Middlesbrough 2017/18: Babylon’s Burning

Does this man manscape?

To attempt promotion to the Premier League is an expensive business as revealed when Middlesbrough submit their accounts to the government registrar for the 2017/18 season and reported a £20.2 million operating loss

Only the receipt of parachute payments and some player sales prevented these losses from being too damaging for Boro, who are fortunate to have a benevolent owner in Steve Gibson to fund the club’s operations.

Key Financial Highlights for year ended 30 June 2018

Turnover £62 million (down 49%)

Wages £49 million (down 25%)

Pre-player sale losses £20.2 million (2016/17 profit £10.3 million)

Player sale profits £15.3 million (up from £11.3 million)

Player signings £66 million (up from £48 million)

Income

Nearly every club in its accounts splits income into three categories to comply with EFL League recommendations, matchday, broadcasting and commercial.

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Year on year Middlesbrough’s matchday income fell by 18% last season to £7.1 million.

Premier League attendances averaged 30,499 and this fell to 25,544 in the Championship despite Boro having a relatively successful season and reaching the playoffs before losing to Villa.

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Until parachute payments run out Middlesbrough are not hugely dependent upon matchday as an income source, as it only represents one pound out of every nine generated by the club last season.

Losing its Premier League status was a blow for the club and the town last season and being relegated in the first season after promotion means that Boro only are entitled to parachute payments for two seasons instead of three as would have been the case had they avoided relegation.

Income for clubs in the Championship from matchday varies depending upon ticket prices, attendances and the number of corporate seats each club is able to sell, with the likes of Villa and Leeds having an advantage in the latter two categories.

Such is the magnitude of the Premier League TV deal that Middlesbrough received over £41 million from parachute payments out of total broadcast income of £46.3 million in 2017/18.

Having another parachute payment this season will generate about £35 million, but Boro are promoted they will then revert to the EFL deal with Sky, which is worth about £2.3 million a year plus a £4.3 million ‘solidarity’ payment from the Premier League, this can then be topped up by £100,000 for each home fixture and £10,000 if the club are playing away if chosen for live broadcast.

A lot of clubs in the Premier League are reliant on the BT/Sky deal for the majority of their income and Boro are no exception, even in 2017/18 TV was still providing three-quarters of their revenue.

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So, looking at the Championship as a whole it appears that parachute payments have created a two or three tier division, with those clubs who have just come down earning the most and then this tapers for those who have been relegated for two or three seasons.

Getting commercial partners to sign up for deals is more difficult in the Championship than the Premier League as sponsors prefer to see the names of their products when a team is playing Liverpool or Manchester United compared to Barnsley or Burton.

In Boro’s case commercial income fell nearly 30% to £8.6 million, which is less than two seasons previously when the club was promoted to the Premier League, although there may have been promotion bonuses paid that season.

Nevertheless, commercial deals can be significant and Boro are earning over £170,000 a week from such arrangements, which puts them into the top half of the table in the Championship sponsor-wise.

Growing commercial income is the best way for a club to increase overall income as broadcast income is negotiated centrally and matchday income can only go up if prices are raised (not popular with fans) or ground capacity increased (time consuming and expensive).

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Earnings overall halved last season to £62 million and will fall by about a further £10 million in 2018/19 as parachute payments decrease, before returning to the £20m a year level unless ‘Boro are successful in being promoted by May.

Costs

Player costs

Running a football club is an expensive business and Middlesbrough’s main costs, like those of nearly all clubs, were in relation to players, in two forms, wages and amortisation.

Paying players a competitive wage is a challenge as owners and fans want promotion and to achieve that means acquiring top talent in an industry where small improvements in the quality of players doesn’t come cheap.

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Usually when clubs are promoted they give players improved contracts with relegation clauses should the worse happen and Middlesbrough appear to have applied this principle to a degree as wages fell by a quarter in 2017/18.

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Boro players still earned an average of £23,000 a week from our formula (we have no inside knowledge so this is an educated guess) as the club invested heavily in new signings as owner Steve Gibson tried to recruit players to help the club bounce straight back to the Premier League.

Earning so much from parachute payments meant that Middlesbrough ‘only’ paid out £79 in wages from every £100 of income last season, which is low by Championship standards, although this could rise substantially in 2019/20 should they fail to be promoted, unless there is a major clear out of highly paid players.

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Sanity is in short supply in the Championship when it comes to wage control, with the division overall paying out £101 in wages for every £100 of income and Birmingham last season under I’m A Celebrity favourite Harry Redknapp somehow paying out twice that sum.

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 Middlesbrough signed Britt Assombalonga from Forest in the summer of 2017 for £15 million on a four-year deal, this works out as an annual amortisation cost of £3.75 million (£15m/4). The amortisation cost in the profit and loss account represents the total for all players signed for fees in previous seasons.

Middlesbrough’s total amortisation surprisingly increased in 2017/18 compared to their season in the Premier League due to the club investing heavily in buying players in a bid to achieve owner Steve Gibson’s desire to ‘smash the league’ and ‘go up as champions’.

Consequently ‘Boro have the highest amortisation total of any club in the Championship for last season, although this could be overtaken when Villa eventually publish their results. Even so it is clear that Gibson has backed his managers in the transfer market.

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Adding amortisation and depreciation together gives total player costs for Boro of £118 for every £100 of income.

Profit

Profit is income less costs, but it contains lots of layers and estimated figures. Middlesbrough, 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.

Despite the benefits of parachute payments Middlesbrough lost nearly £100,000 a week last season using this measure, although it is far lower than when the club previously was in the Championship.

Total operating losses in the Championship in 2016/17 were £260 million, so Middlesbrough’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 Middlesbrough’s financial success here is profits from player sales. The likes of de Roon, Rhodes and Ramirez were sold and this helped to reduce the losses to tolerable levels for Steve Gibson.

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).

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For Middlesbrough this was a loss of nearly £400,000 a week in 2017/18, despite the benefits of parachute payments.

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.

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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.

Middlesbrough’s EBITDA profit was £7.1 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. This suggests the club was making money which could then be invested in player transfers.

Once trading costs have been paid, many clubs also have to pay interest on their borrowings, which cost Boro £30,000 a week in 2017/18.

Player Trading

Middlesbrough spent £66 million on new players in the year to 30 June 2018 as the club recruited Assombalonga, Braithwaite, Fletcher, Howson, Randolph, Shotton, Christie and Johnson in multi-million pound deals.

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.

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Steve Gibson did bankroll a net spend of over £20 million which showed his faith in the managers, although Boro fans might question the quality, if not the quantity, of the recruitment.

The player recruitment does seem to have been funded on credit though, as amounts owing to other clubs increased to over £56 million, compared to just £1.5 million in 2013.

In the footnotes to the accounts it shows that the big spending on 2017/18 has subsequently been reversed as the club had net income of £27.7 million in summer 2018 from selling Traore and Gibson.

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. Historically Steve Gibson has lent ‘Boro over £93 million as well as about £90 million in shares, although this did not increase during 2017/18. Instead it looks as if the club bought most of its signings during the season on extended credit terms, which will result in significant payments being made for them over subsequent years.

Summary

Middlesbrough went for broke in 2017/18 in trying to immediately return to the Premier League. The failure to achieve this objective has resulted in cost cutting in the present season but if the club is not promoted this season there will be a tough challenge ahead as income will halve again likely to lead to a player exodus to balance the books unless Steve Gibson is willing to invest substantial amounts of cash once more.

Sheffield United 2017/18: Geisha Boys & Temple Girls

Introduction

Championship finances are the most mind numbing in any division in the professional game and Sheffield United have just produced their accounts for 2017/18.

Having to compete against clubs with the benefit of parachute payments as well as some with rich benefactors means that wages are high, and losses are common.

Relative to other clubs in the division was always a tough task but a seaason of consolidation in 2017/18 has been the platform for potential promotion in the current season.

I must confess to always liking Sheffield United as when I was a kid their Admiral kit was the one in the catalogue that looked cooler than a strawberry Mivvi and they had the magnificent Tony Currie playing for them.

Sheffield United’s finances showed the odds against which the club has had to struggle but a good manager and a goalscoring machine in Billy Sharp have helped keep the club competing in the Championship.

ey Financial Highlights for year ended 30 June 2018

Turnover £20.0 million (up 76%)

Wages £19.0 million (up 90%)

Pre-player sale losses £10 million (up 30%)

Player sale profits £8.4 million (up from £2.7 million)

Player signings £3.9 million (up from £3.1 million)

Income

Winning promotion to the Championship in 2016/17 meant that Sheffield United, like all clubs who went up, had access to potentially higher income sources from the three main activities, matchday, broadcasting and commercial.

Income from matchday rose by 34% to £8.7 million mainly due to average attendances rising from 21,892 to 26,854 as a combination of the attractiveness of Championship football, local derbies against Wednesday and Dirty Leeds and many away teams bringing full allocations.

Local rivals also have decent matchday income by Championship standards but the Blades figures for a side that has not been in that division for six years suggests the club has a very solid fanbase that is likely to sell out Bramall Lane should they be promoted to the Premier League (note figures are for 2016/17 unless clubs have published their totals for last season, which explains why there are some teams in the table who are now in other divisions).

Due to the Championship being on Sky Sports on a far more regular basis than Leagues One and Two, broadcast income quadrupled last season as the EFL TV deal is split 80%/12%/8% between the three divisions.

Every club in the Championship receives a solidarity fee from the Premier League (about £4.3m) a flat sum from the EFL from their Sky deal (about £2.2m) plus a ‘facility fee’ of £100,000 for a home match and £10,000 for an away match for those which are chosen for live broadcasts.

Relegated teams from the Premier League also receive parachute payments of between which completely distort the relative income of clubs in the Championship, this is estimated to be worth about 7 points a season to clubs in the first year of receiving such parachutes.

Income from ‘other’ sources is mainly from commercial deals, retail/merchandise and for some clubs conferencing/events, this showed a modest 7% rise for the Blades last season.

Sheffield United are in the bottom quartile of the Championship when it comes to other income and this is something they will no doubt try to grow if they are successful in the Championship and beyond as sponsors like to be associated with top division sides due to the high television profile.

Having the benefits of being in the Championship means that Sheffield United had a much more balanced split of income from the three sources compared to the previous year but there is clearly an opportunity to increase the ‘other’ stream.

Unlike those in receipt of parachute payments, Sheffield United have to budget for income in the £20 million bracket with a number of similar sized teams and this means that it is tougher, but not impossible, to be competing at the top of the Championship.

Costs

Nowadays the most significant costs for a club are in relation to player wages and transfer fees and here Sheffield United had some advantages and some disadvantages having come up from League One the previous season.

Going up resulted in a 90% rise in wages as many players who were responsible for promotion to the Championship were awarded enhanced contracts as well as the Blades having to offer more money when recruiting in 2017/18 to ensure the wages they offered were competitive for the division.

Leeds’s relatively low wage bill may surprise many but there is a significant difference between those clubs such as Sheffield United and those that still benefit from parachute payments with many players reluctant to move and take a pay cut.

Income for nearly all clubs in the Championship barely covers wages and this is true too for Sheffield United who paid out £95 in wages for every £100 of income.

Keeping wages under control when there is a potential £100-120 million a year windfall in the Premier League from TV income is very difficult to resist and this explains why some clubs gamble in terms of their wage bills even if it runs the risk of breaching FFP limits, which restrict losses to £39 million over three seasons.

Every player signed for a fee also adds to costs in the profit and loss account via transfer fee amortisation, which is calculated by dividing the amount paid over the contract period. So, when Sheffield United signed Richard Stearman for an estimated £900,000 on a three-year deal this works out as a £300,000 amortisation charge each year.

Amortisation for Sheffield United was broadly similar to that of the previous season in League One which may be reflective of boardroom struggles at the club and owners who were reluctant to spend large sums on players.

