Manchester City and Etihad Airways: Economy plus?

History

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

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

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

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

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

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

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

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

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

The threat to the Elite

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

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

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

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

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

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

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

How does it work?

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

Summary

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

 

Newcastle: Opportunity Knocked

Introduction

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

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

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

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

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

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

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

Finances pre Ashley

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

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

Since Ashley took over, the situation has reversed.

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

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

Income

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

Costs

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

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

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

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

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

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

Profits/losses

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

The Ashley Years: 2008-17

Income

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

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

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

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

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

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

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

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

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Costs

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

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

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

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

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

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

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

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

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

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

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

Transfer Market

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

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

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

Summary

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

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

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

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

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

The Ashley Years Table

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QPR FFP Fine: Everything Counts in Large Amounts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is this a fair settlement?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

New TV Distribution Rules: Everyone’s A Winner.

Q: What’s the problem?

Some of the ‘Big’ clubs feel that they get a raw deal from the existing way that broadcasting monies are split in the Premier League, so want to change the rules.

Q: What’s their particular beef?

At present the Premier League divides money into five pots.

(a) Domestic broadcast money from BT/Sky of £1.7 billion a year is split into three pots

  • 50% is split evenly between all 20 clubs
  • 25% is split based on the number of times the clubs are shown live on TV.
  • 25% is split based on the final league position.

(b) Central advertising for sponsorship of the Premier League is split evenly between all 20 clubs.

(c) Overseas broadcast money worth about £1bn a year is split evenly between all 20 clubs. It is this issue that is creating the aggravation.

Q: What’s wrong with splitting the money evenly?

Nothing, except the ‘Big Six’ (Manchester United and City, Liverpool, Arsenal, Chelsea and Spurs) claim that viewers overseas are only interested in seeing their clubs on the box and so should get more of the cash.

When the Premier League was set up in 1992 (and football was invented) the overseas TV rights were so miniscule that nobody cared about them, so the club chairmen were happy with an even split.

Q: Surely a more democratic split of monies makes the game more competitive?

Yes it does, and the Big Six were happy to go along with this, until Leicester City spoiled their little cartel and won the Premier League in 2016. This caused the owners of the big clubs to soil themselves and try to ensure it did not happen again.

Q: I thought the smaller Premier League clubs were against such a split?

They were, in October 2017 a vote for the Big Six plans to redistribute overseas money partly on a merit (league position) basis was delayed/deferred. According to inside SAUCES this would have resulted in 65% of the overseas money being split evenly between clubs and 35% on merit.

If this had been approved the broadcast distribution between clubs would have been as follows:

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The proposal would have resulted in 12 clubs being better off and 8 worse off than under the original rules. The reason why it was 12 and 8 rather than 10 and 10 is that less money would have gone to clubs relegated (who receive parachute payments) and ‘solidarity’ payments to the other clubs in the Football League Championship, League One and League Two.

This is because the Football League agreed to a deal with the Premier League such that a fixed percentage of money given on an equal basis to Premier League clubs would be allocated to parachute and solidarity payments. Reduce the amount of Premier League money split evenly and therefore the amount that filters through to the EFL clubs by about £48 million.

The reason why a vote did not take place at the Premier League chairmen meeting was that Richard Scudamore, the often maligned but actually pretty decent Premier League chairman, realised the proposal would not get the 14 votes required for a change in the rules and so managed to put off a decision being made.

Since then the Big Six have been quietly fuming at not getting their way and there has been a muttering and unfulfilled threat of quitting the Premier League and joining a European Superleague if their wishes were unfulfilled.

They clearly believe that the Premier League’s success is all due to their clubs. This is very harsh on Scudamore and his team, who have marketed the Premier League superbly, partly on the grounds of it being more competitive and unpredictable than other leagues.

In 2017/18 Burnley and Palace have beaten champions Chelsea, Swansea have beaten Liverpool, West Brom and all three promoted clubs have beaten Manchester and practically everyone has beaten Arsenal.

Scudamore has spent the last six months trying to keep all 20 club owners, if not happy, then at least not moaning too much, and he’s succeeded.

Q: Why should the Premier League give money to clubs in the Football League?

It’s an issue that clearly vexes Liverpool’s American owner John Henry. He was quoted in an interview with Associated Press as saying “it’s much more difficult to ask independent clubs to subsidise their competitors beyond a certain point”.

Henry clearly thinks that clubs in smaller towns and cities are an irrelevance and whether they survive or die is of little consequence for him. Point out the Liverpool signed the likes of Kevin Keegan from Scunthorpe, Phil Neal from Lincoln City and Ian Rush from Wrexham and he would probably look confused (as after all soccer began in 1992).

Q: Why were the other Premier League clubs opposed to the change?

Many of them would have ended up with less money and the Premier League would have become less competitive too.

Q: What are the agreed changes?

Under the rules which kick off in 2019/20, any INCREASE in overseas TV money will be split on a final league position. This means that the existing level of overseas cash will still be distributed evenly.

To stop the clubs at the top running streets ahead of the lower/midtable clubs, there is a cap such that the club who wins the Premier League cannot have more than 180% of the Premier League TV money than the side finishing bottom, under the present rules it works out at about 161%.

