Celtic: Rattlesnakes

Introduction

Is that what you call a treble?

Celtic announced their 2017/18 results in mid-September 2018, but these came in the form of a detailed press release, rather than the full annual report. Like many things in relation to Celtic, it left a few unanswered questions where perhaps it would have been easier to give a fuller story.

Having failed to make the qualifying rounds of the Champions League, the club face a challenging season where for the first time in many years there could be a credible challenge to their domination of the domestic game.

Ambivalent comments from manager Brendan Rodgers, a Rangers who are getting a lot of attention since the arrival of Steven Gerrard and a decent start from the two main Edinburgh teams seem to have knocked the confidence of the club and its fanbase.

Having achieved the double treble in 2017/18, where does this leave the club financially for the following season, in a sport and city where memories are very short.

Key figures for 2017/18

Income £101.6m (2017 £90.6m) Up 12%.

Wages £59.3m (2017 £52.2m) Up 14%.

Recurring profit before player sales £5.1m (2017 £6.7m) Down 23%

Player signings £16.6 m (2017 £13.8m)

Player sales £16.5m (2017 £4.2m)

Income

According to the accounts the club generates its income from three main sources. Matchday, merchandising and broadcasting.

Matchday income was up 16%%, the main reasons for this were:

  • Champions League and Europa Cup participation meant there were mor games at Parkhead. Attractive opposition in the form of PSG and Bayern Munich meant that premium prices could be charged for these matches.
  • Higher average attendances which rose to over 57,000.

Matchday income contributed 43% of total revenues for the club. Compared to the English Premier League (EPL), this is a far higher proportion than for any club in that competition.

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Celtic’s matchday income was far higher than that of any other club in the SPL, with Rangers being closest at £21.6 million, due to more matches and higher attendances. If the club had been part of the Premier League it’s matchday total would have placed it seventh in that division.

Being in Europe against glamour opposition such as PSG and also playing Rangers domestically allows the club to charge higher prices too,

Broadcast income rose by 10%, to over £40 million, again driven by Champions League qualification. This is crucial for Celtic as the domestic TV deal is relatively meagre. In 2017/18 the total prize money in the Champions League was £1,200 million, compared to £350 million in the Europa League. The SPFL deal is worth just £19 million a season split between the teams.

As can be seen from the above, when Celtic make it to the group stages of the Champions League, as they did in 2012/13, 2013/14, 2016/17 and 2017/18, there is a spike in broadcast income.

Even so, compared to the Premier League, where the side finishing bottom still earned £100 million in TV money, Celtic are paupers compared to those clubs, but kings compared to most of the rest of the SPL.

The payout from participation in UEFA competitions has increased significantly in 2018/19 to enlarge the gap still further.

Celtic also benefited with the payments being made in Euros, as the poond continued to be weak following the decline in the UK economy following Brexit.

Commercial/merchandising income was up 8%, the club launched another three kits with New Balance.

Hibernian are the only other club to publish their results to date for 2017/18, but even so the gap between Celtic and the other clubs is huge.

The failure to qualify for the group stages of the Champions League could narrow the gap between Celtic and Rangers in terms of income for 2018/19 substantially.

Costs

The main expense for a football club is in relation to players. These consist of two main elements, wages and amortisation.

Wages increased by 14% in 2017/18. This could be due to bonuses being paid for winning the domestic treble and participation in the Champions League group stages. After a period of relative stability during the decade Celtic’s wage bill rose significantly in 2016/17 and then by a further £7 million in 2018.

Hibernian are the only other club to report for 2017/18 and their wage bill rose by 17%.

For the first time a Celtic director received pay of more than £1 million, with Peter Lawwell taking home in total £1,167,000. Somewhat bizarrely, for the four previous years the highest paid director had always been paid £999,000, perhaps not wanting to upset fans with the thought of one of the suits trousering more than a million for being to help mastermind the defeat of the likes of Ross County and ICT.

Celtic seem to have their wage levels under control, even with the increased amounts being paid. The wage/income ratio, which in the English Championship was over 100%, was more in line with the EPL, which averages 68%.

Amortisation is the method clubs use to spread the cost of a transfer over the length of the contract signed. For example, when Celtic bought Scott Sinclair for £3m on a four year deal this works out as an amortisation cost of £750,000 a year (£3m/4 years).

The total amortisation figure in the accounts each year relates to the whole squad for which the club have paid a fee.

Even considering the amortisation fee for the year, Celtic’s total spending on players worked out as £67 for every £100 of income in 2017/18.

The amortisation charge arose as a result of Celtic spending £10.6 million on players for the 2017/18 season.

Eh pal, explain to me what amortisation means again.

Exceptional costs

Celtic did have a further £4.1 million of costs in 2017/18 that were called ‘exceptional’. These are expenses that are one off in nature and so not expected to recur every year.

This included £511k in relations to signings that proved to be shite less impressive than when the club bought the player, and so had to be written down. There were also payments totalling £3.5 million in respect of staff who had their contracts terminated early, which is likely to include Nadir Ciftci, who was encouraged to leave the club a year early after signing for £1.5 million from Dundee United and scoring four goals during his three seasons at Parkhead.

Profits and losses

Ask an accountant what they mean by profit, and they will start to sweat, loosen their tie, and look nervously around the room.

There are many types of profit that can be calculated, but here at the Price of Football we concentrate on three.

The first is operating profit. It is total income less all day to day operational costs of running the club.

Celtic’s operating profit was a record £18 million in 2017/18, due to the good cost control already mentioned but distorted by the 20% profit sell on when Virgil Van Dijk was sold by Southampton to Liverpool in January 2018.  Rangers had an operating loss of £6.8 million for 2016/17 but broke even in the six months to 31 December 2017.

The problem with operating profit is that it can be distorted, especially by player disposals. We therefore also calculate profit before player sales and other one-off items such as redundancy payments and contract terminations.

This is referred to as EBIT (Earnings Before Interest and Tax) This removes the volatility in relation to selling one player in a single season at a huge gain as has already been seen.

Despite the domestic success and European qualification over recent years, Celtic made an EBIT loss of over £30 million in the last nine seasons.

This shows that the club is dependent upon selling players each year to help make the books balance. Celtic have made a profit of £83 million since the summer of 2009 on player sales and this is likely to have increased substantially further in 2018/19 after the sale of Moussa Dembele for £18 million to Lyon.

The final profit figure adds on player amortisation and depreciation of the stadium and other long-term assets. We call this EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation). This is the nearest figure we have that is a ‘cash’ profit total. This is what is used by analysts when they are trying to calculate a price for a club that is up for sale.

Celtic’s EBITDA profit of £15.9 million in 2017/18 was the same as the previous season and shows how critical it is for the club to have Champions League qualification. This compares to an EBITDA loss of £0.7 million for Rangers for 2016/17.

In the English Premier League EBITDA profits average £61 million, which highlights the gulf between that and the SPL,

Player Trading

Celtic’s player trading reflects their dilemma. By Scottish standards they are a huge club but compared to the Premier League they are small fry financially. Over the last nine years the club has had a net zero spend on signings, and this is likely to turn negative once the Dembele sale is taken into consideration in 2018/19.

Whilst this means the club is likely to vacuum up many trophies domestically it also results in a squad that struggles to make much progress in Europe.

Celtic have made a profit of about £100 million, taking into account Dembele, since the summer of 2009

Debts

Celtic are debt free, having cash of £43million of cash at 30 June 2018, compared to outstanding loans of £11 million. Whilst this will no doubt impress investors and potential buyers of the club, fans may feel that the club should have invested more money in players if it wants to progress in Europe and ensuring that Rangers are kept at arms-length domestically.

Celtic’s investors have neither bought shares in the club nor lent it money over the period of analysis. This may because they feel there has been no need, as Rangers’ well documented struggles have left with bigger issues to deal with and the other clubs in the SPL are so far behind financially that they have not generated anything than token rivalry.

This has allowed Celtic to pay down debts to lenders relatively slowly, but at the same time could be indicative of a club lacking in ambition to compete on a broader sphere, in the shape of European football.

Conclusion

Celtic are in a strong position financially but money in the bank is no guarantee of trophies in the cabinet. The SPL looks more competitive this season than for a long time, and Celtic could be accused of resting on their laurels for a season too long.

Such are the riches of UEFA competition it could only take one season for the huge financial  gap between the two Glasgow clubs to evaporate, and that season could potentially be 2018/19.

The numbers

The benefits and perils of taking a football club onto the stockmarket.

Football clubs have a choice of ownership models, here we will look at the two most common corporate identities for investors.

On 23rd August 2018 Manchester United plc became the first football club in the world to be worth $4 billion. We know this because their share price finished that day at a record high price of $24.60 on the New York Stock Exchange, where the club’s shares are publicly traded.

OnO

At around about the same time as United went through this price threshold there were rumours that Liverpool and Chelsea had been subject to takeover bids for about £2 billion, but the actual price is unknown, because both these clubs are private companies.

United’s share price boost at this time was partly based on the view taken by the markets that if Chelsea and Liverpoil were worth £2 billion then United were worth more than that and factored the difference into the share price.

Many people queried the logic of Juventus signing Cristiano Ronaldo, and whether the club would benefit from a €110 million transfer fee and wages for a 33 year old player.

Since joining Juve, the doubters have been proved wrong as the club’s value has more than doubled from €600 million to €1,400 million as the market digested the impact that CR7 has on the global commercial desirability of the club with sponsors.

The Juventus share price rise was a classic case of the market responding to a single factor in relation to a company, and that factor was Cristiano Ronaldo and his squeaky clean image that is so popular with sponsors of both the individual and the club for whom he plays.

When rape allegations in the media in relation to Ronaldo appeared the share price went into a hasty reverse.

What goes up…

A cynic might say that a short seller (someone who sells shares they do not own in the hope that the price will go down and they can buy them back at a lower price) would be very pleased with the accusations made, as it has allowed these people to make a fortune in the markets.

In the 1980’s and 90’s many clubs in the UK, as diverse as Spurs, Millwall, Southampton, Hearts and Sheffield United changed their status from private to public. Within 20 years the vast majority had reverted to being private companies, chastened by their experience to the additional scrutiny and costs of being members of a stock exchange.

All businesses, including football clubs, need finance. Before the first ball is kicked, the first ticket sold, the club will need to buy the land on which to play their matches, build a stadium, employ a manager and coach, sign players and so on. Cash will only come into the club at a later date as matches are played, commercial deals signed and broadcasting rights are sold.

Finance comes from two sources. Clubs can borrow from either banks, private institutions or owners or they can generate cash from issuing shares to investors.

Prior to being acquired by the Glazer family in 2005, Manchester United plc had its shares traded on the UK stock exchange and was debt free.

The situation changed when the Glazers borrowed substantial sums from financial institutions to fund the acquisition of shares from the market and take the company private.

Because United was seen by lenders as being a risky investment, banks charged interest rates of up to 16.25% on the borrowings. This has resulted in United paying out £767 million to banks since being acquired by the Glazers.