High amortisation fees reflect those clubs that have had a long-term investment in recruiting players on big transfer fees and once again those clubs who are in receipt of parachute payments have an advantage here as they have more income to spend on players and also have transfers from when they were in the Premier League.

Other costs, including the likes of rent (£360,000) electricity, marketing, transport and insurance increased by 30% to £8.4million, reflecting the extra burden that clubs incur in the Championship.

Profits

Reference is oftern made to profits when discussing club finances but you have to be careful as there are as many types of profit as there are opening batting combinations for the England cricket team.

Subtracting expenses from income gives a profit figure, but some expenses are erratic in nature and sometimes excluded when trying to determine a club’s underlying financial health for the season.

Each profit figure shown has a slightly different view of the club and they are best considered together to highlight those costs which are significant.

The simplest profit is to deduct all day to day costs from revenue, before considering borrowing expenses, and this is called operating profit. Here Sheffield United made a relatively low loss of £1.7 million last season.

A look at the above figures shows there has been much volatility in relation to profits and losses from year to year. This is mainly due to one off transactions which distort the numbers, such as profits on player sales and in the case of Sheffield United in 2014 a £34.5 million loan being written off.

Most analysts ignore finance, tax and one-off costs to create something called EBIT (Earnings before interest and tax) which represents the club’s underlying profit, and for Sheffield United in 2018 these increased losses to £10 million.

The EBIT figure shows that running Sheffield United is a frighteningly expensive business as the club has effectively lost £150,000 a week from trading over the last seven years and therefore the club needs to generate income from an additional source, and that source if player sales. However, the Blades are far from towards the top of the EBIT losses table as many other clubs have huge running losses.

Sheffield United made a record profit of £8.4 million in 2018 from player sales and these appear to be linked to sell on clauses from the like of Harry Maguire and Kyle Walker.

Player Trading

Sheffield United spent a modest £3.9 million on new players in 2017/8 and after considering player sales had a net income of £4.5 million. In recent years the club has used player sales to balance the books with sales exceeding spending five times in the last seven years. The club has shown it’s the quality of the sums paid combined with astute management rather than the amounts themselves that can deliver a promotion challenge in the Championship.

According to TransferMarkt (and I know it’s not very accurate but better than nothing) the club has spent about £6 million on players in 2018/19 which is more than offset by the transfer of David Brooks to Bournemouth.

Funding

Clubs get funding from three sources, bank loans, owner loans (which may or may not be interest bearing) and shares issued to investors.

Sheffield United are controlled by Kevin McCabe and Prince Abdullah who have fallen out with one another and are involved with unpleasant legal battles. Whatever the club is worth in the Championship it could be sold for £150 million in the Premier League should promotion be achieved.

The partnership between the two parties was initially responsible for paying down the debts of the club but there have been little new borrowings in recent years.

Conclusion

Sheffield United have done extremely well to be at the top end of the Championship on a relatively low budget with owners who are reluctant to put in further cash until their dispute has been concluded. Realistically losses of about £10-12 million this season are likely to be the case, but the sale of David Brooks should offset some or all of them. How long the club can rely on player sales to balance the books in a division that generates higher losses than any other in Europe is uncertain.

Credit has to be given to Chris Wilder and his team for getting on with the day job, making smart loan to buy signings (Oliver Norwood potentially is looking at his third promotion to the Premier League in three seasons with different clubs) and ignoring the boardroom shenanigans.

If the club does not go up this season a lot will depend on Billy Sharp to maintain his prolific scoring to help the Blades in 2019/20 and whilst he is getting no younger the likes of Jermaine Defoe and Glenn Murray have shown that age is not necessarily an issue if you know how to hit the back of the net.

Liverpool 2017/18: Toxteth O’Grady

Liverpool 2018: The Killing Moon

Pick it, lick it, roll it, flick it.

Introduction:

Jurgen Klopp has many reasons to smile at present with his team competing for the Premier League title and in the knock out stage of the Champions League.

Under Klopp’s management, combined with what seems to be astute operational management by the club’s commercial and marketing department, the club has also announced a world record pre-tax profit of £125 million for 2017/18.

Reds’ fans won’t give a hoot about the profits as they look forwards with anticipation and trepidation to the remainder of the season, but there is a link between good financial and footballing management depending upon the business model employed by different club owners.

Grinding through the numbers suggests that the club is in good financial shape although a closer inspection reveals that the record figures were mainly due to the sale of Philippe Coutinho.

Even so, compared to the management of the club under Hicks and Gilette a few years ago Liverpool are light years away from the near bankruptcy that they faced as debts piled up and banks came closer to pressing the trigger.

Key financial figures for year to 31 May 2018: Liverpool Football Club and Athletic Company Limited

Income £455.0 million (up 25%).

Wages £263.0 million (up 27%) .

Operating profit before player sales £1.1 million (down 84%)

Player signings £190 million (up 149%)

Player sales £137 million (up 89%)

Owner loans £120 million (down £10 million)

Income:

New income sources are always a challenge for clubs as ultimately they are split into three broad areas, matchday, broadcast and commercial, some of which are more controllable than others in terms of increasing the numbers.

Keeping up with the peer group is the hardest challenge for Liverpool and in this regard the club has done exceptionally well in 2017/18 as the club rose from 9th to 7th in the Deloitte Football Money League, which focuses on club revenue.

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Liverpool’s income rose faster than any other club (that has reported to date) for last season as total revenue increased by a quarter, which is an achievement for any business that has been trading for over a century.

Of the ‘Big Six’ clubs (although Spurs haven’t won the title for nearly 60 years and are yet to publish their 2018 results) the income growth in 2017/18 allowed Liverpool to leapfrog both Chelsea and Arsenal last season.

Premier League income is dominated by the big clubs but has increased for everyone nearly every year since its inception in 1992, when Liverpool’s revenue was only £17.5m, which in the Reds’ case equates to a 14% increase every year.

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Parting fans from their cash is never an easy task for football clubs but Liverpool have managed to increase matchday income by 82% since 2013 on the back of greater capacity at Anfield and selling more tickets to the hospitality sector.

Every club has a slightly different strategy when it comes to season ticket holders and Liverpool’s is to restrict ST numbers to just 26,000 out of their 54,000 capacity and have many more available to fans on a match by match basis.

Although such an approach does generate resentment from those on the Liverpool season ticket waiting list (presently closed as it could take up to 15 years to get a ST) from a cold commercial basis this policy makes financial sense given the club’s international appeal.

The concept of the football tourist, armed with selfie stick and half and half scarf, provokes merriment from away fans at Anfield but such fans do generate cash even if they are held in contempt by regulars at the club.

Success in reaching the Champions League which meant more sold out matches at Anfield which contributed to the 10% rise in matchday income last season, despite a freeze in individual ticket prices.

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Having matches sell out is great but matchday revenue is a combination of attendances, prices and number of matches and Liverpool were relatively successful here in generating over £1,500 per fan over the course of the season, nearly 50% more than present Premier League rivals Manchester City and three times as much as neighbours Everton.

Income from broadcasting increased by 43% due mainly to Liverpool generating £72 million in UEFA TV income as a function of reaching the Champions League final compared to a European free season in 2016/17.

Such is the importance of Champions League progress Liverpool generated more broadcast income that any other English club last season despite only finishing 4th in the Premier League.

Being a club with a large global profile helped drive up commercial income by 13% in 2017/18, partly due to a sleeve sponsorship deal with Western Union and in addition sponsors paying bonuses as Liverpool reached the Champions League final.

Of the commercial deals that clubs have, kit manufacturing and shirt sponsorship are usually the most lucrative, Liverpool renewed their deal with Standard Chartered in May 2018 for an estimated £160 million over four years so this should provide a boost for 2018/19.

Getting hold of a Liverpool replica shirt at present is tricky as practically everyone produced by present manufacturer New Balance has flown off the shelves as sales have hit record levels.

In comparison to the other ‘Big Six’ clubs Liverpool are doing well but there is scope for further growth, Manchester United’s commercial department are legendary at getting companies to pay for the privilege of attaching their products to United’s crest and Liverpool appear to be trying to copy this model of having different commercial partners for the same product in different locations.

Ensuring the club has commercial income growth is an essential feature of setting a club apart from the also rans in the Premier League and it appears that Liverpool are in talks with a variety of kit manufacturers to boost the present £45m a year they generate from New Balance in a deal that expires after 2019/20 to something closer to the £75m that Manchester United earn from adidas.

Success on the pitch makes clubs very appealing for sponsors and the lack of it in recent years is partly why Liverpool have suffered relative to some of their peer group, although this could reverse if Jurgen Klopp starts bringing trophies to Anfield.

Costs

The main costs for clubs are those relating to players, in the form of wages and transfer fee amortisation.

Liverpool’s wages have doubled since 2013 and increased by 27% in 2017/18 reflecting the investment in the squad as Salah, VVD and others were recruited during last season as well as other players earning improved contracts. This meant that overall Liverpool’s wage bill overtook those of Chelsea and Manchester City, although City’s figures should be viewed with caution due to the unusual structure of the club in terms of how costs are treated by the parent company City Football Group Limited, which also owns clubs in Australia, USA and Uruguay.

Liverpool’s average weekly wage (and we fully accept that these are rough and ready figures) jumped from £100,000 to £126,000 a week, allowing Liverpool to compete with other elite clubs both domestically and internationally.

Despite the wage increase Liverpool are paying just £58 in wages for every £100 of income. As a rule of thumb clubs in the Premier League are usually deemed to have good wage control if they are paying out 60% or less of income as wages, so the significant increase in income in 2018 covered the wage rise. If Liverpool don’t make a lot of progress in the Champions League in 2018/19 this ratio could deteriorate.

It is not just players who have benefitted from the generosity of the owner, the highest paid director saw their income rise by 45% to £1,329,000, although this is not overly high by Premier League standards.

By Premier League standards Liverpool’s board are reasonably well paid, but this pales into significance when compared to Daniel Levy’s package of over £6 million at Spurs, although Daniel’s fan club will no doubt point out this is partially linked to bonuses linked to his amazing success at delivering Spurs’ new stadium on time and budget. Those who are suspicious of Manchester City’s finances will have food for thought as City have a zero cost for their directors.

The amortisation cost represents the transfer fee paid spread over the term of the contract signed by a player. So, when Liverpool signed Virgil Van Dijk for £75 million on a five and a half year deal it meant that the amortisation cost is £13.6 million (75/5½) a year.

Liverpool’s annual amortisation cost has doubled since 2013, showing the extent of FSG’s h investment in the playing squad.

In using amortisation, it is possible to get a broader feel for a club’s longer-term transfer policy rather than just a couple of windows of buying a selling within an individual season.

Although Liverpool have invested heavily in players in recent years, they are relative paupers in terms of amortisation compared to the two Manchester clubs and Chelsea as the latter have all been spending large sums on transfers over a number of years.

In terms of player sales, these were substantial, as the departure of Coutinho, Sakho, Lucas and Stewart contributed to a profit of £124 million from disposals. As can be seen from the above chart these figures are volatile and vary considerably from year to year. Sales of the likes of Suarez and Sterling in previous years have been lucrative financially for Liverpool but didn’t necessarily help achieve success on the pitch.

Liverpool also had an interest cost of £7.5 million in 2017/18, although some of this was due to accounting dark arts in relation to amounts owed on player transfers and a £19 million tax bill, again mainly due to accounting issues rather than tax being paid to HMRC.

Profits and Losses

Profit, if you ask the right accountant, is what you want it to be, and there are as many types of profit as there are ex-members of the Sugababes.

A rough definition is that profit represents income less costs, and if this figure becomes negative it becomes a loss.

