Crystal Palace 2018/19: Dissidents

Summary

2018 £’m 2019 £’m Change
Revenue 150 155 +3.4%
Wages 117 119 +1.7%
Operating losses (39) (36) -7.3%
Player sale profits 2 46 +1,795%
Pre-tax profit/(loss) (38) 5
Squad cost 197 208 +5.3%
Borrowings 64 83 +29.4%

Introduction

Blog updates during a pandemic when we should be doing the day job appear to be the in thing for public sector employees so here’s my look at Crystal Palace’s 2018/19 finances.

Only one other club remained to publish their accounts in the Premier League following Palace, and it will come as no surprise that Mike Ashley’s Newcastle are the guilty party here and they hurriedly put theirs out within a couple of days of Palace.

Revenue streams

Revenue for a Premier League club comes from three key streams, broadcasting, matchday and commercial.

Income overall for Palace increased last season by 3.4% to £155 million, with the benefits of promotion in 2012/13 and the new three year broadcasting deal in 2016/17 being very evident.

Six years in the Premier League has resulted in Palace being comfortably mid-table in both league position and overall income totals.

Judging by the average attendances of 25,455 Selhurst Park was effectively sold out last season which resulted in a slight increase in matchday income.

Only 6.8% of Palace’s income comes from matchday, which reinforces why the owners are keen to increase stadium capacity as the alternatives of ticket price increases or more matches are difficult to deliver.

How long it will take Palace to expand the stadium, especially in a post Covid-19 lending world with banks likely to be risk averse, remains to be seen.

No one can deny that the Premier League TV deal is an incredible achievement and Palace were the beneficiaries as they earned a record £124 million last season due to higher overseas income offsetting finishing one place lower than in 2017/18.

Six clubs who already have a financial advantage (and you don’t have to guess too hard as to who they are) have pressurised the others to revise how to distribute broadcast income to ensure that they will earn even more of the pie, which is potentially bad news for clubs such as Palace.

Over the period Palace have been in the Premier League the club has been able to steadily increase its commercial income generated from sponsors and partners as they became more of an established PL team, this continued in 18/19 with an 8% increase.

Nestling between Leicester and Southampton in the commercial income table is a reasonable achievement for Palace, who are able to leverage on their London location to international sponsors.

Income overall for Palace is very much skewed towards broadcasting, but there are ten clubs in the Premier League who are dependent upon this source for 75% or more of income so they are not alone.

Costs

Staff costs are always the main issue when looking at a football club and Palace’s strategy here is a risky one but it has been successful.

A relatively small increase was incurred in wages for 2018/19 as many players were locked into long term deals and bonuses for final league position would have been slightly lower than the previous season.

Spending over £70 on wages for every £100 of income is deemed dangerous by UEFA and Palace have crossed this ‘red line’ for the last four seasons, but it has ensured they have remained in the Premier League by paying competitive wages.

Palace’s wage bill puts them in the top half of the Premier League at £55k a week, research suggests there is a positive correlation between league position and wages, although there is a chicken and egg element here as most player contracts are incentivised.

Included in the wage bill is directors’ pay which in the case of Palace tends to just relate to one person, presumably Steve Parish, who last season had remuneration of just under £3 million.

No one comes near Daniel Levy’s £7m from Spurs last season (which apparently contains a large bonus for delivering a stadium late and over budget) but a few eyebrows might be raised in Norbury at Palace being fourth in the table.

Eagles fans might point out where it says in the accounts that ‘funds in excess of the basic salary received by the highest paid director are to be reinvested into the Academy’ which seems odd as it would surely be more tax effective to simply pay the director less and commit more towards the academy.

Lovers of accounting nerdiness get excited when amortisation is brought into football finance discussions, but this is simply spreading the cost of a transfer over the contract period.

Each year since returning to the Premier League Palace’s amortisation cost has increased, which reflects both inflation in the transfer market and the increased number of players coming from other clubs.

Size does matter when it comes to amortisation costs, with the expected big clubs at the top of the spend here, with the exception of Spurs, who may find that their approach backfires in terms of continuing to deliver top four places in the Premier League.

