Aston Villa 2017/18 Finances and FFP: Devil in the Detail

Introduction

Down at Villa Park fans are hopeful that the recent return to the first team of Jack Grealish can cement the club’s playoff position as they have the benefits of the final year of parachute payments.

Over the other side of the city rivals Birmingham City have just been docked 9 points as a punishment for a breach of the EFL’s Profitability and Sustainability rules.

Championship football is challenging as the clash between those with parachute payments, stalwarts of the division and recently promoted League One teams means that there is a lack of a level playing field between the 24 competing clubs.

The reign of Doctor Tony Xia, the flamboyant club owner until the summer of 2018 nearly took the club into liquidation but there appears to be some greater financial stability since his departure.

Income

Overall total income for clubs is split into three categories to comply with EFL League recommendations, matchday, broadcasting and commercial.

Relying on fans to turn up and watch a team is more important in the Championship than the Premier League due to the lower sums earned from broadcasting.

Throughout the last decade Villa had a big decrease in matchday income in 2011/12 when the club finished 16th under Alex Mcleish and began a period in the lower half of the Premier League prior to relegation in 2015/16.

Of the £11.8 million of matchday income for 2017/18 about £1m came from the playoff final as it is custom for the side promoted to forego its share of the Wembley receipts as it is about to receive a large cash injection upon joining the Premier League.

Nevertheless, Villa still generated more matchday income than any other club in the division, although Leeds are yet to publish their 2017/18 accounts and may run Villa close.

Year on year Villa’s matchday income increased by 10% in 2017/18.

Getting an average attendance of over 32,000 last season was an achievement and this year the figure has increased to over 35,000 as fans bought into the commitments of the new owners.

In terms of broadcast income Villa saw a drop of 16% to just over £40 million as the second year of parachute payments results in a fall from £41m to £34 million with the remainder of the money being from the EFL deal with Sky Sports.

Villa will see a further drop in broadcast income of about £20 million this season due to a further cut in parachute payments to about £14 million.

EFL clubs earn about £2.5 million from the broadcast contract plus £100-140,000 for a home match that takes place before the cameras and £10,000 for an away match.

Some clubs feel this deal undervalues the Championship and there are rumours of a breakaway to try to negotiate better terms although as yet there is nothing concrete.

Sponsorship and commercial income are therefore essential for Championship sides and here Villa posted a 9% increase mainly due to the training ground being sponsored.

The problem with the Championship is that because it is seen in less countries than the Premier League in terms of a TV audience commercial partners are not willing to pay the same levels for deals and that is why Villa’s income has halved since 2016.

Every club in the Championship (with the possible exception of Dirty Leeds) would like to be in Villa’s position in terms of commercial income as the benefits of a being a big city club and a legacy of the time spend in the Premier League make it attractive compared to much of the competition.

Villa’s overall income was therefore a division leading £68.6 million which explains the paradox of the club’s financial performance as it was also the lowest generated at Villa Park for over a decade.

Earnings in the Championship as a whole are split between into three broad tiers, with those in receipt of parachute payments at the top followed by Championship regulars such as Leeds and Forest and finally clubs who have been bobbing up and down between the division and League One.

Costs

Player costs

Being so close to the Premier League and its riches has meant that clubs often overspend on player costs as they gamble to get promoted.

Running up huge wage costs was one of the reasons why Tony Xia nearly destroyed Villa as the club was effectively paying out Premier League salaries whilst in its second season in the Championship by recruiting the likes of John Terry and Robert Snodgrass on loan as well as the legacy of previous disastrous purchases such as Scott Hogan on lucrative contracts which meant they could not be moved on.

Usually relegated clubs reduce wages in the second season following relegation from the Premier League but Villa’s increased by 19% to £73 million.

Compared to other Championship clubs Villa had by far the biggest wage bill in the division paying more than the bottom five clubs combined with an average player salary of £1.8 million a year.

Earning so much from parachute payments meant that Villa ‘only’ paid out £107 in wages from every £100 of income last season, which is low by Championship standards, although this could rise substantially this season and even more so in 2019/20 should they fail to be promoted unless there is a major clear out of highly paid players.

