Grimsby Town: Seven Seas

Introduction

Remember ITV Digital? The board of directors of Grimsby Town certainly do. They are still blaming the demise of the company for the financial woes of the club 15 years after the Monkey advertised channel went kaput in…err…March 2002.

A screenshot of a cell phone Description generated with very high confidence

For those of you unfamiliar with the company. ITV Digital went bust after signing a £105 million per season TV deal for live broadcast of Football League matches.

To give some context, the current Sky deal for the Football League is worth about £60 million.

Whoever signed the contract on behalf of the Football League was clearly put on the naughty step, as it ended up losing about £180 million when ITV Digital went into administration. Grimsby, like many small provincial clubs, were hit hard by the event, as TV rights generated about 60% of the club’s income in 2002. The club was relegated in 2003, and that was the last time the club was in the top two divisions.

Since then it’s been a struggle for the club in terms of both league position and finances. But how much of this misfortune can be put at the door of ITV Digital?

A close up of a map Description generated with very high confidence

That’s a shame, as we like Grimsby here at the Price of Football. Not only can you get a great fish and chips pre match, there is also the experience of the final game at the end of the 2002/3 season, between Grimsby and Brighton, which took place on a Sunday afternoon.

Both sides had to win to have a chance of avoiding relegation, and to get to the match on time we ended up spending our first (and possibly last) Saturday night in Cleethorpes.

A great time was had by all, shapes were thrown on the dancefloor of some memorable nightclubs. The highlight however was being offered by a local lady of indeterminate age and morality a chance of a romantic encounter behind a skip after buying her a drink, on the grounds that she’d ‘never had a Cockney’.

What she would have offered for if a bag of chips had been offered as well was sadly never clarified.

The offer was declined, partly because of fear (she claimed to have four children by three different fathers, all of whom were apparently in prison), and partly because we feared her genital cleanliness was as impressive as her knowledge of geography.

The financial consequences.

The ITV Digital demise certainly cost Grimsby money, in 2002 it accounted for 70% of total income that season.

However, the club would have suffered financially too if the club had been relegated. This is because the TV deal was very much skewed towards clubs in the Championship.

Worse was to happen in 2009/10, when the club was relegated to the National Conference, which was not covered by the EFL TV deal. This explains why income took another dive in 2011, as the club took its time to come to terms with a new life.

Latest results

Grimsby eventually returned to the EFL in 2016/17, and have just published their first set of financial results since being once again part of the 92.

The first thing to say about Grimsby is a positive one. The club has not hidden behind Companies Act legislation and produced abbreviated accounts, which do not show key metrics such as income, wages and profits.

Here at the Price of Football we are hugely disappointed that so many clubs (8 in League One and 17 in League Two) are not transparent and show the full picture of their finances to fans, who are the spiritual and emotional, if not necessarily the financial, owners. The Football Association could do something here, but their silence on this governance issue is damning.

Impact of promotion

Promotion has been good for Grimsby, with income rising by 24% and average attendances up 21% to 5,259, the sixth best in the division. The rise in attendances only made a £30k increase in matchday revenue, mainly because the figures for the previous season were boosted by Grimsby getting promoted via the playoffs at Wembley, which was a big payday for the club.

Wages also took a hit since the administration. The club does seem to have had some bad years where wages were as high or higher than income, but have taken back control ((c) All Brexit Voters) of wage levels in recent years. Whilst wages rose by 30% in the first season back in League 2, this was more than covered by the benefits of return to the EFL.

Player signings

Grimsby have never been a wealthy club, known for big signings, and this is reflected in the sums paid for players since 2002.

2016/17 resulted in Grimsby having their highest player outlay since before ITV Digital went bust. On the plus side, the club also sold the splendidly named Omar Bogle to Wigan. Whilst Grimsby have not disclosed the fee, a bit of accounting fun and games suggests that total player sales for the year generated £1,066,000.

It does appear that some Grimsby fans are unhappy with the ownership of the club. The largest shareholder is John Fenty, a local businessman and Conservative councillor, who has we think about 42% of the shares.

Owner investment

Like many provincial clubs, Grimsby are dependent upon the owners for financial support.

From what we can see, the total invested in the club by the board is as follows:

It certainly appears that the board (presumably Fenty) has put money into the club, especially after relegation to the Conference/National League. How wisely the money has been spent is best dealt with by those with local knowledge. Many seem to think that Fenty’s decision making is on a par with my ability to do ballroom dancing whilst blindfolded.

There doesn’t, however, appear to be much of a correlation between the fall of ITV Digital and the owners writing out cheques to cover losses. Grimsby made an operating loss of just £111,000 between 2002 and 2017, although is should be emphasised that this period was bookended by £1 million profits in both 2002 (as the club had received some money from ITV Digital) and 2017 (due to the sale of Omar Bogle).

Where the club goes from here is open to conjecture. Attendances are down 15%, as second season syndrome kicks in. In Russell Slade they have an experienced EFL manager, and currently sit just three points off a playoff position.

Promotion to League 1 is worth about £400,000 a season extra in TV income. Whether Grimsby could then survive in the bear pit of the Championship, where we are estimating total losses to exceed £300 million, is debatable, but the likes of Burton, who were the team who relegated Grimsby into non-league football, have shown it can be done.

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).

A screenshot of a cell phone Description generated with very high confidence

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.

A screenshot of a cell phone Description generated with very high confidence

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.

A screenshot of a cell phone Description generated with very high confidence

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.

A picture containing text Description generated with high confidence

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.