The headline figure in the Liverpool press release was a world record profit of £131million, before taking into consideration finance costs and tax. Taking such a profit figure as a measure of success is okay, but it includes some items which are volatile (such as player sales gains, redundancy costs and player write-downs).

Stripping out the above distortions gives something called EBIT (earnings before interest and tax) profit, which is a better measure of recurring profits excluding the non-recurring transactions.

Liverpool’s EBIT is far lower than the operating profit, but it does show that the club is capable of making profits without having to rely on player sales. This is a good sign as there are some clubs who have suffered significant losses from their day to day activities and so player sale profits become a necessity rather than a bonus.

Liverpool’s EBIT losses worked out at £140,000 a week in 2017/18, reasonable but not spectacular by Premier League club standards.

If non-cash costs such as player amortisation are stripped out, the position however improves, and Liverpool have an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) profit of a far more impressive £95 million.

EBITDA is an important profit measure as it is the closest to a ‘cash’ profit that analysts use to assess a business and shows how much the club has to invest in player acquisitions from its day to day activities. Liverpool have made over £339 million in EBITDA profit over the last six years but have invested more than that in improving the squad.

Player trading:

Liverpool had a record year in 2017/18 in terms of player purchases and sales, but the net spend was broadly the same as in 2015 and 2016 at £58 million.

Compared to their peer group, Liverpool’s spending is very modest.

Since the end of the season the board have backed Jurgen Klopp in the summer 2018 transfer windown with a net £181 million on new signings such as Allison, Fabinho and Keita.

Liverpool were owed £169 million by trade creditors, this will mainly be for player transfers but at the same time owed others £148 million

Funding the club

Clubs usually have a choice between third party loans (which attract interest payments) owner loans (which may or may not charge interest) and shares (which occasionally pay dividends).

In the case of Liverpool, the club have focussed on owner and bank loans. Liverpool have an overdraft facility at the bank of £150 million but at 31 May 2018 ‘only’ had used £56 million of this available facility. In addition, Liverpool owed FSG £100 million for a loan in respect of stadium expansion.

A look at the cash movements on borrowings shows that Liverpool appear to have peaked in terms of their debts and are in a position to repay some of the sums due, as £30m was given back to the bank and FSG in 2017/1. The large investment in players in 2018/19 may have resulted in the overdraft increasing again.

Conclusion

Liverpool have had a strong, but perhaps not as spectacular a year financially as has been reported elsewhere. Money spent on infrastructure in previous years has borne fruit in terms of generating extra income and the club has invested record sums in player purchases in the ambition of reaching the Holy Grail of a Premier League title.

This level of investment will have to continue if Liverpool want to consistently challenge to the two Manchester clubs for titles and trophies. Manchester United have an advantage in terms of stadium capacity and commercial deals, Manchester City have the backing of owners will limitless funds. The three main London clubs seem to be at a hiatus at present and it will take time to work out what are the ambitions of their respective owners.

Swansea City: Soul Train

Introduction

Huw Jenkins, Swansea’s chairman, who made millions when the club was acquired by American investors in 2016, has resigned. Reading between the lines it appears that there are conflicts in terms of day to day running of the club.

The club’s finances are clearly an issue, as is the strategy of the majority shareholders Jason Levien and Steve Kaplan in terms of how the club is going to deal with the aftermath of relegation.

Swansea haven’t yet published their accounts for 2017/18, but were there warning signs in the previous year?

Key Financial Highlights for year ended 31 July 2017

Turnover £128 million (up 31%)

Wages £99 million (up 21%)

Pre-player sale losses £22 million (up 12%)

Player sale profits £37 million (up from £6 million)

Player signings £64 million (up from £16 million)

Income

Swansea, like all clubs, have three main sources, matchday, broadcasting and commercial.

The club reduced season ticket prices in 2014/15 which explains why matchday income fell that season and since then the amount generated from fans has been broadly static as ticket prices have been frozen.

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Given the relative scarcity of large corporate sponsors in the area, a limited stadium capacity and the club not being located in an affluent area it is of little surprise that Swansea are close to the bottom of the table when it comes to matchday income.

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This is also reflected in the relatively low average sums generated from each fan by the club from matchday. The big English city clubs, with the added attraction of UEFA cup fixtures were generating 3-5 times as much from each fan compared to the Liberty Stadium.

Broadcast income is allocated in a relatively democratic method in the Premier League (although the ‘Big Six’ of Manchester United, Manchester City, Arsenal, Spurs, Chelsea and Liverpool, three of which have US owners, one Russian, one Middle East and one Bahamas are doing their best to skew the money further towards themselves) and is by far Swansea’s biggest paymaster.

The large rises in 2013/14 and 2016/17 were due to new BT/Sky deals coming on stream. The Big Six generate more money from TV due to three factors, participation in Champions/Europa League, appearing more often on BT/Sky (each appearance is worth £1 million once a club appears more than ten times) and prize money linked to the final position in the table.

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Swansea’s broadcast income fell by about £10 million in 2017/18 due to being relegated and so receiving less ‘merit’ money.

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In 2018/19 Swansea’s broadcast income will fall to about £45 million, followed by £35 million, £14 million and £7 million if they remain in the Championship, so cost cutting will be a feature of the club unless the owners invest.

Swansea have done well to nearly double their commercial income since 2013. Part of this is due to signing shirt sponsorship deal with betting companies, who are prepared to pay more than companies in other industries for the benefit of exposure globally on television. Expect this figure to fall in 2018/19 as Championship matches attract much lower TV audiences than the Premier League. LeTou were estimated to be paying Swansea £4.5 million in 2017/18 but this will fall substantially this season/.

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Like most clubs, Swansea generate the greatest proportion of their income from broadcast revenues, with £86 out of every £100 coming from BT/Sky . This is fine so long as the club was a member of the Premier League.

Every club in the Premier League is looking to increase income but with TV deals having perhaps reached a ceiling and grounds already full the burden for growth is falling upon commercial departments.

Swansea fans are realistic enough to know that they are in the bottom ten clubs each season whose overall income is fairly close to one another and to an extent determined by merit and facility broadcast fees. These clubs are the ones most likely to be in the relegation mix each season so realistically start each season with a 30% chance of being relegated.

Costs

The most significant costs for a club are in relation to player wages and transfer fees and here Swansea have been notable for their willingness to pay decent wages by Premier League standards, with an average weekly wage of £47,000 in 2016/17, which is towards the top end of the bottom half of clubs in the Premier League .

The problem with such an approach is that the club pays out so much of its income in wages that there is little left to pay the other running costs.

Dividing wages by income gives a ratio that is used by analysts to assess whether a club is spending too much on player remuneration and Swansea had the second highest ratio in the Premier League in 2015, 2016 and 2017.

Without knowing much about the internal workings of the club one person who seems to do reasonably well from Swansea’s tenure in the Premier League is the highest paid director.

£12,000 a week isn’t excessive by Premier League standards, (the median amount paid is £620,000) but you would expect someone on such a wedge to be capable of making good recruitment and commercial decisions.

Every player signed for a fee also adds to costs in the profit and loss account via transfer fee amortisation, which is calculated by dividing the amount paid over the contract period. So, when Swansea signed Sam Clucas from Hull for an estimated £12 million on a four-year deal this works out as a £3 million amortisation charge each year.

Swansea’s amortisation cost has more than doubled since 2013 as the club tried to further establish its position as a Premier League club.

Despite the investment in the likes of Ayew, Bony and Clucas in 2017/18 Swansea’s amortisation cost was slightly lower than some of their peer group in the bottom ten and this may be an indicator why the club was relegated in 2018. There is a case for saying amortisation highlights the medium/long term investment in new players.

If the amortisation charge is added to wages, then it is possible to look at the total investment in players as a proportion of income.

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In Swansea’s case this is quite alarming as the club was paying £96-£102 in these costs for every £100 of income. This left virtually nothing remaining to pay the rest of the bills and therefore either player sales or owner funding was required to balance the books.

Like all businesses, Swansea have to also pay for everything from electricity, transport and insurance as overheads and these have risen substantially in the last five years. This is an area the club must address in the Championship as by 2017 the club was spending £1/2 million a week on such costs.

Profits

In finance you have to be careful when discussing profits as there are as many types of profit as there are ex-members of The Fall.

Expenses are usually subtracted from income to arrive at profit, but some expenses are erratic in nature and sometimes excluded when trying to determine a club’s underlying financial health for the season.

Simply deducting all day to day costs from revenue, before considering borrowing expenses, meant that Swansea could claim to have made a record £79 million last season.

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A look at the above profit and loss figures shows there has been much volatility in relation to Swansea’s profits and losses from year to year. This is mainly due to one off transactions which distort the numbers, such as profits on player sales and in the case of Swansea paying up the contracts of a variety of sacked managers and their entourages.

Most analysts ignore finance, tax and one-off costs to create something called EBIT (Earnings before interest and tax) which represents the club’s underlying profit, and for Swansea in 2017 this converted the profit of £14 million into a loss of £22 million. The main reason for this decline was the combination of lower income and higher player related costs that have been already highlighted. Swansea have been dependent upon player sales to balance trading losses that averaged £380,000 a week in the last three seasons, despite record levels of broadcast income.

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The EBIT figure shows that running Swansea is a frighteningly expensive business and therefore the club needs to generate income from an additional source, and that source if player sales.

Swansea made a record profit of £37 million in 2017 player sales (Ayew, Williams etc) and this is likely to have been eclipsed in 2018 as Sigurdsson and Llorente were sold.

If player transfer sales are to be excluded from profit, then there is a case for excluding transfer amortisation costs too, which leads to another form of profit, called EBITDA. This is popular with analysts as it is a trading cash profit equivalent.

This is possibly the most revealing figure about Swansea as it suggests that the club has a strategy of breaking even at least in terms of EBITDA profit. This does mean that the club has to also break even in terms of player trading unless it wants to borrow from banks or the owners stick their hands in their pockets. However, Swansea’s relatively loose wage bill control resulted in the club having the lowest EBITDA profit in the Premier League.

Player Trading

Swansea spent a record amount on new players in 2016/17 but also had record revenues from sales, which resulted in a net spend of £22 million. According to Transfermarkt the net spend the following season was £8 million.

Swansea seem to have had a policy of re-signing player whom they had previously sold at a profit, but this has not been successful on the pitch as the likes of Bony and Ayew failed to impress on their return to the club.

Funding

Clubs get funding from three sources, bank loans, owner loans (which may or may not be interest bearing) and shares issued to investors.

Swansea are controlled by Steve Kaplan and Jason Levien, who have a 70% majority stake between them. When the deal was brokered a lot of people made a lot of money and the romantic element of Swansea’s rescue from near bankruptcy and rise through the divisions looked slightly grubbier as a result.

David Conn Guardian Sale of Swansea

The sale of the club in 2016 seems to have been the start of the club’s decline on the pitch as relations between the Supporter’s Trust and the new owners have fractured. Kaplan and Levien’s motives are unclear, but they presumably perceive Swansea as a franchise and want a return on their investment.

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Since acquiring the club there is no evidence of substantial investment by the new owners. There’s a case for saying this shouldn’t be necessary given the riches of the Premier League, but it’s an uncomfortable situation to be in when so many people

Conclusion

Swansea are in a tricky position, they have not invested in the playing squad since relegation and are using player sales and parachute payments as a means of generating cash. Matchday prices have been reduced to try to ensure that attendances do not fall significantly but the club appears to be budgeting for life as a Championship club rather than gambling on a quick return to the Premier League.

The club’s business model in the Premier League was a dangerous one, spending more on wages than their peers worked for a while, but some poor managerial and player choices had led to a fire sale and a desperate need to get players off the wage bill now the club are in the Championship.

