City boots the beautiful game into touch

Rising TV money, rising gates, rising revenue ? It's boom time for football as the new season starts. But soccer shares are going down
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When the Premiership season kicks off on Saturday, there will be one question on the lips of supporters: can any team stop Manchester United running away with the championship again in Sir Alex Ferguson's final season as manager?

But the questions for supporters in the Square Mile are very different. Will football stocks ever be worth investing in again or will clubs – in their quest for victory on the pitch – always spend more money on players' wages and transfers than they can earn?

This summer the 20 quoted Premier League clubs spent more than £220m on new players among them. And it's a trend that shows no sign of abating.

On the face of it, football in the UK, or at least the Premier League, ought to be a terrific business. More people are attending games at the big clubs, and revenues from television rights have gone up at an unprecedented rate: around £1.5bn is to go into the Premiership clubs over the next three years.

Merchandising continues to grow. And the biggest clubs, including Liverpool, Leeds, Arsenal and Manchester United, are tapping into new markets for their brands, particularly in the Far East.

Since football clubs began to float on the stock market four years ago, most have managed to meet their revenue targets. Deloitte & Touche's annual report on football clubs shows that Premier League turnover in the 1999 to 2000 season increased by £103m to £772m.

The latest survey from the consultancy firm, out on Tuesday, is expected to say that turnover continues to accelerate and that football in Britain is a £1bn-a-year business.

But shares in football stocks have dropped like a stone – the Bloomberg index of British football shares has fallen by 37 per cent in the past year – and the City is no longer enamoured with the beautiful game. The reason is simple: transfer fees and players' wages have increased faster than revenue growth.

In an age where a new signing can mean the difference between glory or gloom, it is easy to see why football managers are so willing to open their wallets. In the five years to the summer of 2000, clubs in the Premiership had a total income of £2.75bn, paid out £1.46 bn in wages and salaries, and made operating profits of £352m. But they paid out £538m net in transfer fees after player sales.

Throughout the 1990s, wages increased at a compound annual rate of 25.8 per cent, 5 per cent more than turnover. This season the number of £1m-a-year players is expected to swell.

The pressure to spend money is clear. At the top level, competition is fierce, with the battle ground shifting to Europe. Clubs at this level, such as Arsenal and Liverpool, are competing for the best players with the big spenders in the Italian, Spanish and German leagues. These clubs, and the top Premier League teams, are way ahead in revenue terms.

The cash available for Premiership clubs is so much higher that Scottish giants Celtic and Glasgow Rangers are considering a move to the Premiership. Last year Premier League clubs generated, on average, £39m in revenues. Deloitte & Touche predicts that this will grow to £65m this season.

The story is very different at the lower reaches of the Premier League and in the First Division. And the financial gap, says the consultant's report, will widen. The Premiership's less-fashionable clubs have to spend on players as they try to avoid relegation, which affects finances as well as morale. First Division clubs are expected to generate £12m this season.

After two years in the First Division, Nottingham Forest is in financial trouble and has been forced to say that all its players are potentially up for sale. Queens Park Rangers has fallen a step further. The team has been relegated to the Second Division and the administrators have arrived. Yesterday the club kicked off against Stoke with a mixture of youth team members, free transfers and signings from non-league clubs.

In City terms the boom years in football stocks are probably over. "The entire sector is out of favour," says HSBC analyst Virginie Lannevere. Even Manchester United, which posted profits after tax of £12m last year, cannot avoid being dragged down by the negative attitudes to the sector.

But why did the City ever think football stocks would become the next big thing? The Square Mile's interest in football stocks was fuelled by unrealistic expectations that pay-per-view TV would take off rapidly and the belief that football matches could be delivered around the world by the internet.

Rupert Murdoch was also keen to get the media rights, an interest that further heightened share prices. BSkyB's £575m bid for Manchester United was barred by regulators, but the satellite broadcaster still owns 9.9 per cent of the club. Granada and cable group NTL also own minority stakes in football clubs. The extent and speed of take-up for pay-per- view and the internet simply did not materialise.

The first regular pay-per-view schemes are being launched this season and most specialists believe it will take time for revenues to build. "The impact of the sector's fall from grace in the eyes of the City is clear. The risk of more clubs going bust is certainly increasing," says Ms Lannevere. But the clubs that are more likely to go bust are those in the Nationwide League, as the disparity between the divisions grows.

A more optimistic view is taken by Rogan Taylor, director of the Football Industry Group at Liverpool University. He believes the drop in the stock market values of clubs is a rationalisation and that the impact of the City and its money is limited. Mr Taylor thinks being a public company can constrain management, who have to answer to shareholders and can't spend limitless amounts of cash on players.

Despite the loss in shareholder value, the City is still fascinated by the revenue-generating power of football and would be likely to jump back in if there were signs of greater financial discipline and some sort of cap on wages.

"If there is a change in structure to the salaries of players and some sort of control, the City would come back because football is the number one sport. It is better than Formula 1 because of the depth of coverage," says Ms Lannevere.

As the kick-off looms the City will be watching, but with rather more caution than four seasons ago. It is entirely possible that Manchester United will run away with the championship again, while clubs lower down the league are more likely to struggle on the pitch and in revenue terms.

But it is not impossible that these clubs could beat the financial and betting odds and triumph in the uncertain game of football.