Having a big wage bill is only part of the player costs for a club, as there is also transfer fee amortisation to consider too.

Amortisation works by spreading the cost of transfers over their contract life, so when Villa signed Scott Hogan in January 2017 for £12 million on a four year deal this results in an annual cost of £3 million in the profit and loss account over that period.

Normally a club relegated from the Premier League would have a reduced amortisation charge but the huge spending in 2016/17 on player of £88 million sanctioned by Tony Xia meant there was an increase that season of nearly half and a legacy cost of the same sum the following season.

Doubters of Villa’s modest transfer spend in 2017/18 should not the club was second to ‘Boro in the Championship amortisation table and Villa’s total player investment cost worked out at £141 in wages and amortisation for every £100 of income, meaning the club was dependent upon Xia to pay for the excess as well as all the other club running costs.

Profit

Jumping over other expenses and looking at profit, which is income less costs and Villa, like all clubs show a variety of profit measures in their accounts, so they need a bit of explanation.

Operating profit is income less all the running costs of the club except loan interest. It is a ‘dirty’ profit measure in that it includes one-off non-recurring costs such as redundancy, write downs and gains on player sales that distort the underlying figures when trying to work out long term sustainable profitability.

Both Randy Lerner and Tony Xia oversaw a club that had operating losses every single year during the last decade despite the benefits of Premier League membership and parachute payments.

Stripping out the volatile impact of player sale profits and other one off events, which are unpredictable and not part of the clubs’ day to day trading, gives a profit measure called EBIT (Earnings Before Interest and Tax) which gives even more depressing news for Villa fans.

In the case of Villa, the club had non-recurring income of £3 million from ‘Income from compensation deed relating to freehold land’ which appears to compensation for part of Villa’s training facilities being used the for HS2 rail project.

Villa’s EBIT losses average £790,000 a week over the last decade and the only way these can be covered is by selling players, borrowing money or having the owner invest by buying more shares. Villa made a profit of £16 million on player sales in 2017/18 and may need to sell more players if they fail to be promoted this season.

Total losses in the Championship from the 17 clubs who have reported to date are £366 million and could easily be increased by at least £100 million more once the likes of Sheffield Wednesday, Derby and Sunderland have reported their figures.

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

Villa’s EBITDA loss was still more than £500,000 a week and it has had losses in nine years out of the last ten which shows that is has failed to generate cash from its day to day activities.

Profitability and Sustainability/FFP issues

The present incarnation of Financial Fair Play is called Profitability and Sustainability. Clubs are assessed over a three year period and allowed to lose a maximum of £35 million before tax for each year in the Premier League and £13 million in the Championship. Therefore, for Villa in 2017/18 the allowable loss was £61 million.

Some expenses are excluded for FFP purposes, namely promotion bonuses, academy, infrastructure, women’s football and community schemes.

In 2016 Villa wrote down property values by nearly £45 million when the club was relegated from the Premier League.

The above calculation suggests that Villa were within the FFP limits by £2.6 million in 2017/18, with the HS2 land sale being just enough to keep the right side of the limit.

Being so close to the limit does also mean that Villa (and other clubs which are too close to the FFP naughty step for comfort) will have had to submit regular monthly financial reports to the EFL to ensure they are compliant with P&S rules for the present season.

Player Trading

Villa spent just £1.8 million on new players in the year to 30 June 2018 as the club had a hangover from the previous season when purchases were £88 million.

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

Funding

Clubs can obtain funding in three ways, bank lending, owner loans (which may be interest free) or issuing shares to investors. In the year ended 31 May 2018 Villa issued nearly £70 million in shares to investors as Tony Xia stuck money into the club for a period of time. However, when Xia’s money ran out the club was unable to continue to pay the bills, leading to the crisis that nearly destroyed it.

Nassef Sawiris and Wes Edens acquired control of the club in the summer of 2018 and injected the cash needed to continue trading.