Kaplan and Levien’s motives for running the club are mysterious. They appear to want Swansea to be self-financing, which is understandable to a degree, but having spent £70 million buying control in the club in 2016 it is difficult to see how they will get their money back as the club is likely to be valued at half that sum or less outside of the Premier League.

It’s probable that their aim was to generate some income from dividend payments from the club whilst it was in the Premier League or alternatively flip the club and sell it on to another ‘investor’ with the moral compass of  an alleycat for a handsome profit, but neither has materialised to date.

The Championship is a bear pit of a division, with clubs averaging trading losses of £330,000 a week, which have to be funded somehow. Player sales can only assist here for a limited time as ultimately the pool of players who can be sold at a profit diminishes as wage levels fall.

Huw Jenkins’ cryptic comments and the silence from the owners suggests that finance-based arguments led to his resignation and fans are no doubt fully aware of the profit that Jenkins made when selling his stake in the club in 2016 (and the £4 million of dividends paid to shareholders prior to that).

Good governance for any business requires transparency and honest communication and these both appear to be in short supply in SA1 at present.

Arsenal 2017/18: My Friend Stan

Introduction

That’s another fine mess.

Stan Kroenke, Arsenal’s invisible owner, saw goodbye to three big players in the club during 2018 as the club went trophy less but perhaps more importantly for the moneymen failed to qualify for the Champions League for the second season in a row.

The power struggle with Ukrainian Alisher Usmanov ended with Stan as the final man standing as he bought out his rival, allowing the American to also take Arsenal from the AIM Stock Exchange to the less scrutinized private company.

Arsene Wenger’s dignified reign as manager came to an end with perhaps sighs of relief from both the Frenchman and his many vocal and at times very angry detractors amongst Gooners.

‘Necessary change and succession’ was the official reason for Chief Executive Ivan Gazidis leaving the Emirates too, which seems perhaps one person too many with experience at the top of the club departing for Milan.

Keeping things quiet has always been the Kroenke way and the way the club’s accounts were added to the website, without any fanfare or accompanying trumpets, was in keeping with his style of communication.

Key Financial Highlights

Turnover £403 million (down 5%)

Wages £240 million (up 20%)

Pre-player sale losses £18 million (previously £53 million profit)

Player sale profits £12 million (up from £7 million)

Player signings £166 million (up 46%)

Income

Reporting income, Arsenal, like all clubs, have three main sources, matchday, broadcasting and commercial.

Overall income fell by 5%, which in an age where clubs are supposed to be making more and more money, is a cause for concern.

Emirates regulars will be familiar with the high prices charged for both season and day tickets to watch Arsenal, but the club appears to have realised that it cannot squeeze more money out of fans for tickets as many prices were frozen for the fifth year in a row.

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Nevertheless, matchday income fell slightly, mainly due to the club being unable to generate as high prices, especially for hospitality packages for Europe League fixtures against the likes of Bate Borisov as for Champions League opponents.

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Keeping up with Manchester United will be difficult but compared to other Premier League clubs Arsenal’s matchday income is impressive, but there is no room for complacency, with Liverpool and Spurs likely to catch up as capacity increases at their stadia.

Extracting money from fans is never easy, but the high proportion of corporate and hospitality seats at The Emirates means that Arsenal generated £1,660 per fan last season and Arsenal have the highest proportion of income from matchday of any Premier League club as a result.

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Due to the way that UEFA allocate TV money, Arsenal’s broadcast income fell by 10% despite the club reaching the semi-final of the Europa League, where clubs receive only a quarter of the prize pot available in the senior competition.

Relative to other clubs in the Europa League Arsenal earned more than any other club in terms of UEFA prize money, mainly due to BT paying a huge sum for the broadcasting rights, a large portion of which then goes to clubs from BT’s ‘domestic’ leagues in England and Scotland.

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Only those clubs with Champions League participation (Leicester’s figures are from 2017 when they were in the CL) exceed those of Arsenal, but the gap is one they can ill afford to let grow.

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Penalty clauses from commercial partners sponsors for only qualifying for the Europa League may have been the reason why Arsenal’s commercial income fell in 2018 too, albeit by a small amount.

Sponsors want their products to be seen by big audiences, mainly on TV, and this is where the Champions League delivers as it has such a global appeal with armchair fans.

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Some £15 million of Arsenal’s commercial income total comes from property income, compared to just £1 million the previous season, otherwise there would have been a far more significant fall from this area.

In comparison to Manchester United, which is in a league of its own when attaching the badge to sponsor products and Manchester City, with its unusually lucrative deals with Middle East partners. Arsenal are generating about half as much from commercial sources, which ultimately has an impact upon the ability to compete in the player market.

Like most clubs, Arsenal generate the greatest proportion of their income from broadcast revenues, but the club does generate more matchday income as a proportion of total than any Premier League team.

Every club in the Premier League is looking to increase income but with TV deals having perhaps reached a ceiling and grounds already full the burden for growth is falling upon commercial departments.

No one at The Emirates will admit it but the danger for Arsenal is that Liverpool are likely to overtake them in terms of revenue when their 2018 figures are released, and Spurs could do the same within two years should they ever finally move to the new stadium.

Costs

The most significant costs for a club are in relation to player wages and transfer fees and here Arsenal saw significant increases in 2018.

Bringing new expensive players to The Emirates meant that the wage bill rose 20% in 2018 to £240 million although included in this figure is a £17 million payoff for Arsene Wenger and his coaching team who departed from the club when The Professor left office at the end of the season.

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Urgent investment in the squad necessitated the wage rise and Arsenal were not alone in 2018 in having pay outstrip income, but this is not sustainable in the long run.

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The club, compared to the remainder of the ‘Big Six’ are where most would expect to see them, trailing the two Manchester teams and close to Chelsea, the only consolation for Gooners is seeing Spurs having a lower wage bill than Everton although Spurs are yet to report for 2018.

Dividing wages by income gives a ratio that is used by analysts to assess whether a club is spending too much on player remuneration and Arsenal have moved having the second lowest ratio in the Premier League in 2017 to mid-table last season.

Every player signed for a fee also adds to costs in the profit and loss account via transfer fee amortisation, which is calculated by dividing the amount paid over the contract period.

Arsenal’s amortisation cost has more than doubled since 2013 as the club has taken the foot off the brake in terms of player recruitment to try to compete with the other ‘Big Six’ clubs (excluding Spurs).

Despite the investment in the likes of Lacazette and Aubameyang in 2017/18 Arsenal’s amortisation cost is substantially lower than some of their peer group and this may be an indicator why the club failed to qualify for the Champions League as amortisation highlights the medium/long term investment in new players.

Like all businesses, Arsenal have to also pay for everything from electricity, transport and insurance as overheads and these are now running at about £80 million a year.

Profits

In finance you have to be careful when discussing profits as there are as many types of profit as there are Pringles flavours.

Expenses are usually subtracted from income to arrive at profit, but some expenses are erratic in nature and sometimes excluded when trying to determine a club’s underlying financial health for the season.

Simply deducting all day to day costs from revenue, before taking into account borrowing expenses, meant that Arsenal could claim to have made a record £79 million last season.

A look at the above profit and loss figures shows there has been much volatility in relation to Arsenal’s profits and losses from year to year. This is mainly due to one off transactions which distort the numbers, such as profits on player sales and in the case of Arsenal paying up the contracts of Arsene Wenger and his coaches.

Most analysts ignore finance, tax and one-off costs to create something called EBIT (Earnings before interest and tax) which represents the club’s underlying profit, and for Arsenal in 2018 this converted the profit of £79 million into a loss of £18 million. The main reason for this decline was the combination of lower income and higher player related costs that have been already highlighted.

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The EBIT figure shows that running Arsenal is a frighteningly expensive business and therefore the club needs to generate income from an additional source, and that source if player sales.

Arsenal made a record profit of £120 million last season from player sales (Oxlade-Chamberlain, Sanchez, Walcott, Giroud etc) which helped to offset the day to day losses. However, in previous years the club had made minimal profits from player disposals.

If player transfer sales are to be excluded from profit, then there is a case for excluding transfer costs too, which leads to another form of profit, called EBITDA. This is popular with analysts as it is a trading cash profit equivalent.

The good news for Arsenal is that their EBITDA is a positive figure for 2017/18 but £60 million lower than the previous season.

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The EBITDA profit at £84 million shows the club is generating over £1.5 million a week in terms of cash, which can then be used to invest in player transfers.

All clubs in the Premier League generate a positive EBITDA, but some are juggernauts and others also rans. Arsenal are certainly generating cash but trail some way behind most of their peer group.

Player Trading

Arsenal spent a record amount on new players in 2017/18 but also had record revenues from sales, which resulted in a net spend of just £28 million.

Spending £166 million on players should have improved the quality of the squad, but the final league position may lead observers to conclude that the acquisitions have failed to improve Arsenal, who ultimately spent less than the other clubs (excluding Spurs) with whom they are competing for a top four place

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In a somewhat footnote to the accounts Arsenal did spend a net £61 million in the summer 2018 window on players.

The problem for Arsenal going forwards is that they appear to have some highly paid players on contracts that are unlikely to be matched by other clubs. Getting such players off the books is a delicate negotiating task.

Under a form of financial fair play rule in the EPL called Short Term Cost Control (STCC) clubs can only increase the wage bill by £7million a season plus any extra income they generate from matchday or commercial sources.

Arsenal are snookered here at present as the Emirates is sold out every week and fans won’t tolerate higher prices and so it’s up to the commercial department to make the club attractive, but to do this they need to be able to offer them Champions League football.

A new kit deal with adidas worth £60m a year will help here but when competing with other big clubs it’s a case of running to stand still in terms of wages as other clubs are giving double digit percentage increases.

Media talk is that Emery will be limited to £45m in the market this summer, although if that is a net spend then should still give them a chance to compete.

Funding

Clubs get funding from three sources, bank loans, owner loans (which may or may not be interest bearing) and shares issued to investors.

Arsenal are owned by KSE UK Inc, Stan Kroenke’s private company, but the club also has loans as a legacy of moving from Highbury to The Emirates stadium. The club repaid £8 million of these loans in 2017/18 but paid over £11 million in interest on the outstanding loan balance of £193 million. Whilst this seems a large sum Arsenal had over £230 million in the bank at 30 June 2018, so their net debt position is healthy.

Conclusion

Arsenal are in a tricky position, two years without Champions League participation is costly for a club that has invested so much in player transfers and wages in the last couple of years but to a certain extent they are running to stand still when competing with the other big clubs in terms of player investment (except Spurs).

Stan Kroenke’s motives for running the club are as mysterious as ever. He appears to want Arsenal to be self-financing, which is understandable to a degree, but this may result in the club earning the riches of the Champions League less regularly and finding it harder to attract the best talent in terms of coaches and players, which will restrict growth in terms of commercial deals and further anger Gooners who have been patient to date with Unai Emery but a few more moderate results could result in them returning to the toxic atmosphere that blighted the latter days of Arsene Wenger’s dynasty.

Rangers: Phoenix from the ashes or new dawn fades?

Rangers won the Scottish Premier League five times between 2003 and 2011, as well as reaching the final of the UEFA Cup in 2008, which on the face of it was an impressive achievement as the club went toe to toe with a resurgent Celtic during that period.

To compete with Celtic the club was however prepared to take steps that would ultimately lead to the liquidation of the club’s operating company and had to apply for membership of the Scottish Third Division. It would take four years out of the top flight before the club was once again able to face its rivals in a league match.

The high profile recruitment of Steven Gerrard as manager in the summer of 2018 has whetted the appetite of fans and pundits, but is the club a phoenix from the ashes, or are its new foundations made of sand?

During the 1990’s Rangers were the dominant force in Scottish football, the wealth of owner David Murray allowed the club to recruit the likes of Paul Gascoigne, Tore Andre Flo, Brian Laudrup and Mo Johnston, and the club won nine titles in a row. Murray claimed ‘for every five pounds Celtic spend we will spend ten’ and the dynasty seemed unstoppable, but it was built on debt.

