Over the last decade or so, the financial performance of Premier League football clubs has been under scrutiny for various reasons including the requirements to comply with the Financial Fair Play (FFP) rules. We haven’t really delved into the minutiae of the numbers, but thought it would be good to provide an overview of the kind of transactions that could attract scrutiny when dealing with related parties.
Manchester City* was acquired by Sheikh Mansoor from Abu Dhabi in August 2008. Since then the club that used to fear relegation to the lower league in early 2000’s has become a powerhouse in football, systematically winning everything they set their sights on. Following the acquisition in 2008, the owners of Manchester City (City) have implemented a multi-club model, buying various football clubs across the world, and have pumped millions of dollars into City through sponsorship deals, whilst investing heavily into the club’s stadium and training infrastructure.
City have been accused of breaching FFP and now face 115 charges.
In this case study we will focus on a handful of those dealings and how they would appear from a transfer pricing perspective. Transfer pricing (TP) requires transactions between related parties to be conducted at arm’s length i.e. on the same terms as if the parties were unrelated.
Player Transfers
For people who do not follow football, players are expensive and good players are very expensive. As mentioned, City invested heavily in training infrastructure during the early years of Sheikh Mansoor’s ownership and are now reaping the benefits of their youth academy in particular. They no longer rely on having to purchase expensive players and have been making financial gains by selling some of their young players who do not have an immediate pathway into City’s first team to other clubs. Between June and August 2024, they sold second team/youth players and raised over EUR 125 million; however, we wanted to focus upon their one particular arrival from a League 2 French outfit – Savinho.
Savinho was purchased by Troyes, a club in the second league of French football, for approx. EUR 6.5 million in 2022. He never played for Troyes as he played a season out on “loan” with Girona, a team playing in the Spanish first division. He had a stellar year for Girona and helped them qualify for the UEFA Champions League – the pinnacle of European football. In 2024, City paid Troyes EUR 25 million for the purchase of Savinho.
When you look at the numbers above in isolation, nothing appears out of the ordinary. However, below the surface Troyes, Girona and City are all owned by the same Group. From a TP and common-sense perspective, we would ask them the following questions:
- Troyes purchased a player they never had any intention of playing and were able to book a profit of close to EUR 20 million. This will go a long way in strengthening their club for the future – it’s a huge amount of money for a lower league team in France. If the intention was never to play for the club, have the Group just moved funds around and banked money in jurisdictions they need it (i.e. profit shifting)?
- Let’s assume they executed the above transaction correctly and the initial transfer was above board. According to Transfermarkt.com, Savinho’s market value at the time of transfer from Troyes to City was EUR 50 million following his stellar season. Yet City ‘only’ paid EUR 25 million for him. This essentially means they will book 25 million less in expenses helping them with the FFP rules. If the two parties were truly independent of each other, it is highly doubtful that the amount is considered to be at arm’s length. To put things in perspective; City sold one of their second-string players to Southampton for EUR 23 million. This particular player had only ever played in the lower English leagues, unlike Savinho who played at the pinnacle of Spanish football.
Outside of this transfer, the constant player loan deals between members of the Group can be considered questionable. Loan deals where players are loaned to other clubs are common practice in the industry. Generally, when there is a loan between two clubs, the deal attracts a loan fee. For example, Borussia Dortmund loaned Yan Couto from City this year and it is estimated that they paid a EUR 4 million loan fee. Last year, the same player was loaned to Girona (a related party) with no loan fees attached to the transaction. We would question why the former attracted a loan fee, when the latter did not.
Branding and Image Rights
Since the takeover in 2008, the club has received significant amounts in branding revenue from Etihad Airways and through stadium naming rights. Perhaps interestingly, when you look at the related parties dealing disclosures in City’s annual report, Etihad Airways is not listed as a related party. From a quick search through Wikipedia, the following is the history of Etihad Airways:
“In July 2003, future UAE president Sheikh Khalifa bin Zayed Al Nahyan, who wanted an airline for Abu Dhabi, issued a royal (Amiri) decree that established Etihad Airways as a national airline of the United Arab Emirates. Sheikh Ahmed bin Saif Al Nahyan founded the airline and utilised AED500 million of start-up capital.” (Wikipedia.com, accessed on 3 October 2024)
Sheikh Mansoor (who is the owner of City) is related to the individuals listed above who founded Etihad airways. These dealings have been subject to reviews in the past. However, again, we are only looking at it from a TP perspective and if they are considered related parties, the sponsorship deals should be at arm’s length.
If we go back in time a little, during the 2013-2014 financial year, City generated £346.5 million in revenue, breaking the £300 million threshold for the first time in their history (Source: 2013-14 Annual Report). Commercial revenues accounted for £165 million of this, increasing from £143 million in the 2013 financial year.
The following are the commercial revenues of Manchester United (City’s biggest rivals) around the same period:
To put things in perspective again, according to Deloite’s 2009-10 money league report, City’s commercial revenue in 2010 was £57 million and much below that prior to the takeover. Anyone who watched football in the early to late 2000’s would know that Manchester United were a beast of a club commercially, with one of the largest supporter base in the world.
For City to nearly match them (within 15%) commercially by 2014 could indicate their commercial deals with Etihad helped them bridge the gap quite substantially. When determining what is arms length, a study would need to be undertaken that looks into what an unrelated person would be willing to pay for the branding and stadium rights.This would probably require a competitor analysis. However, on the surface it seems that City simply grew too fast, and though it is easy to look back now and say it seems about right, at that point in time it did seem like a substantial amount.
Multiclub model
Another interesting aspect of City’s ownership is the multiclub/franchise model being undertaken. Outside of all the transfers/branding issues, another consideration would be the use of the “City” name e.g. New York City or Mumbai City. Something we haven’t looked into in too much detail (because we do have day jobs and can’t talk about football all day) is how the image rights are being treated (if at all) and where the income is actually being recognised.
Conclusion
The above may seem like a rant from a bunch of bitter fans of other football clubs (which may be true) but our aim was to give you an overview of how transfer pricing could apply to various different types of transactions within a particular group, as well as how some of these transactions could seem familiar if you do have payments for IP, asset transfers and payments for goods and services with internaional related parties.
Get in touch
If your business is affected by transfer pricing regulations, please don’t hesitate to get in touch with your local Moore Australia advisor today.
*Disclaimer: Moore Australia is in no way affiliated with any of the football clubs listed in the above case study and we have used publicly available information to prepare this article. We acknowledge that there might be relevant information relating to the above which is not available to us and might alter our considerations.