Q: Who will be the winner and losers then under the new rules and why did smaller clubs vote in favour?

Whoever came up with the new rules (and I have my suspicions who it may have been) has created a distribution method in which no one is worse off, as it is only the additional overseas money that is split on the new method. Everyone is therefore guaranteed their former income.

The teams who will lose out, as already mentioned, are those outside of the Premier League.

Under the old rules, if the Premier League generated an extra £100 million, £27 million of this would ‘leak’ out to the EFL clubs as follows:

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The Premier League clubs would each therefore receive an extra £3.65 million whereas the likes of greedy clubs such as Grimsby, Barnet and Forest Green in League 2 would receive an extra…err…£32,000 each per season, enough to play the average wage of one Liverpool player for all of three days.

John Henry could claim that these lower league clubs have done nothing to deserve any extra money, and under the new rules, his wish has come true.

The Premier League will now keep £100 million out of each extra £100 million generated from overseas income. Having crunched the numbers (and this was beyond me so I was lucky to use the talents of some university boffins for assistance) shows how an extra £100 million would be distributed using both the present (2018/19) and new (from 2019/20) rules.

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As can be seen from the above, 14 clubs would be better off under the new rules than using equal distribution, as no money goes to the Football League.

Funnily enough 14 votes were needed to pass the new rules and they were duly approved. If overseas money increased by a larger amount, say £750 million a season, then 15 clubs would be better off than under an equal share basis.

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Q: But what about the EFL clubs, couldn’t they vote against this?

The EFL clubs were the ones who negotiated and voted for as agreed set percentage of equally distributed Premier League monies. At the time they were delighted with the result but may be regretting it now.

It’s not the first time in this country in recent years that people have voted for something that makes them economically worse off though.

Conclusion

If you are a big club owner things are looking great. There’s more money coming into your club from the Premier League and in addition UEFA have announced an extra £780 million of annual prize money each season too.

This money won’t go to players, as under the Premier League’s Short Term Cost Control rules wages can only increase by £7 million a season plus any money generated by the clubs themselves through commercial and matchday income.

The money won’t go to the EFL either, so who does that leave as potential beneficiaries apart from club owners themselves?

Aston Villa and FFP

 

 

It’s the hope that hurts you most

Executive Summary

Villa easily satisfied FFP in 2016/17 due to parachute payments and player sales despite spending £88 million on players.

They should easily satisfy it in 2017/18 as player trading position reversed and sold more than they bought.

Will need major belt tightening in 2018/19 as parachute payments fall from £34m to £15m and FFP loss limit falls from £61m to £39.

If you want the long version read on…

Introduction

There’s nearly as many questions about Financial Fair Play (FFP) these days as there is about Katie Price’s love life, and the answers are usually equally confusing.

I’ve been asked to look at Villa’s FFP position, and this will involve an element of guesswork in places, as some figures are not yet published or have never been in the public domain.

The Rules

In the Championship FFP is based on a rolling three-year period, with the aim of keeping losses to an ‘acceptable’ level.

Presently the rule is that a club can have an FFP loss of £13 million for every season it is a member of the Championship within the three-year period, and £35 million for each season in the Premier League.

Therefore, for Villa, for 2016/17 the allowable FFP loss was £83 millon (2x£35m + £13m) falling to £61 million in 2017/18 and £39 million in 2018/19.

The known losses

According to Villa’s accounts, the club lost £81.3 million in 2015/16 and £14.4 million in 2016/17 giving a grand total of £95.7 million, so it initially looks as if an FFP breach had occurred, but we now enter the world of murky accounting and additional FFP rules.

Good costs

To add to the confusion, some costs are excluded when calculating FFP losses. This is because they are considered ‘good’ as they represent an investment in the future of the game or its facilities.

These costs include:

  • Academy running expenses
  • Community support schemes
  • Infrastructure costs (usually depreciation on the stadium and training facilities etc)
  • Promotion bonuses to staff should the club go up to the Premier League.

Looking at Villa’s accounts for 2016/17

  • The club has a tier one academy, it looks as if this cost was £5.9m for Villa. (£5m in 2015/16)
  • Community support was £2m (£2.2m in 2015/16)
  • Infrastructure cost (depreciation) was £2.9m (£48.5 million in 2015/16 due to a bit write off of the value of Villa Park).

This means that Villa could have had an FFP loss of £31.8 million (£61m allowable three-year loss less £29.2m FFP loss incurred in last two years) for 2017/18.

Squeaky bum time

Have Villa managed to get in under this figure of £31.8 million for 2017/18?

I would say they have, but there is not a lot of room to spare.

In 2016/17 the loss of £14.4 million was AFTER selling players at a profit of £26.6 million. Villa have made significant sales in 2017/18 and it looks as if they’ve made a profit on these of a further £15 million.

Now for the bad news, Villa’s broadcast income for 2017/18 is down by about £7 million from £41 million to £34 million due to a reduction in parachute handouts. It’s likely the club’s other income will fall by £2-3m too as commercial deals expire.

The wage bill will still be high, and the figure for 2016/17 of £61 million was the third highest in Championship history, only beaten by Newcastle (who were promoted) in 2016/17 and QPR in 2013/14 and are now facing an FFP fine of between £40-50 million.