A screenshot of text Description generated with very high confidence

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.

Glasgow Rangers 2016/17: Orange Crush

Introduction

I’ve only ever seen Rangers play once, which was at the 2008 UEFA Cup final. It’s fair to say that there was a discrepancy between the number of people who came to Manchester for the event and those who had tickets. The following morning I was on a breakfast TV show, and had to walk around and over hundreds, if not thousands, of Rangers fans who had decided to sleep al fresco on the streets following the match.

2016/17 saw a return after four years to the Premiership, Joey Barton scrapping with team mates, lawsuits against former directors and Mike Ashley, three managers, fan groups buying shares in the club, fan groups falling out with each other after buying shares in the club and occasionally some football.

Rangers accounts are…err… comprehensive, clocking in at 59 pages. Having said that, there are some excellent disclosures that put other clubs to shame, showing a degree of transparency at times that is a credit to those who prepared the information. The financial statements touch upon the ongoing disputes with enemies both within and external to the club.

The club’s recent history is  a source for fiery debate in Scotland, and the legal status of Rangers International Football Club plc provokes incendiary comments on social media from polarised views on both sides of the divide.

None of the name calling is of any interest to us at the Price of Football, we are non-partisan.  As someone who works in higher education though, it is nice to see so many people from East Glasgow enrolling on night courses on Scottish Insolvency Law in recent years.

Suffice to say a club called Rangers ended up applying to join the Scottish Third Division,  and schools in small towns such as Elgin, Peterhead and Alloa had to introduce seventeenth century Irish history into the curriculum for the impending visit by the club and its fans.

The accounts don’t really answer the question as to how big are Rangers, as the numbers reveal a paradox when comparing to clubs south of the border.

Income

Unlike clubs in the English Premier League, some of whom have 80% of more of their income from broadcasting rights, Rangers are reliant mainly on matchday income as a source of revenue. This is unlikely to change until the club starts not only competing but also progressing in UEFA competitions.

Rangers total income rose by just over 31% in the year to £29.2 million. This is some way behind Celtic’s total (for 2016, they have not yet published their 2017 figures) of £52 million, but way above that of the next largest Scottish club, Aberdeen (£13.4 million). Rangers third place finish in 2016/17 is poor compared to the club’s financial advantage over every SPL club except Celtic.

Compared to England, the income total places Rangers between Wolves and Leeds in the English Championship, but behind small clubs in the Premier League such as Bournemouth and Crystal Palace.

Promotion back to the Scottish Premiership (SPL) in 2016 led to an increase in average attendances at Ibrox from 44,359 to 48,893, of which over 43,000 were in the form of season tickets.

Such attendances drove matchday income to £21.6 million, far in excess of any club in the Championship, and would put the club in the top half of the English Premier League (EPL).

Admittedly Rangers matchday totals includes ‘hospitality’, of which there is probably copious amounts at Ibrox to help the locals give vocal backing to the team.

Broadcasting rights, whilst better in the SPL than the Championship, are still miniscule at £3.6 million compared to the £100 million minimum in the EPL.

‘Other’ income including shirt sponsorship (£1.5m) and commercial income (£0.3m) are also up significantly by 43%. Rangers should benefit in 2017/18 from having greater control over their merchandising in future years, following the resolution of a dispute with Sports Direct. This can be a significant sum for a club with such a committed fan base. Celtic, for example, had merchandise sales of over £12.5 million in 2016.

Costs

Rangers have had the second highest wage bill in Scottish football for a number of years. Even when they were playing against the local amateur teams in the third division the wage bill was over £17 million, more than the total of the bottom two Scottish divisions put together.

Wage costs were brought under control slightly in subsequent years, but promotion to the SPL resulted in a 35% increase in total wage costs.

Rangers’ unusual (but welcome) breaking out of player from other wages shows that player wages took up £10.4 million (59%) of total staff costs. This is quite low compared to English clubs, where player wages are usually in the 80-85% of total staff costs range.

This means that player wages as a percentage of total income was only 36% (29% in 2015), and total wages to income 60% (59% in 2016), a figure that would make many English owners jealous (in the Championship wages were 101% of wages in 2016).

Part of the reason for the good wage control was due to highest earner Joey Barton being only paid for a couple of months before getting a free transfer to Ladbrokes, and Kenny Miller was old enough to claim a pension and so wasn’t officially on the payroll.

How the other £7 million wages are distributed at Ibrox is not disclosed. If the club has an in house legal team I’d expect that they have been very busy in recent years and will have been paid accordingly.

In past years the highest paid director at the club has been on a significant sum, especially if viewed solely in the role of running a lower division Scottish football club.

As boardroom regimes have come and gone at Ibrox that particular cost has diminished, and directors have not rewarded themselves for the last couple of seasons. This is in contrast to Celtic, where the directors took home over £1.6 million in 2016.

Rangers did disclose that ‘key management personnel’ costs were £455k for the year. This is presumably the combined costs of Mark Warburton and the Yoda like Pedro ‘The dogs bark and the caravan keeps going’ Caixinha.

Other costs rose by 30% to £12.3 million, this is not fully disclosed, but increased repairs, stewarding, policing and travel for an overseas pre-season tour have contributed.

Rangers invested significantly in the squad in 2016/17 following promotion, with £10.3million being spent according to the accounts. This might cause a few eyebrows to raise amongst Rangers fans, as apart from £1.8 million for Joe Garner from Preston most signings were thought to be for no more than low six figure sums or free transfers. Perhaps Mike Ashley managed to sign himself for the club for £5 million in one of his more creative moves, as the numbers otherwise look very strange.