Celtic were however improving their finances thanks to the backing of Irish billionaire Dermot Desmond, with managers such as Wim Jansen and Martin O’Neill the battle for supremacy in the Scottish game became more balanced on the field, and the investment in infrastructure at Celtic Park plus more regular progress in UEFA competitions meant that the club’s income was ahead of that of their rivals.

Because Celtic were generating more money in the early 2000’s, it meant they could sign better players to compete with their rivals in terms of recruitment. Rangers were during this period generating large losses as they had a smaller capacity stadium and were generating less matchday income.

The only way to underwrite these losses was to borrow money, which the club did with enthusiasm such that by June 2004 Rangers owed £74 million to financial institutions.

Behind the scenes Rangers were also trying to compete with Celtic by some creative tax activities. This involved the creation of Employee Benefit Trusts (EBTs) where the club paid money into a trust.

The EBT then ‘lent’ money to players who in theory promised to pay it back, but there was no or little effort to ask for that money back from the players, who effectively therefore treated it as regular income.

The advantage to Rangers in taking this approach was that the club did not pay National Insurance contributions on the payments to the players, who also did not pay income tax on these loans from the trusts.

The players were happy because they ended up with the net pay they were seeking, so everyone was a winner…apart from the government.

This policy worked to the extent that Rangers won the Scottish Premier League five times from 2003 to 2011, but critics will argue they were abusing the tax system in the process and those titles were at best tainted and some even go as far as to say those achievements should have been stripped from the club’s list of trophies.

The global financial crash of 2007, created by the financial community who lent money to people and businesses who had no ability to repay the sums advanced, hit Rangers in two ways.

Owner David Murray’s business struggled and so was unable to provide the club with further financial support, and the main external lender, the Bank of Scotland, (now part of Lloyd’s Group) effectively went into public ownership following its own financial meltdown, and there was a far less relaxed approach towards Rangers from the bank’s new senior management as a result.

Furthermore, the UK tax authorities became increasingly unhappy with Rangers’ use of EBTs, which had been originally sanctioned for non-employees, which was not the case in respect of the club and its players. The tax authorities saw the approach taken by the club as extreme tax avoidance and pursued Rangers for a tax bill of up to £49 million.

An increasingly desperate David Murray therefore sold the club to Craig Whyte for just £1. Whyte promised to settle the tax issues and the bank loans but did neither and as more and more creditors were issuing writs for unpaid debts the club appointed administrators in February 2012.

This angered HMRC, who had wanted to appoint their own administrators to investigate Rangers’ affairs. HMRC therefore refused to agree to a deal with the administrators, leading to Rangers operating company going into liquidation, provoking a constitutional crisis in Scottish football.

A new company, Sevco Scotland, was set up and bought Rangers’ assets from the liquidator, although players were allowed to leave the club for free as their contracts were with the old club.

Most SPL clubs voted that SevCo, now called Rangers Football Club Limited, was not allowed to take the place of Rangers in the top flight, and instead the newly formed company was allowed instead to join the Scottish Third Division, giving people in small towns such as Peterhead and Elgin the opportunity to learn about seventeenth century Irish history through the songs sang by Rangers fans when their club visited.

  • Rangers had income of £19 million in 2012/13 in the Scottish Third division, which was more than double than that of the other nine teams in the division combined as the club unsurprisingly won the division and Rangers had similar success in the Scottish Second division the following season.

During this time Rangers was falling further behind Celtic in terms of generating income and signing players, which meant that when Rangers were finally promoted to the SPFL and had their first season there in 2016/17 they generated only a third of Celtic’s revenue.

Rangers have also returned to using debt as a means of funding the club, although as there is great suspicion from banks towards the club, the lending is almost exclusively from directors.

At the last count Rangers owed lenders £21 million in June 2018, although subsequently some of this has been written off as lenders converted the IOU’s from the club, which some consider to be worthless, into shares instead.

The arrival of Steven Gerrard has introduced a feel-good factor to the club, and there were million pound plus signings such as Barisic, Goldson and Murphy, along with loans from Liverpool as Stevie G used his contact book to try and improve the quality of the playing squad.

The club is now competing with their rivals in an SPFL that has greater uncertainty than has been seen for many years. For this to be achieved the board has admitted it will need a further £4.6 million to survive this season and has gone cap in hand to investors for extra funds.

The recent elimination from the Europa Cup will not have helped Rangers’ financial position although reaching the group stages has helped generate greater income than in 2017/8.

In addition largest shareholder Dave King seems to spend more time in court arguing with the likes of Mike Ashley and The Takeover Panel, who believe he should buy out remaining shareholders, than focussing on issues on the pitch.

Whether King has the wealth that he claims to buy the shares from these shareholders is as yet unproven, as are many issues in relation to the club’s activities.

Even if King himself does not have funds there appear to be other backers to underwrite the club’s losses, although this could lead to another power struggle.

Furthermore, there are squabbles and threats of litigation between the administrators, liquidators, former owners, HMRC and former players, which could result in large sums being payable by some of them, but the only guarantee is that the lawyers, as always, will be rich on the pickings between the disputes between these parties. The club however is unlikely to bear these potential costs.

One of Rangers’ fans most popular songs is ‘Follow Follow’, but given the club’s present predicament, perhaps this should be renamed ‘Borrow Borrow’.

Chelsea 2017/18: The Lion Sleeps Tonight

Introduction

…so where do the electrified fences go Ken?

Chelsea had an up and down season in 2017/18, winning the FA Cup but not qualifying for the Champions League.

The club’s financial structure is complicated, Chelsea Football Club Limited is owned by Chelsea FC plc, which is owned by Fordstam Limited, which is funded by Lindeza Worldwide Limited (based in the British Virgin Islands) and Camberley Investments Limited (based in Middlesex), which are owned by Roman Abramovich.

This analysis looks at Chelsea FC plc, mainly because Fordstam Limited tends to publish its accounts a few months later.

Key Figures

Turnover £443 million (up 23%)

Wages £244 million (up 11%)

Pre player sale losses £41 million (down 23%)

Player sale profits £113 million (up 63%)

Player signings £290 million (up 174%)

Income

Chelsea, like all clubs, have three main income sources, matchday, broadcasting and commercial.

Matchday income rose by 13%, mainly driven by Champions League participation increasing the number of fixtures at Stamford Bridge compared to 2016/17 where the club finished 10th and so didn’t play in a UEFA competition.

Compared to other Premier League clubs, Chelsea’s matchday income is impressive, but there is a significant gap to Arsenal and Manchester United above them. Liverpool, who were Champions League finalists and had the benefits of a full year at the increased capacity Anfield, should overtake Chelsea when their accounts are released. Spurs, if when they move into the new stadium which has a capacity of 60,000 and high ticket prices, are likely to also leapfrog Chelsea.

The decision of Roman Abramovich to cancel the move to a new stadium puts an effective cap on Chelsea’s ability to generate money from matchday sales, although the club is very good at extracting cash from the 41,000 who attend there at present.

Chelsea’s broadcast income rose by over a quarter, despite the club finishing fifth compared to being Champions the previous season and so earning less Premier League TV prize money.

The reason for this is that by being in the Champions League Chelsea picked up €65 million in prize money from UEFA, partly due to making it to the last 16 and partly due to BT paying a huge sum for the broadcasting rights, a large portion of which then goes to clubs from BT’s ‘domestic’ leagues in England and Scotland. This, thanks to Brexit uncertainty decreasing the value of sterling, was worth about £59 million to Chelsea.

Chelsea had the second highest broadcast income, although they are likely to drop to third when Liverpool publish their figures, which will include €81 million for reaching the Champions League final.

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Chelsea’s commercial income rose by 24% as the new kit contract with Nike, worth an estimated £60m a year, came into fruition early after the club had previously bought adidas out of their contract.

Whilst Chelsea’s growth here is impressive, they are still some way around Manchester United, which is in a league of its own when attaching the badge to sponsor products and City have unusually lucrative deals with Middle East partners. Chelsea are a big enough club to be able to have separate sponsorship deals for both first team and training kit and this too will help in terms of their commercial growth.

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Broadcast income contributes over half the total in the Premier League, which is why the clubs are so compliant when kick off times are rearranged for the benefit of the cameras

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Chelsea have a fairly even split of income between the three segments, but difficult to see how matchday can grow whilst located at Stamford Bridge. The overall growth in income is impressive compared to other clubs who have reported their results to date.

Costs

The most significant costs for a club are in relation to player wages and transfer fees and in both respects Chelsea saw significant increases in 2018.

The wage bill rose 11% in 2018. This would have been partly due to paying additional sums to players and management for qualifying for the Champions League, the failure to do so the previous season resulting in the wage total falling for the first time since 2012. The A screenshot of a cell phone Description automatically generated

The good news from Chelsea’s perspective is that the wage rise was lower than that of income, which is unlike what was experienced by most other Premier League clubs.

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Compared to the remainder of the ‘Big Six’ Chelsea are where most would expect to see them, trailing the two Manchester clubs but ahead of Arsenal (and the gap is likely to grow given their lack of CL exposure this season) and Liverpool, who may shortly replace Chelsea as the 3rd highest wage payers due to significant investment in their squad and improved contracts for star players. Spurs having a lower wage bill than Everton may surprise many, especially Toffees fans.

Amortisation is how clubs deal with transfer fees in the accounts. The fee paid is spread over the contract length, so when Chelsea signed Morata for £60 million on a five-year contract in 2017, the amortisation cost is £12m a year (£60m/5). By dealing with transfers like this is helps to reduce volatility in the accounts from having one big transfer window followed by a couple of small ones and shows the medium term impact of a club’s transfer policy as the total amortisation cost applies to the whole squad (excluding players from the academy and Bosman signings who cost nothing).

One figure that is very odd in relation to Chelsea is that of directors’ pay. This has varied from year to year considerably.

Chelsea’s amortisation cost increased by over 40%, reflecting the impact of signing Morata, Bakayoko, Drinkwater, Rudiger, Zappacosta, Emerson, Giroud, Barkley and some other bench warmers and Carabou Cup regulars.

This large investment meant that Chelsea now have the second highest amortisation cost in the Premier League, more than twice that of Liverpool and nearly three times the figure for Spurs.

The amortisation cost, combined with wages, meant that it was costing Chelsea £83 for every £100 of income last season in overall player costs, which didn’t leave a huge amount to pay the other costs of running the club, which you would think would have to be under tight control…but if so would have thought incorrectly.

Chelsea’s ‘other’ costs include everything from electricity, transport and matchday expenses. These are now costing the club over £2 million a week and seem to be rising rapidly every year, with the exception of 2016 when the club only finished 10th in the Premier League.

One cost that is not a burden to Chelsea is finance costs. Other clubs, such as Manchester United and West Ham, pay interest to their banks and owners respectfully, but Roman Abramovich has never taken money out of the club in this regard.

Profits

There are as many types of profit as there are Pringles flavours. In the Chelsea press release the focus was on profit after tax of £62 million. This is correct and brings the total losses after tax under Roman Abramovich to ‘just’ £677 million, which will buy you a two up two down in Hammersmith these days.

A look at the above profit and loss figures shows there has been much volatility in relation to Chelsea’s profits and losses from year to year. This is mainly due to one off transactions which distort the numbers, such as profits on player sales, the cost of sacking managers and legal disputes and settlements, such as last year spending £6m on buying back retail and licencing rights from the rights holders in 2018.

Most analysts ignore finance, tax and one off costs to create something called EBIT, which is the club’s underlying profit, and for Chelsea in 2018 this converted the profit of £66 million into a loss of £41 million.