Summary

Key Financial Highlights for year ended 31 May 2018

Turnover £68.6 million (down 7%)

Wages £73.1 million (up 19%)

Pre-player sale losses £54.0 million (up from £41.1 million)

Player sale profits £15.9 million (down from £26.6 million)

Player signings £1.8 million (down from £87.9 million)

Villa gambled and lost under Tony Xia in the last two seasons trying to return to the Premier League. The failure to achieve this meant that it came close to ceasing to exist. If the club is not promoted this season there will be a tough challenge ahead as income will fall again leaving the club with high running costs and a likely player exodus to balance the books as the FFP limit falls from £61m to £39 million.

Sheffield United 2017/18: Geisha Boys & Temple Girls

Introduction

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

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

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

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

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

ey Financial Highlights for year ended 30 June 2018

Turnover £20.0 million (up 76%)

Wages £19.0 million (up 90%)

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

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

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

Income

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

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

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

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

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

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

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

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

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

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

Costs

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

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

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

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

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

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

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

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

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

Profits

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

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

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

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

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

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

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

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

Player Trading

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

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

Funding

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

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

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

Conclusion

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

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

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

Liverpool 2017/18: Toxteth O’Grady

Liverpool 2018: The Killing Moon

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

Introduction:

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

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

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

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

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

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

Income £455.0 million (up 25%).

Wages £263.0 million (up 27%) .

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

Player signings £190 million (up 149%)

Player sales £137 million (up 89%)

Owner loans £120 million (down £10 million)

Income:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Costs

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

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

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

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

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

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

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

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

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

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

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

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

Profits and Losses

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

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

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

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

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

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

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

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

Player trading:

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

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

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

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

Funding the club

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

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

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

Conclusion

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

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

Swansea City: Soul Train

Introduction

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

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

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

Key Financial Highlights for year ended 31 July 2017

Turnover £128 million (up 31%)

Wages £99 million (up 21%)

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

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

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

Income

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

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

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

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

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

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

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

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

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

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

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

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

Costs

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

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

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

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

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

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

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

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

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

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

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

Profits

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

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

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

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

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

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

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

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

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

Player Trading

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

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

Funding

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

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

David Conn Guardian Sale of Swansea

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

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

Conclusion

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

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

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

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

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

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

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

Arsenal 2017/18: My Friend Stan

Introduction

That’s another fine mess.

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

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

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

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

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

Key Financial Highlights

Turnover £403 million (down 5%)

Wages £240 million (up 20%)

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

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

Player signings £166 million (up 46%)

Income

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Costs

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

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

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

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

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

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

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

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

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

Profits

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

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

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

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

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

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

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

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

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

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

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

Player Trading

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

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

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

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

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

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

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

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

Funding

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

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

Conclusion

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

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

Chelsea 2017/18: The Lion Sleeps Tonight

Introduction

…so where do the electrified fences go Ken?

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

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

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

Key Figures

Turnover £443 million (up 23%)

Wages £244 million (up 11%)

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

Player sale profits £113 million (up 63%)

Player signings £290 million (up 174%)

Income

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

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

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

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

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

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

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

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

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

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

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

Costs

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

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

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

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

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

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

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

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

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

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

Profits

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

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

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

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

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

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

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

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

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

Player Trading

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

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

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

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

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

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

Funding

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

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

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

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

Conclusion

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

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

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

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

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

Everton 2017/18: The Long and Winding Road

He who smelt it, dealt it…

Introduction:

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

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

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

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

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

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

Income £189.2 million (up 10%).

Wages £145.5 million (up 39%) .

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

Player signings £214.6 million (up 133%)

Player sales £108.5 million (up 98%)

Owner loans £149.25 million

Income:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Costs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Profits and Losses

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

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

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

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

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

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

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

Player trading:

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

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

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

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

Funding the club

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

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

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

Conclusion

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

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

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

West Ham 2018: Plastic Passion

Introduction:

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

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

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

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

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

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

Income £176.3 million (down 4%).

Wages £106.6 million (up 12%) .

Operating profit £22.0 million (down 55%)

Player signings £60.9 million (down 25%)

Player sales £57.7 million

Shareholder loans £54.5 million.

Income:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Costs

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

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

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

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

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

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

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

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

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

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

Directors’ pay

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

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

Profits and Losses

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

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

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

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

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

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

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

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

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

Player trading:

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

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The net spend was just £3 million though.

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

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

Funding the club

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

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

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

Conclusion

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

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

Brighton 2017/18: What Do I Get?