Interesting, very interesting

Critics argue that this money would have been better spent being invested in the squad rather than paid to banks, although it could be argued that the local branch manager of Barclays probably had a better chance of nutmegging a defender and sticking one into the net at the Stretford End than the likes of Memphis Depay or Bebe.

Like a puppet on a string…but who was the puppetmaster?

The alternative to borrowing money is for a company to issue shares to investors. A share normally allows an investor to vote on key decisions each year such as who are the company directors. There are broadly two types of company, although recently some clubs have gone down a third route of being community owned.

Public companies are able to issue shares to anyone, through what is called an IPO (Initial Public Offering). The company issues a prospectus, where it sets out its intentions in terms of a business strategy and budget.

The benefit to the club is that it can raise money from anyone and everyone, thereby broadening the number of people who are willing to invest and raising more money. This money could be invested in the playing squad, improved facilities for fans and so on.

The benefit to shareholders of buying shares in a public company is that they can easily sell their shares on an open market and know the price of those shares from day to day. From a fans point of view they could own anything up from a single share in the club.

The shareholders are not however involved in the day to day running of the club and are not consulted on strategic or operational decisions, which are delegated to the board of directors and the manager/coach.

Therefore, if a fan thinks that buying 100 shares in their favourite club will allow them to have a say in transfer, ticket price and away shirt colour policy they are wrong.

There are significant downsides to being a publicly quoted football club.

(1) The club is subject to greater compliance costs, as it is necessary to abide by the rules set down by the relevant stock exchange as well as more complex and detailed company law requirements.

Millwall estimated these costs to be about £100,000 a year when they made the decision to return to being a private company in 2011. At one stage Millwall had 78 billion shares in issue, but each one was worth 2/100 of a pence each, making the costs of maintaining records for each shareholder and sending out communications via the post prohibitive.

No one likes our share price, we don’t care.

(2) The club may have to answer to analysts and commentators in the media to a greater degree on its financial dealings. Analysts give advice to their clients as to which companies they should invest in, and so tend to want to know the intricacies of the club’s finances. The club directors may feel this is time wasted and prefer to focus on the day to day running rather than being grilled and observed with keen interest by a bunch of bankers.

(3) The majority of shares in publicly quoted companies are owned by institutions such as pension and insurance companies. These shareholders have little interest in the club as a sporting institution, their aim is to maximise a short-term financial return rather than the longer-term success of the club.

(4) For an owner, going public means potentially losing control of the club. The Glazers at Manchester United have prevented this by having two types of shares in the club. Class ‘A’ shares carry one vote each and are the ones traded on the New York Stock Exchange. Class ‘B’ shares carry ten votes each and are owned by the Glazers. This allowed the Glazers to generate £140 million in 2012 by taking United public. Half of this was used to pay down debt and the other half went to the Glazers.

The ‘A’ shares represent about 25% of the total number of shares in Manchester United, but carry just 3% of the votes. This allows the Glazers, provided they do not fall out with each other, to make whatever decisions they see fit without worrying too much about unhappy third-party investors.

The alternative is to be a private company. Here shares are not traded on a market and are not easily transferred from person to person. Most clubs have what are called pre-emption rights, where anyone wanting to sell must first offer the shares to existing shareholders before selling to a third party.

Private companies usually have a single or a few shareholders, who are often board members too. As such they benefit from not being answerable to outside parties, more relaxed company law and accounting filing rules but the club has fewer methods of raising finance.

Regardless of being public or When a business makes profits, which historically has been a rarity for football clubs, those profits belong to the owners.

The owners then have the choice of either reinvesting the profits back into the club or taking them out in the form of dividends.

Very few owners have taken the dividend route, one of the most famous however was Blackpool in 2011, where after being promoted to the Premier League, owner Karl Oyston saw fit to pay himself £11 million in dividends from the money generated that season. This has led to huge subsequent protests from Blackpool fans who felt that the money should have been used to improve matters on the pitch, as the club slowly fell through the divisions.

Manchester United, being a public company since 2012 and therefore the demands of the market, have paid dividends of over £64 million since that period.

Whilst this has caused grumblings amongst the United fanbase who have been happy that the club is paying less out to finance providers in the form of interest, but if this is simply being replaced by dividends will not be happy, neither will Jose Mourinho, having seen his transfer requests this summer rejected by Ed Woodward and the board, all of whom receive dividends on their shareholdings…

 

Walsall 2018: Heading Out on the Highway

Introduction

Walsall have just published their financial results, the first for a League One club for 2017/18, and, just as they have done for the previous five years, they’ve made a profit and kept their status in that division for the eleventh consecutive year.

That seems to be enough to satisfy the ambitions of the club owner, Jeff Bonser, though some fans seem to be fed up with his control of the club, and the way he extracts money from it through owning the stadium.

Financial summary

Income: £5,853,000 (down 12%)

Wages: £3,376,000 million (down 0.3%)

Sustainable operating profit £63,000 (down 89%)

Wages to income 58% (up from 51%)

Player sales £110,000 (purchases of £179,000 in 2016/17)

Borrowings £2,038,000 (down £289,000)

Income

Not breaking the law

Most clubs show three types of income in their accounts, but somewhat frustratingly Walsall only show two, by combining broadcasting and commercial streams.

Matchday income was almost identical to 2016/17 at just under £1.1 million. Average attendances fell by 6.2% and early exits from the cup competitions didn’t help either. The importaince of a good cup run or a draw against a ‘big’ team was highlighted in 2015 and 2016 when the Saddlers made it to the FL Trophy final at Wembley and had a cup draw against Chelsea respectively.

This works out at £229 per fan for the season, a 7,5% increase on the previous season, but probably due to having an extra home cup game compared to 2016/17. If fans think this is far lower than the price they pay for their season ticket, note that the club figures exclude VAT at 20% and are an average of adult and concession prices.

‘Other’ income fell by nearly £800,000 to £4.76 million. The main components of ‘other’ income are broadcasting (estimated at £1.5 million) and commercial sponsors, catering conferencing and so on. The importance of this income source, which can generate cash far more often than the 23-28 home match days each season is highlighted as it brought in more than half of the Saddler’s revenue in 2017/18.

Compared to the income of L1 clubs the previous season, Walsall in 2017/18 were about mid-table in terms of the total generated (Bolton’s figures were distorted as they were in receipt of parachute payments from the Premier League).

Costs

Footballs main costs are in relation to players, and here Walsall continue to keep tight control.

The total wage bill, including pensions and national insurance costs, was 0.3% lower than the previous season, despite the club employing eight more staff., The reason for the slight fall is likely to be linked to a 19th place finish in League One, compared to 14th the previous season, and so player win bonuses would be lower.

The club clearly have a tight wage budget set each year, but the wage to income ratio increased from 53% to 58%, meaning that the club was paying out £58 in wages for every £100 of income that was generated in 2017/18. This compares to an average of 100% for clubs in the Championship.

The increase in staff numbers meant that the average annual salary of someone at Walsall fell by 6% to £24,824. Players and management are clearly likely to be on higher than this average figure, and we estimate they earned about £90,000 (£1,730 per week) which puts the club at the lower end of the division of those clubs who report wage totals (many clubs hide behind a legal loophole and don’t show this figure), and may explain why they have infrequently challenged for promotion to the Championship in recent years.

Director pay at Walsall fell by 9% but was still £175,000

One figure that irks some Walsall fans is the rent paid by the club, as it does not own the Bescot Stadium. For the last couple of seasons Walsall have paid £449,000 a year to Suffolk Life, owner Jeff Bonser for rent for the stadium, training facilities and car park. Whilst the rent was frozen compared to 2017, it had risen significantly in prior years.

It does seem that whilst Walsall are one of the lowest wage payers in the division, they are one of the most generous tenants to their landlord.

Profits

My Oh My

Profits are income less costs. Walsall seem to be able to break even each year, just. This could be manipulated by the directors’ tweaking their pay to ensure the club finishes in the black each season.

There are different profits that can be used when analysing a business, Operating profit is before taking into account interest costs on loans.

Walsall’s operating profit fell by 78% in 2018, mainly due to the decline in income in the year, but the club made a profit, which is not the case for many of its fellow League One clubs.

EBIT (Earnings Before Income & Tax) is the same as operating profit but strips out non-recurring items such as gains on player sales, legal cases writedowns and redundancies.

Walsall’s EBIT was £63,000 in 2018, whereas every other League One club that published an profit and loss account made a loss in 2017, and there is little reason to suspect this will have changed in 2018.

Walsall paid £50,000 in interest costs in 2018, of which £23,000 was on loans from directors. This means that directors made a total of £656,000 from the club in 2017/18 (Rent £459,000, pay £175,000 and interest £22,000).

One of us is in the money.

Player trading

You don’t see Walsall mentioned too often in the transfer gossip columns of the papers or sports broadcasters, and there’s a good reason for that.

In the four years leading up to 2016/17 the club neither sold nor bought a player for a fee. This record was broken when Cypriot striker Andreas Makris was signed for £179,000 (€200,000). Makris’s season proved to one of disappointment, with one goal in 32 games.

After proving to be shite a disappointment Makris’s value was written down in the accounts, and he was sold back to Cyprus in the summer of 2017 and this has shown up in the 2018 accounts as a fee of £110,000.

Walsall did not sign any players for a fee in 2017/18, but they are not alone in League One in relying on Bosman signings and loans.

Debts

The sale of Makris allowed Walsall to repay some of their outstanding loans. In total the club had borrowings of just over £2 million at 30 June 2018, a reduction of £289,000 compared to the previous year. Included within these borrowings is £1,339,000 due to directors and £399,000 to the bank, which is guaranteed by Jeff Bonser.

Conclusion

Walsall, almost uniquely for a League One club, have shown that they can break even season after season by managing their wage budget carefully, and being ultra-cautious in the transfer market.

Promotion to the Championship is worth about an extra £7 million a season in TV money, plus bigger gates against local rivals such as Villa, West Brom and Birmingham City. With the club so close to the playoffs at present going up could be an income windfall.

The danger with promotion is that wage bills also tend to balloon (the average is £22 million per season) and for clubs with resources such as Walsall the stay in the Championship is often brief (Burton, Barnsley and Rotherham can testify to that).

Whilst owner Jeff Bosner has been generous in lending money and guaranteeing the bank loans and overdraft, he is also the biggest beneficiary of the club financially in terms of the varying income sources from Walsall.

From an analysts’ perspective, we do however commend Walsall for producing their results so quickly after the end of the season and not taking advantage of legal loopholes to restrict the amount of information they publish.

The Numbers

 

Birmingham City 2018: Do What John?

Top Top Finances

Introduction

Birmingham City’s parent company Birmingham Sports Holdings Ltd, announced its financial results for the year ended 30 June 2018 recently.

The results do also include the group’s other activities, as it tries to diversify into property management, but these had no impact upon income and a minor impact upon costs in the year.

The results are in Hong Kong dollars, so have been translated into sterling at an estimated rate for the year, when Birmingham finally submit their figures here in the UK there may be slight differences if other exchange rates are used.

Birmingham are the second team in last year’s Championship to produce their results, following Hull City the previous week. Any tables for the division as a whole use figures from 2016/17 for other clubs.

