Hull City 2018: Eye of The Tiger

Introduction

Hull City Tigers Limited were the first club to submit their accounts to the government registrar for the 2017/18 season and reported a £24 million profit before tax in the business review. Both the above look good, but things happen for a reason, and there’s more to the early publication and impressive profit than perhaps meets the eye.

In the strategic report the board say the following…

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Hull finished 18th last season, yet scored 70 goals, which was only surpassed by three teams, and conceded 70 too, which was only surpassed by four. They currently lie 21st after nine games, and the former Scunthorpe United physio has not managed to improve their fortunes.

Income

Every club must split its income into at least three categories to comply with EFL League recommendations, matchday, broadcasting and commercial.

Hull’s matchday income fell by 35% last season to £5.1 million, which was 9% of the club’s total income.

This was mainly due to a fall in attendances from 18,062 to 12,447. Attendances were the lowest for many years, reflecting poor performance on the pitch along with a deteriorating relationship between owner Assem Allam and a section of the fanbase.

A final position of 18th, following relegation the previous season from the Premier League was far below expectations.

Since Allam acquired the club attendances have been up and down like a newlywed’s knickers, broadly in line with the division in which the club has been playing, this makes it difficult to work out the size of the club’s ‘core’ fanbase.

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The attendance figure is confusing, as the stated attendances given out during the season averaged 15,622. The 3,000+ difference could be due to the number of non-shows from fans, mainly season ticket holders, unhappy about the running of the club. Since the Allam’s acquired Hull

Compared to the rest of the division the previous season, Hull’s matchday income was mid table.

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Broadcast income for clubs in the Championship varies significantly due to parachute payments. Hull received over £41 million from the Premier League, out of total broadcast income of £45.6 million. This sum will fall by about £10 million in 2018/19, and unless the club is promoted back to the Premier League will then decline to about £6.5 million in the Championship (or should the worst occur, £700,000 in League One).

Hull generated over 80% of their income from TV monies, this is broadly in line with figures since Allam bought the club but could change dramatically next season.

Hull have been in the Premier League or in receipt of parachute payments throughout the decade, resulting in TV income contributing £305 million out of the £401 million the club have earned as income during the Allam era.

Parachute payments are a double-edged sword, clubs need to have them as an insurance policy when in the EPL as even with relegation wage clauses many would go into administration if they were unavailable. The research suggests that they are worth about 6-8 points of an advantage on average to clubs who are receiving them. This has not stopped clubs in recent years being promoted whilst not in receipt of parachute payments though, as fans of Huddersfield, Brighton, Blackpool, Watford and Palace etc. will testify.

Commercial income fell by over 60%, reflecting the difficulty the commercial department has when selling packages to sponsors when the opponents are the likes of Burton and Reading compared to Manchester United and Liverpool.

The poisonous relationship between the board and the fanbase was also a contributory factor as sponsors are reluctant to have their brand associated with a business that is unpopular.

It’s very difficult to plan for any business when income levels are erratic, and Hull’s recent bouncing between divisions alongside an owner who seems to have fallen out of love with the club has restricted the ability of the management team to create a strategy for stability.

Costs

Player costs

Hull’s main costs, like those of nearly all clubs, were in relation to players, in two forms, wages and amortisation. Initially Hull appear to have excellent wage control compared to the rest of the division, as they managed to halve staff costs compared to the previous season due to a combination of relegation clauses and player sales.

The club paid out only £55 in wages for every £100 of income, broadly the same as the previous season. The downside to this was that this meant recruiting players who weren’t able to compete for a top six place.

In the Championship in 2016/17 practically every pound in income was paid out in wages. Hull have the lowest wage to income ratio in the division in 2018/18, which will be of little comfort to fans, whilst keeping Allam and the bank manager happy.

Player Amortisation

This is how a club deals with player transfers in the profit and loss account by spreading the cost over the contract period. For example, when Hull signed Kevin Stewart from Liverpool in the summer of 2017 for £4 million on a three-year deal, this works out as an annual amortisation cost of £1.33 million. The amortisation cost in the profit and loss account represents the total for all players signed for fees in previous seasons.

Hull’s amortisation cost fell by over 60% in 2017/18 due to the club selling players signed for the Premier League season being moved on. A close up of a map Description generated with very high confidence

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Even with the decrease in 2017/18 Hull’s amortisation figure would have been in the top half dozen compared to the Championship the previous season.

Adding amortisation and depreciation together gives us total player cost of just over £43 million, which is 77% of income.