Introduction:

Tony Bloom, Brighton’s owner, probably heaved a sigh of relief in 2017/18, not just because his team had been promoted, but for the first time in living memory the club made a profit.

Over the six initial seasons that Brighton had played in the Championship at the Amex stadium, the Albion had lost £110 million.

Nevertheless, Bloom still ended up lending the club £32 million in 2017/18 as he underwrote investment in new players and capital projects.

Yet for some Brighton fans this benevolence from Bloom is not enough, and recent tantrums and whines on social media suggest that some fans will always want more, especially if someone else if footing the bill.

Key figures for year to 31 May 2018: Brighton and Hove Albion Holdings Limited

Income £139.4 million (up 378%).

Wages £77.6 million (up 148%) .

Operating profit £12.8 million (previous year loss of £38.9 million)

Player signings £57.5 million

Player sales £3.5 million

Tony Bloom investment £318 million (up £32 million).

Income:

Brighton, like all clubs generate money from three main sources, matchday, broadcasting and commercial, and whilst the figures for 2017/18 were a record for the club, they are still relatively low compared to those clubs who are regularly competing in European competitions and have global fanbases.

Love it or loathe it, broadcasting income is the main driver of income for a club such as the Albion, and the difference between clubs in the EFL and the EPL is part of the reason why clubs in the Championship are losing nearly £400 million a season as they seek the end of the rainbow in the division above.

Overseas and domestic broadcasters are prepared to pay top prices for Premier League rights at they have discovered that this is the one product that minimises viewers cancelling their subscriptions.

Only a quarter of Brighton’s income came from TV in the Championship, but this rose to four-fifths in the Premier League, and some clubs are even more exposed to this income source.

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Many critics of the Premier League claim that broadcast income levels are a bubble and will burst, bankrupting clubs who are dependent upon it in the process, but there is little evidence to support the view that we are near the end of the road for the likes of BT and Sky paying billions to cover the game live.

Selling TV rights at a loss when the Premier League was started in 1992/3 had proved to be a masterstroke, as the value of those rights has subsequently increased to about a billion pounds a year.

Brighton’s matchday income rose substantially in 2017/18, although we suspect that part of the increase is due to changing what is included in the split of matchday and commercial income totals.

Less fixtures in the division would in theory result in less income, but a combination of increased average attendances (up from 27,966 to 30,403) and higher matchday prices led to a 25% increase.

Unlike most other clubs, Brighton’s ticketing policy includes subsidised travel to and from the Amex stadium for those that want it, so a direct comparison with clubs of a similar ground capacity is not entirely valid.

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Even so, Brighton generated more matchday income than the likes of Leicester, who won the Premier League in 2016, and had £10m more from this source than half a dozen competitors, and this was partially due to the club’s ability to monetise the fanbase compared to previous years.

As a newcomer to the division, Brighton were slightly constrained by existing commercial deals, and according to Nick Harris’s excellent SportingIntelligence website have a very low value shirt sponsorship arrangement with American Express compared to the going rate for the Premier League.

http://www.sportingintelligence.com/2018/07/30/manchester-clubs-lead-the-way-as-pl-shirt-sponsorship-climbs-to-313-6m-290701/

Nevertheless, commercial income rose by a quarter to over £10 million, but the club is a pauper compared to the riches earned by the self-styled ‘Big Six’.

Despite the relative lack of commercial income, Brighton have fared reasonably well in the Premier League overall, finishing 12th in our initial total income table, although this may change as more clubs announce their 2018 results.

What is likely to be the biggest driver of income change for 2018/19 is the club’s final league position, as this is worth £1.9 million for every extra place in the league that the club finishes.

Costs:

Having a place in the Premier League means that expenses rise too, and the main drivers here relate to players, in the form of wages and transfer fee amortisation.

Increasing a wage bill by nearly 150% would be considered madness in most industries, but football is like no other, and to compete the club has had to pay the going rates.

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There were new contracts given to some of the players central to Brighton being promoted from the Championship in 2016.17, such as Dunk, Duffy, Stephens, Knockaert and Bruno, as well as new signings joining the club whose agents have a rough idea of the going rate for the division.