Summary

Income up 12% to £19.6 million

Wages up 78% to £40.1 million

Pre-player losses up from £16.1 to £45.3 million

Player purchases up to £15.3 million

Income

Every club must split its income into at least three categories to comply with EFL League recommendations, matchday, broadcasting and commercial.

Birmingham’s matchday income rose by 9% last season to £4.9 million last season, which was a quarter of the club’s total revenues. This was a continuation of a continual rise over the last few seasons.

The increase in matchday revenue was on the back of attendances rising 12.4% from 18,717 to 21,042 at the now snappily named St Andrew’s Trillion Trophy Stadium. Last season was the first since the club was relegated in 2011 that crowds have averaged more than 20,000.

Whilst attendances were up, the club was unable to generate more money from fans, presumably as season ticket prices were frozen for the fifth season in a row.

Broadcast income for clubs in the Championship varies significantly due to parachute payments. Clubs now receive these for three years (two if relegated in first season following promotion) and this is tapered as 55%, then 45% and finally 20% of the equally shared element of Premier League payments.

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For clubs such as Birmingham who are not in receipt of parachute payments, they receive about £6.5 million in the Championship for broadcasting. About £4.3 million of this comes from ‘solidarity payments’ from the Premier League as a share of the PL TV deal, and the remainder from the EFL’s own deal with Sky.

Birmingham’s parachute payments finished in 2015, the main reason why they have increased since 2016 is down to the more lucrative Premier League TV deal which kicked in in 2017, which increased solidarity payments, as well as being more popular with Sky, as each home match is worth an extra £100,000 if broadcast live.

Parachute payments are a double-edged sword, clubs need to have them as an insurance policy when in the EPL as even with relegation wage clauses many would go into administration if they were unavailable. The research suggests that they are worth about 6-8 points of an advantage on average to clubs who are receiving them. This has not stopped clubs in recent years being promoted whilst not in receipt of parachute payments though, as fans of Huddersfield, Brighton, Blackpool, Watford and Palace etc. will testify.

Commercial income increased by 15% to £7.1 million. This could be part of the ‘Harry effect’ as the love him or loathe him Redknapp is as ‘face’ (albeit one where all the good looks were clearly on the mother’s side judging by his son Jamie) which is well known and so sponsors might want to associate with. The other potential cause for the rise in commercial income is the role of owners Trillion Trophy, who may have used their contacts to arrange partnership deals with Hong Kong based sponsors.

Commercial income should rise further in 2018/19 due to the naming rights given to the stadium by the owners, although there may be raised eyebrows at the EFL if the sum paid is above normal market rates, and any excess will be disallowed for FFP purposes.

Overall Birmingham’s income rose by 12%, which is a much bigger rise than nearly all Blues’ fans have had in 2018. The big discriminator in the Championship is parachute payments, which create a two speed division in term of income and costs.

Birmingham’s overall revenue puts the club about 15th/16th in the division as a whole for last year, assuming there are no other major changes. This makes it difficult to compete if wanting to compete for a playoff place, unless you are very lucky or take a cavalier approach to FFP.

This is only good from a profit perspective if costs have risen by less than 12%, which leads us to…

Costs

Player costs

The group said this about costs.

Birmingham’s main costs, like those of nearly all clubs, were in relation to players, in two forms, wages and amortisation. Birmingham seem to have gambled on making signings for both fees and on Bosman deals in which the club went for broke in terms of offering players terms that would not be matched elsewhere. For example, David Stockdale, voted goalkeeper of the year in the PFA awards in 2017, turned down a new contract with Brighton, promoted to the Premier League, and instead opted for a three-year deal with Birmingham. It’s highly unlikely he would reject the chance to play in the PL unless he was given a very good deal at St Andrew’s.

The group paid £204 in wages for every £100 of income, as wages rose by 78% to over £40 million. Some of the wage rise could be put down to the holding company taking on staff in Hong Kong for the property deals, but this is highly unlikely to involve many people or pay them huge sums. Birmingham’s wage bill had already risen by 50% in 2017 as another managerial catastrophe in the shape of Gianfranco Zola turned into a disaster.

Some of the wages could be due to the non-football part of the group, but no details are given, and the statement in the accounts states that the rise was due to players and coaching staff.

The Championship is a clown car of a division when it comes to wage control, but even by the lunatic standards of Birmingham’s peers, the attitude by senior management to player costs was similar to that of leaving Boris Johnson in charge of a brothel (or more frighteningly, the UK economy…either way everyone would be shafted).

Player Amortisation

Amortisation is the accounting nerdiness for how a club deals with player transfers in the profit and loss account. This is achieved by spreading the transfer fee over the life of the contract signed. For example, when Blues signed Jota from Brentford in the summer of 2017 for £6 million on a four-year deal, this works out as an annual amortisation cost of £1.5 million. The amortisation cost in the profit and loss account represents the total for all players signed for fees in previous seasons.

Birmingham’s amortisation cost nearly tripled in 2017/18 due to the club moving from a period of austerity to signing the likes of Jota, Roberts, Colin, Dean and Gardner for seven figure fees.

The increase in amortisation charge meant that Birmingham’s charge in 2018 was higher than that of promoted Brighton and Huddersfield the previous season.

Adding amortisation and depreciation together gives us total player cost of nearly £48 million, which was higher than that of relegated Hull, who had the benefit of parachute payments to cushion the blow. This resulted in Blues having a total player cost of £243 for every £100 of income, and that’s before paying for heat, light, insurance, medical costs and so on.

Again this heavy investment in players has resulted in Birmingham having the highest such cost in the division.

Profits and losses

Profit is income less costs, but it contains lots of layers and estimated figures. Birmingham, like all clubs, show a variety of profit measures in their accounts (although in Birmingham’s case they are mainly losses), so they need a bit of explanation.

Operating profit is income less all the running costs of the club except loan interest. It is an unreliable profit measure in that it includes volatile one-off non-recurring costs such as gains on player sales and redundancy packages for managers that make calculating the underlying profitability of the club difficult.

The scary news for Blues’ fans is that the holding company made an operating loss of £825,000 a week in 2017/18, a total of £43 million, which is more than two and a half times the loss made in 2017.

Total operating losses in the Championship in 2016/17 were £260 million, but even so Birmingham’s figures are at the extreme end of the scale. As recently as 2015 they were making a profit.

Whilst Birmingham’s losses in 2018 were close to those of Newcastle and Brighton the previous season, both those clubs were promoted and paid out bonuses of about £10 million each.

Stripping out player sale profits and other non-recurring items (redundancies, legal cases, debt write offs etc.) gives a more valid profit measure called EBIT (Earnings Before Interest and Tax).

For Birmingham the position deteriorated further to over £45 million as the club had gains on player sales of over £2 million from selling Ryan Shotton and Kerim Frei. This is even higher than local rivals Villa lost in 2017 under the head scratching ownership of Tony Xia.

Nearly every club in the Championship has significant EBIT losses, which were £392 million in 2017, as many owners gambled on spending big to try to secure promotion to ‘the promised land’ of the Premier League, which in reality celebrating defeats at the Etihad when Manchester City score less than three goals against you and getting giddy when beating the likes of Cardiff and Huddersfield.

If non-cash costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club charges a cost for other long-term assets such as buildings) are excluded then another profit figure called EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) is created. This is liked by professional analysts as it is the nearest thing to a cash profit figure, and it is more likely to be a positive figure than the likes of EBIT.

Despite adding back these costs, Birmingham has an EBITDA loss of over £36 million. This shows that the club was haemorraghing about £700,000 a week in cash from its day to day trading.

Birmingham had EBITDA losses that exceeded those of any club in the Championship in 2017.

In addition, if a club has loans then the loan interest is then deducted to arrive at profit before tax. Birmingham’s interest cost in 2018 was about £1.6 million as the parent company borrowed more and more money to pay the wages.

FFP losses

The summer has been one of rumour and counter-rumour in relation to Birmingham’s FFP situation.

In the accounts the club has admitted the following

Under EFL FFP rules, a club is allowed a maximum loss over 3 seasons of £39 million. However, FFP starts with profit before tax but the losses exclude the following

  • Infrastructure costs such as depreciation
  • Academy costs
  • Women’s football costs
  • Community scheme costs

Birmingham have a category 2 academy, which is estimated to cost about £1.5 million a year, so looking at the three years to June 2018 gives a rough FFP loss of over £57 million

This cavalier approach to FFP in 2018 resulted initially in Birmingham being given a ‘soft’ transfer embargo, in which the club was not supposed to sign players for a fee, and any free transfer signings were restricted to an annual salary of ‘only’ £600,000 a year. This embargo was not publicised to in theory allow the club to recruit players without everyone knowing the extent of the club’s financial problems…although in practice, football, being the open gossip factory that it is, was circulating rumours all summer that something was amiss at the club.

If the figures above are accurate (and they do contain lots of guesstimates) then it is clear why other clubs in the Championship who have followed the soft embargo rules (likely to be Sheffield Wednesday and Villa, possibly Derby too) were so hacked off with Birmingham when they signed Kristian Pedersen for £2.4 million.

This is the reason why Birmingham are under a threat of a points deduction, as the EFL have unlimited punitive powers and want to make an example of someone as other clubs have abided by the rules.

Player Trading

Hull spent £15.3 million on new players in the year to 30 June 2018, after years of having a policy of a negative net transfer spend.

The large spend on players is why the amortisation charge in the profit and loss account is so high. Fans often point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent.

Accusations will be made pointing the finger at Harry Redknapp for the large spending on players, but there should be someone within the club hierarchy who sets a budget limit, and this seems to have been absent at Birmingham.

At 30 June 2018 Birmingham owed other clubs £8 million for outstanding transfers and another £5.7 million is payable if certain conditions are satisfied (such as promotion to the Premier League).

Investment

Club owners can invest three ways, sponsorship, lending or buying shares. The renaming of the stadium in the summer of 2018 suggests Trillion is trying to reduce FFP losses by using this route, although the EFL will be doing their best to ensure only a ‘market’ rate is allocated to when calculating the allowable loss.

The club parent borrowed about £13 million in 2018.

Summary

Birmingham gambled on Harry Redknapp weaving some magic in 2017/18 and that the consequences of non-promotion wouldn’t apply to them. This might have been because they saw the EFL taking a soft line with QPR, Bournemouth and Leicester for FFP abuses in recent years.

Whether the EFL do have teeth is still to be seen, but there will be many other clubs watching with close interest.

Data Set

Manchester United 2018 Finances: Made of Stone

Panic on the streets

Introduction

Tuesday 25th September 2018 may not go down as a great day in Manchester United’s history, as the club lost in the Carabao Cup to Derby County and there was a very public spat between Jose Mourinho and Paul Pogba, but off the field the club announced record revenues for the year ended 30 June 2018.

They’re paying Woodward HOW much?

How this was achieved is more to do with the abilities of the marketing department which continues to set a standard that most other clubs can only envy.

Earnings this high are likely to ensure that United are once again top or close to the top of the Football Money League when other clubs announce their results, although this is of little consolation to fans who saw their team go without a trophy in 2017/18.