Expect the wage bill to be trimmed a bit but Villa have recruited John Terry and signed some loan players who are on big money. I’ve gone for a 10% reduction in wages to £55 million

Villa also spent a fortune on players in 2016/17 of £88 million on players. The cost of these are spread over the length of the contract signed. So if we assume players are on four year deals this is a cost of £22 million a season unless the player is sold.

These two costs put together are likely to be in the region of £70 million, and expected income is about £65 million, taking into account the fall in parachute payments.

Villa’s overheads in 2016/17 were £91 million excluding amortisation, of which £61m was wages, so lets assume that if there have been cutbacks for 2017/18 there are £25m of non-wage overheads.

Putting this together we have

£’m
Income 62
Wages (55)
Amortisation (22)
Other overheads (25)
Estimated accounting loss (40)
Add back:
Gain on player sales 15
Allowable FFP costs 10
FFP loss (15)

Therefore over the three years to June 2018 Villa will have a rolling FFP loss of £44.2 million, well within the £61 million limit.

2018/19

This is where I fear Villa will face its biggest challenge. The allowable three-year FFP loss will fall to £39 million from £61 million and parachute payments from £34 million to £15 million. Put those together and it’s a financial squeeze of £41 million.

In addition, they may struggle to get players on big wages such as Ross McCormack off the payroll. Even if he goes out on loan Villa will be picking up the majority of the tab.

It suggests that the club may have to sell Grealish and Chester to ensure they don’t exceed the limit.

Premier League Club Values 2017

It’s worth THIS much!

As the 2017/18 season comes to an end, all but one Premier League (EPL) club has submitted their accounts for publication, and that has allowed us to estimate values.

The new domestic broadcasting deal that came into play in 2016/17, combined with wage restraint due to the EPL’s Short Term Cost Control rules, has boosted club income and profitability.

As a result the total value of EPL clubs has risen over 30% from £12.1 billion to £15.8 billion.

The clubs have been valued using the Markham Multivariate Model (MMM) devised by Dr Tom Markham, a graduate of the University of Liverpool’s Football Industries MBA programme, and is now head of Strategic Business Development at Sports Interactive, the producers of Football Manager.

The model has been slightly tweaked to remove some of the volatility in gains arising from selling players in individual years, which explains why some of the comparative figures from 2016 are different to those published last year.

The average value of a club in the EPL is now £791 million, up from £607 million the previous season. This helps explain why there are so many investors, speculators, wide boys and charlatans keen to get involved in the division.

The Table

The formula used to calculate club values is (Revenue + Net Assets) x (Revenue + Cleaned Net Profit + average gain on player sales over last three years)/ Revenue x stadium utilisiation % / wage control %

The formula assumes that the club will continue to be in the EPL for at least five years. If the club is relegated then values in the Championship (and for Sunderland League One) are probably 15-20% of the EPL figures.

Club summaries

1: Manchester United £2,463 million (2016 £2,402 million)

United have consolidated their position at the top of the table as a result of higher broadcast income and making profits of £11 million compared to losses of £10 million on player sales. Not selling players at a loss helped too, along with winning two trophies (three if you believe Mourinho).

2: Chelsea £ 2,062 million (2016 £1,837 million)

Chelsea’s ability to continually sell players at a profit (£159 million in three years), bonuses for winning the EPL & new kit deals pushed them into second position. Biggest constraint is matchday income, only £65m compared to over £100 m for United and Arsenal

3: Manchester City £1,979 million (2016 £2,139 million)

A bit of a slide for City, as the investment in new players and wages under Pep meant profits fell from £20m to £1m despite income up 20% & wage control percentage rose from 50% to 56%. Profitability is an irrelevance to the owners, but an increase is on the cards for 2018.

4: Arsenal £1,822 million (2016 £1,269 million)

Arsenal’s ability to extract money from fans is very impressive, their matchday income is second only to Manchester United. Lower wages than Liverpool, the Manchester clubs & Chelsea help. Profits up from £2m to £35m contributed too. Lack of CL exposure in 2018 will restrict value growth.

5: Spurs £1,445 million (2016 £1,169 million)

Champions League income & tight control over wages (apart from CEO Daniel Levy’s £6 million) which are £80-£140 m less than the other ‘Big Six’ clubs mean Spurs value is higher than you would expect from a club that has not won the league for nearly 60 years.

6: Liverpool £1,129 million (2016 £626 million)

It might upset Reds’ fans to see their club sixth, but remember the owners only paid £300 million for the club a few years ago. The club’s value increased by over £500 million in 2017 & expect to see another big jump in 2018 due to the Coutinho sale, using the expanded stadium more often due to CL success and another top four finish. The club should leapfrog over the two North London clubs when we do the next valuation.

7: Leicester £955 million (2016 £339 million)

Leicester’s value nearly trebled due to participation in the Champions League & earning more from the competition than winners Real Madrid due to the formula used to award prize money. Expect to see a big fall in 2018 though.

8: Southampton £508 million ( 2016 £299 million)

For a club that was sold for £260 million little over a year ago this looks impressive. Gains on player sales of £112 million in three years is a driving force, and the sale of VVD in 2018 is likely to keep this figure high this season.

