FanPost

#InterIsHere: Where Do We Go From Here - Part II

Ivan Perisic of FC Internazionale salutes at the end of the Serie A match between FC Internazionale and US Sassuolo at Stadio Giuseppe Meazza on May 12, 2018 in Milan, Italy. - Valerio Pennicino/Getty Images

In the first part of this multi-series Fanpost I had highlighted areas that I believe need to be fixing ahead of next season while at the same time trying to allay some of the fears tied to the much discussed and debated FFP gap Inter needs to bridge ahead of the 30th June UEFA deadline.

In the second part of this series I wanted to take a closer look at our finances and what sort of additional financial flexibility we can expect in the transfer market next year due to the additional revenues we can expected from CL qualification next year.

In order to do this, we need to start by taking a closer look at Inter's financial position in 2016/17 which was publicly disclosed when Inter did its most its recent bond issuance via Goldman Sachs. While the disclosure did not contain the same level of detail around players salaries and amortization that I was able to piece together from various sources including www.calcioefinanza.it and www.transfermarkt.com, I believe I ended up in the right-ball park as the final operating costs and expenses figures are within €800,000 of the high level numbers officially reported by Inter.

While I apologize in advance for the mind-numbing level of detail, I do believe it is really helpful as it the sets the stage for us to get a better understanding of our main revenue and expense streams, where we stand this year in terms of FFP as well as what UEFA CL qualification means in terms of incremental revenues next year.

Before we head to the financial information though, I wanted to outline some of the assumptions I have made which could in turn have a large impact in the revenue and expense calculations that you see below. These include the following:

  • TV Rights: TV revenues for the 9 months ended March 31st 2018 as officially reported by Inter was €85.2 million vs. €80.2 million for the same period the previous season. The €95.6 million figure estimated below for 2017/18 season represents a linear interpolation of last year's revenues based on current-run rate. Serie A TV rights revenues for the for the 2017/18 season were €1,064 million and are expected to go up to €1,421 million assuming the latest bidding process for domestic broadcasting rights matches the €1.05 billion minimum bid criteria set by the FIGC. Inter's allocation of these revenues for the 2018/19 season are calculated based on the same percentage of the overall revenues for the current season.
  • Shirt Sponsorship: Pirelli sponsorship has a base amount is €10.1 million and €11 million for the 2017/18 and 2018/19 seasons respectively. The higher amounts shown for the 2017/18 and 2018/19 seasons reflect my conservative estimate of payments of additional bonuses (up to €13 million available in total as per our with Pirelli ) on the back of CL qualification in each of these years plus CL participation in 2018/19. Given that I am only assuming €3 million of the €13 million available is paid in bonuses, there is considerable potential for these bonuses to be higher depending our performance in the UEFA CL and final position in Serie A.
  • Technical Sponsors: Nike will only pay €3.8 million to Inter for the 2017/18 season. This was down considerably from the €9.4 million paid to Inter in the 2016/17 season due to us not qualifying for both CL and EL this season. With Inter getting into CL next year, I have assumed this amount goes up to match the €12.5 million amount paid in each of the 2015/16 and 2014/15 seasons.
  • Suning: The Suning sponsorship includes a €25 million one-time non-recurring payment for name rights and sponsorship that was paid in the 2016/17 season, with an annual base commitment of €16.5 million. There are also a number of bonuses tied to performance but full details on the bonus structure remain a bit vague. In any case based on what we saw this year we know that €3.5 million is payable for finishing in the top 4 positions ahead of the winter break, with the another €3 million coming Inter's way for closing the year in the CL spots. We were also paid €1.6 million this year tied to results of the Primavera team and I have assumed that our young Primavera cohorts will keep that dough coming in next year as well. Finally there are also bonuses attached to CL performance and as I will detail shortly my base case here is that we make it to the CL knock-out stages, which will trigger another €1.5 million waterfall which accounts for the difference between the revenues between the 2017/18 and 2018/19 seasons from the Suning sponsorship.
  • UEFA Payments: The CL revenues assumed are based on the new revenue distribution plan that was announced by UEFA for the 2018-21 seasons. Inter's UEFA revenues for 2018/19 include the guaranteed €15 million participation fee, €23 million payment due to ranking 9th out of 32 teams in the group stage in terms of historical results coefficient (this is my estimate but there could be a +/- factor of €32-33 million here), 2 wins for €1.5 million and 2 draws for €0.9 million each in the group stage and €9.5 million from qualification into the knock-out stages, which is where I have assumed our CL run will end.
  • Gains from Player Sales: At the moment this represents the €3 million made from the sales of Jovetic, Medel and Banega earlier in the year plus the €2.5 million in capital gains made from the recent sale of Kondgobia to Valencia.

