Newcastle 2017: Lovely Jubbly

Introduction

Mike Ashley, Newcastle’s colourful owner, has finally submitted the club’s accounts for the year ended 30 June 2017 for public scrutiny.

In first announcing a selected set of information from the accounts on the club’s website Ashley has laid himself open to accusations of trying to massage the message from the club’s season in the Championship.

Kind words are in short supply in Tyneside for Ashley, who bought the club in May 2007 and has overseen two relegations during that period.

Easy to criticise, and hard to love, but is Ashley as bad as some make out, given that he has lent the club over £140 million interest free, and invested a similar sum in buying share in the club too?

A look at the accounts suggests that the bleak picture painted by the press announcement last weekend perhaps overegged the pudding in terms of just how big a gamble the club took last season in incurring record losses of over £90 million.

Income

Starting at the top of the income statement, Newcastle had total revenue of £85.7 million, a record for a club in the Championship, but nearly a third less than the previous season in the Premier League.

Having a lot of money is one thing, and Newcastle have earned exactly £900 million under Ashley’s ownership, but putting it to good use is another, and Toon fans will question a lot of the decisions made in how that money has been utilised.

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Looking at the breakdown of the income total, the biggest contributor is broadcast income from the Premier League in the form of parachute payments.

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Earning Newcastle £40.9 million in 2016/17, parachute payments, which worked out at 55% of the Premier League’s ‘Basic Award’ (the part of the broadcast deal that is split evenly between clubs, aim to cushion the blow of relegation when clubs have players on Premier League contracts which otherwise would be difficult to fulfil in the Championship (or, in the case of Sunderland, League One).

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Year by year parachute payments fall, from 55% of the basic award in the first year outside the Premier League, to 45% in year two and 20% in year three.

Income from broadcasting in the Championship for non-parachute payment clubs is a basic of about £6.5 million a year, plus £100,000 for every home match shown live on Sky.

Some of the Championship broadcasting income (about £2.3 million per year in the Championship) comes from ‘solidarity payments’ from the Premier League, which is an annual handout to the 72 clubs in the Football League.

A huge gap therefore exists between those clubs in the Championship earning parachute payments and those that do not.

Fans of parachute payments point out that it allows clubs to negotiate long term contracts with decent players who might otherwise go elsewhere if there are large wage reductions clauses in their contracts.

Allowing clubs three years (or two if they are promoted and immediately relegated, such as happened to Middlesbrough in 2016/17) means that there doesn’t need to be a fire sale of player of the calibre of JonJo Shelvey if a club goes down.

This allows a club relegated to regroup and familiarise itself with the financial constraints of the Championship and reduce the risk of going into administration.

Critics of the parachute payment system claim that it gives clubs relegated from the Premier League an unfair advantage over their rivals.

Only one club in receipt of parachute payments in 2016/17 was promoted though, and that club was Newcastle, Norwich finished 8th and Villa 13th, despite also receiving nearly £41 million from the Premier League.

Commercial income for Newcastle in 2016/17 was £14.8 million, down from £28 million the previous season.

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Knockers of Ashley will point out he uses St James Park as an advertising vehicle for his Sports Direct cheap and cheerful sports emporium, and he should be generating more commercial income than any other club in the division.

Newcastle fans take the view that they should be earning far more commercial money given the history, heritage and size of the club, but it already is fairly competitive with many in the Premier League whose matches are broadcast around the world each week and who generate vastly bigger viewing figures than those teams in the Championship.

Earnings from matchday sales were maintained due to Newcastle fans turning up every week and average attendances at St James Park were an amazing 51,108, beaten by only five teams in the Premier League.

You must give respect to Newcastle fans for turning up in numbers as matchday income at St James’ Park was twice that of any club in the Championship as crowds averaged 51,000.

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Costs

Wages are a club’s biggest expense, and Newcastle spent a record amount of £112.2 million in 2016/17, up 50% from the previous season in the Premier League, but this headline sum includes some one-off costs.

A sizeable chunk of the wage bill (£9.9 million) was paid for promotion bonuses and a further £22 million was for players who were not considered part of the first team and so had their contracts paid up or went on loan with NUFC picking up some or all the wage bill.

Nevertheless, even if these figures are excluded the wage bill would have been over £80 million, compared to the average Championship figure of £29.8 million.

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Kowtowing to Mike Ashley as Newcastle United Ltd.’s only director is Lee Charnley, who earned ‘only’ £150,000 for his services in the year and waived his right to a bonus.

Every club needs a front man and Charnley acts as the interface between unhappy Toon fans and the Ashley.

Rightly or wrongly, Charnley is seen in as bad a light as Ashley on Tyneside but his pay is far lower than that of other football executives, with the average in the Premier League being £1,008,000 a year and some other CEO’s in the Championship earned seven figures too.

The other major cost is transfer fee amortisation. This is how clubs deal with the sums paid for player transfers. This is achieved by spreading the cost over the contract life. So when Matt Ritchie was signed in the summer of 2016 from Bournemouth for £11million on a five year contract, this works out as an amortisation charge of £2.2 million (11/5) a year.

The total amortisation cost incurred by Newcastle was £35.8 million, far higher than that of any other club in the division. This also reflects ‘impairment charges’ which is when the club writes down player values in the accounts when they are a bit rubbish. The sum involved within the amortisation figure is not shown, but I’m sure Toon fans can name the players and the manager(s) who signed them.

Amortisation is not however a cash cost, so there’s a case for treating it cautiously when looking at the figures.

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Profits

Profits are income less costs, and here the club has been disingenuous by promoting in the press release a £91 million loss figure. However, this is before considering gains on player sales of over £42 million and includes the non-recurring costs from promotion bonuses and the contract write ups.

If you strip out the one-off costs and income and exclude amortisation claiming it is a non-cash expense, we get to something called EBITDA (Earnings Before Interest Tax Depreciation and Amortisation). This is the profit most focussed on by analysts, at it is a sustainable cash equivalent of profit.

This gives a figure of £19.8 million, still sizeable but far less than the sum being touted by the club to the media when the results were announced.

Newcastle made substantial EBITDA profits in previous years so were able to absorb this loss reasonably easily.

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There is no chance of Newcastle being subject to Financial Fair Play sanctions from the Football League as promotion bonuses are excluded and gains on player sales included when calculating FFP losses.

Player trading

Mike Ashley’s reluctance to spend money in the transfer market is legendary. In the period since he bought the club he has spent £308 million on players (less than what Mourinho and Guardiola each spent in their first 15 months in charge) and raked in sales income of £244 million.

This gives a net spend of just £65 million over the period.

Last season in the Championship Newcastle bought players for £41 million in the shape of Ritchie, Gayle, Yedlin and Clarke, but managed to rake in £70 million from selling Sissoko Wijnauldum and Townsend.

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Compared to the rest of the division Newcastle certainly spend big, but it was less than half the sums paid by Villa, who finished far down the table.

Debts

Mike Ashley lent the club a further £15 million during the year, taking his total interest free loans to £144 million. The club also had an overdraft at 30 June 2017, presumably used to pay the promotion bonuses, but this overdraft would have been wiped out when the Premier League broadcast income for 2017/18, which eventually totalled £123 million started to flow to the club.

In addition to the loans Ashley has invested a further £134 million in shares in the club, taking his total investment to £278 million. Rumour is he is trying to sell if for £400 million, but this price looks optimistic for a business that realistically has a 1 in 4 chance of losing its main source of income (PL TV money) at the start of each year.

Conclusion

Newcastle did take a gamble in investing in players in 2016/17 to engineer a return to the Premier League, but not as much as the club has claimed.

Astute management from Benitez combined with canny signings on players who have a good resale value during the season helped them bounce back.

What happens next with Mike Ashley at the helm is unknown, he is the football Fog on the Tyne and it won’t lift until he leaves.

Sunderland: Short Changed

As Sunderland’s new owner Stewart Donald picks up the reigns of the club and former head honcho Ellis Short walks away with the debts of £161 milion (and £40m in instalments from Donald) , the figures for their final season in the Premier League contain some grim reading although are rescued to a degree by the sale of Jordan Pickford in June 2017.

Summary of key figures (Sunderland Limited)

Income £126.4 million (up 17%)

Broadcasting income £95.6 million (up 34%)

Wages £84.4 million (up 1%)

Loss before player sales £38.9 million (up 30%)

Player purchases £47.5 million (£30.7 million in 2016)

Player sales £43.1 million (£11.7 million in 2016)

Borrowings: £161.7 million (£137.3 million in 2016)

Income

The Black Cats have been in the Premier League (PL) since 2007, and Ellis Short took control of the club a year later.

Their income has broadly been linked to new PL broadcasting deals, which are negotiated every three years.

The impact of the new TV deals that commenced in 2011, 2014 and 2017 have been the biggest drivers of extra income for the club.

The problem for a club such as Sunderland is trying to find other ways of generating income when there is so much focus on the self-styled ‘Big Six’ (United, City, Liverpool, Chelsea, Arsenal and Spurs).

During their ten years in the Premier League, Sunderland earned £866 million, their fans will wonder how well that money has been spent.

Nineteen clubs who were in the Premier League last season have reported their results to date. Only small London club Crystal Palace, whose owner also controls a company called ‘Smoke and Mirrors Limited’ are now outstanding in sending in their results to Companies House, although they have sent them to the Premier League as the figures have to be scrutinised by the end of the calendar year.

All Premier League clubs are reporting higher income for 2016/17 than in the previous season. The average income of the 19 clubs that have reported to date is £233 million, up 28% from £182 million the previous season. The average in the Championship is just £28.6 million.

The median income, (remember that from your GCSE Maths class?) perhaps more relevant to a non-Big Six club, is £171 million.

Sunderland are in a bunch of nine clubs who are in the £117-138 million income bracket.

The main reason for the increase in overall income in the Premier League for 2016/17 was the new Sky/BT domestic TV deal, worth £5.1 billion over three seasons.

 

Overall the Big Six already have 56% of the total income of the Premier League clubs but want more.

Like all clubs Sunderland broadly their income from three sources, matchday, broadcasting and commercial/sponsorship.

Matchday Income

Matchday income fell by 15% to £9 million. Whilst stated attendances fell only 4% to an impressive sounding 41,287, anecdotal evidence was that many fans, especially those with season tickets, did not go to many matches, such was the dismal performances on the pitch.

Sunderland’s matchday income per fan fell by over 10% to just £217. This works out at just £11.41 per match and is one of the lowest in the division. For Sunderland fans querying the figure remember this is the average price so included children and other concessions and is also net of VAT at 20%.

Part of the reason why the figure is so lows is that Sunderland is not an affluent city and does not attract large numbers of football tourists who are willing to pay large sums to attend matches (and spend a lot on merchandise).

Being knocked out of the FA Cup in the third round didn’t help matchday income either.

The lack of decent football had a more significant impact on the prawn sandwich brigade, as it’s very difficult to sell boxes and hospitality packages at high prices to watch poor football.

Under Ellis Short, Sunderland’s matchday income fell by over a third during the nine years he oversaw the club. He can’t be accused of fleecing the fans, as  overall in the Premier League, matchday income counts for £1 in every £7, but for Sunderland it is only £1 in every £14.

The large capacity of the Stadium of Light meant that Sunderland did have greater matchday income than nearly half the clubs in the Premier League last season, but their total pales into significance compared to the big boys.

Care should also be taken when looking at individual figures, as different clubs calculate numbers in different ways. Some clubs include merchandise sales as part of matchday, whereas others stick it into the commercial heading.

Overall the Big Six hoover up 75% of matchday income of the Premier League, as they have larger stadia in the main and also are able to attract daytrippers and tourists to watch their matches, at premium prices.

Broadcast Income

Broadcast income for Premier League clubs is linked to deals signed by the PL on behalf of all 20 clubs in the League.

Sunderland suffered in 2016/17 from finishing bottom of the table compared to a squeaky bum 17th the previous season. This was more than compensated though by the new domestic BT/Sky broadcasting deal, which was worth 70% more than the previous one that expired in 2015/16.

Premier League TV money is divided into 5 pots, as follows:

For domestic rights there are three pots.

  • 50% of the money is split evenly between all 20 clubs (called the ‘Basic Award’)
  • 25% is split based on the number of times a club appears live on TV, with each club being guaranteed ten matches, and an extra £1 million for each additional appearance
  • 25% is based on final league position, with the bottom team receiving £1.9 million, and every place above that being worth an additional £1.9 million. Therefore, by finishing four places higher in 2016/17 than the previous season Sunderland earned an additional £7.6 million, which is more than they earned through matchday income.

Overseas TV rights are presently split equally between all 20 clubs, but a bunfight is likely to take place this summer as the ‘Big Six’ claim they are main reason why overseas broadcasters pay so much for PL rights. The Big Six’s argument conveniently ignores that they earn additional broadcasting rights from appearing in European competitions.

If the Big Six are to be successful, they will need 14 votes at the meeting of club owners in the summer. Expect to see tantrums and threats of joining/creating a European Super League should they not get their way. They are of course more than welcome to close the door should they leave.

The PL’s central advertising/commercial contracts are also split evenly between all 20 clubs.

Despite stinking out the Premier League in 2016/17, Sunderland’s broadcast income increased by a third to nearly £96 million. In the three previous season the figure was broadly static, reflecting the Sky/BT deal that was in operation during that period.

