Chelsea: a Debt package not a Soccer Team

[Karl Baxter]

Despite drastic cutbacks it seems that Chelsea are still leaking money at an alarming rate, making it unlikely that anyone will want to buy them or that Abramamovich will ever recover the 710m pounds he has pumped into the club.

Check out the BBC story:
http://news.bbc.co.uk/1/hi/business/7887463.stm

BOSS SACKINGS ADD TO CHELSEA LOSS

Chelsea Football Club is set to reveal a 66m pound loss for the year to the end of June 2008, the BBC has learned.

The amount includes a total of 23m pound in compensation paid to Jose Mourinho, Avram Grant and five coaches who left the club during the year.

However, it does not cover the sacking of Luis Felipe Scolari, who was axed from Stamford Bridge this week.

The latest in a string of hefty losses will ultimately be borne by Chelsea's Russian owner, Roman Abramovich.

The BBC has learned that Mr Abramovich's investment in the club has reached 710m pounds.

He has now changed part of that investment from an interest-free loan into shares in the club, as a sign of continuing commitment to Chelsea.

The move will also help defuse European criticism that Chelsea is a heavily indebted business, says BBC business correspondent Nils Blythe.

In another attempt to scale back its debt, the club is aiming to pay for any purchases this summer by selling players.

Criticism

Of the 23m pound compensation paid to former managers and coaches, the bulk of the money was paid to Jose Mourinho.

His replacement, Avram Grant, lasted just eight months before leaving the club to be succeeded by Scolari - who reports suggest could walk away with 7.5m pounds having been only seven months into a two-year contract.

The club's loss is slightly better than the 74m pounds lost last year and 80.2m pounds in 2006/7. It is also some way short of the record 140m pounds announced by Chelsea in 2004/2005.

The club came fifth on the list of the world's richest clubs in 2007/8 - behind Real Madrid, Manchester United, Barcelona and Bayern Munich.

However, Deloitte's Football Money League is based on revenue and does not take debt into account.

Some European clubs have been critical about the level of debt that some leading English clubs, such as Chelsea and Manchester United, are carrying.
Edited by: Karl Baxter

 

[Europe]

I didn't know Chelsea had that much debt. I thought he bought the club free and clear and was just making up the amount that wasn't covered by revenue out of his own pocket. If I understand the article, he gave the club a loan interest free. Is the debt owed to Abromovich? By contrast the Glazers owe a bank the money? Correct?

 

[Karl Baxter]

I didn't know Chelsea had that much debt. I thought he bought the club free and clear and was just making up the amount that wasn't covered by revenue out of his own pocket. If I understand the article, he gave the club a loan interest free. Is the debt owed to Abromovich? By contrast the Glazers owe a bank the money? Correct?

First he buys the club. Then he lends the club, which he owns, vast amounts of money interest free. In effect he is lending money to himself - no wonder it's interest free. If someone were foolish enough to buy the club, I'm sure Abramovich would, in accord with the traditional business practices of his people, start charging interest.

Converting part of that debt to shares is nearly meaningless, because he owns all the shares anyway and dividing the club into more shares will simply devalue the value of the existing shares. But at least by doing this, makes the club slightly more saleable. People would rather buy cheap Chelsea shares than take on board a debt of several hundred million pounds payable to Abramovich, which would certainly stop being interest free. But of course the article fails to mention how much of the debt has been converted into shares.

Assuming the Abramovich-to-Ambramovich Chelsea debt also covers the annual losses, which it must do or how could the team function, then the debt is the figure of 710 million minus the 140 million he originally paid for the club, or 570 million, minus the amount converted into shares.

In accordance with the economic principles of the age, Abramovich thinks that debt can somehow be magically transformed into money. This must be why he was reportedly expecting 800 million for the Chelsea brand. But only an extremely mad rich Arab or the government of Barack Obama would be prepared to pump this much money into a business package that simply doesn't work and will eventually collapse.

Of course, Chelsea could turn a minor profit if they stopped hiring and firing overpriced players and managers, and emptied their squad of anybody earning over 5,000 pounds a week, but then they would probably get relegated in the process.

I assume you're right about the Glazers, but I haven't lookied into it in any detail. The bad point about that deal is if the numbers don't add up, the banks will be less merciful than Abramovich would be to himself.

 

[Europe]

It looks like Abramovich is treating it as a hobby. I wonder if he ever thought he would make money on this?.If he does great, if he doesn't I guess he thinks so what.Many people spend thousands or tens of thousands a year on hobbies not expecting to get anything back from it. I am thinking of things like golfing or boating or very expensive trips. If you are worth 10's of billions ,then a couple hundred million dollar loss is no big deal for him. You can say that is not fair to other clubs who don't have "play money". Doesn't Platini want to put in a rule teams can't do what Abromovich or the Arabs are doing at Man City?