Goals rather than profits excite fans, although the financial results show that United are still setting the standard that others aspire to in terms of generating money.

Losing a match in the Carabao Cup is likely to have little impact on United’s financial fortunes, as the competition generates only £100,000 prize money for the competition winners, compared to £1.8 million for the FA Cup and £38.6 million for the Premier League.

Income

All clubs divide their income into three main streams, matchday, broadcasting and commercial.

Zooming in on the figures show that United’s matchday income fell by £1.8 million last year.

Extracting the matchday income is straightforward, as it is the average ticket price multiplied by the number of matches played at home.

Reducing the number of games at Old Trafford in 2017/18 was the main driver of the fall in income as United’s early exit in the Champions League to Sevilla resulted in five fewer home matches.

Since acquiring the club, the Glazers, whilst criticised for many of their early pricing activities by fans, have frozen matchday prices for most of the last decade and this is reflected in matchday income being relatively constant.

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As a member of the Premier League, United, like all clubs, agree to centrally negotiated broadcasting deals which are usually for three-year periods which commenced in 2014 and 2017.

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Reds fans are used to rarely seeing their team play at 3pm on a Saturday, and this is because United are very popular with TV audiences, appearing more times last season than Champions Manchester City due to their ability to deliver high ratings.

Each incremental final season position in the Premier League is worth an extra £2 million to a club, so United finishing 4th compared to 2nd in 2017 generated £4 million on top of the benefits of being in the Champions League compared to the Europa Cup.

The area in which United have excelled over the last decade has been commercial income as the club’s marketing department has struck global and regional deals with everyone from tractor manufacturers to Indonesian isotonic drink partners.

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Whilst commercial income has plateaued in the last three years, mainly due to the new big deals with adidas and Chevrolet both being long term, United have announced a sleeve sponsor deal for 2018/19 with American toilet and generator manufacturer Kohler which is likely to be worth many millions.

Adding all three income sources together took United to overall revenues of £590 million, a substantial way ahead of the only other club to have announced results for 2017/18, Manchester City.

The income gap between the two Manchester clubs has narrowed in 2018, but over the last decade United have generated over £1.1 billion more than City and far more than any other club in the Premier League.

Superior levels of income are however no guarantee of success in terms of trophies, a lot depends on how well a club spends its income.

Expenses

For most clubs the main expenses are going to be player related, in the form of wages and transfer fee amortisation.

United’s wage bill increased by 12% in 2017/18, despite paying no bonuses for winning trophies, the increase was due to new contracts for existing staff such as Jessie Lingard and Jose Mourinho as well as signing Alexis Sanchez in January for a contract estimated to cost the club £20-25 million a year.

City’s wage bill, which a few years ago was out of control as the club tried to attract players by paying above market rates, now show more modest rises since 2013 as the owners focus on FFP compliance and a breakeven model in terms of profitability.

Keeping players happy and recruiting new ones is always a challenge whilst not exceeding the wage budget but what United do have in their favour is good control of wages as a proportion of income.

Only a club with owners who were prepared to underwrite huge losses could have coped with City’s wage bill a few years ago, as wages peaked at £114 for every £100 of income in 2011 whereas United have always had one of the lowest wage control financial metrics since the Premier League started.

Funding transfers is another big outlay for clubs, and this is shown in the profit and loss account via the amortisation charge, which is the fee paid spread over the contract life.

For example, United paid Everton £75 million for Romelu Lukaku in July 2017 on a five-year contract, which works out as an annual amortisation cost of £15 million (£75m/5).

Every transfer fee is amortised, and the total is shown as an overall expense in the profit and loss account, United’s amortisation figure rose by 11% to £138 million.

Despite the amortisation figure rising substantially since Sir Alex Ferguson’s retirement in 2013 United have failed to win the Premier League or Champions League, which adds further weight to those who take the view that Ferguson was able to maximise results without breaking the bank.

Overall costs rose by 9% compared to just a 1.5% increase in income, which hit profits. Included in costs was £896,000 paid to United’s auditors, PriceWaterHouseCoopers (PWC) for the audit and ‘tax compliance services’. Ed Woodward is a former employee of…PWC.

Because the Glazers acquired United by borrowing huge sums of money, the club has historically paid large amounts of interest on loans. The good news for United is that these interest costs are falling as time progresses but have still sucked a large amount of money away from the playing budget over the years.

Over the last decade United’s net interest cost has been £447 million. In the early years of Glazer ownership, the club was seen to be risky borrower, and so ended up paying interest rates of up to 16.25%. As things improved, in part due to Alex Ferguson’s caution in the transfer budget the interest cost has fallen, but the club has now paid an estimated £785 million to banks since the takeover arose in 2005.

Other clubs, funded by their owners, such as Chelsea, Manchester City and Stoke City, have paid no interest on the sums advanced.

Profits

There are a variety of profit measures to consider when looking at a business, the good news for United is that the club has performed well regardless of the assessment method compared to most other clubs, but 2018 was poor compared to the previous year at Old Trafford.

Operating profit is simply income less day to day running costs excluding interest. This fell by 45% in 2018, as the increase in player costs exceeded the rise in income. United’s record operating profit was in 2009 when they sold Cristiano Ronaldo for a then world record fee and banked a huge profit on the transaction.

Compared to their local rivals, United have made £618 million of operating profits whereas City have lost £474 million.

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Some figures in the profit and loss account are erratic and so distort profits. These include gains on player sales, redundancy costs, legal settlements and so on. If these are stripped out we get EBIT (Earnings Before Interest and Tax), which reflects a more sustainable view of United as a business.

EBIT profits fell by nearly 60% to £28 million in 2017/18, again reflecting the club’s big investment in player costs that was not matched by income increases, along with the price of an early exit from the Champions League, which was worth $102 million in prize money to winners Real Madrid last season. The low EBIT figure in 2015 in the table shows the impact of not qualifying for the Champions League to United that season.

Stripping out the non-cash costs of transfer fee amortisation and depreciation gives EBITDA (Earnings Before Interest Tax Depreciation and Amortisation). United like to quote this figure in press releases as it excludes some key costs (interest to banks and player amortisation) and so tends to be a high number. Other analysts like EBITDA because they claim it is a cash proxy of profits as non-cash costs are ignored.

EBITDA fell by 12% to £177 million but was still the third largest in the club’s history.

United’s fiscal muscle is very much shown in the EBITDA figures, generating £1.3 billion of such profits in the last decade, a billion more than Manchester City.

The final profit figure to consider is profit before tax. This shows the impact of the Glazer’s borrowing so much money to finance their acquisition of the club. United’s profit before tax was £26 million, equivalent to Sanchez’s wages for the season. United have made £171 million in profits before tax over the decade, compared to City’s loss of £544 million in the same period.

Profits belong to the club owners, who have the choice of either reinvesting back into the club’s future or withdrawing in the form of a dividend. The Glazer’s are the biggest shareholders in United and they and other shareholders took £22 million of the profits for the year for themselves.

Player trading

United spent £163 million on new players in 2017/18, recruiting Lukaku, Matic, Lindelof and Sanchez, although the latter was part of a swap deal with Arsenal for Henrik Mkhitaryan.

This takes the club’s spending over the last decade to just over £1 billion. The problem for United, is that the transfer market is competitive and crowded, and City have spent £460 million more than them in the same period.

Many fans talk about ‘net spend’ when it comes to player trading, and here United are in an unusual position as unlike many other clubs they do not need to sell to buy.

Having said that their player sales in recent years have not been particularly lucrative, reflecting some acquisitions, such as Depay, Di Maria, Zaha and Babe who have failed to impress in a United shirt.

Since selling Cristiano Ronaldo in 2009, United have only made £86 million profits from player sales in the subsequent nine years. City have more than that in the last three years and Liverpool exceeded this sum from the sale of Coutinho last season.

What United do seem to have done is adopt a policy of signing players on credit rather than paying cash for them.

Since the Sir Alex days, the sums owed by the club have increased rapidly, from £11 million at the start of the decade to £258 million by June 2018. This may explain why the United board were so reluctant to allow Mourinho to sign more players in the 2018 summer transfer window, as so much was still owed for previous recruits.

Funding

Clubs can be funded from borrowing from a bank and/or owner investment in shares. Under the Glazers United borrowed over £1/2 billion from banks to buy the club from the previous owners.

Debt has both good and bad qualities, it is tax efficient and can multiply the original investment from owners but comes at a cost of the interest being paid and can lead to bankruptcy if payments are not made.

United’s borrowings have increased since 2014 but this is as much to do with the club taking out two loans in US dollars (one for $425 million and the other for $225 million) and sterling falling in value post Brexit as much as anything else.

Critics of United supremo Ed Woodward will query why the club has over £240 million of cash sitting in a bank account earning next to no interest, which perhaps would be better used to pay down the loans, where the interest rate being paid is higher.

A look at the loans appears to indicate that the money is not repayable to the banks until 2027 and 2025. Critics of Woodward point out that he’s an ex-banker and is more concerned with earning fees for his old chums in finance than doing what is best for United.

If United’s EBITDA profit falls below £65 million then they may have to pay interest penalties, but there appears to be little chance of that happening at present.

Summary

United are in a strong financial position. Woodward’s recent comment that “playing performance doesn’t really have a meaningful impact on what we can do on the commercial side of the business” won’t have gone down with the United faithful.

This is further evidenced by United’s board’s refusal to accede to Mourinho’s summer transfer requests suggesting that they don’t particular care, or need to care, what the fans think, and whether you’re a Red or ABU, that isn’t good for football.

Data Set

 

Hull City 2018: Eye of The Tiger

Introduction

Hull City Tigers Limited were the first club to submit their accounts to the government registrar for the 2017/18 season and reported a £24 million profit before tax in the business review. Both the above look good, but things happen for a reason, and there’s more to the early publication and impressive profit than perhaps meets the eye.

In the strategic report the board say the following…

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Hull finished 18th last season, yet scored 70 goals, which was only surpassed by three teams, and conceded 70 too, which was only surpassed by four. They currently lie 21st after nine games, and the former Scunthorpe United physio has not managed to improve their fortunes.

Income

Every club must split its income into at least three categories to comply with EFL League recommendations, matchday, broadcasting and commercial.

Hull’s matchday income fell by 35% last season to £5.1 million, which was 9% of the club’s total income.

This was mainly due to a fall in attendances from 18,062 to 12,447. Attendances were the lowest for many years, reflecting poor performance on the pitch along with a deteriorating relationship between owner Assem Allam and a section of the fanbase.

A final position of 18th, following relegation the previous season from the Premier League was far below expectations.

Since Allam acquired the club attendances have been up and down like a newlywed’s knickers, broadly in line with the division in which the club has been playing, this makes it difficult to work out the size of the club’s ‘core’ fanbase.

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The attendance figure is confusing, as the stated attendances given out during the season averaged 15,622. The 3,000+ difference could be due to the number of non-shows from fans, mainly season ticket holders, unhappy about the running of the club. Since the Allam’s acquired Hull

Compared to the rest of the division the previous season, Hull’s matchday income was mid table.