So lets see how we arrive at these numbers for 2016/17 and what we can expect in 2017/18 and 2018/19 in terms of financial performance.

2016/17

2017/18

2018/19

TV/Media Rights and Prize Money

112.3

109.5

196.5

Serie A TV Rights

90.0

95.6

127.5

Archive Content Rights

10.6

10.6

10.6

Inter TV

4.1

2.8

2.8

UEFA TV Rights and Participation Fees

7.6

0.5

55.6

Sponsorships

124.0

130.3

133.6

Pirelli

9.2

13.0

14.0

Nike

9.4

3.8

12.5

Infront

15.0

12.0

-

FullShare and Donkey Mother

-

10.5

10.5

TIM Mobile

3.1

3.1

-

Volvo

-

1.1

1.2

Bwin

-

1.0

1.1

iMedia

-

27.2

27.2

Beijing Yixinshijie

30.0

25.0

25.0

Suning

44.1

24.6

26.1

Inter Academies

10.2

6.0

6.0

Other Sponsorships

3.0

3.0

10.0

Matchday Revenues

31.1

35.5

42.5

Total Operating Revenues

267.4

275.3

372.6

Player Salaries

129.0

88.0

91.3

Samir Handanovic

2.5

2.5

2.5

Juan Pablo Carrizo

0.8

-

-

Tommaso Berni

0.2

0.2

0.2

Daniele Padelli

-

0.5

0.5

João Cancelo

-

2.0

-

Cristian Ansaldi

1.5

-

-

Kwadwo Asamoah

-

-

3.0

Yuto Nagatomo

1.3

0.7

-

Danilo D`Ambrosio

1.2

1.6

1.6

Dalbert Henrique

-

1.2

-

Lisandro López

-

0.2

-

Marco Andreolli

1.1

-

-

Stefan De Vrij

-

-

3.0

Joao Miranda

3.0

3.0

3.0

Jeison Murillo

1.3

-

-

Andrea Ranocchia

2.4

2.4

2.4

Davide Santon

1.3

1.3

-

Milan Skriniar

-

1.2

3.0

Gary Medel

1.6

-

-

Felipe Melo

2.5

-

-

Geoffrey Kondogbia

3.5

-

-

Éver Banega

3.0

-

-

Rafinha

-

0.8

2.5

João Mário

2.7

1.4

-

Marcelo Brozovic

1.5

2.5

2.5

Antonio Candreva

2.5

2.2

-

Roberto Gagliardini

1.5

1.5

1.5

Ivan Perisic

3.0

4.5

3.0

Borja Valero

-

2.2

2.2

Matías Vecino

-

1.7

1.7

Jonathan Biabiany

1.6

0.8

-

Éder

1.8

1.8

-

Gabriel Barbosa

2.7

-

-

Rodrigo Palacio

2.4

-

-

Mauro Icardi

4.5

4.5

6.5

Stefan Jovetic

3.5

-

-

Yann Karamoh

-

0.2

0.2

Lautaro Martínez

-

-

1.5

Andrea Pinamonti

0.1

0.5

-

Frank De Boer

2.0

-

-

Stefan Pioli

1.4

-

2.2

Luciano Spalletti

-

2.2

2.2

Sub Total

58.4

43.5

45.7

Other Playing Staff Wages & Taxes

70.6

44.5

45.6

Amortization of Player Transfer Fees

74.1

77.1

50.7

Samir Handanovic

2.1

0.4

0.4

Juan Pablo Carrizo

-

-

-

Tommaso Berni

-

-

-

Daniele Padelli

-

-

-

João Cancelo

-

-

Cristian Ansaldi

2.4

2.4

2.4

Kwadwo Asamoah

-

-

0.3

Yuto Nagatomo

0.3

0.3

-

Danilo D`Ambrosio

0.5

0.5

0.5

Dalbert Henrique

-

5.2

-

Lisandro López

-

-

-

Marco Andreolli

-

-

-

Stefan De Vrij

-

-

0.8

Joao Miranda

3.3

3.3

2.2

Jeison Murillo

1.7

1.7

-

Alessandro Bastoni

-

1.8

1.8

Andrea Ranocchia

1.0

1.0

1.0

Davide Santon

1.2

1.2

-

Milan Skriniar

-

4.8

3.8

Gary Medel

3.1

-

-

Felipe Melo

2.1

-

-

Geoffrey Kondogbia

8.1

6.1

-

Éver Banega

1.1

-

-

Rafinha

-

-

João Mário

8.8

8.8

-

Marcelo Brozovic

1.3

0.8

0.8

Antonio Candreva