It comes as no surprise that Sunderland were close to the bottom of the table in terms of broadcast income for the season, given that they only received £1.9 million in prize money for finishing 20th in the PL.

The relatively democratic division of broadcast income is highlighted in the above table. For every £1 of TV income received by Sunderland, the top earning team (ere Manchester City) earned £213. When it comes to matchday income that figure rises to £580 earned by Manchester United for every £100 by Sunderland, and commercial is £999 by United for every £100 by Sunderland.

As the club was relegated in 2016/17 attention now turns to the PL’s snappily named rule D.25, more commonly called parachute payments.

Sunderland therefore will have received for 2017/18 55% of the basic award (£35.3 million in 2016/17) and overseas broadcasting money (£39.1 million in 2016/17), which works out at £41 million.

For the forthcoming season in League One, this will drop to £33.5 million, and then there will be a final payment of £14.9 million in 2019/20.

After that the club’s broadcast earnings will be governed by the EFL broadcast deal, which is worth about £2.3 million a season for clubs in the Championship, £345,000 in League One and £230,000 in League Two.

In addition, clubs in the EFL receive solidarity payments from the PL. Here a proportion of the PL’s broadcast deal is passed down to the 72, and this is worth about £4.3 million for a Championship club.

Commercial Income

Commercial income in the Premier League is a case of the haves and the have nots. Here the Big Six mop are to an extent able to name their price, as it is a seller’s market and the likes of Liverpool exploit their global appeal by signing deals for individual products and end up having an official…err…timing partner with watch manufacturer Holler.

For clubs such as Sunderland the outlook is different. Here the buyers can play the likes of The Black Cats, Bournemouth, Everton, Stoke etc. off against each other when negotiating shirt and commercial deals, so the prices are far lower. In addition, smaller clubs have limited overseas appeal as football tourists and other plastic fans only tend to ‘support’ the major clubs. There are relatively few fans in Malaysia and Lagos who support the non-Big Six clubs.

Sunderland split out their hospitality/conference income out in the accounts, unlike most clubs.

Sunderland’s catering income fell by 30% in 2016/17, mainly due to some season ticket holders becoming so disillusioned that they did not turn up to matches, and the club struggling to sell hospitality packages in respect of a team that only won three games at home all season. Commercial income fell too, Dafabet continued their shirt sponsorship, worth about £5 million, but the club struggled with other deals.

Cost

The main costs at a football club are player related, wages and transfer fee amortisation.

Wages

During the Ellis Short era, Sunderland paid out £600 million in wages in nine seasons. Both he and Sunderland’s fans must be scratching their heads over just how well that money has been spent, although fans will still probably have nightmares at the memories of the likes of Santiago Vergini, Jozy Altidore and Danny Graham taking home large sums each week.

“You can fool all of the people some of the time”

Wages increased during the Short era in all but one season. Although the total wage bill only increased by 1% in 2016/17, Sunderland have a financial year end of 31 July. This means that for some players relegations clauses would have kicked in on 1 July as at that date the club is officially no longer a member of the Premier League.

Sunderland’s accounts therefore suggest the average wage was (we estimate) about £40,500 a week, although that includes one month at the lower rate in the Championship.

“They’re averaging £40k a week and I’m on £70k, try not to laugh Jack, try not to laugh in case anyone sees you”.

Their total wage bill is broadly where you would expect it to be for a club that has been a constant feature of the Premier League for the last decade, above that of promoted clubs and below that of clubs with bigger stadia and resources.

The riches of the Premier League TV deal meant that Sunderland only paid out £67 in wages for every £100 of income. If the club is relegated to the Championship the outlook is different. In the last season for which there are full records clubs paid out an average of £101 for every £100 in wages, which leaves nothing to pay for the other other running costs…including player signings.

One reason why Sunderland’s wages to income ratio has fallen is due to a variant of Financial Fair Play (FFP) called Short Term Cost Control (STCC). This restricts wage growth to £7 million a season plus any money the club generates itself from matchday and commercial sales. For a club such as Sunderland this gives a significant challenge, especially with matchday and commercial income declining.

Ellis Short has always been a hands-off owner and has tended to delegate the day to day running of the club to a chief executive. This person has been very well paid, although the competence of the decision making must surely be questioned given the many crises the club has encountered during that period.

Running a company that is effectively only open for business 20-25 times a year should allow the chief exec to concentrate on operational issues, but Sunderland seem to have had too many embarrassing moments that call into question the culture of the club, which should be set at boardroom level and filter down via the manager and coaching staff.

Chief executive Martin Bain is presumably the lucky recipient of the £1.24 million package for the highest paid director of the club for 2016/17, although it is suspected he will be packing his bags (with a large payoff) should the club sale proceed shortly.

Sunderland have had three big payoffs under Ellis Short for directors who left the club rapidly and were given ‘compensation for loss of office’. In 2011 someone (probably CEO Steve Walton) received a £573,000 payoff, the following year it was an eye watering £1,996,000 (probably to Niall Quinn) and in 2016 Margaret Byrne, who oversaw the Adam Johnson incident was rewarded to the tune of £850,000.

Player amortisation

Transfer amortisation is the method used to expense transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when Sunderland signed Didier Ndong for £13.6 million from Lorient on a 5-year contract, the amortisation charge works out as £2.72 million a year (£13.6/5).

The total amortisation expense in the profit and loss account of £29.4 million for 2016/17 is the sum of all the players who have been signed by Sunderland and for whom there has been a transfer fee.

Sunderland’s amortisation total of £29.4 million is marginally lower than the previous season, but over the last few years has been reasonably consistent. The advantage of looking at amortisation instead of player signings and sales for an individual season is that it removes the fluctuations that can arise on a short-term basis.

Whilst they are not operating in the stratospheric levels of the Big Six, Sunderland had a reasonably high amortisation cost in 2016/17 compared to the other 14 clubs who are in the relegation shakedown at the start of each season.

This would appear to suggest that Sunderland’s managers have been backed in the transfer market by the owner, but whoever oversees recruitment has wasted the budget.

If wages and amortisation costs are added together, then they took up 90% of Sunderland’s income in 2016/17, and this was the lowest figure for this ratio during Short’s ownership period.

Over his nine years in charge of the club in the Premier League, it had total income of £803 million, but had wage and amortisation costs of £833 million, which means that Ellis Short was responsible for all the remaining costs of running the club.

The first signs of how relegation is affecting local people who work for the club is shown in terms of staff numbers, as these fell by 10% in 2016/17. It is highly likely that this decline will accelerate in 2018 as the club was once again relegated, and this is the real tragedy in relation to the club. Footballers are transient in nature and moving from club to club is an occupational hazard, but for the people employed behind the scenes, they tend to be often supporters whose job at the club pays their day to day bills.

Sunderland also had a couple of one off costs in 2016/17. They were forced to pay £9.7 million in a disputed court case with Inter over the signing of unwanted Ricky Alvarez, who was signed on loan with a clause that Sunderland had to buy him in 2016 if they avoided relegation. The club duly did this, but didn’t offer Alvarez a new contract, so he disappeared to Sampdoria, and Sunderland effectively had to pay £1.2 million per game for his eight- match career at the Stadium of Light for his transfer fee, plus his wages.

Following relegation, Sunderland then valued the players in the squad using their best estimate of market values. They then wrote off over £14 million from the accounting values of the players, which is a huge sum given the way that players are accounted for in the books.

The club have not given the names and amounts by which they have written down individual players, but Mackem fans will no doubt have a long list of the guilty parties.

Loan Interest

Sunderland have considerable debts. Ellis Short’s loans are thankfully interest free. The club also has a £70 million loan from American lender SBC. This loan attracted an 8.5% interest rate, which meant that an interest charge of £6.5 million clocked up on the loan in the year, and along with other borrowing costs, the club was charged £130,000 a week in interest over the season.

Profits and losses

Profits are income less costs. Sunderland made losses before player sales in 2016/17 of £38.9 million, which works out as £750,000 a week. Even if the one-off costs discussed above are eliminated, the loss falls to a still substantial £14.8 million.

Under Ellis Short Sunderland lost a total of £248 million before player sales, and this is the richest division in the world.

EBIT (Earnings before interest and tax) remove volatile one-off transactions such as legal issues on disputes, player sale profits and payoffs.

In the Premier League Sunderland had the fifth highest EBIT loss.

Profits on player sales are calculated in a complicated manner. Rather than compare the sale and purchase price for the player, instead the sale fee is compared to the accounting value of the player, which is the cost less any amortisation charges. Sunderland sold Jordan Pickford came through the youth team, and so the whole fee is treated as a profit.

This allowed Sunderland to show a profit of over £33 million on player sales for the year to 31 July 2017. This is however lower than many of the clubs around them who made an EBIT loss. Chelsea, for example, sold Oscar to China for about £60 million, and showed a total profit on player sales of £69 million.

If profits on player sales are added in, Sunderland’s losses fall to £6 million. They are however the only club to make a loss after player sales in the whole of the Premier League.

Sunderland showed a profit of are the only club in the Premier League last season to make a loss before player sales last season, which again is an indictment of how poorly the club has been managed.

After a long period of time in which nearly all clubs were loss making, partially due to Alan Sugar’s ‘prune juice’ effect, where any increases in TV income went straight through the club into player wages, the Premier League is now far more lucrative.

Under Financial Fair Play (FFP) rules, Premier League clubs can make a maximum FFP loss of £105 million over three years. In the Championship it is £39 million over three years.

So, for the season that has just ended Sunderland will be allowed an FFP loss of two years in the Premier League plus one in the Championship, which gives a figure of £83 million. Some costs, such as infrastructure, academy and community schemes, are ignored for FFP purposes, so the club should be relatively safe in respect of FFP compliance.

Player trading

Accounting for player trading is troublesome. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. However, when the player is sold, the profit, which is based on the player’s accounting rather than market value, is shown immediately in the profit and loss account.

This creates erratic and volatile figures in the profit and loss account, which is why these are separated out from the rest of the financial results.

If we instead focus on the actual purchase and sales, Sunderland have the following figures:

The above table shows that over the nine years under Ellis Short’s ownership Sunderland have bought players for £329 million and generated sales of £169 million, a net cost over the period of £160 million over the period.

At the start of 2016/17 the squad had cost a total of over £109 million, so money had been invested in the players, but it included an awful lot of duffers.

Sunderland’s spending in 2016/17 was competitive by the standards of clubs who are not part of the PL elite. It reinforces the view that signing rubbish players, rather than not backing the manager in the market, was the driving force behind the club’s relegation to the Championship.

Debts to and from the club

Whilst Sunderland sold Pickford in June 2017, it appears that Everton paid a fair amount of the fee in cash, as amounts due from other clubs were only £11.4 million.

Of greater concern is the fact that the club owed other clubs £45.2 million for player transfers. This may be insignificant compared to the likes of Manchester United who owe over £180 million, but United do have huge income streams and don’t have league games at Fleetwood and Plymouth next season.

‘What’s worse, spunking £250 million on this shower of shite or the twat sat behing me snoring”?

Since Short took over, the club has borrowed £250 million from both him and SBC.

Some of these borrowings have been converted into shares, but at 31 July 2017 Short was owed £93 million via his Jersey based company Drumaville, and a further £70 million is due to SBC.

These loans are secured, which officially means that should repayment be sought (and the SBC loan is officially due for repayment in August 2019) the lenders could force the sale of the Stadium of Light and training facilities.

When the takeover of the club by Stewart Donald’s consortium was announced, Ellis Short inferred he was leaving Sunderland debt free, effectively writing off his loan and taking on the responsibility for the one from SBC.

What is uncertain in respect of the takeover is whether the consortium is paying anything for the shares, and if there are sums due to Short should the club return to the Premier League soon.

Summary

Ellis Short’s tenure as Sunderland owner is a textbook example of someone who thought the Premier League was an opportunity to make a lot of money and getting it spectacularly wrong.

He has effectively written out a cheque for half a million pounds every week for ten years to keep the club afloat, and during that period has seen a series of executives and managers come and go at the club.

Whilst he can afford to lose this sum, it’s still an unpleasant experience for anyone to walk away from such a spectacular financial mess.

The reaction of Sunderland fans seems to be measured. They appreciate Short’s benevolence but are angry at the quality of decisions made by a series of well remunerated professional business managers in charge of club operations.

The irony is, having measured the club value using the industry standard Markham Multivariate Model, Sunderland as a Premier League club was worth about £215 million if managed correctly, but as a Championship, and now a League One club, it is effectively worthless, as the losses each week and lack of TV income is too much of a burden.

The new owners are taking on either a black cat…or a white elephant.

Data Set

West Bromwich Albion: Dazed and Confused.

It’s of little consolation to West Brom fans as their club is facing relegation, but the club’s holding company have just published their financial results for 2016/17 revealing record profits. A few months later though it was the night of the long knives in the boardroom and the club’s boardroom big cheeses were shown the door.

Summary of key figures (West Bromwich Albion Holdings Limited)

Income £137.9 million (up 40%)

Broadcasting income £118.7 million (up 51%)

Wages £79.1 million (up 7%)

Profit before player sales £26.7 million (Loss of £5.2 million in 2016)

Player purchases £37.4 million (£28.2 million in 2016)

Player sales £19.8 million (£6.3 million in 2016)

Borrowings: None

Income

The Baggies have been in the Premier League (PL) since 2010/11, and their income has broadly been linked to new PL broadcasting deals, which are negotiated every three years.

