11th July 2017

Blog – 2nd March 2017

2nd March 2017


Claudio’s Burden

The stark, harsh reality of life in the lower half of the EPL came to the fore with the sacking of Claudio Ranieri. Irrespective of the outrageous achievement of winning the EPL with the most rank outsiders in living memory, his real success was taking a club whose financial position was nothing short of very ordinary and bringing home a payday for the owners beyond their wildest expectations. Unfortunately, as we will show, it has also proved to be his undoing.

As we have highlighted on previous occasions, the economics of football is a curious beast. The game struggles to generate both value and meaningful returns for shareholders. And yet, and yet…rich, indulgent and sensible investors (they wouldn’t be rich without being sensible and successful) continue to line up to buy their way into the most popular football league in the world.

Leicester City picked up a £91m prize for winning the Premier League in 2016. The last set of available accounts (2014/2015) show that the club achieved revenues of £104m with broadcasting income making up just over 70% of the total. Given the new TV deal commenced in the same season as Leicester won the title, the broadcast revenue element in the latest set of accounts is likely to be in the region of £110-£120m. Add in match day revenues and sponsorship of, say, £40m and the likely end-result is a revenue total in the region of £250m.

For 2016/17 season, Leicester will probably achieve TV revenues of £140-£145m given their Champions League participation. Match day and sponsorship revenues will probably come in at around £50m, thus the probable revenue total will be around £195m. So, by not repeating the feat of 2015/16, the club is down by around £50-55m on a revenue-only basis.

Should the club be relegated, then the TV money disappears and is replaced by the Premier League parachute payment which we think will be around £50m. Add in a reduced match day and sponsorship pool of £40m and revenues should come in at around £90m.

Therefore, the revenue hit of winning the EPL and then being relegated in successive seasons is approx. £160m.

From an Economic Profit perspective (where we subtract all charges and taxes from the revenue number to give a true picture of wealth creation or destruction), the club has generated economic losses of just over £108m between 2008-2014. The club’s return to the EPL in 2014/15 generated an economic profit of £24.41m and it is likely that this will increase for 2015/16 given the prize money element and relatively neutral transfer activity. However, a possible revenue reduction of £160m would decimate any possibility of a positive economic return.

Despite the stunning success of Mr. Ranieri’s efforts in 2015/16, it is clear to us that the owners could not stomach the thought of a financial meltdown. If the club were to stay in the EPL, then another £30-35m could be added to the total as part of the overall prize pool at the end of the season depending on where the club finishes. Even so, the precarious nature of the EPL is clear for all to see.

The rule of thumb is that whilst winning the EPL is a glorious and financially fruitful endeavour for club investors, the real challenge is the continuous investment to remain competitive and maintain status within the EPL. For Leicester City, the financial horror of relegation prompted one of the more unfortunate decisions in football. It remains to be seen if it is the right one.