Financial Fair Play and Southampton's Finances

Recent discussions of the effects of financial fair play (FFP) on Southampton and the probability that FFP is at the root of this summer’s departures have inspired me to respond by starting a Southampton FC focused blog.  This may seem a strange response for an American who has only been a Southampton fan for four years but that is a subject for another post.

In this analysis, I am relying upon Southampton’s most recent financial report on the club’s official web page. I have not investigated the details of the reports myself.  I have also used the information found on the Financial Fair Play Explained website (http://www.financialfairplay.co.uk/) extensively.  I have used the www.transfermarkt.co.uk web site as my source of transfer fee amounts.  (Some of them seem a bit high, but they represent a consistent source of information from people who specialize in obtaining this type of information.) I will round the numbers off to the nearest half million pounds and, when necessary, adjust for payments to third parties based upon the best information I have.

Baring relegation, there are two different financial fair play rules that could matter to Southampton--UEFA and the BPL. UEFA’s rules can be safely ignored for now because they will only come into play when and if the Saints qualify for European competition. Moreover, it appears that the rules do not apply in the first year that you qualify--in other words Hull and Liverpool can pay in Europe this year no matter what their financial losses might have been last season.

The BPL rules allow teams to lose up to 105 million pounds over three years. Clearly, Southampton is in no danger of doing that. However, the loss is limited to 15 million pounds over three years if the owner does not kick in the rest as equity.  Very likely this will not be a problem for Southampton even if Katharina Liebherr does not intend to contribute another penny.

Why?  Because there are a whole lot of expenses that are not counted against the FFP limits.  Of particular relevance to Southampton are the costs of their youth program and physical plant which would include the new training facility.  Further, transfer fees are not expensed in the year they occur but are amortized over the life of the player's contract .  Thus, for example, Southampton paid 11.5 million pounds for Dusan Tadic.   However, he was signed to a four year contract so only 25 percent of that amount is counted against FFP limits in each year—or 2.9 million pounds.  On the other hand, transfer income, minus remaining amortization, counts as income in the year received.  Obviously, Southampton’s transfer income this year dwarves its amortized transfer expenses—even including deductions for recently purchased players like Rameriz, Lovren, Osvaldo, and Wanyama.

The more significant limit on Southampton is, therefore, not FFP itself or the willingness of Katharina Liebherr to invest money in the club, but the premier league salary cap.  All premier league teams can have wages of up to 52 million pounds year with no restrictions.  Very likely, Southampton was at that level last year.   The financial report for the prior year states that the payroll was 47.1 million pounds.  Given the new players that were signed last summer and the long term contracts signed in Spring 2013, Southampton very likely hit right up against the 52 million pound limit.

Increases above that amount are limited to 4 million pounds a year plus any net increase in commercial revenue and net transfer income. Thus, improved commercial revenue is important for Southampton to increase its payroll but, obviously, the current net positive transfer spend is what can really make the difference.

Transfermarkt (rounded off) provides the following information which I have adjusted for various factors.  This process is not exact, but exactness does not matter right now:

Transfer Fees (in millions of pounds)

Dusan Tadic   11.5

Graziano Pelle  9.0

TOTAL SPENT 20.5

Luke Shaw        33.0

Adam Lallana   22.0 (reduced from 27.0 to account for payment to Bournemouth)

Dejan Lovren    20.0  (reduced from 22 to account for payment to Lyon)

Rickie Lambert    5.0

Calum Chambers 18.0

Mauricio Pochettino 2.0 (this number is not from Transfermarkt)

TOTAL TRANSFER INCOME 100

Thus, Southampton, right now, has about 79.5 million pounds that can be used to buy players or pay increased salary to current players.  Actually, there should be some additional money available because there must have been some increase in commercial revenue and the players that have been sold are no longer being paid.  However, even ignoring those complications 79.5 million pounds is more than 1.5 million pounds a week.

This shows the severe salary cap crunch that faced Southampton at the end of last season.  Without new revenue we could only raise salaries a total of 4 million pounds.  Even if there was some increase in commercial revenue and even if Osvaldo could be unloaded for ¾ of what we paid for him that would not likely total even 200,000 pounds a week of increased available spending available.  Given the money that was going to be offered to our players by other teams, something had to give.

Of course, this did not mean that five players had to be sold.  Luke Shaw along provided over 600,000 pounds a week in salary cap space.  That money could have been used to pay everyone else who has left what they received at their new clubs--but that would not really have been sustainable.  Rodriguez, Schneiderlin, Clyne, Cork, and others would have wanted raises and no transfer spending could have occurred without reducing the 33 million net transfer profit and thereby reducing the available salary cap space.

So how many players had to be sold.  There really is no clear answer to that.   Lambert went for other reasons and Pochettino’s apparent release clause was met so that 7 million was going to be available no matter what.  Very likely Lallana or Lovren needed to go and, given the sequence of events, the Board probably saw Lallana as the one they could replace more easily.  The Lovren transfer was obviously forced on the board by the player’s sheer jerkiness.

The Chambers transfer is a completely different matter.  By the time he was sold, we didn’t need the (comparatively) small amount of money and he probably would have appreciated in value in the next year.  From the outside perspective—which is the only perspective I have since inside information about Southampton is relatively thin on the ground in San Luis Obispo, California—this transfer BUT ONLY THIS TRANSFER seems like a mistake.

One final note, if Southampton increases its salary cap to, for example, 65 million a year this season, next season it can increase that to 69 million a year even with no increase in commercial income or positive net transfer spend.