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Broadcast income for clubs in the Championship varies significantly due to parachute payments. Hull received over £41 million from the Premier League, out of total broadcast income of £45.6 million. This sum will fall by about £10 million in 2018/19, and unless the club is promoted back to the Premier League will then decline to about £6.5 million in the Championship (or should the worst occur, £700,000 in League One).

Hull generated over 80% of their income from TV monies, this is broadly in line with figures since Allam bought the club but could change dramatically next season.

Hull have been in the Premier League or in receipt of parachute payments throughout the decade, resulting in TV income contributing £305 million out of the £401 million the club have earned as income during the Allam era.

Parachute payments are a double-edged sword, clubs need to have them as an insurance policy when in the EPL as even with relegation wage clauses many would go into administration if they were unavailable. The research suggests that they are worth about 6-8 points of an advantage on average to clubs who are receiving them. This has not stopped clubs in recent years being promoted whilst not in receipt of parachute payments though, as fans of Huddersfield, Brighton, Blackpool, Watford and Palace etc. will testify.

Commercial income fell by over 60%, reflecting the difficulty the commercial department has when selling packages to sponsors when the opponents are the likes of Burton and Reading compared to Manchester United and Liverpool.

The poisonous relationship between the board and the fanbase was also a contributory factor as sponsors are reluctant to have their brand associated with a business that is unpopular.

It’s very difficult to plan for any business when income levels are erratic, and Hull’s recent bouncing between divisions alongside an owner who seems to have fallen out of love with the club has restricted the ability of the management team to create a strategy for stability.

Costs

Player costs

Hull’s main costs, like those of nearly all clubs, were in relation to players, in two forms, wages and amortisation. Initially Hull appear to have excellent wage control compared to the rest of the division, as they managed to halve staff costs compared to the previous season due to a combination of relegation clauses and player sales.

The club paid out only £55 in wages for every £100 of income, broadly the same as the previous season. The downside to this was that this meant recruiting players who weren’t able to compete for a top six place.

In the Championship in 2016/17 practically every pound in income was paid out in wages. Hull have the lowest wage to income ratio in the division in 2018/18, which will be of little comfort to fans, whilst keeping Allam and the bank manager happy.

Player Amortisation

This is how a club deals with player transfers in the profit and loss account by spreading the cost over the contract period. For example, when Hull signed Kevin Stewart from Liverpool in the summer of 2017 for £4 million on a three-year deal, this works out as an annual amortisation cost of £1.33 million. The amortisation cost in the profit and loss account represents the total for all players signed for fees in previous seasons.

Hull’s amortisation cost fell by over 60% in 2017/18 due to the club selling players signed for the Premier League season being moved on. A close up of a map Description generated with very high confidence

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Even with the decrease in 2017/18 Hull’s amortisation figure would have been in the top half dozen compared to the Championship the previous season.

Adding amortisation and depreciation together gives us total player cost of just over £43 million, which is 77% of income.

This again compares well financially to the other teams in the division but does nothing for the fans who were watching the team week in week out last season at the arse end of the table.

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One cost that is a bit unusual is that of property rent. Since the Allam’s took control of the club this has increased every year (apart from 2014) by 10% a year. It would be interesting to find out who is the landlord, and for how many further years there is this step increase in rent costs, which have almost doubled since 2011.

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Profit

Profit is income less costs, but it contains lots of layers and estimated figures. Hull, like all clubs, show a variety of profit measures in their accounts, so they need a bit of explanation.

Operating profit is income less all the running costs of the club except loan interest. It is a ‘dirty’ profit measure in that it includes one-off non-recurring costs that are a bit bobbins when trying to work out long term sustainable profitability.

The good news for Hull is that during the period of the Allam ownership the club has made operating profits on nearly £26 million. How much of this is due to the skill of the owners is questionable.

Total operating losses in the Championship in 2016/17 were £260 million, so Hull’s finances appear to be far healthier than those of their competitors. If these profits were invested wisely in the playing squad then the club should have been in a strong position to compete this season, but this does not appear to be the case.

A bit driver of Hull’s financial success here is profits from player sales. The likes of Clucas and Maguire have been major income sources for the club. Over the last four years Hull have made £83 million in profits from player sales, without these the club would have made a loss.

Stripping out player sale profits and other non-recurring items (redundancies, legal cases, debt write offs etc.) gives a more valid profit measure called EBIT (Earnings Before Interest and Tax).

For Hull this was a loss of over £100,000 a week in 2017/18, despite the benefits of parachute payments.

Hull’s EBIT profits mirror the club’s seasons in the Premier League, which were profitable, and the Championship, which were loss making.

Nearly every club in the Championship has significant EBIT losses, which were £392 million in 2017, as many owners gambled on spending big to try to secure promotion to ‘the promised land’ of the Premier League, which in reality is a series of severe spankings by big clubs interspersed with celebrating like a loon when beating the likes of Swansea and Bournemouth.

If non-cash costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club expenses other long-term asset such as office equipment and properties over time) then another profit figure called EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) is created. This is liked by professional analysts as it is the nearest thing to a cash profit figure.

We have calculated Hull’s EBITDA profit at £7.5 million (although Hull put on their accounts that it is £8.2 million), which shows that the club is generating cash from its day to day activities, although as said before, this is mainly driven by parachute payments.

Hull have made total EBITDA profits of £83 million under the Allam regime.

Once trading costs have been paid, many clubs also have to pay interest on their borrowings. Hull historically have had a mixture of bank loans and those from Allamhouse Ltd, the holding company owned by Assam Allam.

The interest cost in 2018 was about £50,000 a week and has totalled £21 million since Allam took over. It is not possible to work out how much, if any, of this interest has been paid to AllamHouse. In most sets of accounts there is usually a footnote called ‘related party transactions, which details transactions with owners, but this does not appear in the Hull City accounts.

Player Trading

Hull spent £16.9 million on new players in the year to 30 June 2018, which may come as a surprise to fans.

The large spend on players is why the amortisation charge in the profit and loss account is so high. Fans often point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent.

The Allam’s initially did invest in the squad, but it’s noticeable that in the last three years sales have exceeded purchases, this may be connected to their alleged gradual loss of interest in the club.

Clubs selling players in the Championship is a common issue though as trading losses have to be minimised.

Investment

Club owners can invest three ways, sponsorship, lending or buying shares. The club has not issued any shares since being taken over but has borrowed a total of £111 million from both the owners and banks. The bank loans have now been paid, off, leaving outstanding loans of £63 million to Allamhouse.

The bank loan of £21 million was repaid during the last year. This will make the sale of the club easier as there are fewer secured creditors to deal with .

Summary

Hull’s finances as a club receiving parachute payments look very solid and far better than almost any other club in the Championship. The goose that lays those particular golden eggs is about to stop though, and the club’s income is likely to fall by at least £10 million this season and a further £30 million in 2019/20.

For this reason it is probably best for all concerned that the club is sold to owners who can have a constructive relationship with fans and agree a reasonable set of expectations.

Continuing to call the club Hull City Tigers Limited, after failing to get the FA to rubberstampt a name change to the club is both petty and provocative.

The first thing any new owner should do if wanting to win hearts and minds is to change the company name back to Hull City AFC (or similar) Limited.

The biggest problem in relation to Hull is agreeing a sale price. The Allam’s have put money in, although their motives and commitment are confusing.

As a Premier League club Hull City was probably worth about £170 million according to our calculations. As a Championship Club on gates of 12,000 a true value is probably around £35 million. The Allams will probably want to recoup at least the £63 million that is owing to them (plus whatever they paid for the shares) and bridging this gap will be very difficult as the club simply isn’t worth the higher sum.

Data Set

Accrington Stanley: The Milkman of Human Kindness

Accrington Stanley, who are they?

In September 2014 Accrington Stanley were served with a winding up order by the tax authorites.  This was one of a series of financial demands that the club had had to deal with as it lurched from crisis to crisis. It was saved at the last minute by a local businessman…and in May 2018 was promoted to League One as Champions.

We met Accrington’s owner, Andy Holt, the social media scourge of the Premier League, the EFL and Salford City’s Gary Neville at the National Football Museum recently.

He’s kindly not only given us the club accounts in respect of their League Two winning year for 2017/18, but also the budget for the club’s battles in League One this season.

The figures will be subject to the same level of scrutiny as that of any other club, and comments as always will be independent, but a huge thanks to all at Stanley for sharing the information with us.

At a time when there are public protests from fans at many EFL clubs in respect of owner behaviour, lack of transparency and poor governance, here is one club which has an open-door approach to engagement, and this, in our opinion, is good for the club, the fans and anyone who has an affection for the game. Nothing was hidden from us, we were given totals from everything from gate receipts to how much it costs to hire the portable toilets for the season.

Income

Accrington Stanley Road

Like all football clubs, Stanley generate money from three main sources, Matchday, Broadcasting and Commercial. Stanley have broken their figures into far more detail, but for comparative purposes it makes more sense to keep to the standard headings, with the one exception of academy grants.

Many clubs in League One and Two take advantage of corporate law that allows companies below a certain size to only submit limited information to the company registrar, and so avoid public (and fan) scrutiny.

Although the Football Supporters Federation and other groups have lobbied the EFL and the FA for this to be changed, claiming clubs are an essential part of many towns and cities, and so belong to the community rather than individual owners, this appeal has fallen upon deaf ears at the EFL and FA.

At the same time credit should be given to those clubs who are prepared to show the full extent of their finances. Stanley have gone one step further in giving us the full breakdown of numbers.

As can be seen, Stanley, even in a promotion year, are towards the bottom end of the income spectrum. This is a function of being a relatively small town (population 35,000) and a place which doesn’t tend to attract too many affluent football tourists.

As can be seen, matchday income has been slowly rising, mainly on the back of increased attendances, but even so the club has a relatively small hard-core support that it is aiming to increase through closer links with local community, and success in winning League Two in 2018.

The importance of a good cup draw to a club of this size is shown by the 2016/17 figures, when Stanley were drawn away to West Ham in one of the first matches at the London Stadium, which drew a crowd of almost 40,000.

The West Ham game was the equivalent of the club earning an extra £200 per fan based on the number who watched the club over the season. It’s issues such as this on the finances of smaller clubs that are ignored by those who want less participation in the earlier rounds of the League Cup and replays banned from the FA Cup.

Stanley have budgeted for a 20% increase in matchday income for their first season in League One. Gates are presently slightly greater than 2,000 so the budget is broadly in line with expectations.

Broadcast income is split into two elements, there are ‘solidarity payments’ from the Premier League (EPL). These were originally given as an act of benevolence by the EPL, but once clubs became accustomed to receiving the sums then strings were attached, such as the much loathed EPPP scheme.

Solidarity payments in League Two are about £450,000, rising to £680,000 in League One and then there is a big jump to £4.54 million in the Championship.

In addition, clubs receive money from the EFL deal with Sky. This is also skewed towards clubs in the Championship, who receive 80% of the total, with 12% going to League One and 8% for League Two.

There are additional sums received when clubs appear on live broadcasts.