The impact of the new TV deals that commenced in 2014 and 2017 have been the biggest drivers of extra income for the club. The problem the club has is that it is constricted by a 27,000-seater stadium and not being one of the ‘Big Six’ in terms of commercial appeal. Such is the success of the PL in selling broadcasting rights that West Brom are in the top 30 revenue generating clubs in the world in 2016/17.

Eighteen clubs who were in the Premier League last season have reported their results to date. Only car crash Sunderland, probably too busy setting the club coach’s sat nav to Accrington, and Crystal Palace, whose owner also controls a company called ‘Smoke and Mirrors Limited’ have failed to do so.

All Premier League clubs are reporting higher income for 2016/17 than in the previous season. The average income of the 18 clubs that have reported to date is £239 million, up 31% from £182 million the previous season. The average in the Championship is just £28.6 million.

West Brom are in a bunch of eight clubs who are in the £117-138 million income bracket.

The main reason for the increase in overall income in the Premier League for 2016/17 was the new Sky/BT domestic TV deal, worth £5.1 billion over three seasons.

The Premier League divide money into five pots. Three of the pots cover the domestic TV deal, and they are split 50% evenly, 25% based on the number of TV appearances (every club is guaranteed a minimum of ten of these) and 25% based on final league position. Each place up the table is worth just under £2 million.

Overseas broadcasting income and centrally agreed commercial deals are split evenly between the twenty clubs. This arrangement is likely to come under fire in the summer as the ‘Bix Six’ want to grab a bigger slice of this pie for themselves. Their argument is that overseas TV fans would rather watch one of their clubs than that of a team such as West Brom, and so they ‘deserve’ more money.

Whilst this argument is true in terms of the number of viewers, it ignores the fact that the ‘Other 14’ can compete against most clubs in Europe apart from the elite for players (all 20 EPL clubs are in the top 35 richest in Europe) and thus can put up a decent performance against the Big Six.

This partly explains why West Brom won at Old Trafford, Burnley won at Stamford Bridge, Swansea beat Liverpool and many clubs have turned over Arsenal.

Like all clubs West Brom earn their income from three sources, matchday, broadcasting and commercial/sponsorship.

Matchday Income

Matchday income fell by 12% to £6.8 million. This was due to average attendances falling 3% to 23,876 and non-existent cup runs.

Overall in the Premier League, matchday income counts for £1 in every £7, but for West Brom it is only £1 in every £20.

West Brom had the second lowest matchday income total in the division, but still managed to survive in the Premier League for many seasons. This suggests that in the Premier League it is case of spending money wisely, rather than just spending it quickly, that counts.

Ticket prices seem to have fallen since West Brom’s last season in the Premier League, with matchday income averaging £283.51, about 9% lower than in 2016. This works out at £14.92 per match, which may surprise some Baggies fans, but remember this is the average of adults, seniors and kids, and is also net of VAT.

The reduction in prices may be a combination of fewer hospitality packages being sold as the club was pragmatic if unexciting under Tony Pulis, and the capping of away fan prices in the Premier League.

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Broadcast Income

Broadcast income for Premier League clubs is linked to deals signed by the PL. West Brom benefitted in 2016/17 from finishing 10th in the table compared to 14th the previous season, but more importantly from the new domestic BT/Sky deal.

Premier League TV money is divided into 5 pots, splits as follows:

For domestic rights there are three pots.

  • 50% of the money is split evenly between all 20 clubs (called the ‘Basic Award’)
  • 25% is split based on the number of times a club appears live on TV, with each club being guaranteed ten matches, and an extra £1 million for each additional appearance
  • 25% is based on final league position, with the bottom team receiving £1.9 million, and every place above that being worth an additional £1.9 million. Therefore, by finishing four places higher in 2016/17 than the previous season West Brom earned an additional £7.6 million, which is more than they earned through matchday income.

Overseas TV rights are presently split equally between all 20 clubs, but a bunfight is likely to take place this summer as the ‘Big Six’ (Manchester United and City, Liverpool, Arsenal , Chelsea and Spurs), already far richer than the other clubs, want more of this money as they claim they are main reason why overseas broadcasters pay so much for PL rights. The Big Six’s argument conveniently ignores that they earn additional broadcasting rights from appearing in European competitions.

If the Big Six are to be successful, they will need 14 votes at the meeting of club owners in the summer. Expect to see tantrums and threats of joining/creating a European Super League should they not get their way.

The PL’s central advertising/commercial contracts are also split evenly between all 20 clubs.

The present domestic deal lasts until 2018/19, so it is likely that West Brom’s broadcast income peaked last season. If the club is relegated then the PL’s snappily named rule D.25, more commonly called parachute payments, applies.

West Brom would therefore receive 55% of the basic award (£35.3 million in 2016/17) and overseas broadcasting money (£39.1 million in 2016/17) next season, which works out at £41 million.

Commercial Income

Commercial income in the Premier League is a case of the haves and the have nots. Here the Big Six mop are to an extent able to name their price, as it is a seller’s market and the likes of Manchester United have a strategy of signing deals in individual countries for individual products, such as an official tractor partner in Japan.

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For clubs such as West Brom the outlook is different. Here the buyers can play the likes of The Baggies, Bournemouth, Everton, Stoke etc. off against each other when negotiating shirt and commercial deals, so the prices are far lower. In addition, smaller clubs have limited overseas appeal as football tourists and plastic fans only tend to ‘support’ the major clubs. Accordingly, Manchester United make £22.10 from their commercial activities for every £1 generated by West Brom.

A screenshot of a cell phone Description generated with very high confidence West Brom’s commercial income increased by nearly 6% in 2016/17, mainly due to a new shirt sponsorship deal with generic Chinese online casino operator UK-K8.com.

Cost

The main costs at a football club are player related, wages and transfer fee amortisation.

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West Brom’s wages have grown steadily over the last give years, and the average wage is (we estimate) about £38,000 a week. Their total wage bill is broadly where you would expect it to be for a club that has been a constant feature of the Premier League for the last decade, above that of promoted clubs and below that of clubs with bigger stadia and resources.

The riches of the Premier League TV deal meant that West Brom only paid out £57 in wages for every £100 of income. If the club is relegated to the Championship the outlook is different. In the last season for which there are full records clubs paid out an average of £101 for every £100 in wages, which leaves nothing to pay for the other other running costs…including player signings.

One reason why West Brom’s wages to income ratio has fallen is due to a variant of Financial Fair Play (FFP) called Short Term Cost Control (STCC). This restricts wage growth to £7 million a season plus any money the club generates itself from matchday and commercial sales. For a club such as West Brom this gives a significant challenge.

Under the new ownership of the club, the highest paid director has taken a significant reduction in pay. Under the former regime this person, presumably the CEO, was earning over a million pounds per year. This fell to ‘only’ £181,000 in 2016/17.

In February 2018 the club however sacked the CEO and the chairman. The following month the new CEO, Mark Jenkins, claimed to be ‘shocked’ at the state of the club’s finances, especially in relation to wages.

Amortisation (skip this bit unless you want a quick and dirty accounting lecture) is how clubs deal with transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when West Brom signed Jay Rodriquez for £12 million from Southampton on a 4-year deal, the amortisation charge works out as £3 million a year (£12/4). The amortisation fee in the profit and loss account includes all players who have been signed for a fee (assuming they are still in their initial contract).

West Brom’s amortisation total of £17 million is 30% higher than the previous season, and over five times the figure of 2013. It shows that the club decided in 2014/15 to invest more significantly in players, signing the likes of Ideye, Livermore, Chester, Rondon and Chadli for £10million plus fees.

However, compared to the rest of the division, West Brom are relative paupers. Their amortisation charge for 2016/17 was by far the lowest in the Premier League.

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The danger of such an approach is that by trying to survive in the Premier League by spending less on players may be successful in the short term, it is likely to drag the club down over a longer period. The West Brom hierarchy may point out that they finished a creditable 10th in 2016/17 and thought they could repeat the success with a lack of investment in players but the club is playing with fire taking such an approach.

Profits and losses

Profits are income less costs. West Brom made record profits before player sales in 2016/17 of £26.7million

This was mainly due to the club only spending £5 million of the extra £40 million TV money on wages. The previous season, when West Brom finished 14th in the Premier League, the club loss £100,000 a week.

After a long period of time in which nearly all clubs were loss making, partially due to Alan Sugar’s ‘prune juice’ effect, where any increases in TV income went straight through the club into player wages, the Premier League is now far more lucrative.

West Brom had the sixth highest profit in the Premier League using this measure, but it does perhaps suggest once again that the club was setting itself up for a fall by not investing in players.

If you strip out the impact of player amortisation and depreciation (the cost of the stadium and training facilities spread over several years, then another profit measure, called EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) arises. This is popular with analysts looking at businesses as it is the nearest thing they can find to a sustainable cash equivalent of profit.

Once again West Brom did well here, comfortably mid table.

Under Financial Fair Play (FFP) rules, Premier League clubs can make a maximum FFP loss of £105 million over three years. West Brom clearly have little to fear in this regard. In the Championship the club will be allowed to have lost £83 million in the three years to 2018/19 if they are relegated.

Player trading

Accounting for player trading is a financial quagmire. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. When the player is sold, the profit, which is based on the player’s accounting rather than market value, is shown immediately in the profit and loss account.

This creates erratic and volatile figures in the profit and loss account, so these are best separated out from the rest of the financial results.

If we instead focus on the actual purchase and sales, West Brom have the following figures:

The above table shows that over the last five years West Brom have bought players for £96.3 million and generated sales of £44.2 million, a net cost of £52.1 million over the period.

West Brom’s spending in 2016/17 was a record sum for the club, but pales into insignificance in relation to the big Manchester and London clubs. By being the fourth lowest spender on signings in the division and regularly being towards the bottom of the table in this regard for many years it means that the club cannot afford too many poor signings if they are to stay in the Premier League.

The club then spent a further £41 million in 2017/18, but this has not been enough to prevent a dismal season, under first of all Tony Pulis, the man who was accused of fraudulent behaviour at his previous club Crystal Palace https://www.telegraph.co.uk/football/2016/11/28/tony-pulis-accused-fraudulent-behaviour-high-court-judgment/ and was accused of trying to blackmail the owner of Gillingham when he was manager there. https://www.theguardian.com/football/2001/apr/27/newsstory.sport1

Pulis was replaced by Alan Pardew, whose name is an anagram of Warped Anal.

Under Pardew West Brom only had one victory, against a very poor Brighton, in eighteen games in charge.

Debts to and from the club

West Brom didn’t sell many players before the 2017/18 window, and so were only owed £13.4 million by other clubs for players at 30 June 2017.

The club did owe other clubs nearly £23.4 million for player transfers, but this is chicken feed compared to the likes of Manchester United who owe over £180 million.

Perhaps more importantly the club is debt free, with no borrowings from either banks or the club owners. The owners have not put any money into the club though for many years, but the club still had nearly £40 million in the bank at 30 June 2017.

Summary

West Brom have shown that a club can survive for many years in the Premier League on a relatively modest wage bill.

They have had a strategy, which to be fair has worked for many years, of spending less on transfers than their peer group. It now, unless Darren Moore can pull off the greatest escape of all time, as if this approach has finally caught up with them. At the start of each season they have been in the dozen or so clubs who ‘could’ get relegated for some time, and this looks like being the season when gravity finally wins.

Data Set

Burnley: Your name’s not down, you’re not coming in

As The Notsensibles are one of our favourite bands, it’s time to take a look at the financies of Burnley as the club celebrated their most successful season to date in the Premier League in 2016/17 by finishing six points above the drop and have since used this as a springboard to be presently challenging for a European place.

The club, along with manager Sean Dyche and the players, don’t get the credit they deserve for winning matches and playing decent football, with too many critics lazily linking Dyche’s nightclub bouncer dress code, Dalek like voice to a club with the ethos of a slightly upmarket Wimbledon of the Crazy Gang era.

There are three companies involved in the running of Burnley

(a) The Burnley Football and Athletic Company, formed in 1897, runs the club’s day to day operations.

(b) Longside Properties Limited, which appears to own Turf Moor and rent it to the football club.

(c) Burnley FC Holdings Limited, which owns 100% of the shares of both the above companies, and which forms the basis for this analysis.

Executive summary of key figures (Burnley FC Holdings Limited)

Income £121.2 million (up 203%)

Broadcasting income £105 million (up 254%)

Wages £61.2 million (up 126%)

Profit before player sales £26.0 million (Loss of £3.6 million in 2016)

Player purchases £42.8 million (£21.9 million in 2016)

Player sales £1.8 million

Borrowings: None

Income

Burnley have bounced between the top two divisions in recent years, with three promotions and two relegations since 2009, and this is reflected in their volatile income levels.

Burnley have been beneficiaries of either Premier League membership or parachute payments since 2010, and the sharp spikes in income in 2010, 2015 and 2017 represent the years in which they have been in the top flight.

Although it tripled in 2016/17, Burnley’s overall income was the second lowest of Premier League teams last season. Talk to a Lancastrian, and they will tell you it’s not about how much money you earn, but spending it wisely that matters, and The Clarets have wasted little and added strength to their team after surviving last season.

