Winners and losers. Isn’t that what football, sport, competition is about? It has always obviously been thus on the pitch. Any professional sports team is defined by its record in winning trophies, always at the expense of your opposition – that is the very essence of professional sport, why for many of us it occupies so much of our spare time, watching, writing, listening, providing views and consuming the views of others.

Increasingly off the pitch, football is couched in the same language, viewed through the same lenses that there has to be a winner and a loser. And so will much of the analysis regarding the associated party transaction dispute between the Premier League and Manchester City Football Club.

The fact that there is a claimant and a respondent immediately suggests an adversarial approach, and feeds into the notion of winner and loser.

Victory?

However, whilst undoubtedly both parties will want to claim victory, neither will or should want to do so at the expense of the other. Like it or not, and as a supporter of a much less competitive club it is difficult to like it, the Premier League and Manchester City have largely aligned interests. Both can only achieve their objectives through the success of the other – the relationship is much more symbiotic than it is presented by the media, or indeed by either of the parties.

Why is this the case? For the Premier League to continue its global success in its terms, it has to constantly expand. It has to grow bigger, it has to attract more eyeballs, above all else it has to continue attracting more capital. For all the revenue growth, the Premier League and its constituent clubs will always spend (i) more than it earns and (ii) as much as the regulations permit.

A bigger pie

The Premier League in simple terms is about baking a bigger pie. Individual clubs both contribute to increasing the size of the pie, but also compete crazily to ensure a larger individual slice. If the pie grows in size, the Premier League collectively and those that run it are happy, if the individual club through performance or other circumstances can muscle a larger share of that larger pie, even better.

Ultimately that is what this dispute is about.

The Premier League for the sake of the appearance of sporting and competitive integrity has a duty to demonstrate a degree of financial regulation – a free for all with no restrictions on spending or capital contributions whilst increasing the size of the pie initially, would mean a future with perhaps only two or three clubs sharing the vast majority of the pie. Once a competition becomes so competitively unbalanced, another league, another competition, even another sport will seek to occupy that space.

At the same time, the Premier League has a duty to itself to keep making the pie bigger, in the knowledge that the participants hunger can never be sated. It has to allow a system that allows for constant new inflows of capital.

However, the regulations, don’t permit that fully. Clubs have been constrained in the past by profitability and sustainability rules and in the future will be constrained by revenues and future revenue growth.

And thus we get to where we are now, whereby the clubs with access to the best strategic, commercial and legal minds combined with the unlimited funding capacity from State funded backers do constant battle, pushing the limits of existing regulations, all with the view of gaining a competitive advantage for their particular team.

Meanwhile the Premier League has to balance a need for competitive balance with the recognition that to ensure its own competitive advantages, and its position as the current apex predator (in global footballing terms), it must accommodate the highest possible inflows of capital, be it recognisable as such or disguised through associated party sponsorship.

The non-State owned clubs

For everyone else, those not owned by individual States, the outlook is much less certain – hence why the biggest, privately owned clubs, but not State owned would do everything in their powers to put a drag on the competitive advantage of the biggest, but not such a drag as to stop the continued overall asset value growth. Privately owned, or those owned by private equity investors face a much more challenging time ahead.

I say that for a number of reasons. Firstly and most obviously, their capital or the capital of their clients – as is often the case, is at work to produce an investment return. Unlike traditional businesses where profit and future cash generation determines future value, the investment return in football can only come from what is is in effect, constant quantitative easing, new inflows of capital pushing asset values ever higher. There is the argument that perhaps the Friedkins might use in terms of a corporate turn-around or a reversal of declining sporting performance to generate a return, but the reality is that such cases are rare. Secondly, investors seeking an investment return only have access to limited amounts of capital. The capital deployed in the acquisition of a football club by a professional investor is a result of an allocation of capital usually amongst many other investments – thus by its nature is limited.

Thirdly, and perhaps most interestingly, is how the capital is deployed structurally. The private equity model of a limited amount of equity which is geared through borrowings works well when interest rates are low and as we discussed above, when asset values are rising. Both the equity investor and the lender are satisfied in meeting their objectives. From a regulatory point of view, clubs have never been penalised for receiving soft loans from their owners – the benefit of interest free borrowings from owners has been largely ignored.

The likely change in regulations will see this situation change. No longer will club owners effectively get a virtually free ride (other than the cost of capital) in providing loans rather than equity – the assumed interest savings will now form part of future financial regulations. As an aside, I have always been bemused by the idea that Moshiri’s loans were not loans but equity. From an accounting perspective,yes treated as equity however, had circumstances at Everton been different, had the club been successful on the pitch and generated much higher revenues, had the stadium costs been lower, those loans would have eventually been serviced. The writing off of those loans in a takeover is a reflection of the state of the club, it was not the original intent.

It will force owners to invest via equity rather than loans and increasingly through disguised capital injections by way of related party sponsorship and revenue deals.

This creates a huge competitive advantage for the likes of Manchester City, Newcastle United and any other State owned club. The fair market value test of such associated party transactions will to a degree apply a brake, or a limited constraint, but in all whilst (to go back to the win/lose argument) the Premier League will claim victory on this point, I suspect privately that the clubs to whom this applies most will be broadly satisfied. Afterall, whilst there may be a degree of limiting the value of individual associated party transactions how can it limit the number of future commercial partners, related or not?

On balance, this is much more a win/win than a win/lose outcome for the Premier League and those clubs in the future with the greatest ability to rely on associated party transactions. In my opinion, it does little if anything to address the competitive advantages and disadvantages between State owned and other clubs. Indeed one might argue, it makes the task for those investors with limited associated parties even more difficult.

Everton

For Everton, and the new, future owners, the Friedkin Group, our ability to compete more will be driven by our ability to generate revenue increases from both associated and non-associated sources and the Friedkin’s willingness to invest both capital and income generated from within their businesses but also associated parties such as Toyota.

The competitive advantage remains with the likes of Manchester City and Newcastle United, and the Premier League was never going to seek an outcome which restricts future revenue growth and capital – it would be clearly against their interests to do so.

It changes little for the fans either, not that in any sense, other than through the narrow self interests of the largest clubs, are they a consideration in the continued expansionary Premier League – this is about allowing certain clubs to remain billboards for individual States, and for those at the very top of the game who continue to feed excessively from the binge that has been created.

Bigger slices of bigger pies.