Promotion from League Two therefore means that Stanley can expect to earn about an extra £350,000 of broadcast income this season, although the way that Sky and the EFL have agreed to stream all midweek matches (and weekend ones too on international breaks) may have a negative impact on attendances.

Academy grants work out at about £400,000 a year and are used to help subsidise the youth development setup.

Other income is mainly commercial deals with sponsors. Whilst the Premier League elite are regularly able to announce multimillion-pound deals with a variety of companies from despotic regimes, in the lower leagues clubs tend to strike deal with local businesses.

Stanley therefore have granted naming rights and now play at the Wham Stadium, who are also the shirt sponsors. George Michael fans will however be disappointed to find that Wham stands for What More Limited, the plastic box and household accessory company run by Andy Holt.

Whilst the figure has fallen substantially in 2018, this reflects that the club needed a financial injection in 2017 and WhatMore were able to help out that season.

According to the 2017 accounts WhatMore contributed £440,000 in sponsorship in 2017 and £300,000 the previous season.

Whilst Andy Holt likes to present himself as a grumpy Northerner who is not a football fan and only is involved with the club as a stop gap a few years ago to prevent it going bust, the extent of the sponsorship suggests that he’s fallen in love with the relationship between the club and the community and secretly has become a fan.

The advantage to a club of an owner investing money via sponsorship instead of lending is that should the club ever be sold the incoming owner does not have to pay off these debts.

Overall Accrington have managed to survive in League Two in terms of income generated. The budget for League Two this season appears to be based on cautious assumptions.

The Wham stadium has a capacity of just over 5,000, so suspect that when the likes of Sunderland come to play there will be a big scramble for away tickets.

Costs

That’s another fine mess.

The main costs for a football club are player related, and this is as much an issue for Stanley as it for Barcelona or Liverpool.

Stanley’s total wage bill for 2016/17 for all staff exceeded £2 million for the first time. This will have included promotion bonuses.

The budget for the upcoming season is about 9% higher, but, according to Holt, will be heavily impacted by bonuses again.

Stanley were hauled onto the EFL naughty step last season after an eagle-eyed pen-pushing dullard spotted that the owner was buying Big Macs, fish and chips for the squad on the way home from a successful away owner. Apparently, these ‘bonuses’ had not been agreed in advance in players contracts, which seems to take petty bureaucracy to a new level.

Under EFL Financial Fair Play (FFP) rules, now pompously called Profitability and Sustainability regulations, League Two teams can only spend 50% (60% in League One) of income on player wage costs under SCMP rules. Whilst Stanley’s total wage bill exceeds this sum, remember that the wage total in the accounts includes non-playing staff and bonuses, both of which are excluded from the calculations, so are likely to be within the FFP limits.

Having seen Stanley’s playing wage figure, the club is within the 50% and 60% limits for last season and the current one.

To give some context to the wage bill, the average cost of a single Premier League player works out at about £2.9 million a season compared to the total League Two wage cost of £2.2 million at Accrington.

The vast majority of clubs in League Two take advantage of legal loopholes to avoid showing their wage total, but a comparison to the clubs that do show their figure indicates that Stanley were very much towards the bottom of the bunch in this expense area.

Earlier in the summer Holt and Gary Neville were involved in a Twitter spat in relation to Salford City’s signing of Adam Rooney from Aberdeen, on a reported £4,200 a week. For a non-league club with no broadcast income it seems strange that such wages could be paid without huge losses being made. It would be great if Salford City were as transparent in their financial disclosures, over to you Gary!

Stanley will find it tough to compete on wages in 2018/19. Their budget of £2.35 million this season is means the club will have the lowest wage bill in the division by far. A screenshot of a cell phone screen with text Description generated with very high confidence

The other main player related cost is that of transfer fee amortisation. This arises when a player is signed for a fee, and this sum is then spread over the contract period.

Like many clubs in League Two, Stanley’s recruitment policy has historically relied on free transfers and loanees, although it appears that some clubs in the Premier League are now seeking prohibitive loan fees for their players which is making this recruitment prohibitive.

The budgeted figure of £26,000 for amortisation in 2019 suggests that manager John Coleman has kept with the majority of his squad and any signings will be for small fees.

Profits and losses

Hair was so much better in the 70's.

Profit is income less costs. There are a few different profit figures used when commentators talk about the subject, so it is always wise to check which profit definition is being described.

For a club such as Accrington a one-off event such as a good away cup draw or the sale of a player for a fee can have a sizeable impact on profit.

The above graph shows a profit measure called EBIT (earnings before interest and tax). Before taking into account player sales, the club lost about £7,000 a week in 2017/18, a big change on the previous season.

As has already been seen, wages taking up £83 of every £100 of income last season didn’t leave a lot of money to pay for the other running costs of the club so a loss was always likely.

Promotion to League One isn’t going to reverse that, as the anticipated increase in costs is likely to exceed any higher revenues.

The above shows the importance of youth development and scouting to identify players and sell them on for a profit.

The table above shows how profit looks after taking into account player sales. The losses in 2018 and expected losses in 2019 have been reversed.

In 2017/18 the sales of Matty Pearson to Barnsley & Shay McCartan to Bradford were the main fee earners. This summer Ipswich bought Kayden Jackson from Accrington to replace Martyn Waghorn, for a million pound plus fee, which will reverse the expected day to day losses.

Whilst player sales are often the lifeblood of lower league teams they are also never guaranteed and should be taken as bonus income rather than a regular source, and this seems to be the approach taken by Accrington. Player sales can have a huge impact on the club’s ability to pay wages, not only for playing staff, but also all the people behind the scenes.

Losses in League Two in 2017 appear to total over £16 million, with clubs on average losing about £13,000 a week. Accrington were one of a handful to make a profit, benefitting from the player sales already mentioned, as did Grimsby (sale of Omar Bogle for an estimated £1 million) and Wycombe, who earned about £1.8 million as a sell on fee when former player Jordan Ibe was sold to Bournemouth from Liverpool.

Borrowings

Many clubs survive through borrowing money. Most banks are reluctant to advance large sums to businesses that regularly lose money, and so instead borrow from either owners or companies linked to their owners.

Total debts in League Two were over £70 million, with over half of these relating to two clubs, Luton Town and Colchester United.

Accrington’s borrowings are relatively minor in comparison to those of some of their League Two competitors. The above table does show that running a lower league club involves the owner having to dip their hand in the pocket in one way or another, be it either lending, buying shares in the club, sponsoring or… (in case the EFL lawyers are watching) buying fish and chips after a match for the team if they’ve won an away match.

Summary

Whilst trying to put together League Two figures is a bit like making a jigsaw when you don’t have the picture on the front of the box, Accrington’s achievement last season in getting promoted is hugely impressive given their lowly income levels and accompanying tight wage budget.

Stanley’s wage budget will be the lowest in League One this season, Good management and a close-knit dressing room can overcome that financial deficit on the park. It’s unlikely that the club will stand in the way of any player who receives a more generous offer from another club too, so everyone stands to win in the present position.

It’s also good to see a local business seeing the impact that a club has on the local community. According to Holt about 15,000 people are directly or indirectly impacted by Stanley being part of the EFL, be they fans, suppliers, sponsors or people involved in schemes run by the club.

A football club is the heartbeat of many towns and cities up and down the country, and it’s great to see this ownership model do so well, especially given the number of scamps and scumbags who are owners who just see a football club as a vanity exercise or a means of extending a brand.

Data Set

 

Manchester City and Etihad Airways: Economy plus?

History

The 2007/8 Premier League season could not finish fast enough for Manchester City. The final match under Sven-Göran Eriksson was a nine-goal thriller at Middlesbrough, where unfortunately City conceded eight of them.

The club’s reputation at the time was that of the Keystone Cops of English football, a bunch of mavericks in blue where the wheels were always on the brink of falling off.

In those days their hated local rivals at Old Trafford looked upon City with mocking contempt rather than as an enemy, saving their true loathing for Liverpool and Leeds United.

Behind the scenes things were even worse. Whilst City fans were excited at the start of 2007/08 at the prospect of new Thai owner Thaksin Shiniwatra’s promises of big spending and success, an investment in the likes of Rolando Bianchi, Felipe Caicedo and Elano didn’t prove to be successful, and the money from the new owner came from unreliable sources.

City borrowed £46 million in the one year of Shiniwatra’s ownership. Whilst borrowing money has some benefits, these loans came at a price, as City’s interest costs more than doubled to £10.7 million.

The acquisition of the club by Sheik Mansour in September 2008 saved City in more ways than one, as by this stage Shiniwatra had more pressing issues to deal with in the form of corruption charges from his homeland, and he disappeared from the scene with few regrets from City fans.

Mansour transformed City, with an initial scattergun spending policy on marquee signings such as Robinho and an audacious attempt to sign Kaka. At this time transfer fees and wages were an irrelevance to the owners.

This impacted upon City’s financial performance, which moved from a profit of £17 million in 2006 to a loss of £190 million in 2011.

These losses were sustainable because Sheik Mansour was willing to underwrite the losses through a combination of interest free loans and shares. Had FFP rules been in existence at the time then the investment would not have been possible. This allowed the Abu Dhabi owners to pump nearly £1.2 billion of cash into the club.

The threat to the Elite

The owner’s huge investment startled the existing elite of European football, who now saw City as a potential threat to their cartel at the top table of UEFA competitions.

These established clubs put pressure on Michel Platini, the UEFA president, to introduce some method of reducing the rise of ‘new money’ clubs such as Chelsea, City and PSG.

After much internal haggling and huge amounts of money being spent on accounting and legal fees by UEFA, Financial Fair Play rules relating to non-payment of transfer fees were introduced in 2011-12, and then extended in the 2013/14 season in the form of a breakeven model.

The rules are now so complex that the latest version takes up 116 pages of legal and accounting pontification and windbaggery.

UEFA claim that FFP can be summarised in one sentence “Financial fair play is about improving the overall financial health of European club football”.

We would describe that one sentence in one word, and that word is ‘Bollocks’. Businesses go bankrupt due to a lack of cash, not profit, which is an arbitrary accounting concept open to sleight of hand, estimates and manipulation.

The initial rules restricted clubs’ losses to €45 million over three years ending in that period, and then €30 million from 2015/16.

How does it work?

A breakeven model calculates losses as income less expenses. Clubs have three main sources of income, matchday, broadcasting and commercial.

It’s difficult (but not impossible) to manipulate matchday income, which is the number of tickets sold multiplied by the ticket price, and the same is true for broadcast income, which is negotiated and distributed centrally by individual leagues and UEFA itself.

Commercial income is different as represents deals signed by clubs and their business partners. The prices for these deals are open to negotiation.

In the years prior to the Abu Dhabi takeover City’s commercial income was far less than their rivals from Old Trafford, whose ability to negotiate deals on the back of the popularity and success brought by Sir Alex Ferguson was ruthlessly exploited by United’s American owners.

This is where eyebrows have been raised in relation to Manchester City. Etihad Airways, the national airline of Abu Dhabi, replaced Thomas Cook as shirt sponsor in 2009. This had an immediate impact on City’s commercial revenues, which increased by 126%.