This again compares well financially to the other teams in the division but does nothing for the fans who were watching the team week in week out last season at the arse end of the table.

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One cost that is a bit unusual is that of property rent. Since the Allam’s took control of the club this has increased every year (apart from 2014) by 10% a year. It would be interesting to find out who is the landlord, and for how many further years there is this step increase in rent costs, which have almost doubled since 2011.

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Profit

Profit is income less costs, but it contains lots of layers and estimated figures. Hull, like all clubs, show a variety of profit measures in their accounts, so they need a bit of explanation.

Operating profit is income less all the running costs of the club except loan interest. It is a ‘dirty’ profit measure in that it includes one-off non-recurring costs that are a bit bobbins when trying to work out long term sustainable profitability.

The good news for Hull is that during the period of the Allam ownership the club has made operating profits on nearly £26 million. How much of this is due to the skill of the owners is questionable.

Total operating losses in the Championship in 2016/17 were £260 million, so Hull’s finances appear to be far healthier than those of their competitors. If these profits were invested wisely in the playing squad then the club should have been in a strong position to compete this season, but this does not appear to be the case.

A bit driver of Hull’s financial success here is profits from player sales. The likes of Clucas and Maguire have been major income sources for the club. Over the last four years Hull have made £83 million in profits from player sales, without these the club would have made a loss.

Stripping out player sale profits and other non-recurring items (redundancies, legal cases, debt write offs etc.) gives a more valid profit measure called EBIT (Earnings Before Interest and Tax).

For Hull this was a loss of over £100,000 a week in 2017/18, despite the benefits of parachute payments.

Hull’s EBIT profits mirror the club’s seasons in the Premier League, which were profitable, and the Championship, which were loss making.

Nearly every club in the Championship has significant EBIT losses, which were £392 million in 2017, as many owners gambled on spending big to try to secure promotion to ‘the promised land’ of the Premier League, which in reality is a series of severe spankings by big clubs interspersed with celebrating like a loon when beating the likes of Swansea and Bournemouth.

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

We have calculated Hull’s EBITDA profit at £7.5 million (although Hull put on their accounts that it is £8.2 million), which shows that the club is generating cash from its day to day activities, although as said before, this is mainly driven by parachute payments.

Hull have made total EBITDA profits of £83 million under the Allam regime.

Once trading costs have been paid, many clubs also have to pay interest on their borrowings. Hull historically have had a mixture of bank loans and those from Allamhouse Ltd, the holding company owned by Assam Allam.

The interest cost in 2018 was about £50,000 a week and has totalled £21 million since Allam took over. It is not possible to work out how much, if any, of this interest has been paid to AllamHouse. In most sets of accounts there is usually a footnote called ‘related party transactions, which details transactions with owners, but this does not appear in the Hull City accounts.

Player Trading

Hull spent £16.9 million on new players in the year to 30 June 2018, which may come as a surprise to fans.

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

The Allam’s initially did invest in the squad, but it’s noticeable that in the last three years sales have exceeded purchases, this may be connected to their alleged gradual loss of interest in the club.

Clubs selling players in the Championship is a common issue though as trading losses have to be minimised.

Investment

Club owners can invest three ways, sponsorship, lending or buying shares. The club has not issued any shares since being taken over but has borrowed a total of £111 million from both the owners and banks. The bank loans have now been paid, off, leaving outstanding loans of £63 million to Allamhouse.

The bank loan of £21 million was repaid during the last year. This will make the sale of the club easier as there are fewer secured creditors to deal with .

Summary

Hull’s finances as a club receiving parachute payments look very solid and far better than almost any other club in the Championship. The goose that lays those particular golden eggs is about to stop though, and the club’s income is likely to fall by at least £10 million this season and a further £30 million in 2019/20.

For this reason it is probably best for all concerned that the club is sold to owners who can have a constructive relationship with fans and agree a reasonable set of expectations.

Continuing to call the club Hull City Tigers Limited, after failing to get the FA to rubberstampt a name change to the club is both petty and provocative.

The first thing any new owner should do if wanting to win hearts and minds is to change the company name back to Hull City AFC (or similar) Limited.

The biggest problem in relation to Hull is agreeing a sale price. The Allam’s have put money in, although their motives and commitment are confusing.

As a Premier League club Hull City was probably worth about £170 million according to our calculations. As a Championship Club on gates of 12,000 a true value is probably around £35 million. The Allams will probably want to recoup at least the £63 million that is owing to them (plus whatever they paid for the shares) and bridging this gap will be very difficult as the club simply isn’t worth the higher sum.

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