Alternatively there may have been some payments in relation to previous signings that were conditional on Rangers being promoted to the Scottish Premiership.

Celtic, by means of a benchmark, spent £8.8 million on players in 2015/16.

Equally baffling is the amortisation charge on these transfers of ‘only’ £1.6 million. Amortisation is the cost of the players spread over their contract period, so we would expect this figure to be much higher (£10.3/4 = £2.6 million, plus amortisation of the existing squad)  if players were on an average of a four-year contract.

Rangers showed a cost of £3 million in respect of resolving one of their many disputes. This particular one was with a man who is as unpopular in Newcastle as he is at Ibrox, Mike Ashley. The settlement did however allow Rangers to have greater control in terms of selling and making profits from merchandise sales. Rumours that all you can eat restaurants in Glasgow were celebrating as Ashley severed his ties with the city, as they lost money every time he visited, have yet to be confirmed.

Profitability

Profits are income less costs. Rangers losses more than doubled in the year to £6.3million (£2.7 million 2016). Excluding the Mike Ashley payoff, the losses are broadly the same as the previous season.

Losing £120,000 a week is substantial, although half of it is a one off cost. For Rangers to turn to profitability they will need to make progress in Europe, as it is not realistic to increase their other income streams, and for that they will need to invest in the playing staff, or get a manager who can manage.

Rangers have claimed that their EBITDA profits (which exclude non-recurring items, depreciation and amortisation, are £110,000. We’ve done our own calculations and arrive at a loss of about £700,000. There’s no agreed definition for this category of loss, it just depends on the assumptions used. What is important is that Rangers losses are looking far lower than a few years ago.

Debts

Whilst Rangers do have a fair amount of debt (£14.4m), most of this is in the form of loans from directors and friendly parties. These loans are due for repayment in July and December 2018, and July 2019 It’s not possible to see how such repayments will be made, so we anticipate lenders will roll over the debts to a later date. Alternatively, Rangers might issue shares to investors which are used to pay off the loans.

Rangers have other outstanding legal issues, which may or may not increase the level of indebtedness.

Conclusion

To a certain extent Rangers are boxed in. Celtic have had the benefit of Champions League participation, which, even if they are regularly knocked out in the group stages, gives them a minimum £25 million a year advantage in terms of income, which can be used for player recruitment and wages.

Celtic benefit from the market pool in terms of Champions League distribution, which is where British clubs take more money out as a result of BT Sport paying such a huge sum to broadcast the competition.

The Europa League is a more realistic option for Rangers at present, but it is long haul before it starts to be lucrative for competing teams.

Whilst there is regular talk in the media of both Old Firm clubs playing in England, there’s no realistic chance of this occurring. English teams probably don’t want the competition, and there could also be a breach of UEFA rules.

Rangers therefore need to hope that they can secure investment, from a benefactor, rather than an investor wanting a financial return, to be able to topple Celtic and then have the riches that Champions League membership brings. But the club has seen in recent years promises from some of those at the top turn to dust.

Five Year Financial Summary

Rangers International Football Club plc 2013 2014 2015 2016 2017 Year
£’m £’m £’m £’m £’m Change
Income
Matchday 13.2 12.4 11.6 17.3 21.6 24.9%
Broadcast 0.8 1.0 1.2 2.1 3.6 71.4%
Other 5.1 4.2 3.7 2.8 4.0 42.9%
Total Income 19.1 17.6 16.5 22.2 29.2 31.5%
Operating expenses
Staff costs 17.9 14.4 13.3 13.0 17.6 35.4%
Other costs 13.5 10.8 10.0 9.4 12.3 30.9%
EBITDA (12.3) (7.6) (6.8) (0.2) (0.7)
Player amortisation 1.7 0.9 1.0 0.8 1.6
Depreciation 0.8 1.3 2.1 1.6 1.6
EBIT (14.8) (9.8) (9.9) (2.6) (3.9)
Non-recurring income (costs) 16.2 0.0 0.0 (0.8) (2.5)
Gain on player sales 0.0 0.4 1.2 0.1 (0.4)
Total Costs 17.7 27.0 25.2 25.5 36.0
Operating profit/(loss) 1.4 (9.4) (8.7) (3.3) (6.8)
Net interest paid 0.2 0.1 0.1 0.0 0.0
Profit before tax 1.2 (9.5) (8.8) (3.3) (6.8)
Tax (0.3) (0.2) 0.0 (0.1)
Profit after tax 1.2 (9.2) (8.6) (3.3) (6.7)
£’000 £’000 £’000 £’000 £’000
Highest paid director 716 378 225 0 0
£’m £’m £’m £’m £’m
Total player cost 19.6 14.9 13.1 13.7 19.6
Wages/Income % 94% 82% 81% 59% 60%
Total player cost/income % 103% 85% 79% 62% 67%
Balance Sheet Highlights
Player trading
Player additions 1.6 0.3 0.3 1.7 10.3
Player sales 1.0 0.5 1.3 0.1 0.8
Net player addition/(disposal) 0.6 (0.2) (1.0) 1.6 9.5
Post year end player trading
Net cost (income) 0.0 0.0 0.7 3.0 (0.2)
Cash 11.2 4.6 1.1 3.0 2.8
Borrowings 1.7 2.4 9.2 9.0 14.4
Net debt/(cash) (9.5) (2.2) 8.1 6.0 11.6
Position 3D 1 L1 1 C 3 C 1 P 3

Stoke City 2016/17 Results: Bring on the dancing horses

Introduction

We like Stoke City, owned by a local who has underwritten the club’s rise to the Premier League, free coaches organised for fans to away matches, decent ticket prices, oat cakes (if you’ve not tried them you are missing out), cheap beer…and Peter Crouch, one of the game’s most likeable players.