5.2

5.2

-

Roberto Gagliardini

-

4.5

4.5

Ivan Perisic

3.8

2.4

2.4

Borja Valero

-

2.0

2.0

Matías Vecino

-

6.0

6.0

Nicolo Zaniolo

-

0.4

0.4

Jonathan Biabiany

0.2

0.2

-

Gianluca Caprari

1.1

-

-

Éder

2.4

2.4

-

Jens Odgaard

-

0.5

0.5

Gabriel Barbosa

6.6

6.6

6.6

Facundo Colidio

-

2.5

2.5

Rodrigo Palacio

2.2

-

-

Mauro Icardi

1.1

1.1

1.1

Stefan Jovetic

4.0

-

-

Yann Karamoh

-

-

1.1

Lautaro Martínez

-

-

4.6

Andrea Pinamonti

0.1

0.1

-

Sub Total of Transfer Fee Amortization

63.8

72.1

45.7

Other Transfer Fee Amortization

10.3

5.0

5.0

Other Operating Costs

93.1

102.0

111.0

Total Operating Costs

296.6

267.1

232.9

Net Gain on player sales

44.3

5.5

-

Net loaned player fees

1.7

5.5

-

Operating Profit/(Loss)

16.8

19.1

139.6

Add:

Capitalization of Youth Programmes

5.0

3.0

3.0

Depreciation and Impairment of assets

11.0

10.0

10.0

Minus:

Financial Expenses

32.2

40.0

50.0

Profit/(Loss) before taxes

0.6

(7.9)

102.6

2017/18 Financial Position:

So lets tackle the current season first.

As you will no doubt note at the moment the FFP gap for the 2017/18 season seems to be a lot smaller than is currently being reported in the media.

I think the underlying reason for this is that the press has assumed that since Inter's operating revenues and player amortization remain largely unchanged from last year, in line with the 2016/17 season we will again need to record capital gains in the context of €44 million in order to balance our books as outlined above.

This however is far from the case as we can see by taking a closer look at the accounts.

Revenues from sponsorship and media/TV remain largely unchanged with cumulative revenues of €239.8 million in 2017/18 vs. €236.3 million in 2016/17. However with the wage bill falling from €129 million to €88 million (the figure widely being reported is €82 million but I have assumed that we will need to make bonus payments tied to CL qualification to players and staff) and player amortization largely in line with last year, higher net revenues from player loans and capital gains of €5.5 million already in the kitty, the FFP gap that we need to cover ahead of the June 30 deadline should be much smaller in the context of €10-20 million.

As you will note this figure is much more conservative versus the €7.9 million gap shown in the financials calculations above, in order to account for any material assumptions that are off or some material line items are not being captured accurately.

You can refer to the proposed road map for bridging this gap in Part I of this post.

2018/19 Financial Position:

One would assume that with aggregate revenues going up by close to €100 million for the 2018/19 season we should be able to spend what we want on the transfer market right?

Wrong.

The response for this is the one we dread hearing each and every year. UEFA FFP.