9: Everton £440 million (2016 £107 million)

Moshiri wiping off the club’s debt, a reversal from being loss to profit making, better wage control & the sale of John Stones were the major drivers of Everton’s quadrupling of value this year

10: West Brom £381 million (2016 £165 million)

If something looks too good to be true, it’s probably not true, and the Baggies valuation is a classic example of this. The club had underinvested in players for a few years up to 2017 & survived until then. Whilst good for profits (£32m in 2017) it meant that it was a high risk for relegation if any new recruits failed to deliver, as the club found out in 2018.

11: West Ham £368 million (£142 million)

West Ham’s value shot up mainly due to income rising far quicker than wages, substantial gains on player sales and debts being paid off after the controversial sale of the Boleyn (where did the profits end up there?)

12: Burnley £352 million (2016 n/a)

The EPL’s best run club? No frills in the boardroom or the dressing room meant that promoted Burnley made a substantial profit, pay out just over half their income in wages and are debt free. A formula for success in terms of value for a club on gates of 20,000. Likely to be maintained in 2018 with a 7th place finish.

13: Bournemouth £344 million (2016 £143 million)

Flying under the radar as they have done since promotion to the EPL. £124million of TC money, quadrupled profits, wages under tight control & owners who lend interest free mean that AFCB can thrive on gates of 11,000.

14: Middlesbrough £312 million (2016 Championship)

Boro’s lack of ambition in the EPL transfer market in terms of trying to survive meant that whilst they were very profitable, and wages dropped from £149 for every £100 of income in the Championship to £53 in the EPL, their value of £312 million will have plummeted in 2018 following relegation.

15: Stoke £300 million (2016 £132 million)

Stoke are a textbook beneficiary of the new TV deal. Wage control improved from 79% to 62%, income rose by nearly a third & the club has no external debt. Whilst the value is likely to hold in 2018 that ignores the impact of relegation, so expect the value to fall in 2019.

16: Watford £283 million (2016 £184 million)

Another club who cope well with a relatively small stadium. Wages kept under control, the Hornets generate modest profits. Sales of Ighalo & Vydra helped boost results in 2017. Could be attractive to a buyer in their present state as close enough to London to command a premium.

17: Hull £257 million (2016 Championship)

Recent Yo-Yo club, value in Championship likely to be about £40-50 million following relegation as TV accounted for 80% (£94m) of their income in 2017.

18: Sunderland £216 million (2016 £128 million)

The only EPL club last season to lose money after player sales, Sunderland are about to be given away for nothing as they face League One. Daft transfers, boardroom payoffs and a revolving door in the manager’s office. The last club run this poorly was the Haçienda in Manchester in the 80’s. Owner Ellis Short may have lost over a quarter of a billion pounds from his involvement with the Black Cats.

19: Swansea City £183 million (£108 million in 2016)

Swansea are bottom due to paying out a higher proportion of income as wages than nearly any other EPL club. Value would be lower but saved to an extent by sales of Ayew & Williams which boost profits in short term. Value likely to be about £40 million in Championship.

20: Crystal Palace £164 million (£142 million in 2016)

Small London club Crystal Palace shouldn’t really be bottom of the table, but their poor cost control (wages and player transfer amortisation costs exceed revenue) in 2017 drags down the value considerably.

West Ham and the London Stadium: Flares ‘n’ Slippers

Introduction:

We don’t particularly like politicians here at Price of Football. Not because we have any left/right leanings, our viewpoint is mid-Atlantic on most issues, but because they repeatedly fail the competence threshold, regardless of their affiliations.

Present London mayor Sadiq Khan (Labour) commissioned an investigation into the deal which has resulted in West Ham residing in the former 2012 Olympic (now London) stadium. The deal to give the Hammers the stadium was granted by the former administration, run by foot in mouth former mayor Boris Johnson (Conservative).

Herein lies the first point, had the previous mayor been Labour, what would be the chances of this investigation and report taking place?

The scenario

Moore Stephens forensic accounting department were tasked with investigating why the transformation costs of the stadium for football purposes rose from an initially estimated £115m in 2014, then £192m and then a final total of £323 million by the time West Ham took occupancy in the 2016/17 season.

Sadiq Khan clearly had a WTF moment when he found out that the local taxpayer would be paying for a substantial element of this increase in cost.

The report, a never-mind-the-quality-feel-the-width 169 pages, takes ages to read, but we nobly gave up a few evenings of gin, hookers and cocaine to wade through the contents.

https://www.london.gov.uk/sites/default/files/olympic-stadium-review.pdf

The history

Before the Olympics took place, the Olympic Park Legacy Company was set up to decide what to do once the games finished.

OPLC looked at a series of options, which were narrowed down to five. The initial desire was to have a 25,000 seater athletics stadium (option 4 below), but a wide range of other issues were considered too.

These were assessed initially from a financial perspective, with the following estimated costs.

The options were also considered from a non-financial perspective.

grt

The final decision was to go ahead with option 10a, but when the decision was made the costs (and more importantly, who would bear them), did not seem to be a major consideration.