Eighteen clubs who were in the Premier League last season have reported their results to date. Only car crash Sunderland, probably too busy setting the club coach’s sat nav to Accrington, and small London outfit Crystal Palace have failed to do so.

All Premier League clubs are reporting higher income for 2016/17 than in the previous season. The average income of the 18 clubs that have reported to date is £239 million, up 31% from £182 million the previous season. The average in the Championship is just £28.6 million.

Burnley therefore earned half of the average income in the division, such is the way that money is skewed towards the ‘Big Six’ in the Premier League of Manchester United and City, Liverpool, Arsenal and Spurs (even though the latter haven’t won the title for nearly 60 years).

The main reason for the increase in overall income in the Premier League for 2016/17 was the new Sky/BT domestic TV deal, worth £5.1 billion over three seasons.

The Premier League divide money into five pots. Three of the pots cover the domestic TV deal, and they are split 50% evenly, 25% based on the number of TV appearances (every club is guaranteed a minimum of ten of these) and 25% based on final league position. Each place up the table is worth just under £2 million.

Overseas broadcasting income and centrally agreed commercial deals are split evenly between the twenty clubs. This arrangement is likely to come under fire in the summer as the ‘Bix Six’ want to grab a bigger slice of this pie for themselves. Their argument is that overseas TV fans would rather watch one of their clubs than that of a team such as Burnley, and so they ‘deserve’ more money.

Whilst this argument is true in terms of the number of viewers, it ignores the fact that the ‘Other 14’ can compete against most clubs in Europe apart from the elite for players (all 20 EPL clubs are in the top 35 richest in Europe) and thus can put up a decent performance against the Big Six.

This partly explains why Burnley won at Chelsea, Huddersfield beat Manchester United, Swansea beat Liverpool and many clubs have turned over Arsenal.

Like all clubs Burnley earn their income from three sources, matchday, broadcasting and commercial/sponsorship.

Matchday income increased by 17% to £5.8 million. This appears to be due to higher attendances (a 23% increase to 20,558) rather than increased ticket prices.

Matchday income was enough to pay Alexei Sanchez’s wages for three months and represents only represents 5% of the club’s total income.

Burnley had the second lowest matchday income total in the division, but still managed to be survive and thene thrive. This shows that size doesn’t necessarily matter, it’s what you do with it that counts (something I’ve been trying to persuade my slightly disappointed wife of for years).

Ticket prices seem to have fallen since Burnley’s last season in the Premier League, with matchday income averaging £284.27, about 10% lower than in 2015. This works out at £14.96 per match, which may surprise some Clarets, but remember this is the average of adults, seniors and kids, and is also net of VAT.

Broadcast income is the one most sensitive the division in which a club plays. Even though Burnley had the benefit of parachute payments in 2015/16, broadcast income still rocketed from £30 million to £105 million.

The present domestic deal lasts until 2018/19, so don’t expect to see Burnley increase their broadcast income until the following season, unless they significantly improve their final league position (likely, and finishing 7th will bring in an extra £18 million compared to finishing 16th) or qualifying for Europe, which is presently possible. Manchester United made £40 million from winning the Europa League in 2017.

Commercial income nearly doubled to £10.4 million, mainly due to the club signing a new shirt sponsorship deal with Dafabet worth £2.5 million a year.

Cost

The main costs at a football club are player related, wages and transfer fee amortisation.

Burnley’s wage expenditure last season is noticeably different to when they were promoted in 2013/14. To a certain extent Burnley budgeted for relegation in 2014/15, and duly went down. They were then in a very strong position to pay relatively high wages in the Championship in 2015/16, and were able to retain key squad members and recruit the likes of Joey Barton to help the club go up as champions.

This time Burnley substantially increased the wage bill, and it was enough to ensure the club stayed up.

Even though the wage bill more than doubled, Burnley had the lowest wage bill in the Premier League in 2016/17.

Burnley players are however unlikely to be seen selling copies of The Big Issue to make ends meet, even as the lowest payers in the division, wages average £29,422 a week.

The riches of the Premier League TV deal meant that Burnley only paid out £51 in wages for every £100 of income. The club’s strategy for 2015 is also highlighted here when it was only £37 in wages. In the Championship over half the clubs pay out more in wages than they generate in income, leaving club owners to pay the rest of the bills.

Amortisation (skip this bit unless you want a quick and dirty accounting lecture) is how clubs deal with transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when Burnley signed Robbie Brady for £13 million from Norwich on a 3½ year deal, the amortisation charge works out as £3.7 million a year (£13/3.5). The amortisation fee in the profit and loss account includes all players who have been signed for a fee (assuming they are still in their initial contract).

Burnley’s amortisation total of £22 million is double that of the previous year, but also tellingly four times that of the club’s last Premier League season. This again suggests the club was using their 2014/15 season in that division as an ‘air shot’, effectively budgeting for relegation and anything other than that was a bonus.

Burnley’s total amortisation in 2016/17 but still one of the lowest in the division. This is partially due to the club’s recruitment of hardworking players such as Ashley Barnes for £300,000, who according to the bellend element of his former club Brighton, was only Sunday league standard.

Profits and losses

Profits are income less costs. Burnley made a lot of profit in 2016/17. This was lower than their previous season in the Premier League due to, as we have already seen, the Clarets in 2014/15 paying relatively low wages and spending little in the transfer market.

Operating profits are income less the running costs of the club (wages, maintenance, insurance, amortisation etc. and they are before deducting interest and promotion costs and player sale profits. In 2016/17 this worked out as £26 million, or £500,000 a week. The previous season the club lost £3.6 million, and this was before paying out over £13 million in promotion bonuses.

Under Financial Fair Play (FFP) rules, Premier League clubs can make a maximum FFP loss of £105 million over three years. Burnley clearly have little to fear in this regard.

Player trading

The accountants treat player trading in a weird way in the financials. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. When the player is sold, the profit is shown immediately, and it based on the player’s accounting value, not the original transfer fee.

This creates erratic and volatile figures in the profit and loss account.

If we instead focus on the actual purchase and sales, the following arises

The above table shows that over the last five years Burnley have bought players for £82.5 million and generated sales of £22.3 million, a net cost of £60.2 million over the period.

Burnley’s spending in 2016/17 was a record sum for the club, but pales into insignificance in relation to the big Manchester and London clubs.

Debts to and from the club

Burnley didn’t sell many players before the 2017/18 window, and so were only owed £1.7 million by other clubs for players at 30 June 2017.

The club did owe other clubs nearly £16 million for player transfers, but this is chicken feed compared to the likes of Manchester United who owe over £180 million.

Perhaps more importantly the club is debt free, with no borrowings from either banks or the club owners.

Summary

Burnley have shown that a club can match some of the bigger spenders in the division in terms of wages and player transfers, and still stay in the Premier League.

The way they have pushed on this season, through hard work and superb defending, gives hope to others within the ‘Other 14’. They are guaranteed another season in the top division and about £125 million in TV income this season, which Sean Dyche can use in the summer transfer market.

Unfashionable yes, underrated certainly, but they are in the top half of the division on merit, and with a potential European campaign to look forward to next season.

Based on the financials for 2016/17, the club is worth a total of about £350 million using the Markham Multivariate Model. This figure looks a little top heavy, but even so it shows the attraction of the Premier League to investors who might want to risk their money in a club that looks after the pennies and can still win plenty of matches.

Data Set

Huddersfield Town: The Model

Must confess to having a huge soft spot for Yorkshire’s leading football club, Huddersfield Town. The locals are friendly, one of their fans runs the funniest football website on t’internet in http://www.htfc-world.com/ , they sell any remaining pies and burgers for £1 at the end of matches to fans, the club is owned by a local lad who clearly loves his club (and isn’t a Billy Bigbollocks), they are not managed by Neil Warnock AND they were promoted last season on merit, relatively under the radar. Did they achieve promotion last season on a shoestring or is that a Yorkshire myth? Let’s look…

Summary of key figures (Huddersfield Town Association Football Club Limited

Income £15.8 million (up 40%)

Broadcasting income £7.5 million (up 54%)

Wages £16.5 million (up 32%)

Loss before player sales £9.0 million (up 7%)

Player purchases £6.6 million

Player sales £1.3 million

Borrowings £53.1 million (Thanks to Uncle Dean!)

Final Position: Promoted via the playoffs to the Premier League.

Income

In the Championship there is effectively two divisions, effectively split between those clubs that do and do not receive parachute payments.

Huddersfield’s overall income was in the bottom quarter of Championship teams in 2016/17. Talk to a Yorkshireman, and they will tell you it’s not about spending money, but spending it wisely that matters, and the Terriers are a textbook example of how to do just that.

The above tables shows the income of all Championship clubs apart from  Newcastle (surely Mike Ashley has nothing to hide?) for 2016/17.

Additionally Barnsley are a pain in the butt as they used a legal loophole to avoid showing their profit and loss account (although they did make a profit of over £10 million last season, mainly due to the sell on clause when John Stones was sold by Everton to Manchester City).

Most clubs are showing higher income than in the previous season. The average income of the 22 clubs that have reported to date is £28.6 million. This compares to an average of £22.9 million the previous season.

Huddersfield therefore were promoted despite earning just over half of the average income for a club in the division, which is an incredible achievement.

The main reason for the increase in overall income in the Championship is due to a combination of higher parachute payments, a new TV deal in the Premier League, which drips down to the Championship in what are called ‘Solidarity Payments and having ‘big’ clubs in the shape of Newcastle and Villa relegated from the Premier League.

Championship clubs earn about £4.3 million a year from solidarity payments, plus their earnings from the Football League TV deal which are worth a minimum of a further £2 million. Championship clubs also pick up £100,000 for each home game broadcast on Sky, and £10,000 for each away game.

The English Football League (EFL) negotiated a flat percentage of all future TV deals with the Premier League (PL) a couple of years ago. This at the time seemed to be a great deal, but subsequently the PL sold its domestic rights for 10% less in 2019-22 than the current three-year arrangement generates.

Like all clubs Huddersfield earn their income from three sources, matchday, broadcasting and commercial/sponsorship.

Huddersfield therefore had the fourth lowest (probably the fifth if the miserable sods at Barnsley had the decency to show the figures) matchday income total in the division, but still managed to be promoted. Which shows that size doesn’t’ necessarily matter, it’s what you do with it that counts (something I’ve been trying to persuade my slightly disappointed wife to buy into for years).

Despite a playoff match at home and a Wembley appearance, there was no change to Town’s matchday income for the season. This was due to a combination of low ticket prices which contributed to average attendances rising to over 20,000, and the club keeping with the tradition of giving their share of the Wembley receipts to the losing playoff team, in this case the division’s dullest club Reading. This also explains why Reading’s matchday income increased by 86% in 2016/17.

The decision by chairman Dean Hoyle to cut ticket prices meant that the club only generated £155 per fan for the season, or £6.73 per match.

Hoyle’s benevolence contrasts with clubs such as Spurs, who next season will be charging a minimum price for a season ticket of £799 and an average price of about £1051 to watch the club at the ‘new’ White Hart Lane.

Town’s broadcast income was up 41% to £7.9 million. The baseline figure for clubs in the Championship is about £6.3 million, plus an additional £100,000 for every home, and £10,000 for every away game that is broadcast live on Sky. A combination of some local derby games, making the playoffs and attractive football meant that Huddersfield were popular with Sky in 2016/17

The impact of parachute payments for the top six clubs in the chart is very evident. Recently relegated Norwich earned £6.80 from broadcasting for every pound earned by Huddersfield.

Huddersfield’s commercial income rose by an impressive 57% to £5.2 million. The combination of higher matchday attendances and the club’s high league position helped when negotiating deals with commercial partners.

Costs

The main costs at a football club are player related, wages and transfer fee amortisation (accounting nerd alert!).

After years of relative caution, wages increased by over 30% in 2016/17. This was due to a combination of better players on better contracts, as well as having to pay win bonuses more regularly than in prior years.

The club’s basic wage bill was one of the lowest in the division.

On top of the wage bill shown above, the club also paid out £11.9 million in ‘promotion costs’ at the end of the season. Most of this cost will be bonuses (thoroughly deserved in our view) to David Wagner and his squad for the trememdous achievement in reaching the ‘promised land’ ( © All Lazy Journalists and Radio Five Live professional twat Alan Green).

Whilst Town’s basic wage bill is low by Championship standards (the average was £26.4 million in 2016/17), they still managed to pay out £104 in wages for every £100 of income during the season, and have had wages bills that exceeded income for many years.

If we factor in promotion bonuses too, then the club paid out £180 in wages for every £100 of income in 2016/17, a price all Town fans will no doubt will say was worth paying (especially as it was Dean Hoyle who paid it, the club paid out £899 in wages (including promotion bonuses) for every £100 of matchday income, or to put it another way, for every £1 in wages, the fans paid 11 pence directly).

Amortisation (skip this bit unless you want a quick and dirty accounting lecture) is how clubs deal with transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract.

Therefore, when Huddersfield signed Christopher Schindler, the German defender with the speech impediment in 2016 for a then record £1.8 million on a three year contract the amortisation charge was £600,000 a year for three years (£1.8m/3). Whilst not a huge fee by divisional standards he did help lift Town to the Premier League (you’re fired…Ed).

The amortisation fee in the profit and loss account includes all players who have been signed for a fee (assuming they are still in their initial contract).