The club’s financial results are similar to the club itself. Nothing too flash, solid, dependable, which begs the question, why on earth have they just been relegated?

Summary of key figures

Income £136 million (up 30%)

Broadcast income £108.7 million (up 37%)

Wages £84.9 million (up 3%)

Wages to income 62% (79% in 2016)

Profit before player sales £3.7 million (£11.9m loss in 2016)

Player additions £35.9 million (£51.4 million in 2016)

Borrowings £75.7 million (up 27%)

Money wasted on Berahinho £12 million (nothing in 2016)

Income

Stoke’s income rose by over 30% in 2016/17, which on the face of it, despite falling from their traditional 9th place to 13th, looks impressive.

This places Stoke broadly where you would expect it to be in the Premier League food chain. Not bothering the elite clubs with their football tourist fans and global commercial partners, but neither are they paupers.

Broadcast Income

Stoke are a club who are very dependent upon continued membership of the Premier League as broadcasting income is the key element of their finances.

A new Sky/BT domestic deal, coupled with the Premier League’s amazing ability to extract increased fees for broadcasting rights overseas, especially in emerging markets such as Asia, means that EPL clubs are sharing just over £8 billion over the three seasons commencing 2016/17.

As a consequence, the proportion of total income that comes from broadcasting for Stoke has increased from 69% to 80% since 2013. There is nothing wrong with this, but now that the club has been relegated,  even with parachute payments, there will be a big hole to fill.

The decrease in the final position from 9th to 13th in the table cost Stoke about £7.5 million in ‘merit payments’ in terms of broadcasting rights distributions. This is because 25% of the amount paid out is based on the final league position.

A further 25% of broadcast distribution is linked to the number of times a club appears on live domestic TV. Stoke had the third lowest number of matches (nine) broadcast, and so suffered relatively to small London clubs such as Crystal Palace (who had 14) who have more local derbies, which are popular with the TV companies.

Parachute payments are yet to be finalised, but are looking at approximately £41 milion in 2018/19, and, if the club don’t bounce back to the Premier League, falling to £34 milion and then £14 million in the following two seasons.

After that the club would be part of the EFL TV deal, which brings in about £6.5 million a season, slightly more if you are regularly chosen  for live TV.

Stoke sell out the Bet365 stadium every week, but it is not a huge cash generator. The Potteries is not a wealthy area of the country, and the Coates family, who own the club, have kept prices low.

Matchday income for 2016/17 was down 14% to £7.2million, which is the lowest for a number of years. This may be partly due to work undertaken to expand the capacity of the Bet365 stadium to over 30,000 for 2017/18.

There are not many figures available for other clubs yet for 2016/17, but an analysis of Stoke’s matchday income for the previous season shows that it is towards the bottom of the division in this regard.

Stoke’s ‘other’ income, which includes commercial deals and sponsorship, rose by 23% to just over £20 million. How much of this comes indirectly via the owners at Bet365, who are shirt sponsors as well as stadium rights, is unclear.

Expenses

Despite the overall 30% increase in income, Stoke managed to keep a lid on wages in 2016/17. The wages bill only rose by £2.7m (3%) to £84.9 million. The previous season wages increased by 24%, so it appears that the club decided to gamble to a degree in 2015/16 on spending on players (and wages) prior to the new TV deal in 2016/17.

This is evidenced by the amortisation charge (player costs spread over the contract term) rising by nearly a third to £23 million.

The reason for such an increase is that after a couple of cautious seasons, Stoke had record spending in 2015/16, with mixed results, as Imbula, Shaqiri and Joselu were signed.

Last season Stoke somewhat bizarrely signed Said Beharinho, who most West Brom fans would have driven to the Potteries for nothing, and Joe Allen took up the bulk of the £35.9 million.

As most of these recent signings are on long term contracts, the amortisation costs will remain relatively high for a few more seasons.

The summer 2017 transfer window was a relatively quiet one for Stoke, the accounts show a net income of £1.9m as the signings of Wimmer and Indi were offset by Arnautovic and Joselu leaving.

It’s not just the players for whom wage restraint exists at Stoke, one director, in all probability chief executive Tony Scholes, had a 14% pay cut in 2016/17. Admittedly this took his paypacket down to a still considerable £806,000, which is the cost of a good night out in Hanley or Burslem.

Such levels of pay are quite common in the Premier League, with  ten clubs having highest paid directors on a million plus a year,  a decent return for deciding on what colour next season’s away kit will be.

Profits

As a family run club funded by the Coates family, the owners are not particularly motivated by making profits.

Profit is the residue after subtracting the running expenses of the club from the income. Prior to 2014 most clubs in the Premier League were losing money. Despite the riches of the game, income went out almost immediately in what Alan Sugar referred to as the ‘prune juice effect’. As each new TV deal was signed, players agents would negotiate improved contracts for their clients to ensure the extra money was swallowed up by higher wages.

Premier League owners managed to reduce the prune juice effect by introducing Short Term Cost Control (STCC) rules, which meant that the wage bill could only be initially increased by £4 million a year, unless the club also managed to increase its non-TV income.

The impact on Stoke shows how successful STCC has been, as the club has gone from losing over £30 million in 2012/13 to making a small profit in subsequent years.