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Even so, wages rose slower than income, and this resulted in Brighton’s wage/income percentage nearly halving, as the club paid out £56 in wages for every £100 in income, comapred to £107 the previous season (and there were substantial promotion bonuses paid out on top of this sum too).

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As a rule of thumb Premier League clubs are usually deemed to be running well if the wage to income ratio is below 60%, so Brighton have achieved this objective in their first season.

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Relative to their peer group, Brighton seem to have wages under control and have not thrown money at the issue of avoiding relegation.

Married to the cost of player wages is the transfer fee amortisation expense, which arises when a player signs for a club and the accountants spread the transfer fee over the contract life.

Yearly amortisation fees represent a less volatile measure of a club’s transfer policy, which can be distorted by big purchases in one year followed by a period of relative austerity, and so give a better long-term guide to investment in the playing squad.

Brighton’s amortisation cost for the year more than tripled, as the club broke its transfer record many times on Ryan, Propper, Izquierdo, and Locadia over the course of the season. Therefore, when Davy Propper signed for an estimated £10 million on a four-year contract, this works out as an amortisation charge of £2.5 million a year.

By Premier League standards the amortisation cost is relatively low, reflecting that the club is in its first year in the division and has also kept faith with players recruited at Championship prices and therefore lower amortisation fees.

Directors’ pay

It was not just the players who benefitted from Brighton’s promotion. CEO Paul Barber saw his pay package increase to over £1.4 million, reflecting the faith that Tony Bloom has in him and the fact that he was coveted by other clubs in the division, such as Liverpool.

Barber attracts some hysterical reactions from sections of the Brighton fanbase, who seem to think he is the spawn of Beelzebub. His email replies to fan complaints are legendary in length, and whilst his dedication to communication is to be commended in many regards, when fans want nothing but appeasement for the personal slights that they take when some decisions are made, he may struggle to make much headway with their views. Every village has an idiot, and there are a lot of villages in Sussex, all of whom seem to enjoy writing letters of complaint to the Brighton CEO.

The Premier League is a law to itself when it comes to executive pay, there seems to be little indication of what is the going rate, and some of the figures quoted, especially for clubs that purport to give no money to the big cheeses, are best described as ‘unusual’ but are likely to get the investigative journalists at Der Spiegel busy going through leaked emails.

Profits and Losses

Profits/losses are income less costs, and the headline figure for Brighton was a £12.8 million last season, or £350,000 a week. This figure is distorted by a couple of factors though.

Whilst the club kept the vast majority of the squad from the Championship, a few players were sold and this generated profits of £3.4 million, The nature of player sales profits is that all of the profit is shown in the year of sales (unlike player purchases which are spread over the contract) and so create erratic and unpredictable figure.

In 2016/17 the club paid out £9.1 million in promotion bonuses, as Tony Bloom rewarded all employees at the club, not just the playing staff, for taking the Albion to the top flight. Such bonuses distorted the results for that season as they are non-recurring in nature.

Stripping out the above two distortions gives something called EBIT (earnings before interest and tax) profit, which is a more balanced look at what recurring profits would be.

This shows the alarming state of trying to compete in the Championship and gives a more nuanced measure of the benefits of promotion, which are effectively £40 million comparing 2018 to 2017.It also reinforces the view that Brighton would have had to cut back significantly in the playing squad by selling players had they not been promoted the previous season to comply with EFL FFP.

Player trading:

According to the accounts Brighton spent over £57 million in 2017/18 on player signings, a club record. This doesn’t necessarily buy you a lot in the present Premier League market though.

Compared to their peer group, Brighton’s spending was reasonable but unspectacular.

Since the end of the season the board have backed Chris Hughton, with another £50-60 million being spent on new signings.

Funding the club

Tony Bloom’s total investment increase in 2017/18 as he lent the club £32 million. These loans realistically stand little chance of being repaid under present circumstances unless the club starts to make significantly higher profits, although there is little sign of Bloom wanting his money returned. The good news is that the loans, unlike some from directors at Premier League clubs, are interest free.

