Derby County: Respectable?

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

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

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

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

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

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

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

Summary of key figures (Derby County Football Club Ltd)

Income £28.7 million (up 29%)

Broadcasting income £7.9 million (up 41%)

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

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

Player purchases £21.2 million

Player sales £23.2 million

Borrowings £143.7 million (SevCo)

Income

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Costs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Profits and losses

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

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

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

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

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

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

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

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

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

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

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

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

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

Player trading

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

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

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

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

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

Debts to and from the club

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

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

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

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

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

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

Group Structure

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

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

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

Global Derby (UK)

Getlaw 101 Ltd

Derby County Football Club Ltd

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

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

Club DCFC Limited (events and catering)

Stadia DCFC Limited (sports and broadcasting)

The Derby County FC Academy Ltd (academy)

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

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

Summary

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

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

Data Set

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

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.

Football and the party manifestos

What does the figure one billion, nine hundred and twenty-two million, nine hundred and forty-one thousand pounds mean in terms of football and politics? (and before you ask, is isn’t Diane Abbott’s answer to the question, “If I buy two pints of lager and a packet of crisps, how much change will I get from a twenty-pound note”).

This is in fact the money generated by Premier League football clubs in 2015/16 from broadcast income. (see breakdown in Appendix 1).

The Labour Party has generated publicity with a proposal in its manifesto that the Premier League should commit 5% of this sum to grassroots football.

We have therefore looked at the manifestos of all the major parties (and UKIP) to assess their views on our national game, and sport overall.

Labour

The Labour party has a full page dedicated to sport, summarised as follows

  • Accredited supporters’ clubs to appoint and remove at least two club directors
  • Improvements to access provision for fans with disabilities
  • Invest 5% of Premier League TV money into grassroots game to help develop next generation of players and coaches.
  • Implement the Waterson Review into secondary ticketing to reduce ticket touting.

https://www.gov.uk/government/news/independent-secondary-ticketing-review-published-today

These proposals initially appear laudable, but upon further inspection seem more populist than pragmatic.

  • Many clubs have foreign ownership, so board meetings could be held overseas, and so difficult to attend in person. There is a further issue of many clubs have many supporters’ clubs. There could be squabbling between them, or the football club could deliberately choose a ‘tame’ supporters’ club, that is unlikely to rock the boat, as the one that has board representation.

It seems anomalous to have board representation for customers at football clubs, but not other businesses. Whilst fans don’t see themselves as customers, and football plays a unique part of our culture, singling out football from other sports again seems unusual.

  • Whilst the Premier League generates a lot of income, income is not the same as profit. The Premier League lost money overall in 2015/16, both on a club level (Appendix 2) and, due to the fall in sterling following Brexit, at an entity level (Appendix 3).

It is therefore difficult to see how the 5% funding for grassroots could be made. The Premier League have committed to paying out significant sums to grassroots football, and whilst this may not reach 5%, it still amounts to many millions of pounds.

https://www.premierleague.com/communities/programmes/facilities/pl-fa-facilities-fund

Richard Scudamore, the Premier League’s £3m a year chief executive, points out that other industries do not help smaller businesses to the same extent as football, so feels the game is being singled out because of its success in negotiating lucrative broadcasting deals.

It seems odd that small clubs such as Crystal Palace, for example, should lose out on TV revenue simply because the Premier League has successfully sold its rights to a broadcaster.

Part of the reason why so many clubs make losses each year is that they pay out large sums in wages. This is turn generates large sums of income tax for the Treasury, as the average Premier League salary now exceeds £2.2 million, so 45% of a large chunk of this will be handed over by clubs.

If money is diverted to grass roots, then presumably less will be paid in wages (and thus taxes) so the proposals will result in the government taking with one hand and giving with the other.

Conservative

Type in the search word ‘football’ into the 88-page Conservative Party Manifesto for 2017, and you get no responses.

Perhaps Theresa May thinks that our national game, a bit like putting the bins out, is a ‘boys job’ and so she has no interest in it.

Typing in ‘sport’ gives 10 answers, 8 of which are in relation to the word ‘transport’. The others merely say that the government will support schools sport.

Liberal Democrats

The LD’s only mention of football mentions a move towards safe standing at stadia, and that’s about it.

UKIP

Neither football or sport get a mention, although leader Paul Nuttall seems keen to introduce waterboarding, which you could consider to be a sport, although it wasn’t on the list of Olympic medal events when we last checked.

Greens

Again, no mention of football or sport, although they seem keen on cycling.

SNP

No mention of football. The only mention of sport is in giving the Scottish Parliament the right to choose which sporting events are shown free to air. This presumably will be of little interest to Scottish football fans, given their national team’s failure to qualify for the World Cup since 1998.

Conclusion

The almost complete disregard of our national game in the 2017 manifestos suggests that football (and sport in general) is closer to the public than the politicians who lead us.