Summary

Stoke have a solid financial base, but are still reliant on the Coates family, via Bet365, and are presently owed over £60 million, interest free, by the club.

It’s difficult to know where the club go next. 9th in the Premier League was about as much as they could realistically hope for, although there is always the allure of a decent cup run.

Provided fans are happy with this situation then the club can carry on in their present role, ruffling the feathers of some of the ‘Big 6’ who don’t fancy playing in front of a hostile local crowd, hopefully a cup run as a distraction now and then…and that’s it. So long as this is acceptable then the club has potentially a decent stay of execution in the Premier League.

Five year summary

Below are all the numbers from the analysis. Apologies for any mistakes!

Manchester City: Some girls are bigger than others

Introduction

No trophies, third in the league, and the costs of embedding a new managerial regime may have had some thinking City would struggle financially in 2016/17

The headline figures are mixed, income is up significantly, profit before interest down 80%, but the club claims to have no debt and is self sufficient.

Direct comparatives with the previous year’s profit and loss account figures are slightly distorted by City having a 13 month period of account for 2016/17, so bear this in mind when looking at growth compared to 2015/16. There’s nothing sinister in our opinion in changing the year end to 30 June.

Income

Clubs have three sources of income.

Matchday

Matchday income at City fell slightly, mainly due to a relatively early knockout in the Champions League. The expansion of the Etihad in recent years has allowed City to generate £50m plus a season from matchdays, but this is still way behind United (£111m) and Arsenal (£100m).

City have always priced their tickets towards the lower end of the market, which is great for fans. Initiatives such as the ‘Tunnel Club’, where (presumably corporate) fans get to sit behind the dugout and see the players in the tunnel pre and post match show that City are trying to extract more from the prawn sandwich brigade.

Matchday income was only 11% of City’s total revenues. You would perhaps expect this from a small club in the Premier League such as Crystal Palace, but it does seem low for a behemoth such as City. United had 19% of income and Arsenal 24% from this source.

Broadcasting

Broadcasting income was up 26% and tops £200m for the first time. This is mainly due to the impact of the new domestic TV deal with BT/Sky. UEFA TV monies actually fell by £13m due to City being knocked out of the last 16 round of the Champions League compared to the semi-final the previous year.

Compared to their closest rivals who have reported to date, at £204m City are slightly ahead of both United (£194m) and Arsenal (£199m)

Any growth in TV income in 2017/18 will be dependent upon City’s progress in the Champions League, as the domestic deal runs for three seasons. Even if City win the Premier League they will only receive about an extra £4m in terms of merit payments.

Commercial

Commercial income at City normally causes Arsene Wenger, an intelligent man who is nonetheless known for whining at events at the Etihad both on and off the field, to start muttering ‘Financial Doping’ as his handlers reach for the smelling salts.

This income source rose over 22% to £218 million. The reason why eyebrows are raised in relation to City in this regard is the club’s commercial links with related parties to the Abu Dhabi owners.

City’s critics accuse the club of negotiating deals at above market rates, overinflating income and therefore allowing the club to pay more for wages and transfers whilst complying with Financial Fair Play (FFP) regulations.

City have fallen foul of FFP issues in the past, but we suspect they have been very careful to adhere to the rules in the present climate of UEFA inspectors.

Can clubs manipulate their finance to comply with the rules? The answer in our opinion is an unequivocal yes, but that is the subject of a separate blog post. Are City guilty of such behaviour? We have no idea, but expect City to not be subject to any UEFA sanctions (the Premier League’s own FFP rules are much easier to satisfy than those of UEFA).

City’s commercial income is still some way behind that of United (£275.5m) but United are in a league of their own when it comes to global appeal, and their commercial department negotiates deals accordingly.

City are way ahead of Arsenal (£125.4m) in this income source, which is perhaps a testament to Arsenal’s inconsistent appeal to sponsors and their commercial department’s rather disappointing performance.

Costs

The main costs for a club are player wages and player amortisation (transfer fee costs spread over the life of the contract).

City’s wage costs, which had been under relative control for three seasons, rose over a third to £264.1 million. This compares to United (£263.5m) and Arsenal (£199.4m). When Sheik Mansour acquired City, the club had to play over the odds in wages to attract high quality players, as Champions League appearances were not in the offing. This explains why wages were so high in 2013.

Clearly recruiting Pep Guardiola and his team, new signings and improved contracts for some squad members came at a cost.

Despite the increase in wages, City’s wage expense as a proportion of total income, which has risen in the year, is a healthy 56%, although notably higher than United (45%) and Arsenal (47%).

Amortisation charges are up nearly 30% to £121.7 million.

‘Other’ costs rose 23% to £104.3 million. It’s not clear what has driven such an increase.

One thing that may have Arsene Wenger once again being only allowed to eat with a spoon is directors’ pay. This is in the City accounts at a zero figure.

City’s parent company, City Football Group Limited, (which is not subject to FFP as such, and has not yet published its results) had ‘key management compensation’ (presumably director pay) of £4.4 million in 2015/16. Such behaviour prompts City’s critics to accuse the club of transferring some costs to other outposts of the City group empire to ensure the club of complying with FFP.

Whilst City have no direct bank debt, they do show an interest cost in relation to the Etihad stadium. Whilst not wanting to bore you with accounting dullardness, because the Etihad is rented on a 250 year lease, which is effectively its useful life, the stadium is treated as being an asset of the club, funded by a loan from the council.

Offset against the above costs is gains on profit sales of £34.6 million (see below for more detail).