Whilst fans may scratch their heads at how he had to lend the club money in a year when it made a profit, Bloom repaid the Albion’s overdraft at Barclays Bank (£16 million at start of season), only a fraction of the cost of new players was reflected in the amortisation charge, and the club also spent nearly £10 million in upgrading the Amex stadium and other infrastructure projects.

This takes his total investment to £318 million, in the form of shares and loans.

Conclusion

Brighton’s approach under Bloom of concentrating on the infrastructure first (stadium and training facilities, followed by squad investment) paid dividends in 2017 and the club was able to capitalise with a solid if unspectacular first season in the Premier League.

With the fifth lowest wage budget in the division, a relegation scrap is going to be the order of the day for a few seasons, but provided Bloom keeps his nerve and faith in Chris Hughton, then there is a fair chance of making some progress.

Whether the pitch fork element of the fan base has such patience (and they are not the ones who were subsidising the club for tens of millions in the Championship) is another matter.

Stoke City 2018: Coat(es) of many colours

Does my bum look big in this?

Introduction:

There’s not a huge number of famous people from Stoke, Stanley Matthews and Robbie Williams come to mind, but then most people may be struggling.

Recent events have brought one person to the public’s attention, and that’s Denise Coates, the main shareholder in Bet365, who own 100% of Stoke City Football Club Limited’s shares.

She was paid £220 million in 2017/18, a record for a private company, which will come as little cheer to Stoke City fans as their club was relegated from the Premier League.

The club was one of the first to publish its financial results for 2017/18.

Key figures for year to 31 May 2018: Stoke City Football Club Ltd

Income £127.2 million (down 7%).

Wages £94.2 million (up 11%) .

Operating losses £30.2 million (up 35.1 million)

Player signings £58.4 million

Player sales £27.9 million

Coates family investment £123 million (up £47 million).

Income:

All clubs generate money from three main sources, matchday, broadcasting and commercial. The Premier League is effectively split into the elite, who are regulars in UEFA competitions and have global fanbases who can be ‘monetised, and the remainder of upstarts, wannabes and those just enjoying the ride.

Stoke City are one of the earliest clubs to publish their finances for 2017/18, so the figures in the Premier League tables are from 2016/17 unless the club is labelled 2018.

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Stoke’s total income is where most fans would probably expect it to be, in amongst a group of clubs who are likely to be scrapping for relegation during the season, but not adrift from that particular bunch.

A screenshot of a cell phone Description automatically generated Matchday income from ticket sales rose slightly to £7.7 million. This was partly due to some ground redevelopment that allowed the club to increase capacity at the Britannia Bet365 stadium to over 30,000. .

Broadcasting income fell 7% to £101 million. This was due to Stoke finishing 19th in the table compared to 13th the previous season. Each position in the table is worth about £1.9 million to a club, so giving them plenty to play for even if relegated is avoided with the few matches remaining at the end of the season. The fact that one place higher up a table is worth more to a club such as Stoke than increasing capacity by 1,800 shows how skewed revenue is in favour of broadcast income.

For 2018/19 expect broadcasting income to fall to about £45 million, and if the club are not promoted, £35m and £14m in the two following seasons. The EFL broadcasting deal for clubs presently pays £2.3 million a season in the Championship, and in addition clubs receive £4.5 million from the Premier League deal in what is called ‘solidarity’ payments.

Other income, mainly commercial and retail, fell by 8% to £18.6 million. Those who snipe at Stoke due to their relationship with owners/sponsors Bet365 will point to this sum being inflated. Whilst Stoke are perhaps a wee bit further up the table in this area than one would expect, it’s by a relatively small amount, compared to the more eye-watering deals signed by clubs with friends of their owners less than 50 miles away.

Costs:

The main costs for a club are in relation to players, in the form of wages and transfer fee amortisation.

The wage bill rose by over £9 million to £94 million. This was due to the club making a lot of signings (who failed to deliver) and a payoff for Mark Hughes when he was sacked in January.

As a consequence, the wage/income ratio rose significantly. Stoke paid out £74 in wages for every £100 of income. The rule of thumb in the Premier League is that clubs are usually aiming for a 60% target.

What’s concerning for Stoke is that if this high cost area is carried over to the Championship it could easily exceed 100%, leaving nothing to pay for the other overheads of running the club.