Huddersfield’s total amortisation charge rise significantly in 2016/17 but was still one of the lowest in the division. This is partially due to the club’s excellent recruitment of loan players in the shape of Aaron Mooy and Izzy Brown, further evidence of being sensible with money instead of just spunking it away spending it for the sake of it, such as in the case of Aston Villa who spent over £80 million on players in 2016/17 and had a subsequent amortisation charge of nearly £24 million.

If the amortisation costs are added to wages, then total player costs (including bonuses) for Huddersfield in 2016/17 were £196 for every £100 of income. This shows that the cost of promotion is ridiculously high (it cost fellow promoted club Brighton £160 in player costs for every £100 of income) to get into the Premier League.

The other major cost for Town is that of the stadium. This is linked to the number of games paid and fans attending. In 2016/17 this was £875,000. The club are tenants until at least 2043, which is nearly a quarter to nine in old money.

Profits and losses

Profits (or more commonly for non-Premier League football clubs losses) are income less costs. The bad news for Huddersfield is that the club lost a lot of money last season from day to day trading.

The good news is that they were promoted, so who cares?

Operating losses are income less the running costs of the club (wages, maintenance, insurance, amortisation etc. and they are before deducting interest and promotion costs and player sale profits. In 2016/17 this worked out as £9 million, or £172,000 a week. This is 7% more than the previous season.

Selling players helps to cushion these losses, but there is no guarantee that this will take place on a regular basis.

The above chart shows that Town did well in 2013 in selling Jordan ‘Where’s the nearest branch of Greggs’ Rhodes to Blackburn in 2013 and Jacob Butterfield to Derby in 2016.

Under FFP rules, Championship clubs can make a maximum FFP loss of £39 million over three years in the Championship. Huddersfield have a pre-tax loss of just £28 million over the three-year period.

Additionally, some costs, such as promotion bonuses, infrastructure, academy and community schemes, are excluded from the FFP calculations. Huddersfield had a category two academy, which costs about £1.5 million a year to run according to our sources, so this, combined with other allowable costs and player sales, means that Huddersfield were well within the FFP limit for the three years ending June 2017.

Under Premier League FFP rules a club can lose £105 million over three years and still be within the limits. The good news for Town is it looks increasingly that they’ll be in the Premier League for at least two of those seasons.

Player trading

The accountants treat player trading in a weird way in the financials. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. When the player is sold, the profit is shown immediately, and it based on the player’s accounting value, not the original transfer fee.

This creates erratic and volatile figures in the profit and loss account.

If we instead focus on the actual purchase and sales, the following arises

The above table shows that over the last five years Huddersfield have bought players for £15.7 million and generated sales of £19.8 million, a net income of £4.1 million over the period.

This allows Town fans to say one word to those who claim that you have to buy your way out of the Championship with player signings and high wages, and that one word is ‘bollocks’.

When you look at spending in the Championship in 2016/17, total spending was £356 million, and some clubs spent ten times as much as Town and did bog all apart from provide chuckles in relation to Ross McCormack, Aston Villa’s £12 million signing from Fulham, missing training because the fat fuck couldn’t be arsed his security gates wouldn’t work at his swanky new home in the Midlands.

Debts to and from the club

Town don’t show how much is owed in respect of player transfers, which is a shame. The club are owed £6.3 million, of which £2.5 million is for deferred tax (don’t ask), so there’s not a lot left for sums owing in relation to players.

Short terms creditors increased from £48 million to £75 million. The majority of this is owed to Dean Hoyle, who has lent the club nearly £53 million interest free, which qualifies him for ‘very nice man’ status in West Yorkshire, which is about as high as praise ever gets.

In addition, there’s a sum of £16 million for ‘other creditors’ which we suspect is in respect of player transfers such as Tom Ince. Huddersfield were quick out of the blocks in the summer 2017 and owed money for signings very early in the transfer window.

Summary

Huddersfield have shown that a club can beat the big spenders in the division in terms of players transfers and wages. In doing so they give hope to others in a similar position compared to the wealthy in the Championship. The promise of £100 million a year in broadcast income causes some club owners to lose touch with reality in terms of trying to buy their way to the (ahem) Promised Land.

At the same time, they have been subsidised by the owner in recent years as the income generated hasn’t been enough to even pay the wages over the last five seasons, which highlights the impossible task of trying to achieve promotion whilst breaking even

Their biggest strength is also their biggest weakness. Dean Hoyle has put over £50 million into the club, and whilst Town won’t need his further support whilst in the Premier League, if they ever returned to the lower divisions we suspect they would struggle financially once parachute payments ran out. Provided nothing happens to DH there’s no problem, but if any Town fans see him about to cross the road, get out of the car and stop traffic until he’s reached the other side, you don’t want anything happening to him.

Data Set

Derby County: Respectable?

If we have one pet hate here at the Price of Football it’s clubs who announce their results on the club website via a press release, but don’t publish them. Such behaviour usually is accompanied by a greatest hits tour of many impressive increases in some key financial figures, but not all the information is disclosed. The local newspaper writes up the press release in good faith, and the fans swallow the narrative as dictated by the club.

The club relies on everyone then losing interest in the finances (and rightly so, we don’t love our clubs because of their balance sheets after all) and later the accounts are sent to Companies House, but no one shows any interest is them, apart from saddo blog writers.

A textbook example of this is what has happened at Derby County in their financial year ended 30 June 2017.

Their press release showed the results of the club for the year but failed to include that about 100 employees appear to have been transferred to different companies, so the comments on the wage bill, whilst being legally correct, were at best disingenuous, and certainly misleading if you were trying to compare like to like.

What the press release failed to mention was the activities of Derby’s parent company, the snappily named SevCo 5112, which now controls the club’s academy, catering and communications activities via newly created companies.

It’s a bit like me telling the wife I’ve been out for an evening for the lads for a few pints and a curry but omitting to mention the £500 of gambling losses at a local casino and the two lost hours in a cocaine and hooker related orgy.

To make murky matters even murkier, SevCo’s accounts only cover 10 months in 2016/17, instead of a full year. Perfectly legal, and no doubt there’s a logical reason for this to be done, but it muddies the waters further.

Summary of key figures (Derby County Football Club Ltd)

Income £28.7 million (up 29%)

Broadcasting income £7.9 million (up 41%)

Wages £34.6 million (up 4%)…or should it be an annualised £39.8 million, up 12% (Sevco 5112)?

Loss before player sales £23.3 million (down 15%)

Player purchases £21.2 million

Player sales £23.2 million

Borrowings £143.7 million (SevCo)

Income

In the Championship the amount of total income is effectively split between those clubs that do and do not receive parachute payments.

Derby’s overall income was the third highest for a non-parachute payment receiving club. but this was not enough to get the club into a playoff position, although Brighton and Huddersfield, both of whom were not in receipt of parachute payments, were promoted, and Sheffield Wednesday made the playoffs.

Only Newcastle (surely Mike Ashley has nothing to hide?) and recently sold Barnsley have yet to announce their results for 2016/17. Most clubs are showing higher income than in the previous season. The average income of the 22 clubs that have reported to date is £28.6 million. This compares to an average of £22.9 million the previous season.

The main reason for the increase in overall income is due to a combination of higher parachute payments, a new TV deal in the Premier League, which drips down to the Championship in what are called ‘Solidarity Payments. Championship clubs earn about £4.3 million a year from solidarity payments, plus their earnings from the Football League TV deal which are worth a minimum of a further £2 million. Championship clubs also pick up £100,000 for each home game broadcast on Sky, and £10,000 for each away game.

The English Football League (EFL) negotiated a flat percentage of all future TV deals with the Premier League (PL) a couple of years ago. This at the time seemed to be a great deal, but subsequently the PL sold its domestic rights for 10% less in 2019-22 than the current three-year arrangement generates.

Like all clubs Derby earn their income from three sources, matchday, broadcasting and commercial/sponsorship.

Derby have shown growth in the all three income areas, but to give some context, their total income of £29 million is still nearly £20 million less than their final season in the Premier League in 2003/4, when income was £48.6 million.

Matchday income in 2016/17 was up 4.5%. Initially the club stated that average attendances for 2016/17 were an impressive 29,085, just, 2% lower than the previous season when the club were knocked out in the playoffs.

A recent press release contradicts the initial attendance figures, and the average figure for 2016/17 is restated at 27,885. Presumably the club either increased ticket prices in 2016/17 or had more hospitality tickets sold.

The club’s attendances have been healthy for the last few years, but it appears that they have increased ticket prices during that period. If the attendance figures are to be believed the club made £311 per fan from matchday receipts, not a rip-off figure, but it has increased by over a third in the last five years.

Derby therefore had the seventh largest matchday income total in the division, although we anticipate this falling to eigth when Newcashley United finally publish their results.

Broadcast income was up 41% to £7.9 million. The baseline figure for clubs in the Championship is about £6.3 million, plus an additional £100,000 for every home, and £10,000 for every away game that is broadcast live on Sky. Derby are always popular with Sky as they generate decent viewing figures.

The impact of parachute payments for the top six clubs in the chart is very evident. Recently relegated Norwich earned £7.50 from broadcasting for every £1 earned by non-parachute payment clubs.

Derby’s commercial income rose by an impressive 44% to £12.4 million. This heading covers a multitude of activities, which to be fair to club they have laid out in the accounts well.

Some figures do cause eyebrows to raise. Merchandising is the same as the previous season, sponsorship increased by £2 million apparently due to a joint venture with a company called Delaware North Companies UK Limited who operate hospitality for the club, and another company called Stadia DCFC Limited to ‘monetise sponsorship, social media and non EFL TV rights’.

What seems strange is if these new companies were set up, why is the football club taking credit for the revenue from these sources?

Costs

The main costs at a football club are player related, wages and transfer fee amortisation. Here things get confusing.

According to the football club accounts, wages increased by a relatively modest 4% to £34.6 million in 2016/17. Immediately after the wage note is a table that summarises the number of employees.

On the face of it the club has either made redundant, or has had resignations from, 99 employees in 2016/17. Most noticeably is the reduction in players and apprentices, until a trawl through Companies House reveals the existence of a company called Derby County Academy Limited, created in May 2016. The contracts of the apprentices and youth coaches etc. have been transferred to this new company. Perfectly legal, but it makes a mockery of the club’s press announcement that wages rose by 3.4% if so many former employees are now working for another company in the group.

Derby County Academy Limited take advantage of a legal loophole to avoid showing that company’s income, wage bill and employment totals, so we therefore scrutinised the accounts of parent company SevCo 5112.

It therefore seems that SevCo 5112, which owns the Academy, Sponsorship and Stadium companies as well as Derby County Football Club Limited has expanded operations, and that’s great, job creation is to be applauded.

SevCo 5112’s wage bill decreased in 2016/17, but the accounts only cover a ten-month period. If the wage total is extrapolated for a year it works out

SevCo 5112’s wage bill decreased in 2016/17, but the accounts only cover a ten-month period. If the wage total is extrapolated for a year it works out as £39.8 million, which is an increase of 12%. There’s nothing wrong with this, you would expect wages to increase if there are more people employed after all. It’s the lack of transparency from the club’s press release that concerns us when it stated…

What the club have said is true in relation to Derby County Football Club Limited, but it is also incomplete. If the club is incomplete in relation to this issue, it begs the question are there other key activities and transactions that it would rather not disclose in the press release, which instead focussed on the far more entertaining and salacious tale of the club suing a former executive, who in turn is counterclaiming against the club.

It’s therefore tricky to get a true handle on what has happened in terms of wages at Derby. If we use the SevCo totals, then the following trend arises.

Wages at the overall operation therefore seem to have trebled over the last five years. This shows a commitment to investing in players who will be of the calibre to help the club achieve promotion.

SevCo 5112 paid out £137 in wages for every £100 in income, which is effectively why Mel Morris says the wage bill in unsustainable. Derby are not along though in paying out wages that would not be tolerated in other lines of business, over half the clubs in the Championship pay out more money in wages than they generate in income. This is under the auspices of Financial Fair Play (FFP). It is scary to think what would happen if FFP didn’t exist.

Amortisation is how clubs deal with transfer fees in the profit and loss account. For most clubs when a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when Derby signed Matej Vydra from Watford for a record £8 million on a four year contract the amortisation charge would normally be  £2 million a year for four years (£8m/4). The amortisation fee in the profit and loss account therefore includes all players who have been signed for a fee (assuming they are still in their initial contract).

Derby’s total amortisation charge has risen steadily in recent years, reflecting the brakes slowly being removed from the transfer budget. They are in the top half of the division in relation to this cost, but some way behind clubs with parachute payments.

If the amortisation costs are added to wages, then total player costs for Derby in 2016/17 were £152 for every £100 of income. This again suggests the club is relatively ambitious in terms of spending whatever it takes in terms of player investment to get back into the Premier League.

We then however come to ‘The Derby Way’ ((c) Mel Morris). Derby’s amortisation charge is based on (cost-residual value)/contract length. It looks as if Derby have managed to reduce their amortisation charges each year by allocating what is called a ‘residual value’ to players. This is an estimate of their  market worth of players when they are no longer required.

The problem with this (and here we enter accounting nerd territory) is that this appears to go against the accounting rules, which state that the residual value should be zero unless certain conditions apply.

Unless Derby can show that they have commitment by third parties (i.e. other clubs) to buy players a year or two in advance then clause (a) does not apply.