Profit

Profit is an abstract concept, in theory it should simply be income less costs. In practice there are a range of profits quoted, depending on which costs are included.

City are quoting a profit of £1.1 million for the year. This is however after taking into account gains on player disposals. Whilst we expect to see clubs making a profit on player sales each year due to the way player signings are treated in the accounts, this figure is volatile as it depends on individual player disposals.

Excluding player disposals, City’s EBIT (which is ‘recurring’ profit before interest and tax) was a loss of £30.2million, compared to a profit of £2.8m the previous season.

Adding back the non-cash expenses in the form of depreciation and amortisation gives an EBITDA profit of £105 million, which is very close to the previous year’s £109m. United made an EBITDA profit of £200m and Arsenal £145m, reflecting City’s relative generosity in terms of wages compared to the two other clubs.

City had a negative tax expense in 2016/17.

Player activity

City spent £203.5 million on the likes of Stones, Jesus, Gundogan and Sane in 2016/17 (what about Nolito and Claudio Bravo some of you will of course also cry? We’ve not mentioned them as they are, in the words of former Manchester legend Frank Sidebottom, a bit bobbins, and we don’t want to embarrass Pep, especially as my wife fancies him).

If these players are each on five year contracts then this gives an extra amortisation cost of £40.6 million (£203.5/5), which ties into the cost analysis above.

In terms of disposals, City sold players for £51 million, to give a net spend for 2016/17 of £153m.

Hidden in the footnotes to the City accounts are a couple of interesting figures (interesting only to those who are still reading this tedious summary we suspect). The first is contingent liabilities. This is the sum City have to pay to players and former clubs if certain achievements (appearances, trophies, international caps etc.) are met. This is £111 million at the end of June 2017.

City had a spending spree in Summer 2017, mainly on signing Mendy, Walker, Bernardo Silva, Ederson and Danilo. A number of players left the club too, but the accounts reveal a net spend of £161 million in the window.

Summary

City’s owners are not motivated by making profits, so the breakeven in the year is more to do with keeping the beancounters at UEFA happy more than bringing a smile to face of Sheik Mansour.

Their business model in relation to being part of a group with tentacles in many clubs across the globe will fuel idle gossip and accusations from the club’s detractors.

For those who think that all this financial analysis is a load of old cobblers, there’s a case for saying, just watch the football, which is possibly the best seen in the Premier League since its inception (although of course no trophies are won in November).

Financial Summary

Key figures from the accounts shown below

 

Hull City 2017: Marooned in Flamingoland

Introduction
They came, they saw, they went back to the Championship. If ever a club in recent years deserves the ‘Yo-Yo’ label, it is Hull City. In the ten seasons commencing 2007-8 the club has been promoted and relegated three times.

Hull were promoted via the playoffs in May 2016, but spent the summer in limbo, with a clear conflict between the owner Assem Allam and manager Steve Bruce, presumably over recruitment.

Mike Phelan took over as caretaker, and on the back of a victories in the first two matches the club made the decision to appoint him as manager on a full-time basis.

It’s doubtful whether any other £100 million a year business would make decisions on the fly in such a manner. Somewhat predictably, Hull’s season went into a nosedive, and they had one win in the next 18 matches, leading to Phelan being sacked.
Hull spent £32 million in the transfer market, mainly on cast offs from other Premier League clubs (Ryan Mason, Will Keane, James Weir), loanees and unheard of foreign signings.

Hull’s relatively conservative transfer policy has resulted in some more established Premier League clubs questioning the distribution of broadcasting revenues and parachute payments to relegated clubs.

Whilst Hull didn’t lose many of the players during the summer window, by the time January arrived the vultures were picking over the relatively few bones left, with top scorer Robert Snodgrass and Jake Livermore jumped ship for West Ham and West Brom respectively in £10 million plus deals.

New manager Marco Silva managed to improve results compared to Phelan, taking the club out of the relegation zone, but defeats to already relegated Sunderland, and fellow strugglers small London club Crystal Palace, sent Hull down.

Silva left for Watford, and Hull’s manager became the splendidly named Leonid Slutsky, who we think used to play Spock in the original Star Trek.
Income


Hull’s figures in recent years highlight the impact that promotion to the Premier League can make. In 2012/13 the club’s total income was £17 million, of which £5.9 million was their final parachute payment after being relegated from the Premier League in 2010.

Income for 2016/17 was nearly £117 million, due to the popularity of the Premier League with broadcasters. A new three-year TV deal with Sky and BT commencing in 2016/17 along with recently boosted overseas rights. Hull’s TV income, despite relegation, was £94 million, or 80% of total revenue. All clubs in the Premier League benefited by on average £35 million due to the new deal.

Because Hull were relegated immediately after being promoted in 2016/17, they will only receive parachute payments for two seasons.

Gate receipts were marginally up in 2016/17, 10% to £7.9 million, but other match day income, presumably corporate boxes and perhaps perimeter advertising (clubs are notoriously vague as to what appears in individual headings) quadrupled from £2 to £8 million.

‘Other’ income, which includes commercial and retail, benefited from Hull’s promotion too. The sad thing in relation to this is that Hull ditched our favourite shirt sponsors, Flamingoland, home of the Mumbo Jumbo extreme ride, for a generic betting organisation.

Costs

As always the biggest outlay for a professional club is in relation to players. Hull’s wage bill more than doubled to £61 million, partly due to signings, but also due to pay rises for the existing squad.

Hull are only the third Premier League club to publish their results, so it’s not possible to directly compare with their peers, but it would have been bottom three compared to the Premier League the previous season.