This meant that West Ham ended up as tenants in the London Stadium (attempts to negotiate naming rights for the stadium have proven to date to be as successful as Marco Boogers career at the Hammers).

The second ranked alternative was the purpose built football stadium, likely to have been occupied by Spurs.

Either way, a significant amount of work would have been needed to convert an athletics stadium into one appropriate for football or multi-sport, and also back again if required.

The findings

There are two main areas when the costs appear to have gone haywire.

1: Construction costs

Political point scoring overrode commercial sense, and the desire to have a legacy (the stadium was chronically underused after the Olympics finished in 2012 until West Ham took occupancy) clouded the judgement of those negotiating from the side of the stadium owners.

West Ham didn’t do anything wrong, they were effectively lottery winners, who paid £15 million for a stadium that cost £323 million to make into something appropriate to play football, plus £2.5 million annually in rent*.

(*they also have to pay for a machine that blows bubbles when the team comes out at the start of the match and half time. It might also be used when they score a goal, but when I went to watch a match there, this facility was not required).

The increase in costs was due to many factors. Seemingly at every planning meeting a new problem would arise, or extra costs would have to be incurred to meet a deadline (such as hosting Rugby World Cup and Diamond League athletics meetings).

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So who paid for these expenses? When West Ham signed up to be tenants, they were effectively capped at contributing £15 million. The rest mainly came from the public sector, the benefits to which are questionable.

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2: Running costs

The set up for running the stadium is complicated. A company, E 20 Stadium LLP (E20), was set up in 2012 by two partners. 65% by LLDC (London Legacy Development Corporation) and 35% by NLI (Newham Legacy Investment) to operate the stadium on a day to day basis. E20 have made losses of nearly £255 million in the first few years of trading, and generated income of…err…£4.9 million.

The main reason for the losses is what is called impairment. Normally under accounting rules, if you buy an asset that will last you a long time you spread the cost over the period you use the asset. This is called depreciation, so build a property for £100 million, you think you will use it for 20 years and then scrap it, so depreciation is £100m/20 years = £5 million annual cost in the accounts.

Imagine, however, that you buy something and find out that you have vastly overpaid for it (this is also known as the Andy Carroll theorem). Under the accounting rules you have to include the asset in the accounts at its expected market price.

Any fall in value is called an impairment.

This is what has happened at the London Stadium. In the first three years of running the London Stadium, E20 has spunked spent £272 million on transforming the stadium into a multi sport arena, and then written off over £246 million of that cost as what has been created is vastly overvalued in market terms. The stadium is therefore valued at £26 million at at June 2016, when West Ham were due to move in.

Front loading of costs is not unusual in the murky world of public-private finance, and can be called prudent (albeit by the Hogwarts school of creative accounting). If you front load your costs and losses, then in later years you can make the company look more profitable.

However…whoever originally drew up the figures has made major miscalculations, and anything that could go wrong has gone wrong (including holes in the new roof apparently).

It is now estimated that the cost of removing seats for athletics meetings, and then bringing them back for when the football season starts will cost £7-8 million a year, and remember, West Ham are paying rent of £2.5 million a year.

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E20 appear to be responsible for all day to day costs of the stadium, including things such as the flags for when West Ham play home matches. Moore Stephens conducted a forecast using best case scenarios, but still envisages annual losses being made by the London Stadium, and borne by the taxpayer.

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Conclusion

We now have a blame game between the have bequeathed the current situation. Those who five years ago were desperate to be associated with the Olympics, and have a selfie with Usain Bolt seem to have gone unusually quiet. Whilst many people co-operated with Moore Stephens, others were less communicative, or circumspect in their responses.

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Those who are criticising West Ham are doing it because they don’t like the club and/or the club owners. Being effectively the only willing tenant for a multi-sport stadium meant that West Ham were in a very strong negotiating position when it came to determining their contribution to the transformation cost, and the annual rent. If you have a strong hand, then surely the logical thing (lets not pretend that ethics or morality are an issue here, they’re not) is to play it, even at huge cost to the public purse.

In that respect what we have with the London Stadium is merely a very high profile and visible varation of PFI deals signed up and down the country over the last 10-15 years by grinning politicians and their management consultant advisors.

Blackpool: Season in the sun

Owen Oyston, Blackpool’s controversial owner, has put the club up for sale, http://www.bbc.co.uk/sport/football/41944602 following losing a legal case with fellow investor Valeri Belokon.

Wealthy they may be, but, after the court ruling, in which Oyston and his son, Karl, were ordered to pay Belokon £31.5 million, both Oystons’ had their assets seized. https://www.theguardian.com/football/2017/nov/06/oystons-blackpool-ordered-pay-shareholder-high-court-valeri-belokon

Establishing reliable information as to the extent of the Oyston family wealth is difficult, as between them as Owen Oyston has at least 40 directorships according to Companies House.

Never popular with fans,  the Oyston empire has many tentacles, but valuing the sum of all the individual elements is difficult.

One approach to unravelling the involvement of the football club in all this is to look at the accounts in the years since the club became members of the Premier League.

Yet the accounts to an extent paint a mixed picture as to the drivers of what initially appears to be a profitable business.

Some of the transactions do support the view, taken by disaffected fans, that the Oystons were using the riches of the one season in the Premier League and the subsequent parachute payments to subsidise other elements of the family business.