Football players do not seem to fall into the realm of being in an active market either because they are not homogenous (i.e. identical) as Tom Ince is different to Bradley Johnson ,  and there are not willing buyers and sellers at any time so Derby appear to be in breach of the rules.

Should anyone care about this? Well…by applying residual values it allows Derby to effectively increase or decrease the annual amortisation charge, and this could have an impact on FFP compliance.

Derby’s amortisation charge as a proportion of player costs is lower than that of any club in the Championship. If they have a lower cost here…then they have a higher profit figure.

Over a long period of time figures even themselves out, but by adopting such a policy, which appears to be in breach of accounting rules too, Derby have the ability to increase or decrease losses in individual years to satisfy FFP…that doesn’t mean they have done it though!

Profits and losses

Profits (or more commonly for non-Premier League football clubs losses) are income less costs. The bad news for Derby is that the club lost a lot of money last season from day to day trading.

The good news is that they managed to sell Hendrick, Ince and Hughes, which brought in a profit of nearly £16.2 million, which offset the operating losses.

Operating losses are income less the running costs of the club (wages, maintenance, insurance, amortisation etc. and they are before deducting interest costs and player sale profits. In 2016/17 this worked out as £23.3 million, or £448,000 a week. This is £4.5 million lower than the previous season but remember this excluded the wage bill for the 99 employees whose contracts appear to have been transferred to other companies. are now still a lot of money to find on a regular basis.

If we look at SevCo’s profit and loss account for the ten months to June 2017, this shows an operating loss of £27.7 million, which works out as £630,000 a week. If this was extended to twelve months, it would work out at £32.7 million

Their total operating losses for the last five seasons of Derby/SevCo are over £87 million, and this excludes one off costs of £6.4 million during that period too.

Fortunately for Derby the sales of Ince, Hughes and Hendrick cushioned the financial blow to an extent (although Derby fans would probably rather have kept their best players).

The sale of Tom Ince raises another eyebrow. The sale was announced on 4 July 2017, but Derby’s profit and loss account ended on 30 June 2017.

https://www.derbytelegraph.co.uk/sport/football/transfer-news/highest-transfer-fees-received-derby-168528

The sale of Will Hughes took place on 21 June, which suggests the club was keen to dispose of both players to reduce their stated losses.

Derby have struggled to sell players on a regular basis at a profit historically, which suggest poor recruitment, but 2016/17 was a huge improvement.

If the club fail to be promoted this season via the playoffs (and we hope they are successful, on the grounds that they are not managed by Neil Warnock), expect to see interest in Vydra after his spectacular goal scoring record in 2017/18.

Under FFP rules, Championship clubs can make a maximum FFP loss of £39 million over three years in the Championship. Derby have a pre-tax loss of just £33 million over the three-year period, helped by profits on player sales and £12 of income from some accounting sleight of hand in 2016 that we expect will be disallowed for FFP purposes.

Additionally, some costs, such as infrastructure, academy and community schemes, are excluded from the FFP calculations. Derby have a category one academy, which costs about £5-6 million a year to run according to our sources, so this, combined with other allowable costs and player sales, means that Derby are within the FFP limit for the three years ending June 2017.

Player trading

The accountants treat player trading in a weird way in the financials. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. When the player is sold, the profit is shown immediately, and it based on the player’s accounting value, not the original transfer fee.

This creates erratic and volatile figures in the profit and loss account.

If we instead focus on the actual purchase and sales, the following arises

Over the last five years Derby have bought players for £65.1 million and generated sales of £26.3 million.

If Derby are promoted to the Premier League there are additional transfer fees and player bonuses of £16.6 million.

Debts to and from the club

The best way to look at Derby’s debts is to focus on the accounts of SevCo 5112 Ltd in conjunction with those of the football club.

The easy bit is player transfers, where the club is owed £20.4 million for players sold (likely to be for the players we have mentioned before) and owe other clubs about £17.2 million.

The football club is owed £13.7 million from ‘group undertakings’. Our suspicion is that Derby County Football Club Limited is still paying the wages and costs of the new companies that have been set up when employees were transferred to these new entities. This is because the likes of the academy generate no/little income themselves to pay the bills (we’d like to be able to prove this, but the academy company also takes advantage of a legal loophole to avoid showing its profit and loss account).

SevCo 5112 owed Mel Morris over £95 million at 30 June 2017, and he’s subsequently given them a further £21 million to keep them afloat since that date. This appears to be interest free, which is good to see. Gold and Sullivan at West Ham charge interest of 4-6% on their loans.

SevCo have other loans of about £45 million on top of Mel Morris’s generosity.

SevCo has received £161 million since 2015 from investors in the form of loans and shares.

Group Structure

If anyone is still reading this, things are about to get a bit messy in terms of the corporate structure of the club in recent years.

In the beginning there was God (also known as Brian Clough to Rams fans) and all of Derby County’s finances could logically be found in the accounts of Derby County Football Club Limited. This company was founded in 1896, and every year produced its results, which showed the finances of the club completely.

In 2008 the club was purchased by American based General Sports and Investment, who ran Derby through a company called Gellaw 101 Limited, which in turn was owned by Global Derby (UK) Limited. This had relatively little impact on the accounts of Derby County Football Club Limited as the other companies effectively didn’t trade.

Global Derby (UK)

Getlaw 101 Ltd

Derby County Football Club Ltd

Derby County Football Club Limited was then purchased by Mel Morris in September 2015 via the delightfully named Sevco 5112 Limited. The accounts for 2015/16 for Derby County Football Club seemed in line with the previous season in terms of all the figures.

However, and this is where things get a real pain, some new companies were set up by SevCo 5112 Ltd, which is perfectly reasonably, as similar things happen at other clubs, and included the likes of:

Club DCFC Limited (events and catering)

Stadia DCFC Limited (sports and broadcasting)

The Derby County FC Academy Ltd (academy)

It looks as if these new companies have costs in the form of employees and running expenses, but generate little income themselves, as this seems to go through the books of Derby County Football Club Limited. Perfectly legal, but it all comes out in the wash when looking at the accounts of SevCo 5112 Limited. It’s just a shame that this is ignored in the press release and by the local media, who perhaps (a) couldn’t care loss as they are Rams fans who just want to see the club promoted and/or (b) don’t want to upset the club by sticking their noses in as fear being denied access for interviews, as happened at Middlesbrough this season.

The Gazette refuses press passes for Middlesbrough FC home matches as stand-off over club’s ‘ban’ on two of its reporters continues

Summary

Derby have invested heavily in players in the past couple of seasons and have a decent chance of promotion via the playoffs. Mel Morris has backed managers in the transfer market, but by his own admission this cannot continue indefinitely.

The attempt to control the narrative by not releasing the full accounts for the club and the holding company in the press release does the club’s reputation no favours. People can only make informed decisions and judgement when given full information.

Data Set

Note: The wages for 2017 are for SevCo 5112 annualised.

Leeds United 2017: Cardboard box? You were lucky…

It may seem an unusual thing to say, but we feel a bit sorry for many Leeds fans. They’ve been shafted more times than Linda Lovelace in Deep Throat and were once so desperate for an owner they even cheered when Ken Bates took over the club.

2016/17 proved to Massimo Cellino’s reign of jaw dropping entertainment at Elland Road, as the colourful (crooked) Italian sold initially 50%, then the whole of the club to fellow Italian Andrea Radrizziani.

Fans were initially excited about the change of control, as Cellino had been tight with the cash (something that most Yorkshire folk would usually approve of) during his time at the club.

Summary of key figures

Income £34.1 million (up 13%)

Broadcasting income £7.6 million (up 45%)

Wages £20.7 million (up 14%)

Loss before player sales £8.8 million (up 26%)

Player purchases £6.8 million

Player sales £9.0 million

Borrowings £25.1 million

Income

In the Championship the amount of total income is effectively split between those clubs that do and do not receive parachute payments.

Leeds generated the highest earnings of the non-parachute payment receiving clubs, but this was not enough to get the club into a playoff position, although Brighton and Huddersfield, both of whom were not in receipt of parachute payments, were promoted, and Sheffield Wednesday made the playoffs.

Only Newcastle (surely Mike Ashley has nothing to hide?) and recently sold Barnsley have yet to announce their results for 2016/17. Most clubs are showing higher income than in the previous season. The average income of the 22 clubs that have reported to date is £28.6 million. This compares to an average of £22.9 million the previous season.

The main reason for the increase in overall income is due to a combination of higher parachute payments, a new TV deal in the Premier League, which drips down to the Championship in what are called ‘Solidarity Payments. Championship clubs earn about £4.3 million a year from solidarity payments, plus their earnings from the Football League TV deal which are worth a minimum of a further £2 million. Championship clubs also pick up £100,000 for each home game broadcast on Sky, and £10,000 for each away game.

The English Football League (EFL) negotiated a flat percentage of all future TV deals with the Premier League (PL) a couple of years ago. This at the time seemed to be a great deal, but subsequently the PL sold its domestic rights for 10% less in 2019-22 than the current three-year arrangement generates.

Like all clubs Leeds earn their income from three sources, matchday, broadcasting and commercial/sponsorship.

Leeds have shown growth in the all three income areas, but to give some context, their income of £34.1 million is still nearly £8 million less than their final season in the Premier League in 2003/4, when income was £41.9 million.

Matchday income in 2016/17 was up 24%, as the average attendance increased by 6,000 to 27,698 as the club just failed to reach the Championship playoffs. Cellino’s promise of a 25% reduction in season ticket prices for the following season if the club failed to reach the playoffs also contributed to this increase. This could have a knock-on effect on matchday income for 2017/18.

The club have kept prices relatively static for a few years and generated £367 per fan from matchday sales.

Leeds therefore had the third largest matchday income total in the division, although we anticipate this falling to fourth when Newcashley United finally publish their results.

Broadcast income was up 45% to £7.6 million. The baseline figure for clubs in the Championship is about £6.3 million, plus an additional £100,000 for every home, and £10,000 for every away game that is broadcast live on Sky. Leeds are always popular with Sky as they generate decent viewing figures.

The impact of parachute payments for the top six clubs in the chart is very evident. Recently relegated Norwich earned £7.50 from broadcasting for every £1 earned by non-parachute payment clubs.

Leeds commercial income fell slightly but is still an impressive £16.4 million. This figure is distorted to a degree since 2015, when Massimo Cellino threw one of his hissy fits and took the catering income in house (it had previously been outsourced), which was responsible for nearly all of the increase from 2015 to 2016 in this area.

Costs

The main costs at a football club are player related, wages and transfer fee amortisation.

Leeds wages increased by 14% in 2016/17, as new contracts for existing players plus some fresh signings increased the costs.

Leeds wage bill places it in the bottom third of clubs in the Championship in 2016/17. Whilst it won’t surprise fans that clubs in receipt of parachute payments are paying out big money still in player wages, we suspect a few Yorkshire eyebrows will be raised when they see their club behind the likes of Sheffield Wednesday, Bristol City and Birmingham (although with ‘Triffic’ Harry Redknapp in charge of the latter for a while in 2016/17, perhaps not so surprised by that club paying out more money to players).

For a club in the Championship to be paying wages that are effectively the same as five seasons previously is unusual. Most clubs get sucked into the vortex of trying to attract new players with more money and this becomes self-perpetuating.

Leeds paid out £61 in wages for every £100 in income. This was the second lowest ratio in the Championship, and Reading’s would have been far higher had they not been in receipt of parachute payments. This figure has fallen significantly under Cellino, partly due to the increase in catering income figure but also because he was clearly keen on keeping costs as low as possible with a view to selling the club to a new owner.

Over half the clubs in the Championship pay out more money in wages than they generate in income. This is under the auspices of Financial Fair Play (FFP). It is scary to think what would happen if FFP didn’t exist.

Amortisation is how clubs deal with transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when Leeds signed Kemar Roofe from Oxford United for £3 million on a four year contract the amortisation charge was £750,000 a year for four years (£3m/4). The amortisation fee in the profit and loss account therefore includes all players who have been signed for a fee (assuming they are still in their initial contract).

Leeds’s total amortisation charge has risen steadily in recent years, reflecting the brakes slowly being removed from the transfer budget. They are in the top half of the division in relation to this cost, but some way behind clubs with parachute payments.

If the amortisation costs are added to wages, then total player costs for Leeds in 2016/17 were £76 for every £100 of income. This again suggests the club is relatively tight (no doubt Leeds fans will say ‘careful’ rather than ‘tight’ in terms of spending whatever it takes in terms of player investment to get back into the Premier League. There are many clubs who are spending £140 plus on this area.

One cost that Leeds have which is not common to all clubs is rent. The club paid £2.1 million in rent during 2016/17 for Elland Road and other facilities. The club did say that they had repurchased Elland Road on 28 June 2017, but there is no sign of this in the accounts or the strategic review of the year which was signed off by Radrizzani on 2nd March 2018.

http://www.bbc.co.uk/sport/football/40433193

A screenshot of a cell phone Description generated with very high confidence

A further look at the club website reveals that Greenfield Investment Pte Ltd, also owned by Radrizzani, and based in Hong Kong (we think) , are the actual owners of Elland Road, so it’s not quite as transparent as it initially seems. Greenfield are themselves owned by Aser Group pte Ltd in Singapore.