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The EBIT figure shows that running Chelsea is a frighteningly expensive business and therefore the club needs to generate income from an additional source, and that source if player sales.

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Chelsea made a profit of £113 million last season from player sales (Costa, Matic, Ake, Cuadrado, Begovic etc) which helped to offset the day to day losses. This policy is loosely connected to their approach of harvesting young players and then loaning them out to other clubs in the hope of some of them having significant values that can generate money in future years. This policy is presently under UEFA’s scrutiny as it is seen as being anti competitive.

If player transfer sales are to be excluded from profit, then there is a case for excluding transfer costs too, which leads to another form of profit, called EBITDA. This is popular with analysts (try reading the Financial Times Lex column, it is a regular there) as it is a trading cash profit equivalent.

The good news for Chelsea is that their EBITDA is a positive figure and a high one at that too, due to Chelsea’s big amortisation cost.

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The EBITDA profit at £94 million shows the club is generating nearly £2 million a week in terms of cash, which can then be used to invest in player transfers.

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All clubs in the Premier League generate a positive EBITDA, but some are juggernauts and others also rans. Chelsea are certainly generating cash, but trail some way behind most of their peer group.

Player Trading

As has already been mentioned, Chelsea bought a lot of players in 2017/18, most can be filed under ‘meh’, but the fees paid were a record for the club.

The general perception is that Chelsea have paid over the odds for many players last season, and this may be linked to the club’s dislike of committing itself to add on fees for international caps, number of appearances and so on. As a consequence the sums paid tend to have all of the above factored into the initial price.

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Chelsea may have to pay an extra £4.7 million for transfers but this pales into insignificance compared to clubs such as Manchester United who potentially have a £66.4 million cost.

Spending nearly £300 million on players should improve the quality of the squad, but it’s difficult to conclude that the acquisitions have enhanced Chelsea, although Everton fans may be of the same opinion given that they outspent Manchester United last season (and signed Wayne Rooney on a Bosman) for relatively little improvement on the pitch.

The above figures show that clubs with a scattergun approach to signings don’t tend to get value for money.

In a somewhat pithy footnote to the accounts Chelsea did spend a further £125 million in summer 2018 on players, it’s unclear whether this sum includes the payoff to Conte, estimated at £9 million, which takes the amount Abramovich has spent on managerial changes under his reign to just over £80 million.

Funding

Clubs get funding from three sources, bank loans, owner loans (which may or may not be interest bearing) and shares issued to investors.

Chelsea are funded by Fordstam Limited, Abramovich’s personal company, which hasn’t yet published its results, although the Chelsea press release did say this company made a profit of £24.9 million last year.

In the Chelsea cash flow statement it revealed that the club borrowed a net £37 million from Fordstam in 2017/18. Whilst the club made a profit in the year, this was insufficient to pay for the net player investment of £150 million, which was why the club had to go cap in hand to the owner.

How much is owed to Abramovich in total will be revealed when Fordstam’s accounts are revealed.

Conclusion

For most clubs winning the FA Cup, making the knockout stages of the Champions League and finishing 5th in the Premier League would be a pretty good achievement. In the world of Roman Abramovich this wasn’t good enough and so Conte paid the price.

Record profits of £61 million are unlikely to be repeated in 2019 due to the UEFA Europa League being less lucrative than the Champions League and lower profits on player sales.

The biggest fly in the ointment is Roman Abramovich and his intentions. He has invested a huge amount in the club and clearly has some affection for it, but his lack of appearances at the ground for the last year and the decision to not go ahead with a new stadium leaves Chelsea falling behind the rest of the pack potentially in future years.

In previous seasons he has paid £1m a year for his private box, but the decision to not renew it for 2017/18 will further the whispers that he is looking for an exit route.

Using the Markham Multivariate Model (Google it if you want more details) we value Chelsea presently at about £2.8 billion, but that value is likely to fall if the club cannot maintain the level of profits on player sales and qualify for the Champions League.

Bolton Wanderers: What’s the frequency Kenneth?

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Ken Anderson, Bolton Wanderers Swiss/Monaco resident chairman, has been in the firing line recently from fans, players, other clubs, unpaid creditors and the local media.

Even before Anderson was involved with the club Wanderers had been struggling financially, despite once heady days in the Premier League and a benevolent former owner.

Nat Lofthouse, the Lion of Vienna, is no doubt spinning in his grave as a series of damning stories have been publicised over the running of the one club he played for during his whole career.

A look at Bolton’s most finances over recent years shows highlights the club’s decline that has led to the present debacle as Burnden Leisure Limited, the parent company that owns both the football club and a nearby hotel, has posted the following figures in the year ended 30 June 2017.

Burnden Leisure Limited Key Figures

Income £14.7 million (down 52%)

Wages £13.8 million (down 38%)

Trading losses £13.5 million (up 67%)

Player signings £0.0 million

Player sales £6.3 million

Borrowings £22 million (down 19%)

Income

Nowadays most clubs divide their income into three main categories, Bolton are slightly different in they own a hotel via Burnden Leisure and so have four sources of revenue.

Day to day income is rare for a football club, which realistically is only open when a match is played.

Earning money from matches becomes more important as clubs drop down the divisions due to lower TV revenues and this impacted upon Wanderers in 2016/17 as they spent a season in League One.

Revenue from matches held up in 2016/17, partially due to average attendances, despite relegation, rising from 15,194 to 15,887, but is significantly lower than the final season in the Premier League in 2011/12.

Some clubs in League 1 don’t publish their profit figures, but from the ones that are available Bolton were towards the top of the matchday income table.

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Overseas TV viewers don’t have a huge appetite for third division English football, and whilst there’s a bit more interest domestically there are few live matches shown either, which explains why broadcast income is so low in this division and has fallen 96% since Bolton were in the top flight.

Nevertheless, Bolton were in receipt of parachute payments for four seasons following relegation, but the ending of these, combined with a further drop into League One, was catastrophic for the club in 2016/17.

Hotel income fell by 16% in 2016/17, probably due to a combination of fewer away fans making overnight stays for weekends in Bolton as away followings tend to be lower, along with general economic trends in the hospitality market.

As the club was on live television far less often in 2016/17 and the nature of the opposing teams was less glamourous, it made it more difficult for the commercial department to sell sponsorship deals, and this was why commercial income more than halved.

Sponsors are often local companies and they are also less likely to be keen to have a large marketing and entertainment budget for events such as football given Brexit uncertainty.

Although a club such as Bolton doesn’t have the global appeal of the likes of Manchester United or Liverpool, it can still be seen when Championship games are broadcast internationally and so expect this to rise in 2017/18.

Some fans think that shirt sponsorship deals are worth a fortune to clubs, but in the Premier League these are sometimes worth no more than £1.5 million a season, in League One it is likely to be in the tens of thousands.

Merging all the income sources together results in Wanderers having the highest total in League 1, but if hotel income is excluded this fall to £8.3 million, which shows that it was a decent achievement for the club to be promoted that season.

At least by being back in the Championship Bolton will be earning more TV money, as the EFL deal and solidarity payments from the Premier League work out at about £7million a season compared to League One.

Costs

League One income is lower than that of the Championship, but costs don’t necessarily fall as swiftly.

Like all clubs, Bolton’s main expense is in relation to players, in the form of wages and transfer fees.

Wage costs fell by a third to £13.8 million and were about a quarter of the amount that Wanderers were paying when they were in the Premier League in 2011/12.

Included in the wage total is about £1.2 million relating to the hotel, which should be noted if comparing Bolton to other clubs in the division.

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League One clubs (excluding those that use a legal loophole to avoid disclosing their costs) had an average wage bill of £6.1 million in 2016/17 and whilst Bolton’s costs were twice this it would have partially due to promotion bonuses, as well as some players being on Championship contracts that didn’t contain large relegation reduction clauses.

Love them or hate them, player wages are a regular topic for discussion amongst fans and based on a rough and ready formula we estimate that Bolton’s first team squad would have been averaging £335,000 a year.

You often hear fans saying that they ‘pay player’s wages’, but this isn’t the case in reality. The matchday income for Bolton for 2016/17 worked out at 25 pence for every pound of wages.

Transfer fees are dealt with in the accounts by something called amortisation. This takes the total transfer fees paid by the club and spreads it over the number of years of the contract signed by the player. So, when Nicolas Anelka signed for Bolton in 2006 for £8 million on a four-year contract it worked out as an annual amortisation cost of £2 million.

As the club’s finances have deteriorated in recent years it has had to reduce the sums paid for players and this impacted upon the amortisation total.

Bolton’s amortisation cost has fallen by 97% since being in the Premier League, which reflects the nature of loans and free transfers that are the most common methods of signing players in League One.

Bolton also paid £33,000 a week in 2016/17 in interest charges, partly due to an unusual arrangement with a company called Sports Shield BWFC Limited, controlled by Dean Holdsworth, which charged a Wonga-Tastic 24% interest per annum before going into liquidation.

It looks as if the interest due to Sports Shield will not be paid following a dispute with the club, so there should be a £1m reversal of interest charges in the 2017/18 accounts.

Further costs related to Ken Anderson, the club owner who was previously barred from being a company director in the UK for eight years.

As someone who used to work in the insolvency industry, you would have to irritate the authorities a huge amount just to get a telling off, so his behaviour in achieving an eight-year ban (which expired a few years ago) must have been spectacular in terms of poor governance and transparency. David Conn, The Guardian’s superb rottweiler like investigative journalist, uncovered some of Anderson’s past that does not paint him in a particularly good light.

Bolton’s ‘rogue chairman’ Ken Anderson puts EFL ownership rules under scrutiny | Football | The Guardian

Anderson was paid £525,000 for his services via Inner Circle Investments Limited, a company he set up in 2015 with an investment of £1 of shares.

By having such an arrangement, it allows him to legitimately say that he is not being paid a salary by Wanderers.

Inner Circle Investments Ltd appears to be little more than an investments vehicle, as the only asset it owns is a 95% share in Burnden Leisure.

In addition, £125,000 was paid to another member of the Anderson family, which appears to Ken’s son Lee Anderson, via something called the Athos Group. A trawl of Company’s House reveals that Athos Group is a services company that seems to have no executive called Lee Anderson. It would therefore appear that Lee was paid for consultancy or other work, such as modelling BWFC leisurewear.

Profits and Losses

There is a common misconception that football clubs, especially those in the Premier League, are a licence to print money. Research shows that clubs in the Premier League only started to make profits from 2014/15 when Sky and BT increased the sums paid for broadcast rights by 70%. Clubs outside the top flight, especially in the Championship, lose large sums, and Bolton are no exception to this.

Over the course of the last decade Bolton lost £178.5 million, despite spending the first half of that period in the Premier League. These losses were initially absorbed by Eddie Davies, before he became too ill to continue. This is where Dean Holdsworth and Ken Anderson stepped in, although it seems the former was all fur coat and no knickers when it came to covering the day to day running costs, and the two fell out, resulting in Anderson obtaining majority control.

Ken Anderson deserves credit if he’s therefore been underwriting the trading losses, and cutting costs.

His critics will no doubt point to the sale of players to offset these losses, the muddy waters on this should clear when the 2018 accounts are published.

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If you are going to run a football club in the Championship then expect to incur substantial losses, as shown above. Ken Anderson has said that he’s not rich enough to take the club forward and is seeking external investment, but surely he must have known how much it costs to run a club in the Championship before becoming involved in Bolton.

Recent non-payment of wages (which Anderson claims to have now paid out of his own pocket), player strike threats and news of players loaned to Bolton having their wages paid by the host club, combined with a transfer embargo from the EFL suggest the club is struggling to pay the day to day costs.

Player trading

Bolton’s player purchases and sales history in recent years is a textbook analysis of a club that has fallen through the divisions.

