Derby County: Respectable?

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

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

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

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

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

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

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

Summary of key figures (Derby County Football Club Ltd)

Income £28.7 million (up 29%)

Broadcasting income £7.9 million (up 41%)

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

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

Player purchases £21.2 million

Player sales £23.2 million

Borrowings £143.7 million (SevCo)

Income

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Costs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Profits and losses

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

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

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

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

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

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

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

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

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

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

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

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

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

Player trading

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

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

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

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

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

Debts to and from the club

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

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

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

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

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

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

Group Structure

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

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

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

Global Derby (UK)

Getlaw 101 Ltd

Derby County Football Club Ltd

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

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

Club DCFC Limited (events and catering)

Stadia DCFC Limited (sports and broadcasting)

The Derby County FC Academy Ltd (academy)

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

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

Summary

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

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

Data Set

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

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