In 2011 the Etihad deal was expanded to include naming rights for what had been previously known as the City of Manchester stadium, (less affectionately called the Council stadium by United fans, due to City renting it from the local government authority) which became the Etihad stadium, along with surrounding training facilities called the Etihad campus.

The agreement was for ten years, at an estimated value of £400 million, which included shirt sponsorship as well as the naming rights.

At the time the largest fee for naming rights was £2.8 million a year by Arsenal for the Etihad. Other clubs had tried and failed to secure high value sums from sponsors. Newcastle United had to accept two dozen pairs of Donnay socks and a signed Dennis Wise photograph as St James’ Park was briefly renamed the Sports Direct Arena, the main company controlled by owner Mike Ashley.

The accusation levelled at City is that the Etihad deal has been used to reduce the club’s losses and help it in satisfying FFP rules.

Because of the Etihad deal City’s commercial income initially matched that of United but has subsequently fallen behind as their rivals have managed to partner themselves with everyone from Japanese Tractor partner Yanmar to mattress partner Milly, although the latter may prove useful as Jose Mourinho’s tactics send United’s global fanbase to sleep.

City’s partnership with Etihad does however mean they have the second highest amount of commercial income in the Premier League, and the fifth largest of any football team globally.

 

Such was the extent of the Etihad deal that there were accusations of ‘financial doping’ from the likes of Arsene Wenger.

UEFA had tried to minimise the impact of deals signed by clubs with organisations connected to the owners through ‘related party transaction’ rules. A related party is one that is controlled by the club owner or a close relative.

In addition, UEFA have set up a Club Financial Control Body (‘CFCB’), the Supermen and Superwomen of financial investigations, effectively a group of accountants so powerful they wear their underpants over their trousers, to ensure that clubs do not overstate the value of commercial deals.

City tried to set up their deal with Etihad in such a way that it complied with the FFP rules, but such were their losses were put on the FFP naughty step in 2014, with the following penalties

  • A £49 million fine, part of which was conditional on improving the club’s business model. City duly received a rebate of two thirds of this sum.
  • An agreement to not increase the wage bill (excluding bonuses) for two seasons
  • A squad reduction for UEFA competitions from 25 to 21 players
  • A reduction in the amount spent on player signings, limited to a net £49 million spend.

City managed to comply with the sanctions and kept their wage bill, which had been £36 million before Shiniwatra in 2007 and zoomed to £233 million by 2014, in check until UEFA were satisfied that the breakeven target was being achieved. This coincided with Pep Guardiola’s arrival and gave City more wiggle room.

PSG were given a similar fine, in what was seen as a victory for the existing elite of European clubs.

Clubs can however dispute any rulings by the CFCB, and this is likely to trigger a long and expensive legal action, where the winners will be the accountants and lawyers.

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In 2015, under pressure from, you guess, a series of lawsuits from unhappy club owners, UEFA relaxed the FFP rules, allowing clubs to negotiate a voluntary deal althgouh this does involve an eventual breakeven target

Summary

The City and Etihad partnership was borne to an extent out of necessity on the part of the club, to satisfy UEFA FFP rules. If the value of the deal initially was excessive given the global position and reputation of City in 2011, then today, with the club having won the Premier League three times since Sheik Mansour acquired the club, the £400 million deal, which has been renegotiated since its original signing, is probably about right, and some even claim it is below the market rate, for Pep Guardiola’s team in the current market.

 

Newcastle: Opportunity Knocked

Introduction

Regular reference is made about the ‘Big Six’ clubs in the Premier League and the disproportionate amount of wealth, transfer spend and media exposure that they generate.

These clubs (Manchester United and City, Spurs, Arsenal, Liverpool and Chelsea) seem to have created a glass ceiling which is almost impenetrable to break (with the notable exception of Leicester in 2015/16 as they jostle for Champions League (CL) positions, having taken 60 out of 62 places in the CL since 2004/5.

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One of my chums on Twitter, called @TheGingerPirlo_ , asked about Newcastle United, a club who had been successful in the early 2000’s, and an assessment of Mike Ashley’s reign of terror, misery ownership on Tyneside compared to what has happened at Spurs during the same period. Should Newcastle have been one of today’s ‘Big Six’ instead of Spurs?

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The guv’nor of football finance, Kieron O’Connor at the Swiss Ramble, has already given his always brilliant assessment of the two clubs’ monetary performance and position on Twitter, but here’s further analysis for those who want any additional information.

Ashley acquired control of NUFC on 15 June 2007, after initially acquiring 41% of the club the previous month.

On that momentous day Rihanna (and Jay Zed) were number one in the pop charts with Umbrella, Tony Blair was prime minister and still reasonably popular, Sid the Sexist in Viz was a virgin and Michael Owen was Newcastle’s record transfer signing…some things haven’t changed since then.

Spurs’ record signing at the time was Dimitar Berbatov, a signing that has since been exceeded 18 times.

Finances pre Ashley

In the eleven years prior to Ashley taking over Newcastle, the club’s league position compared to that of Spurs was as follows.

Newcastle’s average league position was 8th, compared to that of Spurs’ 10th, and the Toon had had four top four finishes during that time period, whereas Spurs highest finish was 5th. Newcastle finished above Spurs on seven occasions during the period in question.

Since Ashley took over, the situation has reversed.

Newcastle have finished below Spurs in each of the 11 seasons since Ashley took over, with an average position of 14th, compared to 5th for Spurs.

When Ashley acquired Newcastle, the key financial figures for both clubs for the previous year was as follows:

Income

Spurs overall had revenue of £103 million compared to £87 million for Newcastle. The main reason for this was that Spurs had a higher league finish coupled with decent cup runs (UEFA Cup QF, League Cup SF, FA Cup QF) as well as the attraction to commercial partners of being based in London. Newcastle’s additional capacity at St James’ Park meant that they had an advantage in terms of matchday income. The retirement of Alan Shearer and a major injury to Michael Owen meant that Newcastle had a relatively poor season on the pitch.

Costs

The main operating costs for a club relate to players in terms of wages and player amortisation (transfer fees spread over the contract term, so Berbatov signing for Spurs for £11 million on a four-year contract works out as an amortisation fee of £2.75 million a year).

This may cause Newcastle fans to drop their bacon sandwiches (this is of course less likely to be an issue for Spurs fans) but in 2006/7 their club’s wage bill was 43% higher than Spurs at £62.5 million. There was little difference in the amortisation charge.

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Spurs therefore only spent £42 in wages for every £100 of income, whereas for Newcastle it was £72.

Spurs had a successful time in the transfer market and made a profit on player sales of £18.7 million, mainly due to the sale of Michael Carrick to Manchester United, whereas Newcastle lost £1.9 million.

Newcastle also had a number of additional expenses that year. The sacking of Glenn Roeder cost £1.1 million in compensation, the takeover by Ashley led to a number of directors leaving the club, which added a further £2.2 million to expenses, and £2.9 million in relation to some aborted takeover bids and financing a stadium expansion took one off costs to £6.1 million. This was however offset by a £6.7 million compensation claim against FIFA and the FA relating to Michael Owen suffering an ACL injury in the previous year’s World Cup.

What is clear is that Spurs, under the astute leadership of Daniel Levy, controlled their costs well and this meant that the club was profitable, unlike Newcastle, where the Hall/Shepherd era was coming to its final throes, which made losses under practically every performance measure.

Profits/losses

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Of the above profit measures, we believe that EBIT and EBITDA are the most relevant ones, as they exclude one off transactions such as profits on player sales and compensation for sacked managers. Spurs were making broadly £30 million more than Newcastle in 2006/7 under both these measures, so Ashley was inheriting a club that whilst it had been more successful on the pitch in the previous decade compared to Spurs, had some warning signs in its finances.

The Ashley Years: 2008-17

Income

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Newcastle continued to have an advantage in terms of matchday income for the first two seasons under Ashley, but relegation in 2008/9 reversed this picture and Spurs have reinforced this ever since. This is mainly due to participation in UEFA competitions, combined with increasing prices for matchday packages as White Hart Lane is a popular destination for football tourists.

In 2006/7 Spurs generated £863 per matchday fan per season, compared to £608 at Newcastle. By 2017 Spurs had increased theirs to £1,433 per fan, helped by four matches at Wembley in the Champions League & Europa Cup. Newcastle, playing in the Championship made only £458 per fan, as the likes of Burton and QPR were clearly less attractive than Monaco and Bayer Leverkusen.

With Spurs new stadium coming on stream in 2018/19 at eye watering prices, and another year in the Champions League, expect the gap here to grow even further.

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Broadcast income was neck and neck between the two clubs in Ashley’s first year of ownership, but again relegation in 2009 changed the dynamic between the two clubs and that has been magnified ever since by Spurs.

With BT Sport paying huge sums for Champions League rights, along with approximately a £2m increase per domestic place in the Premier League, Spurs are likely to generate £100 million a year more from broadcasting than Newcastle as long as they continue to qualify for Europe.

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In terms of commercial income, Spurs have a geographical advantage due to being London based, and therefore more appealing than Newcastle to global brands and partners. Newcastle have suffered too due to the Sports Direct and Wonga factors. Other sponsors are reluctant to be seen alongside the logo of the carrier bag of choice of those who like to wear velour onesies and use payday loans to fund their daily purchases of wifebeater from Bargain Booze.

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Spurs generated total income of £616 million in the decade before Ashley arrived, compared to £709 million for Newcastle.

In the decade since Ashley took control, the reversal is depressing for Toon fans. Spurs income has risen 175% to £1,696 million whereas Newcastle’s has increased only 39% to £986 million, representing a huge lost opportunity.

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Costs

Spurs have overperformed in terms of on the field performances compared to the wages they pay. The other ‘Big Six’ clubs pay substantially more, so it is credit to the negotiation skills of Daniel Levy in agreeing wages with staff that are lower than that of Spurs peer group (except for the pay of the highest paid chief executive in the Premier League…Daniel Levy, who earned £6m in 2017/18)

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In Mike Ashley’s first season as owner Newcastle’s wage bill was 32% higher than that of Spurs. His reluctance to invest in players (and pay them accordingly) as new TV deals were agreed resulted in a reversal of this situation, even when compared to the relatively parsimonious (compared to the rest of the Big Six) wage levels being paid at White Hart Lane.

Overall Ashley has paid out a beastly £666 million in wages over the decade compared to £950 million at Spurs. You pay peanuts, you get Xisco, Titus Bramble and Stephane Guivarc’h…and relegated twice.

At the same time Spurs have keep their wages relatively low compared to income, but by boosting income levels it allowed them to increase the wage total.

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The same reversal of spending had arisen in relation to player amortisation.

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Ashley’s reluctance to invest in the transfer market is very evident. There was a £3m difference between the two clubs in the year before he took over, but since then Spurs have had a total amortisation charge of £364 million, nearly twice that of Newcastle’s £192 million.

If clubs fail to invest in player recruitment, then this has a knock on effect when it comes to selling players at a profit.

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Spurs have benefitted from signing the likes of Modric and Bale and then selling them to Real Madrid, but they were prepared to invest in the first place. Newcastle, by rummaging around the bargain bins on a more regular basis, were more likely to struggle to make a return on those players as many failed to make the grade. Overall Spurs have made a profit of £324 million whereas Newcastle have only made £180 million.