How much rent is being charged by this company to Leeds United Football Club Limited has not been revealed, however a note to the account suggests that rent will fall from over £2.1 million a year to about £760,000, which could mean extra money for the manager to spend on players and wages.

Leeds sources suggest that the rent is for Thorpe Arch rather than Elland Road itself.

Profits and losses

Profits (or more commonly for non-Premier League football clubs losses) are income less costs. The bad news for Leeds is that the club lost a lot of money last season from day to day trading.

The good news is that they managed to sell Lewis Cook to Bournemouth, which brought in a profit of nearly £9 million, which offset the operating losses.

Operating losses are income less the running costs of the club (wages, maintenance, insurance, amortisation etc. and they are before deducting interest costs and player sale profits. In 2016/17 this worked out as £8.8 million, or £169,000 a week. This is slightly higher than the previous season, but still a lot of money to find on a regular basis. These losses are before taking into consideration the one-off cost player write down of £332,000, for someone who was signed for a fee but subsequently turned out to be a bit shite Christian Benteke. We don’t know enough about Leeds to know who the player(s) might be, but Leeds fans will no doubt have a few suggestions.

The previous season Leeds had one-off costs of nearly £4 million in legal and other fees as Cellino fell out with kit suppliers Kappa, previous employees, Sky TV, the Football League and anyone else who didn’t share the enlightened views of the Italian tax evader.

Being in the Championship is tough financially, and this is reflected in Leeds losses over the past few years.

Their total losses for the last five seasons are nearly £56 million, and this excludes one off costs of £6.4 million during that period too.

Fortunately for Leeds the club have managed to sell players on a regular basis at a profit of £25 million during this period, but it still leaves a substantial loss.

Under FFP rules, Championship clubs can make a maximum FFP loss of £39 million over three years in the Championship. Leeds have a pre-tax loss of just £10.2 million over the three-year period, helped by profits on player sales of £21.5 million over that period.

Additionally, some costs, such as infrastructure, academy and community schemes, are excluded from the FFP calculations. Leeds have a category two academy, which costs about £1.5 million a year to run according to our sources, so this, combined with other allowable costs, means that Leeds easily are within the FFP limit for the three years ending June 2017.

Assuming that Leeds have not gone crazy in terms of higher wage deals in 2017/18, they should be in a much stronger position than most clubs in the division in the forthcoming transfer windows.

This is because many clubs have spent big and gambled on promotion this season (2017/18) and will have to scale back investment in the next few windows to ensure FFP compliance. There is a caveat here, this will all depend on the extent to which the owner is willing to back the Leeds manager in the transfer market during the next couple of windows.

Player trading

The accountants treat player trading in a weird way in the financials. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. When the player is sold, the profit is shown immediately, and it based on the player’s accounting value, not the original transfer fee.

This creates erratic and volatile figures in the profit and loss account.

If we instead focus on the actual purchase and sales, the following arises

Over the last five years Leeds have bought players for £26.3 million and generated sales of £27.1 million. This is before the sale of Chris Wood to Burnley in summer 2017.

If Leeds are promoted to the Premier League there are additional transfer fees of £6.3 million payable, as well as player bonuses of over £16 million.

Debts to and from the club

Trying to make out the extent of Leeds debts is tricky. The easy bit is player transfers, where the club is owed £7.8 million (likely to be Bournemouth for Cook) and owe other clubs about £3.9 million.

The club is owed a mysterious £2.3 million in the form of ‘other debtors’ that the club is pursuing through the courts. Who this party is we don’t know, although Leeds fans will no doubt be able to point the finger at the party involved, and that finger is mainly being pointed at former owners GFH, who apparently have some contested debts. Whilst the outcome of the dispute is uncertain, one this is guaranteed, the lawyers will make plenty of brass from the dispute.

The club borrowed £16.5 million in the year, mainly from the owner, although £5 million of this was converted into shares. Total borrowings look to be about £25 million of which £14.5 million is to the owner.

Summary

The Cellino regime of chaos ending was a positive for Leeds in 2016/17. New owner Andrea Radrizzani had a huge amount of initial goodwill which has evaporated to a degree as the club has dropped from top of the table to nowhere in the past few months. This, coupled with the new club crest which turned the club into a laughing stock has meant that the upcoming summer is an opportunity to rebuild bridges with the fan base.

The good news is that the club is in an excellent position to invest heavily in the player market due to being significantly under the FFP loss limit. The big question is whether the owner will be prepared to dig deep and spend to bring in the calibre of player required for Leeds to be promotion contenders in 2018/19.

Data Set

Fulham: Tiger Feet

Fulham 2017

Trying to work out the exact state of Fulham’s finances isn’t easy. You would think that the logical place would be Fulham Football Club Limited, but this company doesn’t appear to own Craven Cottage. A bit of ferreting around leads to Fulham Football Leisure Limited, which owns not just the Football Club Limited but also Fulham Stadium Limited (for Craven Cottage) and FL Property Management Limited (for the training ground) and an Irish based Motspur Park Ltd (also for the training ground).

We were just about to analyse these figures when up popped the groovy sounding Cougar Holdco London Ltd, which was created when Fulham Owner Shahid Khan bought the club from Mohamed ‘Fuggin’ Al-Fayed in 2013. It’s therefore this final company that we will concentrate on in the analysis.

Summary of key figures

Fulham were relegated from the Premier League in 2014, so the year ended 30 June 2017 was their third, and penultimate, in which they receive parachute payments.

Income £34.9 million (down 3%)

Broadcasting income £21 million (down 15%)

Wages £37.1 million (up 3%)

Loss before player sales £30.1 million (up 54%)

Player purchases £24.9 million

Player sales £22.5 million

Borrowings £152.8 million

Income

In the Championship the amount of total income is effectively split between those clubs that do and do not receive parachute payments.

Only Newcastle (surely Mike Ashley has nothing to hide?) and recently sold Barnsley have yet to announce their results for 2016/17. Most clubs are showing higher income than in the previous season. The average income of the 22 clubs that have reported to date is £28.6 million. This compares to an average of £22.9 million the previous season.

The main reason for the increase is due to a combination of higher parachute payments, a new TV deal in the Premier League, which drips down to the Championship in what are called ‘Solidarity Payments. Championship clubs earn about £4.3 million a year from solidarity payments, plus their earnings from the Football League TV deal which are worth a minimum of a further £2 million.

The English Football League (EFL) negotiated a flat percentage of all future TV deals with the Premier League (PL) a couple of years ago. This at the time seemed to be a great deal, but subsequently the PL sold its domestic rights for 10% less in 2019-22 than the current three-year arrangement generates.

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Like all clubs Fulham earn their income from three sources, matchday, broadcasting and commercial/sponsorship.

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The table shows how much Fulham benefitted from being in the Premier League until 2014, when it peaked at £91 million.

Matchday income in 2016/17 was up 17%, as the average attendance increased by an average of 1,500 to 19,200 as the club reached the Championship playoffs.

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Fulham are in the top half of the division in terms of matchday income, due to a combination of reasonable crowds and being able to charge London prices. Having said that, matchday income accounts for less than £1 every 5 of Fulham’s overall income.

Broadcast income was down 15% to £21 million. This was due to the nature in which parachute payments are paid to clubs, which are half in years three and four of those in year two. Fulham will receive the same amount of broadcast income this (2017/18) season as last year, but their parachute period then finishes.

From 2018/19 onwards, broadcast income will be about £6.3 million a season, although the club gets an additional £100,000 for every home, and £10,000 for every away game that is broadcast live on Sky.

The impact of parachute payments for the top six clubs in the chart is very evident. Recently relegated Norwich earned £7.50 from broadcasting for every £1 earned by non-parachute payment clubs.

Commercial income increased by a quarter, although that figure is distorted slightly by Fulham receiving nearly £1.3 million in mysteriously named ‘compensation’

Costs

The main costs at a football club are player related, wages and transfer fee amortisation.

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Fulham’s wages fell by about 45% after being relegated from the Premier League and have stayed steady in the Championship since then. It’s likely that they will be broadly static for 2017/18 too but will then have to be reduced as parachute payments will disappear from next season.

Fulham’s wages are the third lowest in the division, behind those of the two clubs relegated from the Premier League in 2016/17. We would expect Newcastle’s wage bill to be close to that of Villa, except with a few more win bonuses.

Fulham paid out £106 in wages for every £100 in income. This means there is nothing left over to pay the overheads of running the club, which effectively are being paid for by the club owners. This ratio has increased since relegation as income has fallen due to the decline in parachute payments.

Fulham are not however alone in the Championship in paying out more money in wages than they generate in income as over half the clubs in the division have the same predicament.

Amortisation is how clubs deal with transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when Fulham signed Tom Cairney from Blackburn for £4 million on a four year contract the amortisation charge was £1 million a year for four years (£4m/4). The amortisation fee in the profit and loss account therefore includes all players who have been signed for a fee (assuming they are still in their initial contract).

Fulham’s total amortisation charge more than doubled to £13.7 million, reflecting the club’s ambition in signing players in 2016/17 who they hoped would achieve promotion.

If the amortisation costs are added to wages, then total player costs for Fulham in 2016/17 were £145 for every £100 of income. This again suggests the club is spending whatever it takes in terms of player investment to get back into the Premier League.

Profits and losses

Profits (or more commonly for non-Premier League football clubs losses) are income less costs. The bad news for Fulham is that the club lost a lot of money last season from day to day trading.

The good news is that they managed to sell legendary pie eater Ross “Where’s the keys to my front drive” McCormack to Villa for about £12 million and Konstantinos Mitroglou to Benfica for about £6 million, plus the likes of Smith, Pringle and Stekelenburg, bringing in a profit of over £17 million on these deals, which will help the club in terms of FFP compliance.

Operating losses are income less the running costs of the club (wages, maintenance, insurance, amortisation etc. and they are before deducting interest costs and player sale profits. In 2016/17 this worked out as £30.1 million, or £579,000 a week. These losses are before taking into consideration the one-off cost of £7.1 million the club incurred when writing off £7.1 million of stadium development costs and a £1.5 million write down in player values, who were signed for fees but subsequently turned out to be a bit Andy Carroll.

Even when in the Premier League, Fulham have struggled to make a profit without selling players.

Their total losses for the last five seasons are nearly £110 million, and this excludes one off costs during that period too.

Fortunately for Fulham the club have managed to sell players on a regular basis at a profit of £51 million during this period, but it still leaves a substantial loss.

Under FFP rules, Championship clubs can make a maximum FFP loss of £39 million over three years in the Championship. Fulham have a pre-tax loss of £62.1 million over the three-year period, even after considering gains on player sales of £29 million.

Fortunately, some costs, such as infrastructure, academy and community schemes, are excluded from the FFP calculations. Fulham have a category one academy, which costs about £5 million a year to run, so this, combined with other allowable costs, should allow the club to sneak in under the FFP limit for the three years ending June 2017. Once parachute payments end the club will have to do some serious cost cutting, or sell the likes of Cairney and Sessegnon, to avoid a breach of the rules.

Player trading

The accountants treat player trading in a weird way in the financials. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. When the player is sold, the profit is shown immediately, and it based on the player’s accounting value, not the original transfer fee.

This creates erratic and volatile figures in the profit and loss account.

If we instead focus on the actual purchase and sales, the following arises

Over the last five years Fulham have bought players for £101 million and generated sales of £63 million.

The footnotes to the accounts show that the club also spent a net £3.3 million in the 2017/18 transfer window.

Owner Investment

When the Shahid Khan took over Fulham, the club had debts of £21 million. Since then he has paid £44 million for shares and lent the club a further £199 million up to 30 June 2017. Some of these loans have been converted into shares during that period.

Summary

Shahid Khan has invested significantly in Fulham since acquiring the club, but it’s return to the Premier League is uncertain. Whilst many independent observers would be delighted if the club went up this season, just to see the tantrum thrown by Neil Warnock at Cardiff if it happened, failure to do so in 2017/18 would cause a major operational reorganisation to ensure compliance with FFP, and a breakup of the team that has been playing excellently recently.

Data Set

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Blackburn Rovers: Look what you could have won

Key Figures

Rovers became the first Premier League winners to be relegated to the third tier in May 2017, and their annual accounts aren’t going to put a smile on fans’ faces either.

Income £14.9 million (down 32%)

Wages £22.0 million (down 13%)

Loss before player sales £13.7 million (down 17%)

Player purchases £1.3 million

Player sales £11.1 million

Borrowings £112.8 million

The club was acquired by Venkateshwara Hatcheries Pvt Ltd in October 2010, so this analysis concentrates on the club’s finances under their ownership.

Income

2016/17 was the first season Blackburn did not have the benefit of parachute payments.

Not all clubs have announced their results for 2016/17 yet, but most clubs are showing higher income than in the previous season. The average income of the 17 clubs that have reported to date (which excludes some big hitters such as Newcastle and Dirty Leeds) is £31 million.

In 2015/16 the average for a Championship club was £23 million. The main reason for the increase is due to a combination of higher parachute payments, a new TV deal in the Premier League, which drips down to the Championship in what are called ‘Solidarity Payments. Championship clubs earn about £4.3 million a year from solidarity payments, plus their earnings from the Football League TV deal which are worth a minimum of a further £2 million.

Like all clubs Rovers earn their income from three sources, matchday, broadcasting and commercial/sponsorship.

