In the 2nd instalment of this article series today, we take a look at a club structured very differently from a plc to understand if such a structure protects the club from excess predicated on ambition and greed.

You can read Part I of ’Arsenal: An Oasis Of Fiscal Sanity In An Orgy Of Excess’ here.

Real Madrid

Real Madrid as we know it today is very much a product, perhaps irredeemably of Florentino Perez’s Galacticos project from earlier this decade.

The strategy of the Real Madrid president was to sell Madrid’s training ground to raise money that would not only wipe out the club’s debt, but would finance the purchase of top stars who would contribute to on-field success and also to hefty revenue increases from media rights and merchandise globally.

The fact that clubs negotiate media rights individually in La Liga, as opposed to collectively as in the English Premiership, has undoubtedly encouraged this approach.

So far so good, especially given that Real Madrid’s debt was eliminated.

I’ll just post a chronology of highlights detailing events since then to serve as a road map for our understanding:

• May 2000: Florentino Perez is elected president of Real Madrid.
• May 2001: Training ground sold to Madrid city and the regional government for £290m.
• 2000 through 2003:
1. Assembly of the Galacticos with then record transfer fees of £37.2m for Luís Figo; €75m for Zinedine Zidane; €39m for Ronaldo de Lima; and €35m for David Beckham.
2. La Liga winners 00-01; 01-02.
3. European Champions’ League winners: 01-02.

It is then that trouble starts with the sacking of the then manager V.Del Bosque’s, and with Florentino Perez’s refusal to countenance pay rises for the non-galacticos in the face of growing player discontent at the enormous wage differentials.

Claude Makelele’s departure from Real Madrid was the culmination of Perez’s meddling, at one point saying of Makelele:

His technique is average, he lacks the speed and skill to take the ball past opponents and 90% of his distribution either goes backwards or sideways . younger players will arrive who will cause Makelele to be forgotten.

Perez’s outburst on Makelele prompted what now seems a prophetic comment by Zinedine Zidane:

Why put another layer of gold paint on the Bentley when you are losing the entire engine?

It turns out Real Madrid did “gold plate” a “Bentley” without an engine.

Between 2003 and now Real Madrid have topped La Liga but twice; haven’t qualified for the quarter finals of the Champions’ League for six successive seasons now; are on their fourth manager; and are back in debt to the tune of €510m.

On top of this debt, Perez has borrowed a further €151.5m to finance the assembly of the cast for Galacticos the sequel.

One thing is clear on this evidence, assembling stars is no guarantee of success; and this time they haven’t embarked on the enterprise debt-free.

If that doesn’t worry fans, I don’t know what will.

Let me remind you, for context, of the fact that without Christiano Ronaldo’s sale Manchester United would have been in the red, despite consistently strong domestic and European showings; the point being that, beyond a point, even success doesn’t ensure fiscal stability if you’re indebted.

In my view, it should never come to selling the family silver to salvage a situation in the first place. That will only buy one time, little else. Doom is delayed not evaded.

Real Madrid still earn hefty revenues, but a large part of that is down to the €1.1 billion 7 year TV rights deal negotiated in 2006 with Grupo Mediapro. While detailed data is difficult, nay impossible to come by, the odds are that a good part of Real’s debt has been raised with this TV money as collateral.

That is to say, they have borrowed and already spent tomorrow’s money today as TV money is paid out in instalments over the duration of the contract.

Let us now take a look at the economic conditions underlying this situation.

While Real leads the Spanish league, it is selling fewer jerseys than Chelsea and Liverpool, according to uniform supplier Adidas AG. Attendance at the club’s Santiago Bernabeu stadium has fallen 7.8 percent from last season, as Spain suffers its worst recession in 60 years.

A recession in Spain, whose 19.5 percent unemployment rate is the highest in the euro region, is hurting Real’s plan. Average attendances at Madrid’s Bernabeu stadium declined to 67,461 from 73,157 since last season, according to data collated on ESPN’s Soccernet Web site.

Broadcast and sponsorship revenues for this season’s Champions’ League competition are worth €1.1.bn, three-quarters of which goes to the 32 competing teams. Some clubs stand to make €50m from this year’s Champions League.

http://tinyurl.com/ygs4dvm

Elimination from the Champions League cost Real Madrid up to 82 million dollars in prize money, marketing income and other business opportunities this year.

http://tinyurl.com/yg9m9us

The headline says it all: “Decline Of Spain’s Banks Follows Country’s Economic Problems”.

Real Madrid’s ability to refinance their loans, especially at favourable rates, or in a pinch, to raise fresh funds is therefore clearly not a given under these circumstances.

Note that Banco Santander, is one of Real’s big bankers.

http://tinyurl.com/yf3xchy

Again, a worrisome headline: “Santander Faces Scrutiny After BBVA Property ‘Shock’”.

http://tinyurl.com/yj25k5f.

On the strength of these facts, and given yesterday’s illustration how greater indebtedness leaves very little margin for errors, I propose that any sober Real Madrid fan must be very worried about the club’s current situation and direction.

It is also clear that Real Madrid’s membership model, while preventing takeovers by LBO artists, doesn’t afford protection against the vanity and adventurism of the elected management team.

I scarcely need remind our readers that the elections at Spanish clubs are exhibitions of all that’s unsavoury in a democracy: Promises year after year to sign everyone from Lev Yashin through Beckenbauer to Pele, with Tele Santana as manager.

Long suffering Arsenal fans will forgive me for recollecting that delightful summer pastime we’re invariably subjected to: Spanish interest in Arsene Wenger, Fabregas, Vic Akers…..

I’ll sign off on this article to the observation that membership models aren’t necessarily better at insulating football club from mercenary interests.

Tomorrow, in the last instalment, we’ll look at two clubs from each of the ownership models we’ve discussed, that highlight the importance and success of fiscal prudence; Arsenal and Bayern Munich.

I’ll share some thoughts about what I think can be done within a PLC structure to give fans a vote that can act as a protection of last resort against robber barons.