One area where Newcastle have benefitted from Ashley’s ownership is that he paid off the club’s loans and lent the club money interest free. This has resulted in Newcastle only paying £8 million in interest over the decade compared to £55 million at Spurs.

The downside of this is that because it is his own money he had been lending, Ashley has been overly cautious in financially supporting the club once his initial enthusiasm waned.

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Spurs have borrowed money most years, and this has been used to fund infrastructure projects as well as the transfer market. Under Ashley, Newcastle have borrowed a net £4 million in the last 7 years, and this was mainly in 2016/17 as the owner needed the club to return to the Premier League to have a chance of selling it for his desired price of £400 million.

Transfer Market

Both clubs have a reputation for caution in the transfer market and this is reflected in the figures. Newcastle have outspent Spurs in terms of recruitment three times in the last decade (and this is likely to be repeated in 2018/19 too), but overall Spurs have spent £564 million in the period compared to just £331 million by Newcastle.

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Net spend is a topic that gets many Newcastle fans into an anti-Ashley frenzy, and here they have some justification.

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In the first eight years of Mike Ashley’s ownership, there was a net overall spend of just £5.6 million, whereas Spurs net spend was £81 million, despite the sales of Bale and Modric.

Summary

First of all credit should be given to Spurs for having a plan, they wanted to move to the next level in the Premier League, and through excellent recruitment and good cost control they’ve managed to become a club that is expected to challenge for UEFA cup competitions each year.

Ashley’s ownership of Newcastle is baffling. If he wanted to make a fortune by selling the club at a healthy profit, then refusing to invest in the assets that generate the best return, in the form of players, has come back to bite him in the bum.

When he acquired the club in 2007 it was in a prime position to challenge for the top four regularly. Whether he took the eye off the ball (Daniel Levy’s investment in Spurs is 24/7) due to the other elements of his business empire, or a belief that his successful methods in running his retail empire could be transferred to a football club, is unclear.

With the Big Six clubs being worth at least £1 billion each, and Ashley hawking Newcastle around for about £350 million, his period of ownership has cost him hundreds of millions due to his focus on spending as little as possible to keep the club in the Premier League instead of one of ambition on the pitch.

The last decade has been a lost one for Newcastle, and the problem is it is a situation that cannot be seen to be reversed under the present management, and even a new owner, given the wage constraints of the Premier League’s STCC rules which are aimed at reinforcing the status quo in terms of the Big Six, will face an almost impossible task at breaking through the glass ceiling.

The Ashley Years Table

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QPR FFP Fine: Everything Counts in Large Amounts

Imagine someone stealing £170 million from you, and the culprit eventually is fined a tenth of that sum having spent all the money elsewhere. That’s how Derby County and their fans are feeling following the EFL Financial Fair Play verdict against QPR.

On 24 May 2014, in the 90th minute of the Championship play off final against Derby County, (Sir) Bobby Zamora scored the only goal of the game to achieve promotion for Queens Park Rangers.

Had QPR complied with FFP properly, it is highly unlikely that Zamora would have been part of the QPR team, after the club was relegated the previous season from the Premier League, along with the likes of Rob Green, Joey Barton, Nedum Onuoha on big wages from the higher division.

In 2013/14 QPR signed players of the calibre of Charlie Austin, Danny Simpson, Richard Dunne, Gary O’Neill and Matt Phillips, as well as Niko Krancjcar, Ravel Morrison, & Beoit Assou-Ekotto on loan, as Harry Redknapp did what Harry Redknapp does best with a large amount of someone else’s money.

That season QPR’s wage bill was £195 for every £100 of income the club generated, even though the club earned over £28 million in parachute payments, having been relegated in 2012/13.

The wage bill of £75.4 million was only £3m less than that of the previous season in the Premier League. It works out as an average wage of £39,000 a week. The average total wage bill that season for the other 23 clubs in the Championship was £19 million, a quarter of that of QPR.

QPR’s accounts for 2013/14, published in November 2014, revealed that QPR Holdings Ltd made an operating loss (which is income less the day to day costs of running the club) of over £65 million, which works out at £178,000 a day, whilst in the Championship for 2013/14.

So what about Financial Fair Play (FFP), the rules which were supposed to prevent clubs from spending too much money on players and wages?

Under FFP rules for that season the maximum loss allowed by a Championship club was £3 million, or £8 million if the owners put made up the difference. Clubs that broke the rules were either subject to a transfer embargo (which has impacted the likes of Leeds United, Blackburn Rovers and Nottingham Forest in that division) or if promoted to the Premier League an FFP Fine/Tax is payable, with the proceeds going to charity.

Under EFL rules the fine was based on a sliding scale until losses exceeded £10 million above the FFP limit (which works out as a £6.7 million fine) and then 100% of the losses above this amount

Under these rules we estimate the QPR FFP fine would have been something along the following

Operating loss (65.2)
Add back allowable expenses
Promotion bonuses (estimated) 10.0
Infrastructure costs 1.3
Academy/community (estimated) 4.0
FFP loss (49.9)

This works out as an estimated fine of about £46 million.

The QPR approach was initially one of creative accounting. The owners wrote off £60 million of debt due to them by the club, and this was offset against the losses in the profit and loss account, meaning that in the eyes of the club the loss was only £9 million and that there was effectively no FFP tax to pay.

We’ve argued since day one of FFP that for most rules there are loopholes, accountants and lawyers are well practiced at finding them, and this was phase one of QPR owners’ attempt to avoid any penalties.

This approach was presumably rejected by the EFL, as it makes a mockery of the rules, which were aimed to preventing owners trying to buy promotion through their personal wealth.

QPR’s owners include Tony Fernandes (estimated wealth $745 million), Ruben Gnagalingam ($800 million)  and Lakshmi Mittal ($18.6 billion) then took a different approach, seemingly taking the view that rules applying to other clubs were beneath them.

There was no reference to FFP in the 2014 accounts, but a year later, hidden away in the footnotes, was a reference to QPR challenging the legality of the FFP rules.

Since then, not a lot has happened, apart from time passing, and the advisors on both sides clocking up huge sums in fees as they argued over the small print.

Dragging out a ruling is a classic ploy, raising petty objections (arguing over what constitutes allowable expenses for FFP purposes, or which of the Tellytubbies would win in a fight*) and requesting further information that they know will take time to produce, with the sole aim of delaying any potential decision, and therefore payment, hoping the other side loses the will to keep on fighting and will settle for a smaller sum.

I have a mate who is a tax accountant in Swansea. If he knows a client is likely to have to pay more tax he writes an appeal letter in Welsh, as he knows there are a relatively few people who speak the language at HMRC, and so it will take a long time to reply, which will drag out the time until payment is made. If a rebate a due, he writes in English at it elicit a speedier response.

Sources close to the events advised PriceOfFootball.com a couple of years agao that a compromise deal was likely, with QPR likely to pay a much reduced fine, and both sides would claim a victory.

Rumours were that at EFL board meetings where the matter was being discussed the members became so nervous that no minutes were kept on the topic, for fear of this being used by the opposition to further find minor points to quibble about (at £1,000 an hour in fees probs).

An independent arbitration panel was created, with both parties seemingly committed to agreeing to the final decision

In October 2017 the arbitration panel published their decision, ruling against QPR and fining them £40 million, who instantly appealed to further delay any cash beng paid over (thus allowing their lawyers and accountants to upgrade from Range Rovers to Maserati brochures), dragging out the process again.

The ruling had consequences for Leicester and Bournemouth too, who had initially piggybacked on QPR’s claim that FFP was illegal. Both clubs settled with the EFL earlier this year and agreed to pay fines of £3.1 million and £4.7 million, less than had been initially forecast.

We now have the final ruling, after a carefully worded press release from EFL, the main points being:

  • QPR have dropped their objection to the previous ruling
  • QPR fined £17 million as an FFP Tax but it being paid in instalments over ten years.
  • QPR have transfer embargo in the January 2019 window
  • QPR pay EFL’s legal costs of £3 million (plus presumably their own costs too).
  • QPR owners convert £21 million of debt into shares.
  • The FFP fine will be excluded from QPR’s losses when calculating the 2018/19 figures.

Is this a fair settlement?

As a result of being promoted, QPR earned £148 million in broadcasting income and parachute payments between 2014/15 and 2017/18. Derby fans will no doubt take the view that this money could have ended up in the coffers of their club had QPR not flouted the rules.

The debts of QPR to the owners were effectively worthless as the club has no means of paying back the owners, so converting one piece of junk paper in the form of debt to another in the form of shares is accounting sleight of hand, no more than that.

The above table shows that prior to the ruling, assuming the club was worth £100 million (which is generous) then the loans due to the owners were last valued at £52 million, meaning their shares were worth £48 million. The total due to the owners if the club was sold would be £100 million.

By converting £22 million of loans into shares, the debt figure falls, and is offset by an increase in the value of the shares. The total value of the owners’ investment is still £100 million.

The aim here is simply to make the headline fine in the media reports appearfar larger than it is in reality. The press release is as best disingenuous , assumes that all football fans are financially illiterate and will swallow the headline figure of 

Charities that could have received £41 million in the FFP tax, (and there has been discussion from QPR fans, rightly, that Grenfell survivors should be top of this list) will now receive £17 million, which, as some will not be received until 2027, is far lower than even this amount in reality.

If, as is rumoured, the £17 million fine is being paid over ten years, and using an imputed interest rate of 7.4% per year (which, according to HSBC, is their small business loan rate), then sticking the figures into a nerd calculator (see below) shows that the cash cost of the fine to QPR is the equivalent of £9.46 million being paid by the club in 2014 as a fine.

The interest rate chosen is by the way far lower than the interest rate which is being charged by QPR owners themselves of 1% a MONTH on some loans , and 2% a MONTH on others.

The comments from Shaun Harvey that ‘the board was conscious that the financial burden placed on the Club was manageable so as not to put its future in doubt’ is best filed under ‘bollocks’.

Tony Fernandes has previously stated that he was committed to the club irrespective of the decision, and he and his partners certainly have the resources to pay the fine and could have put the cash into the club in the form of shares or a loan to do so if they wished.

If you look at QPR’s accounts for recent years, the club borrowed £222 million, mainly from the owners, between 2013-17.

So there would appear to be little reason, apart from sulkiness or a loss of interest in the club, why the owners could not have invested a further £41 million either in shares or interest free loans to allow the correct amount of the fine to be paid.  The claim that by spreading the fine over ten years will allow the club to avoid administraction is yet another smokescreen.

As for the transfer embargo, the club has sufficient notice to accelerate signings by a few months. The terms of the embargo are more on the lines of  one player in and one player out rather than an inability to sign anyone. So this is a light tap on the wrists, along with the rest of the ruling.

Sadly, if you’re a Derby fan, as far as the EFL is concerned, grab your ankles.

For other clubs thinking of showing two fingers to the rules, the EFL has shown as much backbone as a jellyfish.

*Tinky-Winky, anyone who says different is clearly insane.