Barcelona Gives Up Messi’s Star Power to Try Fixing Its Finances

(Bloomberg) -- Widely regarded as the best player of his generation, Lionel Messi couldn’t make FC Barcelona’s balance sheet a winner. Here’s a look at went wrong with the finances of one of Europe’s storied soccer teams.

How bad are Barcelona’s finances?

Barcelona’s biggest problem continues to be its debt load. The club’s financial net debt at the end of March, when new management took over, was 673 million euros ($792 million). The adjusted provisional debt’s now above 1 billion euros, including the payment of players’ salaries deferred during the pandemic. The club is conducting an audit and the final figure could be higher.

To address the problem, Barcelona has hired Goldman Sachs to sell 525 million euros of private placements that will partly refinance debt but also will provide more liquidity.

Barcelona teamed up in the spring with other major clubs -- including Real Madrid, Chelsea and Italy’s Juventus -- in a failed attempt to establish a European Super League. The plan, which collapsed within days, would have given the participating clubs more attractive revenues than they currently have.

The club reported a loss of almost 100 million euros in the 2019-20 season as the disruptions caused by the coronavirus pandemic reduced its revenues on all fronts. That’s expected to balloon to a 487 million euro loss for the season that just ended.

What went wrong with Barcelona?

According to its annual report, the pandemic had an impact of 130 million euros on Barcelona’s business. However, the new management team said the figure was closer to 42 million euros and that the previous board had used the pandemic and its empty stadiums as an excuse for mismanagement.

In a report, Fitch Ratings noted “volatile and unsustainable financial management of the club under the previous management team, including an investigation by Spanish authorities.”

As a result, even cutting Messi loose may not be a silver bullet. The ratings firm sees “significant execution risk with regard to the new management team’s strategy to lower player wages to ensure financial stability.”

Fitch in late July still rated Barcelona’s notes with a BBB-, one notch above junk.

Why is Messi leaving?

Barcelona announced in a short statement on Thursday that after 17 seasons, Messi’s contract wouldn’t be renewed at the only professional club he’s played for.

Club president Joan Laporta said Barcelona couldn’t sign the Argentine superstar because of “financial and structural obstacles” within the Spanish league, and despite the the club and Messi wanting to ink a new deal.

Messi, 34, first suited up for Barcelona’s youth squad when he was 13, and made his first-team league debut in 2004-05. He was on track to make about $82 million a year under the new Barcelona contract that never went ahead. Forbes estimates his 2021 income, including salary and endorsements, at $130 million, second among all athletes to Ultimate Fighting Championship star Conor McGregor.

According La Liga rules, clubs have a salary cap to spend on players and coaches based on the difference between income and costs. In the case of Barcelona, with Messi on board even with a proposed salary cut, the wage bill was an unsustainable 110% of its revenues.

“The club is above everything -- even above the best player in the world,” Laporta said at a news conference this week.

Because of lower revenues, the club’s threshold to spend on talent is down 47% from the previous season. For its competitor Real Madrid the reduction was 26% as, among other measures, players there agreed to a 10% wage cut.

Laporta explained that Barcelona could have met La Liga’s criteria if it had backed a proposal by CVC Capital Partners to buy a 10% stake in the Spanish league’s business.

The U.K.-based private equity firm offered to invest 2.7 billion euros in the league. Barcelona refused to back the move, which would have tied up part of the club’s broadcasting rights for 50 years. Real Madrid also opposed the deal.

Could it get worse?

Potentially. The financing operation managed by Goldman Sachs should give the club some breathing room, and with Messi out of the equation Barcelona’s wage pressure will be alleviated. However, the payroll will still be an uncomfortable 95% of revenues, and merchandising income could see a hit as sales of signature “No. 10” Messi jerseys -- as many as 2 million a year -- evaporate.

A sponsorship deal with the Japanese e-commerce company Rakuten Group ends in June, while an agreement with the U.S. athletic gear giant Nike Inc. expires in 2023.

Ticket revenues will also depend on the amount of fans allowed into Barcelona’s stadium, the largest in Europe with a capacity of almost 100,000, as the pandemic lingers.

Meanwhile, La Liga is modifying the tender for its domestic broadcast rights auction with any eye to attracting new entrants such as Amazon.com Inc. The auction is expected in September, and it comes as Spain’s main domestic buyer of soccer rights, Telefonica SA, demands lower price

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