting/FFP purposes is £3.6m per year.

What about multiple players?

A fan of capitalization (Source: Manchester Evening News)

That puts big transfer price tags in the perspective of a FFP-conscious club. The annual cost does increase as you stack up more transfer in a single year but it makes it more plausible that a club that has spent millions over the past 5 years could actually be compliant. Let’s take a look at Manchester City (shockingly one of the clubs most often linked to this question in my mail).

Below is a schedule that lays out the amortized costs of ManCity’s transfer spending over the last 5 years.

ManCity Amortization Schedule

At the peak in 2012-13, the annual cost of the spending spree totals €94m. The actual number is less important than seeing how the headline grabbing sums are actually spread out for FFP matters.

The Hidden Costs of Luis Suarez

The Six Million Dollar Mouth (Source: Reuters)

The Six Million Dollar Mouth (Source: Reuters)

No one will ever accuse Luis Suarez of being boring. The Liverpool striker and Uruguayan international has a fiery temper on the pitch which has oft landed him in trouble while in service of both his club and country. Most recently Suarez has found himself on the receiving end of a 10-match ban for biting Chelsea defender Branislav Ivanovic.

Opinions differ on what impact Suarez’s suspension will have on Liverpool, with some calling it an opportunity for reinvention and others seeing big negatives for the club. The ultimate effect remains to be seen, but for now we can take a look at the costs we do know about. To get an estimate of the cost of Suarez’s antics we can look at the games he has been unavailable for and measure them in terms of lost wages; or instances where Liverpool has paid for no option to use Suarez’s talent.

Let’s start by counting the games he has been banned for:Ban Count

That is a total of 15 bans in the 90 league matches that Liverpool have played so far; 21 (currently) bans for the 242 league games he will play over the life of his contract. From his arrival in 2010-11 till the end of 2012-13 Suarez will have been unavailable for 17% (!) of Liverpool’s league matches. Now let’s estimate a cost in lost salary for each game.

Ban Costs

Suarez’s bans to date have (counting forward to 2013-14) cost Liverpool ~2m in lost wages. This figure does not take into account cost of fines or any other related charges. And finally, to put this in perspective with some of the investment already spent on him:

Cost Comparison

6% of the total wages Liverpool will pay Suarez over the course of his contract will be spent toward his bans. That percentage assumes that there will be no more incidents, something which seems unlikely given past history. Turns out there’s a pretty big price for mad genius.