The best place to probably start is the impact of Premier League status on  the profit and loss account of the football club.

One year before promotion in 2010 the club had sneaked under the radar into the Premier League via the Championship Playoffs, beating Cardiff 3-2 at Wembley.

No one expected them to stay up in the Premier League, as Karl Oyston had initially won over the those who claim that players are overpaid by saying that there would be a wage cap.

Initially, Oyston’s stance against high player wages found favour in the media and amongst fans, and this coincided with a decent start for Blackpool in the Premier League.

Soon the problems of struggling to compete in the player market caught up with the team, who were relegated, despite still being outside of the drop zone at the end of April 2011.

A look at the club wage bill showed that with a wage bill of over £24 million, almost twice that of the previous season.

Careful review of the wage note in the accounts then showed that within the total was £11 million to the highest paid director of the club, almost certainly someone with the surname Oyston.

Underdogs Blackpool’s wages for the remainder of the staff, at £13.6 million, were just 7% of those of the club that won the Premier League, Chelsea, with £191 million, and a Premier League average of £79 million.

Net profit for Blackpool, even after paying out the large sum to Karl Oyston, was over 20 million, more than wiping out the modest losses made by the club in previous years.

The accusation made by the Oystons’ critics is that the benefits of being in the Premier League in subsequent years, in the form of parachute payments, were used to subsidise other companies owned by the Oyston family.

How much was promotion worth to Blackpool? The TV money from the one season in the Premier League, and then four years of parachute payments came to £101 million. The court concluded that nearly £27 million of this ended up in companies controlled by the Oystons.

In doing so, it would appear that Valeri Belokon, who originally bought 20% of the club in 2006 for £4.5 million, was disadvantaged by such transactions with Oyston companies. This is because diverting money to other Oyston controlled companies reduced the profits of the club, and also the value of his investment.

How much the Oystons can realistically expect to receive for the club is open to question. As someone who has been involved in the sale of distressed businesses in the past, I’m aware that potential buyers will take advantage of the seller’s need for cash, and bid as low as possible accordingly. Unless there are a large number of interested parties, the club could be sold for a pittance.

With no parachute payments to look forward to, Blackpool, who have been subject to a fan boycott in recent years as part of the NAPM (Not A Penny More) campaign led by the superbly named Tangerine Knights, to starve the Oystons of cash, are difficult to benchmark in terms of a realistic revenue figure from matchday sales.

Attendances this season are averaging just over 4,000, but have been as low as 2,600. This suggests the boycott is having an impact.

If the club is losing money week to week as a result, then the Oystons will be under greater pressure to sell the club as they may struggle to subsidise it from their other business interests, given the court ruling (which they are appealing).

This would be ironic, as the football club would appear to have been subsidising the other parts of the Oyston empire in recent years. There’s a case for saying that the club could be sold for as little as £1, with additional payments linked to future success, just to get the operational losses off the back of the present owners

Where will it all end? The lawyers and other business advisors will certainly have had a happy time from all of this, as legal costs are estimated to run into millions. Blackpool fans will just be hoping for a football club they can get behind under a new owner, and perhaps make some signings in January to give the club a chance of making the playoffs.

Valeri Belokon’s ambitions are unclear, he could conceivably buy the remainder of the club, but will the family sell to him. The intentions of the Oystons, whose credibility and integrity were questioned by the judge in the legal proceedings, are also open to question.

The whole issue calls into question the credibility of the Football League Owners and Directors tests, which are aimed at preventing abuses of stewardship by senior club officials. There’s not a happy ending to this story as yet, although the fans’ are hopeful of a return to the days when the most distressing thing about supporting their club is finding out that Mike Dean is the referee and is almost certainly going to ruin their Saturday afternoon with some attention seeking decisions.

Valuing Newcastle United Part II

In the last post we looked at the methods professionals use to value a business.

We deliberately didn’t calculate using one method,  known as the discounted cash flow method, because (a) it relies on clubs generating positive cash flows, which they traditionally have struggled at, and (b) designing the model involves a lot of nerding out on a spreadsheet.

Some people have rightly pointed out though that with the latest TV deals, clubs are now far more cash rich than they used to be, and so perhaps such a model is worth attempting.

Furthermore, being nerds here at the PriceOfFootball, the temptation to produce something that gives a value was too much to resist.

As many Newcastle fans are aware, there are interested parties involved in due diligence at present at the club. This is the equivalent of having a survey when you are buying a house, and getting to see more detail than is included in the glossy brochure produced by the estate agent.

We don’t get to see such information (my name isn’t Amanda) but we have looked at the recent accounts produced by Newcastle, tried to identify some trends, and used these to crunch a lot of data. We don’t, for example, have the 2016/17 financials from the Championship winning season.

This has resulted in budgets and projections for the next ten years, using assumptions which seem reasonable to us (you may feel they are a load of rubbish, and that’s your perogative).

We have assumed, for example, that Mike Ashley will gradually take his loan out of the club at £18 million a year, which was his original intention according to the accounts.  Similarly we have assumed an average place in the Premier League of 10th.

