NFR - Just a really interesting blog about FC Porto's business model.

[Frankie-Peter Taylor]

Outstanding work. Over the last ten years they've sold players equalling to €554m, making €270m profit, which also works out as creating an income of €30m a season.

http://swissramble.blogspot.co.uk/2010/12/portos-buy-low-sell-high-strategy.html

When football fans witnessed Barcelona's dazzling 5-0 demolition of rivals Real Madrid, they would have been forgiven for assuming that this was an unprecedented performance, but they would have only had to look back three weeks for a similar exhibition in Portugal, when Porto crushed Benfica 5-0 at the Dragão Stadium. The country's most successful team of recent times thrashing its celebrated capital city opponents? Check. Inspired by a South American phenomenon? Check. Guided by a progressive young coach? Check.

After finishing a disappointing third in the Portuguese League last season, Porto replaced their coach Jesualdo Ferreira with André Villas Boas, a protégé of José Mourinho. Although this is his first coaching role at a leading club, the 33-year-old has already stamped his authority on the team, which has played some beautiful, free-flowing football this season. So much so that Porto are unbeaten in the league, which they lead by an astonishing eight points after 13 games, and are very much favourites to regain the title.

Their inspiration has been a young Brazilian striker named Givanildo Vieira de Souza, better known to the football community as Hulk, largely due to his powerful physique. His presence was badly missed by Porto last season, after he was suspended for a few matches for his part in a post-match brawl following an ill-tempered match against Benfica, when he was found guilty of attacking match stewards in the tunnel. His goals might have made all the difference to Porto in the championship run-in and would almost certainly have avoided the ignominy of failing to qualify for the Champions League for the first time in living memory.

This represented a slap in the face for a club that has become accustomed to filling its trophy cabinet in the past few years. Before 2009/10, Porto had been victorious in the Portuguese championship four consecutive times, which meant that they had collected six Primeira Liga titles in seven seasons. Their history in the last decade also features two European successes under the guidance of the Special One, when they beat Celtic 3-2 to secure the UEFA Cup in 2003 and triumphed 3-0 against Monaco to win the Champions League the following year.

Unfortunately, during this period the club was also tainted with the whiff of scandal for its involvement in the so-called "Golden Whistle" investigation, when it was claimed that referees were offered bribes before two of their matches during the title winning campaign in 2004. They were subsequently docked six points and fined €150,000, though some thought they had got off rather lightly. Importantly, they were still allowed to compete in the Champions League, even though they were initially banned, as on appeal the authorities ruled that the time limit for dealing with the match fixing allegations had passed.

All in all though, the "noughties" has been a highly enjoyable era for Porto. Their success on the field of play has been matched by their performance off the pitch, as the club has reported profits in each of the last four years, which is very good going in these difficult economic times. Although the club tends to make sizeable operating losses, it more than compensates for the shortfall by making equally large profits on player sales.

This is a hugely important activity for Porto's business model, which can most clearly be seen in 2006, which was the last time the club made a loss, almost entirely due to the club's decision to retain players that year in order improve their chances of winning. Similarly, the 2010 profit of €0.1 million was €5 million lower than the previous year, which is more or less the reduction in profit on player sales.

The other key driver in Porto's finances is revenue from the Champions League. Indeed, the €10 million reduction in 2010 revenue was largely due to the team's earlier exit from that competition. However, Porto are very skilled at balancing their books, so they compensated for most of the decline in revenue by cutting their costs by €7 million, mainly in the wage bill, though they were also helped by €3 million lower interest payments, due to the reduction in interest rates.

Porto's cash flow from operations (EBITDA) is fairly healthy, averaging €33 million over the last four years, once non-cash items like player amortisation and depreciation are added back, but this is again very reliant on the profit made from player sales. If this were excluded, then EBITDA would be slightly negative.

Although president Jorge Nuno Pinto da Costa has been criticised by some supporters for the club's policy of selling their best players year after year, a cursory glance at the financials is enough to understand why this approach is necessary. The relatively low revenue, combined with wages high enough to remain competitive, mean that Porto need to make money in the transfer market to survive. They have been remarkably consistent in the profits they have managed to generate from this activity in recent years: 2008 €35 million, 2009 €40 million and 2010 €35 million. They are well on course to repeat the trick in 2011 following this summer's sales of Bruno Alves to Zenit St. Petersburg for €22 million and Raul Meireles to Liverpool for €13 million.