The table shows how much Rovers benefitted from being in the Premier League in the first couple of seasons under the Venky’s ownership, but also how much the club was reliant on parachute payments for the next four seasons.

Matchday income in 2016/17 was down 6%, as crowds fell by an average of 1,500 to 12,600 as the club slid to relegation.

Rovers are in the bottom quartiles in terms of matchday income and combined with no parachute payments, in the era of FFP this puts them at a disadvantage when competing for players.

Broadcast income was down 50% to £6.7 million. This was due to the Rovers’ four-year receipt of parachute payments finishing the previous season, combined with the club rarely appearing on Sky at Ewood, which is worth £100,000 a match. As a consequence, the club has the second lowest broadcast income total in the division.

The impact of parachute payments for the top six clubs in the chart is very evident. Norwich earned £7.50 from broadcasting for every £1 earned by Rovers.

Things will be far worse in League One, as solidarity payments are only worth about £650,000 in this division.

Commercial income fell only by 3%, which, given Rovers relative lack of appeal to commercial partners, is probably a reasonable effort. What is unclear is how much of this is from the club’s holding company Venky’s London Limited.

The accounts do contain a mysterious note tucked away on page 29 of the accounts, by which time most right-minded people will have lost all interest.

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The note shows that Rovers received £3.7 million from the parent company, if this is included in commercial income then there’s not a lot of money being generated from other commercial relationships.

Overall broadcasting income is still the biggest contributor to Rovers’ coffers, although it is not contributing three quarters of the club’s income as when the club was in the Premier League.

Costs

The main costs at a football club are player related, wages and transfer fee amortisation.

Rovers wages have more than halved since they were in the last in the Premier League, but the rate of decrease is not as fast as the club’s fall in income.

Wages fell by 13% and are quite low by Championship standards, where the average for last season was about £27.1 million. Clubs such as Sheffield Wednesday, Brighton and Forest, all of whom also do not receive parachute payments, paid out significantly higher sums for wages last season.

Whilst Rovers’ wage bill is towards the bottom of the scale in the Championship, they are still paying out a lot of money compared to the club’s income.

The above graph shows how much the club has been paying out in wages compared to income. In 2016/17 Rovers paid out £147 in wages for every £100 of income. This means that the owners, the Venkys, whilst as popular in Lancashire as a fart in a spacesuit, were not only subsidising the wages to players, but also paying for all the other costs incurred by the club too, such as ground maintenance, electricity for the floodlights and insurance etc.

Since acquiring the club Rovers have generated £228 million of income but spent £248 million in wages under the Venky’s.

The Championship is a car crash of a division, and in 2015/6 the wages/income ratio was 101% for the division as a whole.

It will give Rovers fans little solace in the year they were relegated, but at present they stand at the top of the wages control % table for 2016/17.

Brighton, who are second in the table, had £9 million of promotion bonuses in their wage total which distorted the figure, and also had the enjoyment of being promoted last season.

Amortisation is how clubs deal with transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when Rovers signed Jordan Rhodes for £8 million from Huddersfield on a five year contract the amortisation charge of £1.6 million a year for five years (£8m/5). The amortisation fee in the profit and loss account therefore includes all players who have been signed for a fee (assuming they are still in their initial contract).

Wolves total amortisation charge was £0.7 million, a decrease of 2/3 on the previous season and less than a tenth of the initial years under the Venky’s.

Whilst some will see this as prudent cost cutting, it also suggests that the club have been signing players at the bargain bin level, which means that the chances of selling them at a profit is also diminished.

Losses

Losses are income less costs. The bad news for Rovers is that the club lost a lot of money last season from day to day trading. The good news is that they sold Grant Hanley (to promoted Newcastle) and Shane Duffy (to promoted Brighton) at a combined profit of £10.4 million to offset the day to day losses, which will help the club in terms of FFP compliance.

Operating losses are income less the running costs of the club (wages, maintenance, insurance, amortisation etc. and they are before deducting interest costs. In 2016/17 this worked out as £13.7 million, or £263,000 a week.

In the seven seasons under the Venky’s, two of which were in the Premier League, and four of which the club were in receipt of parachute payments, Rovers have lost £136 million.

The club have managed to sell players on a regular basis at a profit of £38 million during this period, but it still leaves a substantial loss.

Under FFP rules, Championship clubs can make a maximum FFP loss of £39 million over three years in the Championship. Rovers have a pre-tax loss of £25.9 million over the three year period, mainly due to gains on player sales of £30 million, which prevented them breaching FFP.

Fortunately, some costs, such as infrastructure, academy and community schemes, are excluded from the FFP calculations. Rovers have a category one academy, which costs about £5 million a year to run, so this, combined with other allowable costs, should ensure the club has some leeway in terms of meeting the FFP target.

In League One the FFP rules are different, with players wages being not allowed to exceed 60% of income, but the rules are slightly relaxed for relegated clubs.

Player trading

The accountants treat player trading in a weird way in the accounts. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. When the player is sold, the profit is shown immediately, and it based on the player’s accounting value, not the original transfer fee.

This creates erratic and volatile figures in the profit and loss account.

If we instead focus on the actual purchase and sales, the following arises

Under the Venky’s Rovers have bought players for £47 million and generated sales of £57 million. Whilst this has been good for FFP purposes, the chances of the production line of players that can be sold for substantial fees continuing is remote, as evidenced by a footnote to the financials for 2016/17.

The note shows that Rovers had no transfer income during the 2017/18 summer window.

Debt

When the Venky’s took over Rovers, the club had debts of £21 million. Since then the debts have increased nearly every year, and now stand at just under £113 million, and would have been far higher had it not been for player sales in the last two seasons.

Summary

Under the Venky’s, Rovers have both been relegated and squandered their parachute payments. From an independent observer’s perspective the decision making of the owners seems baffling. They seem happy to underwrite losses running into hundreds of thousands of pounds per week for no benefit, financial or in terms of brand awareness of their main business in Indian poultry.

At least Rovers time in League One looks like being a brief one, as losses would potentially increase given the lack of TV money their compared to the Championship. If the club is promoted, the financial strategy of the owners is best described as ‘unpredictable’. Will they do a Fosun at Wolves and go for broke to be promoted, or try to get Rovers on an even keel financially?

Data Set

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Wolves 2016/17: Far Far Away

Introduction

Wolves have been sensational in the EFL Championship this season, and this has prompted critics to question the role of superagent Jorge Mendes, and the owners Fosun International, who acquired the club in 2016.

We’ve taken a look at how the club has fared financially in the first year of Fosun’s ownership, and its position in terms of Financial Fair Play (FFP).

The club has just announced losses of over £23 million for 2016/17, but that doesn’t seem to have stopped its spending, so are they breaking the rules?

Income

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Not all clubs have announced their results for 2016/17 yet, but most clubs are showing higher income than in the previous season. The average income of the 16 clubs that have reported to date (which excludes some big hitters such as Newcastle and Leeds) is £32 million.

In 2015/16 the average for a Championship club was £23 million. The main reason for the increase is due to a combination of higher parachute payments, along with a new TV deal in the Premier League, which drips down to the Championship in what are called ‘Solidarity Payments.

Like all clubs Wolves earn their income from three sources, matchday, broadcasting and commercial/sponsorship.

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The table shows how much Wolves benefitted from being in the Premier League in 2011/12 but also how much the club was reliant on parachute payments for the next four seasons. Those parachute payments expiring in 2015/16 are partially responsible for the significant losses recently released.

Matchday income in 2016/17 was up 22%, as fans bought into the investment by Fosun in the playing squad. Finishing 15th was therefore meant that the club failed to meet expectations of all concerned on the pitch.

Attendances averaged just over 21,500, up about 1,300 on the previous season.

Broadcast income was down 42%. This was due to the Wolves four-year receipt of parachute payments finishing the previous season.

The situation would have been worse but luckily the club was fortunate that the Premier League signed a new TV deal for 2017/18, and a fixed percentage of this is allocated to the EFL in what are called solidarity payments. This was worth about an extra £1 million to all clubs in the Championship, peanuts by Premier League standards, but still very useful to those further down the food chain.

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Wolves’ commercial income was the biggest contributor, which is unusual for a football club. Commercial income was up 15%, how much, if any, of this is due to deals signed with Fosun related companies is unknown.

Some clubs in the Championship generate up to 85% of their income from broadcasting, mainly due to the receipt of parachute payments.

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Costs

The main costs at a football club are player related, wages and transfer fee amortisation.

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Wolves wages almost halved from 2012 to 2014 as the club fell from the Premier League to the League One. Whilst this was tough to take for fans, it did allow the club to jettison some deadwood during that period, such as Jamie O’Hara, who was allegedly being paid a seven figure sum a year whilst playing for the club’s reserves in League One, a situation that troubled him so much he was forced to have affairs with random women whilst his former Miss England Danielle Lloyd was taking the bins out at home.

For the first two seasons back in the Championship Wolves showed restraint in terms of wage spending. The arrival of Fosun and Mendes resulted in wages increasing by 55% last season.

Whilst there are many sniping at Wolves for this increased wage expenditure, the club is only marginally ahead of the average for the division of

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Wages fell by a quarter but are still reasonably high by Championship standards, where the average for last season was about £27.3 million. Clubs such as Sheffield Wednesday, Brighton and Forest, all of whom also do not receive parachute payments, paid out higher sums for wages last season.

Amortisation is how clubs deal with transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when Wolves signed Ivan Cavaleiro for £7 million from Monaco at the start of the season, but as he signed a five year contract the amortisation charge of £1.4 million a year for five years (£7m/5).

Wolves total amortisation charge was £7.6 million, 160% higher than the previous season, and higher than any other club not in receipt of parachute payments. It was still only a third of the amortisation of Villa though, who spend over £80 million on new players in 2016/17.

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Putting these two costs together highlights how much of a transformation arose in 2016/17. The previous season the club’s combined wages and amortisation cost represented £78 for every £100 of income, in 2016/17 this nearly doubled to £151 for every £100 of income.

With the investment in new players in 2017/18, this ratio is likely to increase further in 2017/18. It does suggest that Wolves are going for broke this season, which may mean that they would have to cut back substantially if promotion is not achieved, although their present lead over the team in third place is looking substantial.

Losses

Losses are income less costs. The bad news for Wolves is that the club lost a lot of money last. The good news is that profits were made in previous years, which will help the club in terms of FFP compliance.

Operating losses are the trading losses of a club, and they exclude interest costs. In 2016/17 this worked out as £22.6 million, which works out as £430,000 a week.

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It is these losses, and the subsequent purchasing of players for whom Mendes is the agent in 2017/18, that has caused so much grumbling from other chairmen in the Championship.

Such grumbles weren’t heard however when Wolves made far larger losses in 2012/13, although this could be that they finished bottom of the Championship that season and stank out the division.

Under FFP rules, Wolves can make a maximum FFP loss of £39 million over three years in the Championship. Wolves have an overall loss of £12.6 million over the three year period, so appear to be significantly within the limit. However, if losses are similar this season to 2017 then the three year total will rise to about £38 million. Add in interest costs on borrowings and the losses are likely to exceed £39 million.

Fortunately, some costs, such as infrastructure, academy and community schemes, are excluded from the FFP calculations. Wolves have a category one academy, which costs about £5 million a year to run, so this, combined with other allowable costs, should ensure the club has some leeway in terms of meeting the FFP target.

Player trading

The accountants treat player trading in a weird way in the accounts. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. When the player is sold, the profit is shown immediately, and it based on the player’s accounting value, not the original transfer fee.

This creates erratic and volatile figures in the profit and loss account.

If we instead focus on the actual purchase and sales, the following arises

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After three years of effective restraint, the arrival of new owners Fosun resulted in Wolves spending like drunk lottery winners in 2016/17. The club spent over £32 million on new players in 2016/17. In addition to this, hidden away in the footnotes to the accounts is revealed that the club spent a further £35 million in the present season.

This is likely to substantially increase the wage and amortisation charge, but Wolves will be able to offset against these costs the £7.3 million of profits on player sales, so should be within FFP limits.

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Debt

Fosun lent Wolves £21 million in 2016/17, but unlike the owners at West Ham, who have charged over £14 million in interest charges since acquiring the club, the loans are presently interest free.

It is likely that Fosun have lent further sums during the present season.

In addition to loans from the owners, whilst Wolves have spent a fortune on new players, most of this has been on credit.

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Wolves owed other clubs £23 million for player transfers at the end of the 2017 season, this is likely to be substantially higher at the end of the present season.

Summary

Wolves have been transformed financially following their takeover by Fosun. However, having cash to spend is one thing, and spending it well is another.

Fosun are worth £13 billion, so there is plenty of spare money to spend should they reach the Premier League. What is slightly concerning is the set up of hte group, with Wolves now being owned by a Fosun subsidiary based in the British Virgin Isles.

Last season, whilst there were big money signings, they didn’t have a positive impact on the league position. It looks as is that problem has been remedied for 2017/18.

The role of Jorge Mendes is intriguing, although one would wonder why someone who already represents Cristiano Ronaldo and Jose Mourinho needs to spent a lot of time in relation to having a significant involvement with a Championship club, as the snipers claim.

FFP will be an issue, but only if the club fails to be promoted to the Premier League this season. The club is likely to be within the limits for the three seasons ended 2017/18 if our calculations are correct.

Data Set

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