Settling in mid table in this cost suggests that Palace are where you would expect them to be in terms of results on the pitch.

Profits

There are many types of profit that can be used to measure financial success, Palace use one called EBITDA which excludes both amortisation and depreciation (the cost of long term assets such as property spread over their expected lives) in their strategic report.

When a club has negative EBITDA it effectively means that the club is losing money before taking into consideration player or infrastructure spending which makes the losses made by three clubs concerning.

Unfortunately when player costs are taken into consideration profits for all clubs, including Palace, fall so far more clubs end up in the red.

Normally a business that has been in existence for many years would expect to make profits but football is an industry where normal rules don’t apply.

The majority of clubs in the Premier League don’t make profits on a day to day basis, with total losses of £395 million before taking into account player sales.

Player sale profits for many clubs are volatile and difficult to predict and can have a disproportionate amount of impact upon overall profit. When Liverpool announced a ‘world record’ profit of £131 million in 2018 they were very coy about the sale of Coutinho contributing £124 million of this sum.

Steve Parish, the Palace CEO, was refreshingly honest in stating that a ‘major consideration’ in the sale of Aaron Wan-Bissaka to Manchester United for £45 million was FFP compliance. The sale of AWB reversed the losses and took place on June 29th, just before the financial year end. Had it taken place a few days later, the club would have reported a significant loss.

Player sales generated £434 million of profit for Premier League clubs in 2018/19. It’s highly likely though that in a post Covid-19 economic environment the transfer market will shrink in terms of prices paid. This will mean that clubs will not be able to rely on player sales to dig them out of a financial hole as they have done in the past.

The AWB sale is unusual in one respect in that although the deal went through on 29 June, Palace did not receive any cash at the time of the sale. The cash flow statement for the year shows that player sales (which accountants call intangibles) only generated £1.8 million in the year to 30 June.

Further investigation confirms this as the figures in the debtors total shows that the club is owed nearly £47 million in football transfer fees at 30 June 2019, up from £2m the previous year. There’s nothing wrong with such an approach, but it does seem odd that Manchester United didn’t pay a deposit when signing AWB.

Taking all the above into account, along with interest costs on borrowings, leaves Palace with a profit of £5 million for the year and £3 million overall for the six seasons in the Premier League.

Just over half the clubs in the Premier League make a pre-tax profit, but Palace are the right side of the divide this season on the back of the AWB sale. Expect nearly all clubs to make a pre tax loss in 2019/20 due to Covid-19 costs and rebates to season ticket holders, broadcasters and sponsors.

Player Trading

Last season was the first time since promotion to the Premier League that Palace had a negative net spend. It effectively allowed the club to have some breathing space before starting again. The sale of AWB was the driver of this, and the small print in the accounts suggests that Manchester United may have to pay a further £5m in add-on clauses.

Palace did write down the value of one player by £2.3 million in the year. This is usually when a player signed either has a long term injury or fails to meet expectations and his expected sales value is lower than the sum in the accounts.

In 2019/20 Palace have a net spend of just over £7 million, taking the total to £167 million in the seven years in the Premier League. This has meant that the squad, which when promoted cost less that £3 million, now has a total cost of £208 million as there has been continual investment each year.

In general the longer a club has been a member of the Premier League the higher the squad cost and Palace’s position in the table reflects this.

Borrowings

Palace’s debt have been growing since promotion to the Premier League, partly to fund investment in the playing squad. Palace’s debts are £37 million due to an external lender and £45 million to the owners. Apparently the external debt was initially repaid since then but a further loan has been obtained due to Covid-19.

Related Parties

One thing that doesn’t help owner Steve Parish is some of his transactions with the club. On top of costing the club nearly £3 million with his pay packet, he has two companies that supply goods and services to Palace for a further £279,000. Calling one of these companies Smoke and Mirrors Group Limited probably doesn’t help the situation.

Conclusion

Palace’s good season in the Premier League was matched by a set of results that are solid but reliant upon one transaction to keep them from making losses. Expect the club’s financial results to be substantially worse in 2019/20 but they will not be alone in this.