The assumptions clearly show that we need to get out more, but the aim is to show the nature of the calculations that interested parties will be undertaking (and in far more detail than us).

Having crunched the numbers,  we have ended up with a valuation of £268 million. Not far away from our previous gut feelings.  If Newcastle’s position rises to 9th, the value goes up by about £11 million.

The calculation is however very sensitive to issues such as the extent of growth in future TV deals,  wage control, player spend, and final position in the table.

With that in mind, we have stuck the model up on Google Drive, and you can have a go yourself at working out the numbers.

https://drive.google.com/file/d/0B91KHPCzixvvaHhaSnZCYkN6VXc/view?usp=sharing

All you have to do is change the figures in the yellow boxes on the intro worksheet, and see what you end up with. 

 

The aim of all this is simply to show that there’s an awful lot of guesswork going into the numbers.  Ultimately the price is the figure that leaves Mike Ashley and the buyer both feeling they’ve done well from the deal.

Good luck valuing the Toon!

Newcastle: What’s The Colour of Money?

Newcastle: What’s the colour of money?

Newcastle United are officially up for sale.

http://www.espn.co.uk/football/english-premier-league/23/blog/post/3236029/mike-ashley-puts-newcastle-up-for-sale-but-can-club-be-great-again.

That’s not significantly different from the position over the last few months, where they were unofficially up for sale.

There are many interested parties, but the most important one is Mike Ashley, as the price that he’s prepared to accept that will determine whether recent noises from the club are to be taken seriously.

Stories abound of prices being asked of about £350-400 million. Which begs the question, how do you value a football club? We’ve looked at a variety of methods, to try to determine a range of prices that might be acceptable to both Ashley and a buyer.

We’re not Newcastle fans, (love the city, love Viz and a Saturday night out in the Bigg Market should be on everyone’s bucket list before they die, and indeed, could coincide with the night you die), so we are not going to praise Ashley, neither will we set out to bury him either.

Method 1: Balance sheet values

A balance sheet shows three things, assets (stuff owned by the club), liabilities (what is owes to third parties, such as suppliers, other clubs, tax, loans) and equity (the amount of invested capital from owners, plus reinvested profits).

The balance sheet is based on a simple equation

Assets minus liabilities = Equity

A look at the most recent Newcastle United Limited balance sheet shows the following:

It would therefore appear that Ashley’s equity investment in NUFC is just under £31m at 30 June 2016. With football clubs, (and to be fair, many other businesses) these figures are to a large extent meaningless, and often blurred.

The sum that Newcastle received for the shares when they were issued is £75.599 mill (£6.655m share capital plus £68.944m share premium). This is not the amount that Ashley paid when he took over the club in 2007, the quoted figure being £134.4 million.

Assets are measured by accountants at cost, less depreciation (for wear and tear of tangible assets such as the stadium) or amortisation (which is deducted from player signings over the life of the contract he has signed).

Cost is, as any football fan knows, are not a barometer of value (Angel Di Maria cost Manchester United £60 million and stank out Old Trafford for a year, Scholes, Butt, Giggs, Beckham and the Chuckle Brothers cost nothing, only the former appeared in the balance sheet).

Furthermore, the balance sheet is based on past costs, so ignores the wealth likely to arrive in future years from enhanced broadcasting and commercial deals, and fan loyalty, which brings in money year in year out to the club.

A closer look at the balance sheet shows that as well as the face value of Ashley’s equity investment, he is also owed £129 million in loans at 30 June 2016.

Ashley lent the club a further £15 million in December 2016 via one of his many tentacles, taking the total sum lent to £144 million.

If Ashley is going to get his money back, then he would need £134 million for the shares, and his loan of £144 million repaid too, a total of £278 million.

But for the reasons listed above, this is a case of getting his money back rather than any meaningful value of the club.

Method 2: Comparable valuation methods

If you are buying a house, one way to work out how much to pay is to look at recent prices for other houses in the same street, and use that as a starting point.

If the houses are different sizes, then a metric such as cost per square foot of house space, and use that to produce an initial figure.

Football clubs are different in terms of fanbase, commercial partners and so on, but could be compared in terms of income, profitability and so on.

The most recent Premier League deals have been in respect of Southampton, where an 80% share was sold for £210 million in August 2017, valuing the whole club at £262 million. Everton were sold to Farhad Moshiri in 2016, and he paid £87.5 million for a 49.9% share, valuing the club at £175 million.

The premium in respect of Southampton may seem surprising, but the club has a relatively new stadium, compared to Everton’s charismatic Goodison Park, which is in need of replacement. Everton also owed lenders over £57 million, compared to the Saints debts of £31 million.

Income multiples

Comparing those teams to Newcastle shows that they had very similar income in 2016 of between £121-125 million. Newcastle had higher gate receipts and commercial income (which may surprise many of Ashley’s detractors), but its TV income was lower due to the club being relegated.

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We could therefore work out the price of Everton and Southampton as a multiple of total income.

This gives a revenue multiple of 2.11 for Southampton (£262m sale price divided by income of £124.3 million) and 1.44 for Everton (£175m/121.5m).

On this basis, Newcastle, with revenue of £125.6 million, are priced between £181-£265million. My gut reaction is to go at the top end of that range given that the Southampton deal is more recent.