In the Premier League the club was able to buy and sell players in multi-million-pound deals. Once relegated the initially the club buys players in an attempt to bounce back into the Premier League, and if this becomes unlikely then the purchases decrease and sales rise as the club needs to flog off the talent to pay the bills.

Funding

Football clubs can borrow from three broad sources, third party loans, director’s loans (which may or may not be interest bearing) and shares, which can in theory receive dividends if the club makes a profit, but in most cases don’t.

Whilst Eddie Davies was around Bolton were beneficiaries of his benevolence as he lent money interest free to the club he loved. This, as Tom Jones once said, is not unusual for local lads who have been successful in business, as clubs such as Huddersfield, Stoke, Brighton and Brentford will testify.

Another former director, Brett Warburton, (of the crumpet making baker family) has lent Bolton £2.5 million, but is charging interest at a rate that is far higher than he is likely to earn on his ISA.

Davies lent the club about £175 million, effectively summarised in the above table. He then in 2016 wrote off nearly all the sum due.

In September 2018, shortly before his death, Davies lent the club a further £4.8 million to allow it to pay off a loan due to Blumarble Capital Limited, a company with two employees and relatively few assets, apart from, according to its last recorded balance sheet, a loan due from another company of £4.8 million (almost certainly Bolton) and some cash.

Blumarble effectively bought the loan from the liquidators of Sports Shield and have charged interest at 10% compared to 24% on the original loan.

Blu Marble was threatening to put Bolton into administration at the time. Eddie Davies’s loan came via a company called Moonshift Investments Limited based in the British Virgin Islands tax haven.

Ken Anderson has repeatedly said in his ‘notes from the Chairman’ column that Bolton have lower debts than most clubs in the Championship. This is true, but the credit for this should surely go to Davies rather than Anderson in writing off so large a sum, so it’s difficult why Anderson is so proud of himself over this issue.

Conclusion

Bolton’s is a sad tale, a once proud club whose name is continually being dragged into the mud. Fans just want to be able to see their team play some decent football with the certainty that there will still be a club in a month’s time, and that certainty is not presently guaranteed.

Ken Anderson claims that all is right, and that people should ignore his past in terms of running companies into the ground and being banned from being a director. Perhaps he is correct, all is Hunky Dory and HMRC, Stellar Football Limited (one of the world’s most successful sports agencies) the Insolvency Service, Forest Green Rovers, The Bolton News and all of the club blogs and fan groups have it wrong in terms of the club’s finances.

Straight answers are what are required to allay fears, but Anderson’s approach is one of snide whatabouttery in his Chairman’s notes column in the club program and website, which will I suspect result in a further loss of goodwill to a club that needs support from everyone in the game.

Anderson’s motives are unclear. If he wants to run the club then surely he should expect that it will lose money in the Championship, so whining about having to cover wages makes him no different to any other club owner in the division.

His other ambition may have been to flip the club by selling it at a profit to someone else, here we will have to wait and see the outcome.

As for his financial rewards from involvement with the club, they are high by League One standards but the club was promoted so he can argue were deserved.

If there were not subsequent alleged issues involving winding up orders and non-payment of staff or other clubs for loan fees payments to him become more difficult to justify.

One way to stop the brickbats is for Anderson to publish the 2018 accounts. Bolton will have had to submit them to the EFL for Profitability and Sustainability reasons (the new posh words for FFP), so there’s little reason to delay submission to Companies House. This could stop the criticism in its tracks if all is as rosy as Anderson claims, over to you Ken…

Everton 2017/18: The Long and Winding Road

He who smelt it, dealt it…

Introduction:

Farhad Moshiri, Everton’s new owner, had a busy year in 2017/18, sacking two managers and trying to make progress on a new stadium for the club.

After sacking Ronald Koeman in October 2017, the club’s fans grumpily tolerated the alehouse tactics of Sam Allardyce that took them from 13th to 8th in the Premier League, and then he too was jettisoned.

To an outsider this seems harsh, but phone ins and social media comments clearly indicated that Allardyce’s pragmatism in achieving results was not enough for a fanbase that had high expectations last season.

Spending restrictions under the previous owner Bill Kenwright were replaced with both managers splashing the cash as never before, and this trend has continued in 2018/19 under Marco Silva.

An analysis of Everton’s accounts shows that the club is in a far better place under Moshiri, but is this enough for them to challenge the ‘Big Six’ or should expectations be more focussed on being the best of the rest?

Key financial figures for year to 31 May 2018: Everton Football Club Company Limited

Income £189.2 million (up 10%).

Wages £145.5 million (up 39%) .

Operating loss £10.2 million (previous year £39.7million profit)

Player signings £214.6 million (up 133%)

Player sales £108.5 million (up 98%)

Owner loans £149.25 million

Income:

Matchday income for a club such as Everton tends to be the smallest element, but is essential for both financial fair play (FFP) purposes and if the club wants to challenge the established elite.

How to increase this income stream is tricky, as it can realistically can only be achieved by higher prices, more fixtures (such as through cup runs of qualifying for UEFA competitions)…or by moving to a bigger venue.

As can be seen from the above graph, Everton’s matchday income rose by 15% last season, as the club participated in, but did not progress too far, in the Europa League.

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Selling tickets at competitive prices has always been a symbol of Everton’s traditional working class fanbase, and this is reflected in the relatively low total of £418 per fan, as the club’s stadium is not presently suited for prawn sandwich consumers.

Relative to Liverpool, Everton only generated 29 pence from each fan for every £1 of matchday income for their rivals from Anfield.

A move to Bramley Moore Dock, which is presently under discussion, is therefore essential if Everton have genuine ambitions at generating the level of income that will allow them to compete at the top table.

Nevertheless, it is difficult to see Everton attracting the number of football tourists, who are prepared to pay higher ticket prices and spend large sums in the merchandise store that will substantially boost matchday income, even if the club does move venues.

Commercial income for Everton rose by 60% in 2017/18, and the reason for this, according to the accounts, is that somewhat surprisingly Europa League income of €14.1 million was allocated to this source, as well as new shirt sponsorship deals from SportPesa and Angry Birds.

Income from UEFA is mainly in the form of central payments which are funded by TV companies, so it would seem logical to perhaps show this money as part of broadcasting income, although we would stress Everton have done nothing wrong with the way they accounted for this money.

Diving into the footnotes of the accounts shows that Everton’s commercial income also included £6 million again for sponsorship of the training complex from USM Services, the Ukrainian metal trading company that is partly owned by Farhad Moshiri, this has caused critics to question the commercial logic of such a deal and mutter about ‘financial doping’ of the accounts.

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Finally, Everton generated money from broadcasting, and like most Premier League clubs, this is the main source of income.

As the club finished one place lower than the previous season, this meant that broadcast income was lower, as the formula for how it is allocated to clubs includes an element that is based on the final position in the table.

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Relative to the clubs who finished around it the table, Everton were an attractive proposition to the TV companies in 2017/18, perhaps initially partly due to the Rooney factor, with 19 Premier League matches being shown live, one more than the previous season.

The club has been quoted as saying that the proportion of total income received from broadcasting fell to 69% in 2017/18 from 76% the previous season, but if UEFA prize money is included within broadcasting this figure has hardly changed.

So, overall, Everton’s income for 2017/18 was broadly in line with the club’s final position in the table and whilst the gap to the next club up (Leicester) will be eliminated as the Foxes are no longer in the Champions League, there is still a £120 million hole before Everton can catch up with Spurs, who will have the benefits of playing at Wembley and a new stadium to boost their finances.

Costs

The main costs for clubs are those relating to players, in the form of wages and transfer fee amortisation.

Whilst Everton’s income rose by 10% in 2017/18, it failed to keep pace with player related costs as the investment of players of the calibre of Sigurdsson, Pickford, Rooney, Walcott, Keane and Tosun came with associated wage demands. Normally there is a big wage jump in the first year of a new TV deal (which commenced in 2016/17) followed by relative stability, but this has not been the case for Everton as Moshiri released the handbrake on player recruitment.

Everton’s average weekly wage (and we fully accept that these are rough and ready figures) jumped from £49,000 to £70,000 a week, putting Everton substantially ahead of Champions League qualifiers Spurs (albeit Spurs figures are for 2016/17).

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As a consequence, Everton’s wages to income ratio increased to 77%, meaning that the club was paying £77 in wages for every £100 of income.

It is not just players who have benefitted from the generosity of the owner, the highest paid director saw their income rise by 57% to £927,000.

By Premier League standards Everton’s board are reasonably well paid, but this pales into significance when compared to Daniel Levy’s package of over £6 million at Spurs, although Daniel’s fan club will no doubt point out this is partially linked to bonuses linked to his amazing success at delivering Spurs’ new stadium on time and budget.

The amortisation cost represents the transfer fee paid spread over the term of the contract signed by a player. So, when Everton signed Sigurdsson for £45 million on a five-year deal it meant that the amortisation cost is £9 million (45/5) a year for five years.

Everton’s annual amortisation cost has tripled since Moshiri acquired the club, showing the extent of his investment in the playing squad.

In using amortisation, it is possible to get a broader feel for a club’s longer-term transfer policy rather than just a couple of windows of buying a selling within an individual season. It would appear that Everton’s strategy is to try to compete with the big six in terms of player investment, although this is an arms race where you have to run to stand still as competing clubs constantly up the ante (apart from Spurs).

The substantial investment made in the fees paid for players meant that if amortisation costs are added to wages, it cost Everton £112 in player costs for every £100 of income generated, leaving nothing to pay the remaining bills of the club, unless there are substantial player sales too or an owner willing to underwrite the day to day expenses.

In terms of player sales, these were substantial, as the departure of Lukaku, Barkley and Deulofeu were the main contributors to a profit of £88 million. The danger with such an approach to funding the club’s day to day costs though is that sometimes it forces the club to be a seller, and also there are no guarantees that there will be buyers for your prize assets at the price you were hoping to sell them for.

Everton had some costs that fans will hope will not be repeated.

  • Sacking Koeman and Allardyce, along with their entourages, did not come cheap, as the club has to pay out £14.3 million to show them the door at Goodison. It had cost the club £11.3 million in 2016 when Roberto Martinez was sacked.
  • There were transfer fee write downs of £8.2 million, not sure who the players are, but no doubt Everton fans have their suspicions and will be able to finger them.
  • The new stadium project progressed during the year, but as usual consultants, accountants, lawyers and other parasites had their snouts in the trough as things crystallised, and this cost the club a further £11.4 million, which hopefully will be money well spent if the plans come to fruition.

Everton borrowed substantial sums during 2017/18. Whilst Farhad Moshiri’s loans are interest free, the club also took out a £43 million loan secured on future TV revenues, and a couple of IOU’s from other clubs for transfers (almost certainly those of Manchester United for Lukaku) were used to borrow money from another lender. Consequently, the club ended up with an interest charge of nearly £120,000 a week on these loans.

Profits and Losses

Profit, if you ask the right accountant, is what you want it to be, and there are as many types of profit as there are flavours of Pringles.

A rough definition is that profit represents income less costs, and if this figure becomes negative it becomes a loss.

The headline figure in the Everton press release was a loss of £22.9 million, although this excluded all aspects of player trading, which, if included, would reduce the loss to £10.2 million, compared to a profit of £25 million in 2016/17. This figure is distorted by the one off factors such as manager sacking costs and profits on player sales that have been discussed above.

Stripping out the above distortions gives something called EBIT (earnings before interest and tax) profit, which is a better measure of recurring profits excluding the one-off volatile items.

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Everton’s EBIT losses worked out at £1,232,000 a week in 2017/18, as the investment in player wages and transfer fees had such a significant impact on costs. This is far in excess of previous years, although could be seen as an investment in players for the future, and if it results in qualification for UEFA competitions could be substantially reduced in future seasons.

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If non-cash costs such as player amortisation are stripped out, the position however improves, and Everton have an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) profit instead of a loss.