The restrictions imposed on Inter under the settlement agreement were supposed to end at the end of the 2016/17 season. We are still waiting for an official audit of our accounts to be completed by UEFA but the expectation is that because we are likely to miss a few of the key targets once our accounts are audited, the FFP restrictions will carry into this year as well as the 2018/19 season.

What are these FFP parameters we keep struggling to meet?

  • Breaking even. Balancing the books is the main requirement for FFP. We met the criteria in 2016/17 and I am pretty confident that we will again be able to meet the criteria again by bridging the aforementioned €10-20 million gap through capital gains on player sales. With an incremental €100 million in revenues from CL and TV rights in the 2018/19 season, breaking even should no longer be a concerns for us next year.
  • Player and Staff Wages. The wage bill for players and staff needs to be below 60% of revenues. This has never really been an issue for Inter and is really only something the big EPL and La Liga teams plus PSG had to be mindful of when this restriction was originally announced.

  • Transfer Fee Amortization: The amortization tied to player transfers in the 2015/16 and 2016/17 seasons need to be lower than the amount recognized in the previous year. This is the criteria that we will fail to meet as player amortization was €74.1 million in 2016/17 vs. €48.9 million in 2015/16. We seem to be breaching this again in the current season but some creative accounting whereby we recognize a smaller capital gain of €800,000 on Kondogbia's sale in order to avoid reflecting the €6.1 million amortization tied to his transfer fee in our current accounts should do the trick although it will mean that our break-even gap goes up by ~€2 million.

What does this all mean for our transfer campaign this summer?

For starters we can expect that we will again be operating within the confines of our settlement agreement. However, an extra €100 million expected to come in from CL participation and a more lucrative Serie A TV rights deal means that we should not find ourselves running around in May next year desperately looking to book capital gains in order to balance our books. Ditto on the requirement to keep the wage bill below 60% of revenues which should remain a non-issue for Inter.

Transfer fee amortization though will remain a key focus area. In retrospect the fact that we breached the threshold player amortization in 2016/17 helps and if we give Inter's management the benefit of doubt, failing to meet this criteria may actually have been a strategic decision as it allowed us to operate within a significantly higher ceiling of €74.1million for this season as well as next year.

As per my calculations assuming we bid adieu to Eder, Joao Mario, Candreva, Nagatomo, Dalbert, Pinamonti and Santon plus sign 5 year contract extensions with Icardi and Skriniar and a 2 year extension with Miranda, then we have a minimum of €23 million to play with this summer while operating within the restrictions of our settlement agreement. The possible departures of Vecino and Valero could lead to another €8 million in additional room to maneuver, while next year is probably also the right time to cut our losses on Gabriel Barbosa given higher revenues will allow us to absorb the loss on his sale while providing Inter with another €6.6 million to play with on the amortization front.

Accordingly, we are looking at €23-38 million in amortization room depending on the extent of our summer clear out. Assuming an average contract duration of 4 years for any new buys this equates to €92-152 million in transfer fees, signing bonuses and agent fees. Seems like a lot but then you remember, hey wait a second, didn't we spend €158 million in 2016/17 and another €100 million in 2017/18. Plus if we do end up buying Rafinha and Cancelo in the summer that is €75 million already out of our kitty.

But its not all doom and gloom.

€92-152 million to spend is not pocket change and as long as we put the money to work on the right transfers we can still have a cracking transfer campaign.

We have another €100 million in revenues to play with next year and this is where we can get creative when it comes to finding ways to work around the player amortization limits. As outlined in the financial results table earlier, net spend on loans shows up as a separate line item in the financials and does not count towards player amortization.

Accordingly, I expect Ausilio and Co. to try their utmost this summer to structure as many deals as possible as expensive loans with options to buy post July 1st as this will allow Inter to work around the player amortization limits.

The offers for Simone Verdi and Matteo Politano both seemed to be structured as €8 million loan deals with options to buy for another €14 million at the end of the contract, so it looks like Ausilio is already thinking along similar linesInter Milan roster Inter Milan roster.

So assuming we have €90 million+ to play with in outright transfers and have some luck with a few select loans with options to buy, Inter could be set for a great transfer campaign but more on that in Part III.

Hope you found this an interesting and insightful read. As always your comments and feedback are welcome as always!

What do you think? Post your comments below!