Now that the days of unlimited spending are over, and knowing that Chelsea is now on a (very large) budget due to UEFA's financial fair play regulations, it's worth taking a look at transfer rumours through a fiscal lens.
In some cases, a player may be a good fit for the club tactically speaking, but it may not make a lot of financial sense for Chelsea to buy that player or for the player's club to sell that player.
Given that Nemanja Matic's agent is reportedly in London discussing a potential transfer back to Stamford Bridge, we're going to take a look at whether this deal adds up.
Benfica is publicly traded, and as such, is required to produce quarterly and annual reports detailing exactly what sort of financial shape the club is in. Benfica has posted losses in each of the last four years, totalling £34.5m.
At a glance, it seems curious that the highest-earning Portuguese club and the club with the twenty-second largest revenues in the world (£93.3m) would be posting losses, especially given how much Benfica seemingly earns from it's dealings in the transfer market.
Since the summer 2010 transfer window, Benfica has sold, among others, Ramires and David Luiz (£40m + Matic combined) to Chelsea, Fabio Coentrao and Angel di Maria to Real Madrid (£45.8m combined), Axel Witsel to Zenit St. Petersburg (£33.6m), and Javi Garcia to Manchester City (£16m). These six transfers alone yielded £138.4m and a very good midfielder.
Player Profile: Nemanja Matic
Steve Schmidt took an in-depth look at Matic back in 2011, just before Chelsea sent him to Benfica as part of the David Luiz transfer. Truly a must-read, Steve is eerily spot on with his analysis.
However, Benfica only saw a fraction of this £138.4m. This is due to Benfica fully embracing the concept of third party ownership. Third party ownership (commonly referred to as TPO) is an extremely complex issue, but fortunately LawInSport's Luís Villas-Boas Pires recently penned an excellent overview of the issues surrounding TPO and it is comprehensive while remaining accessible to the layperson (if the LawInSport article piqued your interest on the subject, you can find much more in Issue 10 of the EPFL's Sports Law Bulletin).
Benfica so embraces the TPO model that it highlights it as a core part of its business model when pitching to investors. While the club works with several third party owners, it's most frequent partner is the Benfica Stars Fund. Whether you agree with the ethics or legality of TPO, it's hard to argue that it hasn't played a huge role in Benfica's sucess in recent years. Since the Benfica Stars Fund launched at the beginning of the 2009-2010 season, Benfica has finished first or second in the Portuguese league and has earned a spot in the Champions League in each successive season.
However, there is a very large cost that comes with utilising the TPO model. With regards to Ramires, Benfica only owned 20% of his rights, and as such received less than £4m of the the £19.3m Chelsea paid for the Brazilian. In addition, Benfica had sold significant portions of Coentrao's and di Maria's rights to the Benfica Stars Fund at significantly decreased valuations. For example, in Coentrao's case, Benfica placed a £12.6m valuation on him and sold 20% of his rights to the fund based on that valuation. When Coentrao was eventually sold to Real Madrid at double that valuation, the fund earned 100% return on its investment. Similarly, the fund received £9.3m of the approximately £21m Real Madrid paid for Angel di Maria (20% of the transfer revenue plus a hefty £5m performance bonus). There were similar deals involved with David Luiz and Javi Garcia.
Writing for The Guardian, David Conn shines some light on the Benfica Stars Fund. Conn notes that the Benfica Stars Fund is an investment fund run by Banco Espirito Santo, Portugal's largest bank. He also interviewed João Gabriel, a spokesman for Benfica. Gabriel said "the fund [enables] the club to receive money up front and share the risk of investing in young players" and "also acknowledged that it was a way of trying to manage the club's debts, which stood at [over £181m June 2010]."
According to the BBC, that debt has since climbed to a staggering £380m as of May 2013 (for comparison, the Benfica Stars Fund has recorded a profit of over £85m since it launched in September 2009). The interest payments on its massive debt is likely why Benfica isn't turning a profit. It is important to note, however, that the football club is owned by Sport Lisboa e Benfica-Futebol SAD, a parent company that has various media holdings, including a newspaper, a magazine, and a television channel, Benfica TV (which owns the Portuguese broadcasting rights to the Premier League). The BBC says that their current assets "mean the future looks good," and while I'm dubious (to put it mildly) of this, ahem, in-depth financial analysis of Benfica's long-term viability, the deadline on this article does not leave me enough time to to learn Portuguese, pour over the financial statements, and refute these findings, so we'll just have to take the BBC on its word.
With regards to Matic, Benfica owns 100% of his rights. Originally, the Benfica Stars Fund was entitled to 25% of Matic's rights (given that the fund had owned 25% of David Luiz' rights, it was therefore entitled to 25% of the transfer fee plus 25% of Matic's rights). However, when the club and the fund sat down and took a look at Matic from the perspective of an investable asset, both parties agreed that Matic was valued at a mere £1.68m, and further, the fund elected to sell its 25% stake in Matic back to Benfica for £420,000 (25% of the agreed-upon valuation).
I think it's safe to say that Benfica won that round, considering that a 25% stake in Matic is now likely valued at north of £7m. It's also safe to say that, given Benfica's track record, the club is likely to sell Matic, whose value is at an all-time high. Benfica will likely reinvest those funds received from the Matic sale back into the TPO model, where it can buy a number of players, partly minimise its risk, offset some of its costs, and hope that those players continue the trend of helping the club for a few years before being sold on for profit (which, of course, is reduced by the TPO model).
From Chelsea's perspective (finally, right?), once one can get past the fact that spending £30m on Matic essentially means that David Luiz' transfer fee was north of £50m, Matic's transfer fee and wages can easily be absorbed into the budget imposed by UEFA's financial fair play regulations.
Lets assume that if Matic comes back in January, he'll cost £38m in transfer fees and is signed to a five and a half year deal at £110k per week (his buyout clause stands at £38m and admittedly, this estimate is on the expensive side, but when estimating wages and transfer fees in the context of FFP accounting, I always go high). This represents an annual FFP cost of around £12.6m at the very most (wages plus amortised transfer fee).
With Eto'o, Lampard, Terry, and Cole coming off the books next year (or coming back at reduced wages), this difference more than covers Matic's costs. However, this sort of analysis naively assumes that Chelsea will promote from within by incorporating Romelu Lukaku, a healthy Marco van Ginkel, Tomas Kalas, Patrick van Aanholt, etc. into the first team.
While I firmly believe that the cost-effective method of allowing young players to develop on loan and then slowly assimilate them into the first team is the path Chelsea is heading towards, the rate at which the club is moving down that path is admittedly something of a slow crawl at the moment. As such, it would be silly not to expect Chelsea to avail itself of the highly-inflated transfer market this summer and bring in players from the outside.
Therefore, it's worth mentioning that when you factor in the additional revenue stemming from the Premier League's new broadcasting contract, it becomes clear that this revenue stream alone more than covers the cost of Matic even without factoring in the reduced or non-existent wages from the above-mentioned players (Chelsea's broadcasting revenue will increase by more than £20m this season). Further, this additional revenue allows Chelsea the freedom not to have to choose between Matic and [expensive Player X and young starlets Y and Z].
This is all to say that Benfica is likely to sell Matic, whose value is currently at an all-time high, and that Chelsea can easily absorb Matic's cost into its FFP budget. Now, whether Jose Mourinho, Michael Emenalo, Marina Granovskaia, and Co. actually want Matic back at Stamford Bridge is an entirely different thing, but the numbers seem to add up.
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