The other player related expense is that of transfer fee amortisation. This is the cost of signing a player spread over the length of his contract. So, when Stoke signed Kevin Wimmer for £18 million on a five-year contract this works out as an annual amortisation charge of £3.6 million a year (£18m/5years).

Stoke’s amortisation charge rose by 14%, reflecting the investment in the squad during the season. This also shows the inflated prices being demanded by selling clubs when dealing with the Premier League.

The advantage of focussing on amortisation instead of just looking at transfer fees is that it removes some of the volatility from making one big signing in a single year and shows the impact of the club’s long-term player signing strategy. It’s clear that Stoke City’s board backed Mark Hughes as the amortisation charge is now double that of three seasons ago.

Compared to other clubs of a similar size, Stoke’s amortisation cost is competitive without being spectacular. This suggests that relegation was down to spending money poorly, rather than not having a decent budget.

Directors pay

Much has been made of parent company Bet365 paying their board £330 million in 2017/18. That level of generosity doesn’t extend to the football club, but the £711,000 trousered by the highest paid executive at the club means that they are still able to buy a pack of oatcakes or two for a while.

Profits and Losses

Profits/losses are income less costs, and the headline figure was a £30.2 million loss last season, or £580,000 a week. This figure is distorted by a couple of factors though.

Following relegation, the club reviewed the squad and concluded that it was significantly overvalued. They therefore wrote off £29.4 million of player transfer fees. This is a one-off event that is unlikely to be repeated in 2018/19 unless the club does a Sunderland and slides through to League One. Stoke fans are likely to be able to point the fingers at those players who turned out to be turkeys.

One reason for doing this in 2017/18 is that by reducing player values in 2017/18 it will enable the club to be able to satisfy FFP rules in the Championship should they stay there for a few seasons.

Also, in 2017/18 Stoke sold players at a profit (Arnautovic being the main one) of £22 million. This is another erratic and unpredictable figure.

Since the end of the season the club has sold players at a profit of a further £14 million, the main one coming to mind being Shaqiri to Liverpool.

Stripping out the above two distortions gives something called EBIT (earnings before interest and tax) profit, which is a more balanced look at what recurring profits would be.

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This is a more alarming than the stated operating losses of £30.2 million. Whilst the club lost a similar amount in 2012/13, since then there have been two increases in EPL broadcasting rights, which boosted Stoke’s TV money from £46 to £100 million. The fact that the club has similar losses in 2018 indicates that a lot of money was wasted last season.

Player trading:

According to the accounts Stoke spent over £58 million in 2017/18 on player signings, a club record. This doesn’t necessarily buy you a lot in the present Premier League market though.

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Compared to their peer group, Stoke’s spending was reasonable but unspectacular. The figures reinforce the comments made by Charlie Adam that too many players weren’t prepared to fight hard enough for Premier League survival.

Since the end of the season the board have backed Gary Rowett, with £52 million being spent on new signings, which is a very high figure by Championship standards.

Funding the club

The Coates family total investment increase in 2017/18 as Bet365 invested a further £47 million in the club via loans. These loans realistically stand little chance of being repaid under present circumstances of the club losing so much money. The good news is that with Bet365 making a gross profit of £2.2 billion in the same period there is little chance of the company asking for its money back.

This takes his total investment to £159 million, in the form of shares and interest free loans.

Realistically, the Coates family will have to subsidise the club by a minimum of £10-20 million a year for the foreseeable future, unless promotion back to the Premier League is achieved. The Championship is a bear pit of a division, with practically every club losing hundreds of thousands every month.

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Conclusion

Stoke City are a textbook example of everything that is right and wrong with the Premier League. A good season is finishing in the top half, get a few signings wrong and you’re in a scrap to avoid the drop.

The good news for Stoke fans is that there’s no sign of the Coates’ affection for the club in the city where he made their fortune waning. The only threat could come if Bet365 were bought out by another company, but there is no sign of that happening.

The Championship is more exciting than the Premier League, if less glamourous, and provided the club remains competitive in the division there’s probably more enjoyment for fans once they get used to the regularity of Saturday followed by Tuesday football, with victories becoming more expectation than hope.