With these calculations there is an elephant in the room, which is relegation. Newcastle have been relegated twice in the last ten years. Relegation brings an immediate loss of about £50 million in terms of TV income, and can make a nonsense of asking prices. Randy Lerner of Aston Villa was touting the club for sale in 2015 for £150-200million, but accepted £60 million when the club was relegated to the Championship a year later.

The above figures are distorted to a degree by TV income, which can vary considerably from season to season, as each position in the league is worth an extra £1.9million. So finishing five places up the table from one season to the next is worth £9.5 million.

If we strip out TV income, then the income of the three clubs is

Newcastle £53.1 million
Southampton £33.9 million
Everton £39.0 million

Southampton were therefore sold for a non-TV multiple of 7.72 (262m/33.9) and Everton 4.49 (175m/39).

Applying these metrics to Newcastle gives a price range of £238-£410 million.

Profit multiples

Income multiples are flawed in many respects, especially as it ignores the ability of the business to control costs, which in the case of football clubs, is mainly wages and player transfer amortisation (transfer fees paid spread over the life of the player contract).

Profits are therefore seen as a better measure at valuing a club when using multiples.

Mike Ashley has proved to be very good at controlling wage costs for Newcastle. Wages only increased by 6.7% between 2008 and 2016, compared to a rise of 26% in income. That may be linked to the struggle the team has had to maintain competitiveness during that period, as Everton’s wages grew by 89%, Arsenal 93%, Manchester United 93%, Liverpool 132% and Manchester City 264%

This period has coincided with Ashley taking over a loss-making club (loss after tax £33 million in 2007) and converting it to a profitable one (profits after tax of £100 million since 2011).

There then comes a problem. Which profit should we use for a football club?

In theory we could use either:

Operating profit (profit before interest and tax)

EBIT (operating profit after stripping out non-recurring costs, such as sacking managers)

EBITA (EBIT adjusted for amortisation of player registration fees)

EBITDA (Same as above but also adjust for deprecation)

In practice negotiators look at all of the above when trying to determine a price range.

If we apply those relationships to the Southampton and Everton deals (if the profit figure is a negative them then ignore the figures) we end up with a value of somewhere between £126-968 million, which is of little help.

Sale price Op Profit EBIT EBITA EBITDA
Everton 175.0 (20.6) (9.3) 5.3 7.1
Multiple (8.5) (18.8) 33.1 24.6
Southampton 262.0 8.6 (16.4) 14.6 17.3
Multiple 30.6 (16.0) 17.9 15.1
Newcastle 4.1 0.9 29.2 32.0
£’m £’m £’m £’m
Using Everton multiples n/a n/a 967.4 784.7
Using Southampton multiples 126.0 n/a 523.9 483.4

Discounted cash flows

This method involves calculating the cash that Newcastle would generate in future years, and working out how much you would be prepared to pay now for that cash flow.

There are two big problems.

Cash flows for football clubs are very erratic, they are significantly influenced by relegation, position in the league, and sales of players.

Secondly, which interest figure should we use to work out today’s value of future cash flows? This is a similar procedure to determining a credit score when lending money, but is as much art as science. It is highly unlikely that the Manchester clubs, or the big London clubs would be relegated, so they would have a better credit score than the likes of Newcastle, who have been relegated twice in the last ten years. Working out a precise figure is very difficult though.

For many clubs future cash flows may be negative (almost certainly the case for those in the Championship, where wages have exceeded income for the last three seasons).

Therefore a discounted cash flow approach is unlikely to work for a club, unless there is greater predictability of income.

Markham Multivariate Method

Dr Tom Markham, in his PhD thesis, came up with the following formula for a club valuation.

If we plug the figures into Newcastle for 2016, it gives a valuation of £568.2 million. The method has a lot of merit, but assumes that the club continues to be a member of the Premier League. We have already seen that Ashley is good at wage control, and so the wage ratio % (wages as a proportion of income) for Newcastle is relatively low. This has a significant impact on the valuation, but also increases the likelihood of relegation.

If, for example, Newcastle’s wage control was 71% (the average of the non ‘Big 6’ clubs in the Premier League), and adjusting for Ashley’s loans to the club then the value would drop to £259 million.

This still looks an appropriate value for the club.  Any new owner wanting to make Newcastle competitive with the Big 6 and challenge for a place in Europe would have to increase the wage bill still further, and that would still give no guarantee of success on the pitch.

Summary

Trying to value a club is far more complex than for many other businesses, due to the volatility and unpredictability of the income and costs. What a club like Newcastle needs is not an investor who will use the above methods, but a sugar daddy who will transform the club in a similar way to Chelsea under Abramovic or Manchester City under Sheik Mansour. If anyone has the phone number of a bored billionaire, direct him to Sports Direct as quickly as possible.

However it is difficult to see anyone who will be willing to pay Ashley’s asking price. If he wants someone to fund player recruitment in January then the price needs to be right for any interested party to conduct due diligence. Recent HMRC raids and Ashley’s colourful public image won’t help him maximise the price, which is why a £260-280 million tag seems about right, based on the mid point of the above analysis. Add on a premium for the potential growth and you are looking at about £300 million at a push.