Labour appear to be the only party to have given the game much thought, but its suggestions don’t make sense financially, and seem to be targeting a successful industry for the sake of things.

Having three guardians of the game, in the form of the Football Association, Premier League and Football League, with different aims and ambitions is a contributory factor to the lack of success of the national team. Perhaps the politicians should realise this and stop using the Premier League’s success in selling TV rights as a political football.

Broader issues of a school curriculum that places sport as a secondary issue to learning irrelevant facts, a national obesity crisis, prohibitive pricing for those who want to qualify as coaches, restricted access to facilities and reductions in local and national funding for sport, have far more impact than trying to extract more money from the Premier League.


Appendix 1: Premier League Clubs TV money 2015/16

Appendix 2: Premier League Clubs Net Profit/(Loss) 2015/16

Appendix 3: FA Premier League Losses 2016

Deloitte Football Money League: Manchester United now the biggest earning club.

The business consultants Deloitte have just produced their annual football money league table, which reveals that Manchester United generated $635 million in 2015/16, the highest in the world. Real Madrid, who topped this table in 2014/15, dropped to third place with $572 million, but they did win the UEFA Champions League.

Whilst the monetary success will no doubt delight the Glazer family who own the club, and the shareholders who have bought United on New York’s NASDAQ market, Uniteds fans are likely to be less impressed.

The last time Manchester United won the Premier League was in 2012-13, when Sir Alex Ferguson was manager. Since then they have finished 7th, 4th and 5th, and have had ignominious exits from domestic cup competitions at the likes of MK Dons, as well as failing to qualify from a Champions League group in 2015-16.

One of the reasons why United have generated so much extra money (up an incredible 63% since they last won the Premier League) is the contribution made by United’s commercial deals.

Revenue sources

Football clubs make their money from three sources, Matchday (ticket sales), Broadcasting (TV and media deals), and Commercial (Kit manufacturing, shirt and other sponsorship).

United are limited in terms of matchday income as Old Trafford has sold out every ticket of the 76,000 available for many years, and the club has not raised ticket prices significantly during that period.

So the only way to increase matchday revenue is to have more games at home through good cup and European campaigns. This was true to a degree in 2015/16 as Champions League qualification and winning the FA Cup helped boost matchday income by 18%.

Broadcasting income is determined by the collective deals signed by the Premier League rather than clubs themselves in England. Whilst this has produced some bumper contracts, these are usually for three year periods.

Where United have the most flexibility is therefore in terms of commercial deals. The club’s business strategy is to exploit the huge fanbase (estimated at 659 million by United), and negotiate some global deals. This includes the $925 million ten-year kit sponsorship with adidas, and a $559 million seven-year short sponsorship deal with Chevrolet.

In addition to this United’s commercial whizzkids have signed a number of local partnership deals with companies in individual countries. It therefore has seven separate mobile phone partners (Azerbaijan, Belgium, Caribbean, Hong Kong, Korea, West Africa and China), four alcohol partners, and so on. Last week it signed a deal with Uber, to offer a variety of fan benefits, including a dedicated pick up point at Old Trafford.

Trophies or partners?

All of this has resulted in United’s commercial income increasing by 116% since the reign of Sir Alex Ferguson ended, but has this impacted upon the club’s performance on the pitch?

With an increasing number of commercial partners (now over 70), come an increasing number of demands. Players and management are required for TV and new media commercials, photo shoots, and exhibition matches all over the world.

This means that the opportunity to train, bond and develop, both individually and as a team, especially prior to the start of a season, is compromised. At a time when the sole focus should be on starting the season in peak physical and mental condition, United have been lacking in this regard in recent seasons.

Sir Alex used to run United as a personal fiefdom from top to bottom, and always put the interests of the team ahead of the money men wherever possible.

His successors at Old Trafford, David Moyes, Louis Van Gaal and Jose Mourinho, have not had the same iron control over the activities of the club. Having their stars jet off to appear in photographs and adverts is great for United’s bank balance, but does appear to have affected the club’s early season form.

The distractions caused by the demands of the commercial department pre-season have given United a disadvantage compared to their peers in the Premier League. This has meant that they have been playing catch up during the rest of the season.

So despite United spending big in the transfer market, breaking the English transfer record with the likes of Angel di Maria and Paul Pogba, United have struggled at the start of each season since Ferguson left.

The average points of Premier League champions since it commenced in 1992/93 is 86, or 2.26 points per game. In the last four seasons United have earned a total of 31 points in the first five games of the season, or 1.55 per game.

In the current season, despite a long unbeaten run, United lie in sixth position, twelve points behind leaders Chelsea and four off a Champions League spot.

Real Madrid fans wouldn’t swap a Champions League trophy for being top of the money league. It appears that fans at United may have to settle for a less impressive title, that of the highest money earners, unless the club’s top brass give Mourinho’s men fewer distractions from winning games.