EBITDA is an important profit measure as it is the closest to a ‘cash’ profit that analysts use to assess a business and shows how much the club has to invest in player acquisitions from its day to day activities. Everton have made over £70 million in EBITDA profit over the last six years but have invested more than that in improving the squad.

Player trading:

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According to the accounts Everton spent over £215 million in 2017/18 on player signings, and on top of that Wayne Rooney was recruited on a free transfer. This is almost as much as the club spent in the five previous years put together.

Even taking into account the record domestic transfer fee when selling Romelu Lukaku the net spend was still £106 million.

Compared to their peer group, Everton’s spending is very much as the top end of the table.

Since the end of the season the board have backed new manager Marco Silva with a net £83 million on new signings such as Richarlison.

Funding the club

Clubs usually have a choice between third party loans (which attract interest payments) owner loans (which may or may not charge interest) and shares (which occasionally pay dividends).

In the case of Everton, the club have focussed on owner loans and short term interest-bearing loans.

On top of the sums borrowed in 2017/18, the footnotes revealed that Farhad Moshiri has lent a further £100 million to the club since May 2018. This money has presumably been invested in new players and the ongoing application for a new stadium.

Conclusion

Under Moshiri Everton have certainly moved to a new level of investment, mainly in terms of the playing squad. This wasn’t particularly successful in 2017/18, but there are signs of improvement under Marco Silva as the squad starts to gel together.

Whilst the club is playing at Goodison there is little scope to increase income, and every year until a new stadium is open for business will increase the gap between the club and the ‘Big Six’, all of whom have competitive advantages in terms of income generating capacity and facilities.

Until the new stadium arrives, unless Moshiri is willing and able to underwrite substantial losses (which could cause financial fair play problems should Everton qualify for UEFA competitions) then realistically seventh place and entertaining football is the realistic target for the club.

West Ham 2018: Plastic Passion

Introduction:

Getting to the London Stadium was supposed to be a game changer financially for West Ham, according to the club’s owners, David Gold and David Sullivan.

Once the move was completed the additional capacity, combined with the greater opportunities for developing sponsorship and commercial agreements should have given the club the extra income to allow West Ham to break through the glass ceiling of the ‘Big Six’ clubs who had taken nearly all of the Champions League places this decade.

Local fans however have not been happy with the move, leading to an uneasy relationship with the owners that manifested itself last season on occasion with demonstrations and hostility towards the board of directors.

During the first two years in the London Stadium there have also been conflicts between the club and the landlords, as well as grumblings from the London Mayor that West Ham had a deal that was too generous to the club.

As the results for 2017/18 came out, has the club moved on to a new level, or has the move been more trouble than it was worth?

Key figures for year to 31 May 2018: WH Holding Limited

Income £176.3 million (down 4%).

Wages £106.6 million (up 12%) .

Operating profit £22.0 million (down 55%)

Player signings £60.9 million (down 25%)

Player sales £57.7 million

Shareholder loans £54.5 million.

Income:

Nearly all clubs split their income into three main sources, matchday, broadcasting and commercial, for comparative purposes, and West Ham are no different.

Despite having now spent two years in the London Stadium, which had a capacity of 57,000 last season compared to the Boleyn Ground, where I saw my first ever football match in 1971, matchday income last season was lower than in the final season of the 35,000 seater iconic ground that was West Ham’s home for so long.

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Second season syndrome is often evidenced by lower attendances, but this wasn’t the case for West Ham as tickets sold out for every game, but even so matchday income fell £4 million as there were four fewer fixtures played due to non-participation in the Europa Cup and less domestic cup progress at home.

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Unless West Ham can either further increase the stadium capacity (potential is 66,000), increase prices or achieve a good UEFA competition run it is difficult to see how West Ham can narrow the gap with the clubs above them, especially with Spurs, should their new stadium materialise this season, having a ticket pricing structure aimed at lightening wallets.

Longer term West Ham could potentially sell more tickets to the prawn sandwich element of the fanbase, who are prepared to pay higher prices for hospitality tickets and all that goes with that the commercialisation of the game.

Lowering season ticket prices at the London Stadium was one of the cornerstones of the owners’ rationale behind the move away from the Boleyn, but once reduced, it is difficult to see how prices can then be increased to narrow the matchday income gap with the clubs above West Ham.

In the case of broadcast income, West Ham still remain an attractive proposition to the TV companies, with 17 Premier League matches being shown live domestically in 2017/18, the highest of any team in the bottom half of the division.

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Variances from season to season only tend to arise during the three-year period of a TV deal if the club finishes in a different position to the previous season, so the fall from 11th to 13th resulted in a slight fall from this income source.

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Another way of increasing broadcast income is to make progress in UEFA competitions, as the sums available to clubs for these rights are worth up to £100 million a season and this has created a glass ceiling for clubs such as West Ham keen to break into the ‘Big Six’ who have vacuumed up nearly all of these riches in recent years.

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No one was expecting West Ham’s commercial income to fall last season, so the 6% decrease caused eyebrows to raise as this was the area the owners hoped to grow the most with the stadium move

A reason given for the decrease is that the commercial income for 2017 contained ‘one-off factors’ which were behind the 25% increase that year, presumably linked to the move away from the Boleyn.

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Relative to other clubs West Ham are way behind the self-styled ‘Big Six’ who have the advantage of being able to sell commercial packages to sponsors wanting regular Champions/Europa League exposure, as well as more lucrative overseas pre-season visits to where their football tourist fanbases are located.

Everton’s commercial income being higher than that of West Ham may surprise some Hammer’s fans, but this is partially due to a lucrative training ground naming rights deal with the business partner of Everton’s owner.

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Due to the sums paid by TV companies for broadcast rights, this source represented 2/3 of West Ham’s total income for 2017/18, but this is a lot less than for some other clubs who are effectively little more than entertainment slaves for BT and Sky.

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Income overall for West Ham at £176 million puts them into the top half in the Premier League, and it is difficult to see them being overtaken by the clubs below them, equally it is unlikely to see how they can move to the £300 million a year gang who dominate Champions League places.

Costs

Largest costs for clubs are those relating to players, in the form of wages and transfer fee amortisation.

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Despite all income types falling in 2017/18, the wage bill increased by over 12% as a combination of new players and new contracts for existing squad members proved to be expensive.

Oberving individual player wages is not really within our realm but based on a formula that seems to generate decent benchmark figures, the average West Ham player is paid about £51,000 a week, but this is surprisingly below smaller clubs such as Southampton and Crystal Palace.

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Some comfort can be gleaned by looking at the club’s wages to income ratio, although this has increased it is still within the £60 of wages to £100 of income threshold that is deemed to be ideal for a Premier League club.

Experts divide transfer fees paid over the contract period to calculate something called amortisation and this fell by 10% in 2017/18 despite West Ham breaking their transfer fee record by signing Arnautovic for £20 million on a five-year deal, which gives an amortisation cost of £4 million (£20 million/5) per year.

Looking at amortisation, it is possible to get a broader feel for a club’s longer-term transfer policy rather than just a couple of windows of buying a selling within an individual season.

Luckily for the present season, with Spurs signing no players during the 2018/19 window, and West Ham making substantial investment in the squad, the Hammers should jump to 7th in the amortisation table, suggesting that the owners have backed the manager in the transfer market.

Ever since moving to the London Stadium the club have been involved in a rent dispute with the owners and for 2017/18 the rental cost rose 25% to £2.9 million.

Reviewing the profit and loss acount one other major cost for the club is loan interest, which was about £75,000 a week during 2017/18, about half of which was in respect of loans from Messrs Gold and Sullivan.

Selling the Boleyn Ground in 2016/17 generated a one-off profit of £8.6 million for the club, which reduced overall costs (although the new owners, Boleyn Phoenix Limited then seemed to sell it to Barrett Homes immediately for £19 million profit for themselves, this seems strange for such a shrewd property trader such as David Sullivan).

Directors’ pay

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West Ham’s CEO Karren Brady saw her pay package stabilise at about £900,000 in recent years, reflecting the faith that Gold and Sullivan see in her, although according to some West Ham bloggers she has substantial other income streams too.

By the standards of the Premier League Brady earns about the average amount, although eyebrows will be raised at the lack of payments to executives from some other clubs, with Arsene Wenger and Michel Platini seen muttering ‘financial doping’ to anyone who is prepared to listen.

Profits and Losses

Profit is a bit like love or deciding which is the hardest Tellytubby, in that it is difficult to agree on a universal definition.

Broadly profits are income less costs, and the headline figure for West Ham was an £18.3 million profit last season, or £350,000 a week. This figure is distorted by a couple of factors though.

In 2016/17 the club’s headline profit before tax included the gain on the sale of the Boleyn Ground as well as £28 million from selling Payet and Tomkins. Similarly in 2017/18 the club made £30 million by selling the likes of Andre Ayew, Sakho, Fletcher and Randolph.

Stripping out the above distortions gives something called EBIT (earnings before interest and tax) profit, which is a more balanced look at what recurring profits would be without the one-off impact of player sales and similar non-trading transactions.

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This shows that instead of a profit, West Ham actually lost about £120,000 a week in 2017/18, as the investment in player wages and the decrease in income combined to reduce profits by about £17 million.

If non-cash costs such as player amortisation are stripped out, the position however improves, and West Ham have an EBITDA profit (Earnings Before Interest, Tax, Depreciation and Amortisation).

EBITDA is an important profit measure as it is the closest to a ‘cash’ profit that analysts use to assess a business and shows how much the club has to invest in player acquisitions from its day to day activities. West Ham have made over £207 million in EBITDA profit over the last six years.

Whilst Gold and Sullivan correctly can claim that they haven’t paid themselves a penny in wages since acquiring the club in 2010, they have lent it money as the previous Icelandic Bank owners went bust. Gold and Sullivan have charged interest at between 4-6 % on these loans since then. They claim that this is less than would be charged by commercial banks, and so they are doing the club a favour. Other ‘local’ owners of Premier League clubs, such as the Coates family at Stoke, Tony Bloom at Brighton and Dean Hoyle at Huddersfield have all lent money interest free.

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Gold and Sullivan however have charged the club nearly £17 million in interest charges and have taken out over £14 million of this out in the form of cash since August 2017.

Player trading:

According to the accounts West Ham spent over £60 million in 2017/18 on player signings, substantially less than the previous year. This doesn’t necessarily buy you a lot in the present Premier League market though.

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The net spend was just £3 million though.

Compared to their peer group, West Ham’s spending was at best described as modest in 2017/18.

Since the end of the season the board have backed new manager Manual Pelligrini with a net £89 million on new signings such as Felipe Anderson.

Funding the club

Clubs usually have a choice between third party loans (which attract interest payments) owners loans (which may or may not charge interest) and shares (which occasionally pay dividends).

In the case of West Ham the club have focussed on interest bearing borrowings.

Gold and Sullivan did initially bail out the club but have not lent anything since 2013. Since then the club have taken on overseas investments and also borrowed money on a short term basis which is then repaid when the Premier League forward the first instalment of the annual broadcasting payments.

Conclusion

West Ham’s promises of a financial boost following the move to the London Stadium has not to date materialised, although the uneasy relationship with fans that resulted in hostility towards the board has been reduced to simmering resentment as results have improved under Pelligrini.

Whilst there is scope for income to increase if the capacity of the London Stadium is allowed to reach its maximum potential, realistically the gap between the club’s finances under the present owners, and that of the ‘Big Six’, is likely to result in the annual battle being with the likes of Everton. Leicester and whoever else is showing some short term form (last year Burnley, this year Wolves and Bournemouth) for the less than coveted title of ‘Best of the rest’. Whether fans who have sacrificed their historical home at Upton Park will think this is a price worth paying is yet to be determined.