Earlier today we reported via MilanNews.it that Milan are the only big Italian club with no debts – a sign that the road to recovery is underway.
At a time when the Coronavirus has taken a toll on businesses all over the world in all fields, it is indeed a very big victory for the owners and the management of the club despite Milan apparently being €100m in the red for 2019-20.
But what does it mean to have no debts, and what are the implications? Let’s take a look.
To finance everyday activities as well as things like transfers, football clubs need a lot of money (as much as €10m) every week to cover various wages and bills. This needs to be in liquid form, meaning proper cash and not in the form of assets or commodities like land.
Therefore, the club has various routes to consider like taking out a bank loan or issuing bonds/debentures. As per accounting terms these are liabilities for the club, as Milan have to pay a certain interest rate as well as paying back the principal amount borrowed.
When taking over, Elliot took on a total debt of €150m accumulated from the previous managements. Elliott paid all the people Milan owed money to and brought the debt down to zero. In the current situation, Elliott are completely financing activities of the club.
A club/company with zero debts shows healthy finances and strong ownership which makes it attractive for getting new investors (sponsorships) on board. Sponsors would want to invest in companies where they have a good brand image, something which Milan already have.
With the new stadium agreement obtained from the council and clean finances it would help Elliott to sell the club – as is their modus operandi – to a more illustrious investor. Bernard Arnault and various Qatari funds have been credited with interest in the Italian press of course, and this will only fuel those rumours.
Having zero debts changes the corporate structure. There is a debt/equity ratio of every business and the higher the ratio the more illiquid they are and more liable they are to bankruptcy.
If a club has paid off their bonds/debts it means that they are no longer liable to external investors, and therefore solely ‘owned’ by Elliott.
If a club has a pure equity structure it means that the equity and 100% of the shares can be sold in exchange for cash. Interestingly, the Louis Vuitton group recently used cash to buy Tiffany in a deal that was worth $16bn.
Moreover, a clean balance sheet with no debts would be a bargaining point for Milan with UEFA to get relaxations in terms of their settlement agreement.