Given the increase in income due to the TV deal mentioned above, we would expect wages to rise for most clubs. Premier League club owners have tried to restrict all of this money ended up in players’ wage packets via the pompously named Short Term Cost Control (STCC rules), which restrict the increased amount spent on wages to £7 million PLUS any extra non-TV money earned by the club.

Whilst wanting to appear noble, the aim of STCC is to increase the profits for the owners of clubs, by restricting the amount that goes to players.

The other main player cost is player registration amortisation. Whilst this is a non-cash expense, it is linked to the amount Hull have paid in respect of transfers, spread over the contract life period. At £32.6 million, it is a sizeable sum, but will fall in 2017/18 as Hull have offloaded some players.
Combining the two player costs shows that Hull have struggled in the Championship to deal with the demands of the division.

On the plus side in 2013 and 2016, when Hull were in the Championship and total player costs exceeded income, the club was promoted both times. These figures therefore include promotion bonuses (£10.4m in 2016, not disclosed in 2013).

One other cost that is noticeable in Hull’s books is the interest expense. The vast majority of Hull’s loans are due to the owner and/or Allamhouse Ltd, a company owned by the owner.


The interest rate on the loans, calculated very crudely by us, is not particularly high, and likely to be much lower than that charged by a bank.

Profits
Profit represents total income less the costs of running the club. The profits after tax belong to the owners, and can either be reinvested into the club or paid out in the form of dividends (very rare though, except for Manchester United) .

Hull are a perfect example of why English clubs in the Premier League are attractive to owners. In that division they make a lot of profit for owners, as well as being high profile outfits that are seen globally by TV viewers.

There are a variety of profits that tend to be analysed.
Profit before tax is as it says on the tin.

Operating profit is income less all costs except tax and finance costs.

EBIT is the same as operating profit, adjusted for non-recurring items such as gains on player sales (which, whilst arising each year, tend to be volatile and unpredictable) and legal claims.

EBITDA is the same as EBIT but has the non-cash expenses of depreciation and amortisation added back. This is a proxy for the sustainable ‘cash’ profit made by the club.

Hull’s figures show the price to be paid for playing in the Championship, as well as the rewards of the Premier League. Promotion in 2016 resulted in a boost of over £55 million to Hull’s profit before tax, with the other metrics improving too. Over the five year period of the analysis the club made a profit of just over £10 million. Nothing too excessive, but still enough for a good Saturday night out in Hull city centre.
Conclusion
Hull banked a lot of money in 2016/17 from their one season in the Premier League. As well as selling their crown jewels in the January 2017 window, the remaining good players in the shape of Harry Maguire, Tom Huddleston, Sam Clucas and Andrew Robertson departed in summer 2017. This could be part of a strategy to streamline the wage bill.

Their replacements have not fared well, and Hull are presently hovering near the relegation zone in the increasingly cut throat Championship. The only positive from this is that is Hull continue to perform poorly we could see a return of Flamingoland as the shirt sponsor.

One area of possible concern is the relationship between the club and its owner. Since failing to get the football authorities to change the club name to Hull City Tigers,  Assem Allam has been throwing his toys out of the pram with a series of Trump like inflammatory statements.

In the last year, Hull have increased, then decreased, the number of shares that they have in issue. Whether this was due to a potential sale or part sale of the club is uncertain, but Hull are best filed under ‘watch this space’ in terms of ownership for the foreseeable future.

Norwich City 2017 Financial Results: Up the Down Escalator

Introduction

It’s difficult to dislike Norwich (unless you’re an Ipswich fan). Old fashioned provincial stadium, once beat Bayern Munich, bit of a yo-yo existence, owner gets a bit lively after a few red wines, nothing brash or flash about them.

Their financials are broadly the same, live within their means, sensible transfer policy, most matches sold out at home.

Norwich were relegated at the end of 2015/16, but were among the bookies favourites to be promoted back to the Premier League the following season.

Their board appeared to back the manager Alex Neill in the transfer market, and they spent £19.9 million in the transfer market signing Alex Pritchard (pantomime villain on the South Coast after agreeing to sign for Brighton and then Norwich gazumping the wages offered whilst he was on the M25), Wildschut, Oliveria and Canos. Whilst a few players left the nucleus of the squad stayed with the club.

A good start to the season meant the Canaries were top of the table after 12 games, and those who had backed the club at the start of the season were getting excited. The wheels then fell off, only two wins in the next 12 games, and they eventually finished outside of the playoffs in 8th position. Manager Alex Neil paid the price for not bringing the club the success that was anticipated by losing his job.

Income

The financial results show that relegation has hit the club, but not disastrously. Total income is down 23%, nearly all of this is due to Premier League TV money of £70.2 million in 2015/16 being replaced by parachute payments of £50.5 million. Parachute Payments broadcast income accounted for 67% of total income for Norwich last season, compared to 72% in the Premier League in 2015/16.

These parachute payments will fall in 2017/18 by about a further £10 million. It is however in 2018/19 that the real impact would be felt should Norwich remain in the Championship. The club is only entitled to two years of parachute payments as they were relegated the first season after being promoted. This would mean that broadcasting income would then fall

Gate receipts were down 20%, although average attendances were hardly affected by the drop. The fall may be due to the club being unable to charge the same level of prices to corporate fans, who are less excited by Burton Albion than Chelsea.

Norwich did manage to sell some players during the season, and generated a profit of £11.9m on total player sales income of £18.4m, mainly from the sales of Robbie Brady, Martin Olsson and Nathan Redmond. This helps to reduce losses for the season, but may have impacted upon success on the pitch too.

Costs

Like all clubs, Norwich’s main outlay is in the form of players. Wage costs are one expense, and Norwich, despite apparently having relegation clauses in contracts, still had a total wage expense of £55.1 million. This is the second highest Championship wage bill ever published (although I anticipate Newcastle and Villa may trump these totals when their results are published in due course over the next few months). It’s clear that the board backed the manager in keeping onto the bulk of the squad rather than cashing in, but this was not reflected in results.

The wage/income ratio at 73% is only marginally higher than the previous season in the Premier League at 69%. The ratio was very high in 2014/15 (96%) due to Norwich being promoted to the Premier League and having to pay promotions bonuses, which most boards of directors classify as a ‘nice problem’.

Compared to other clubs in the division, whilst Norwich’s wages look high (the average for the Championship in 2016 was (£23.1 million), the wage/income relationship is far lower than the Championship average of 101% in 2016. This is because many clubs in this division do not have any parachute payments, and so their income is far lower (average of £22.9m in 2016).

Norwich made total payments of £4.3milion for severance. This includes Alex Neil (rumoured to be £2 million) and chief executive Ged Moxey, recruited from Wolves in August 2016, who only lasted until February 2017. He managed to earn during that period £417,000 plus a payoff of £712,000. The reasons behind his departure were never made clear, although rumours of boardroom bust-ups suggest that all was not harmony and light between Moxey, Delia Smith and Ed Balls. Perhaps he criticised Ed Balls’ performance on Strictly, or didn’t like one of Delia’s flans, but, whilst out of work, he won’t be needed to sell the Big Issue just yet after trousering nearly £6,500 a day whilst at Carrow Road.

Norwich do have a history of paying their chief executives well. In previous years some CEO’s have taken home over a million pounds. Moxey would not have quite reached these levels if his pay was pro-rated, but even still it is a considerable sum.

The other cost in the profit and loss account relating to players is that of player amortisation. Whilst here we are straying into accounting nerd territory, amortisation is how clubs account for player signings, by spreading the transfer fee over the length of the contract signed by the player.

For example, if Norwich paid £8 million for Alex Pritchard (and I suspect the actual fee was far lower than this, unless Norwich are promoted), and he signed a four-year contract, then there would be a £2 million annual amortisation charge in the profit and loss account in each of the next four years.

Amortisation is useful because it helps to remove some volatility from player costs, as it spreads the cost over the seasons the player is due to perform for the club.

Norwich’s amortisation charge was £16.5 million, down from £22.4 million the previous season in the Premier League, but still markedly higher than the Championship average of £4.5 million in 2016.

This high amortisation fighure reinforces the view that the club had a strategy of keeping the squad together to try and bounce back into the Premier League.

If we add together the wages and amortisation totals, and compare to income, Norwich’s profitability looks more precarious.

The above shows that for every £100 coming into the club, £95 was being expensed in the form of wages and amortisation.

This is high for all clubs (the Championship average was 120%) but if the club is not promoted this season, then the ratio will rocket due to the lack of parachute payments.

The alternatives available to Norwich would be to either seriously prune back the squad by selling the best (and highest paid) players, or borrow money from either the board or a bank.

A wage bill of £55 million and high amortisation figure could also potentially cause some financial fair play (FFP) issues, although this is now based on a three-year rolling loss total, so Norwich’s relatively good results in 2016/17 will be of benefit.

Profits

Profits are income less costs, so taking the above totals into consideration, Norwich made an overall post tax loss of £2.7 million in 2016/17. It’s not pleasant losing £53,000 a week, but if you strip out the severance costs of £4.3 million, which are (hopefully) not going to recur every year, then the club made a small profit.

Because the club has relatively little debt (no loans and an overdraft of ‘only’ £1.8 million, interest charges were quite low.

The Championship is a bearpit of a division in terms of loss making. In 2016 Championship clubs had total non-recurring losses of £361 million, so Norwich is far stronger on a relative basis to nearly all other clubs.

Liabilities

As mentioned above, Norwich’s debts to lenders appear easily manageable. Delia Smith’s loans have been repaid, they have other borrowings.

The main sums that are payable are in respect of transfers due to other clubs. This is over £18 million at 30 June 2017, of which £15 million must be paid within a year. To counterbalance this the club is owed £7.3 million from other clubs at 30 June 2017.

The small print

In the footnotes to the accounts are a couple of interesting additional pieces of information. Norwich potentially might have to pay out up to £23.7 million if conditions included in transfer and player contracts are fulfilled. This is likely to be linked to promotion.  A further £3 million of loyalty payments could be due too. I’m sure the board would again like to file these as ‘nice problems’ and welcome them, as they are likely to coincide with a return to the Premier League.

The final footnote to the accounts shows that in the summer 2017 transfer window Norwich signed players for £8.8 million (which could rise to £11.3 million) and had player sales (Jacob Murphy, Johnny Howson etc.) of £16.9 million (rising to £19.6 million).

Conclusion

Norwich seem on paper well positioned to compete financially with other clubs in the Championship in 2017/18. One of the problems in the Championship is that many owners take a short-term gamble with clubs, spending large sums of money with no guarantee of success, and then facing a financial hangover if it does not bear fruit.

The Norwich board do not seem to be taking such an approach, which is to be applauded. The danger is that by doing so, they could end up as a very well run Championship club for a long period of time, and that isn’t necessarily any fun, just ask fans of Ipswich Town.

 

 

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.

­­­­

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.