Sheffield Wednesday: Play to win

Sheffield Wednesday announced their results for 2016/17, which revealed that they made a loss of nearly £21 million in the season, as the club invested heavily in a promotion push, which faltered in the playoffs against Huddersfield.

Since then there’s been a debate on social media in relation to the present level of financial distress experienced by the club, with some suggesting that administration is feasible, so we’ve taken a look.

Income

Not all clubs have announced their results for 2016/17 yet. In the previous season the average for a Championship club was £22.9 million, we expect this to be higher in 2017/18.

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

The good news for Wednesday is that matchday income rose by 10% in 2017. Attendances averaged 26,831, an increase of over 4,000 in the previous season, when the club made the playoff finals.

This means that Wednesday are at the top end of clubs in the division for this income source, slightly behind Villa and Brighton, but more than double the amounts earned by smaller clubs in the division.

Despite an indifferent season on the pitch for 2017/18, the club is still averaging over 26,000 in 2017/18.

The bad news is that matchday income is dwarfed by parachute payments given to clubs who have been recently demoted from the Premier League. Whilst it brought in over 40% of Wednesday’s income, Norwich, Newcastle and Villa each earned over £40 million in parachute payments, which gave them an advantage in the transfer/player markets.

Broadcast income was down 7%. This was partly due to Wednesday only getting as far as the playoff semi-final, compared to the previous season when they made it to Wembley, which was worth a couple of million to the club. The decrease was cushioned partially by a new Premier League (PL) TV deal that came into existence in 2016/17, and under the terms of a deal with the Football League (EFL) the money given to EFL clubs is a guaranteed percentage of PL TV revenues.

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Wednesday’s commercial income rose 17% to £6.6 million. This has provoked some bitching from fans of other clubs, who have queried the nature of some of the commercial deals, as some were struck with the club owners’ the Chansiri family.

The value of these transactions, at £1.2 million, does not seem particularly excessive, especially when compared to the likes of Leicester City, who in 2013/14 mysteriously tripled their commercial income after the involvement (ironically) of former Sheffield Wednesday Chairman Sir Dave Richards in obtaining some new sponsorship deals in the Far East.

Leicester have just agreed to pay a £3.1 million fine in relation to their 2013/14 accounts, which had the EFL’s W-T-F-Ometer clicking in the red zone for the past few years.

Costs

The main costs at a football club are player related, wages and transfer fee amortisation. Wednesday invested significantly in both of these in 2017/18.

Wages increased by 52% in 2016/17, to £29.1 million. This was due to signing some Premier League players on loan, such as Jordan Rhodes and Callum McManaman the free transfer acquisition of Steven Fletcher, on an alleged £30,000 a week, and new a new contract for top scorer Forestieri.

Amortisation is how clubs deal with transfer fees in the profit and loss account. When a player signs his contract cost is spread over the life of the contract. Therefore, when Adam Reach signed from Middlesbrough for about £5 million on a three year deal, this works out at about £1.67 million as an amortisation cost each year.

Wednesday spent over £24 million on players in 2015/16 and 2016/17, so the amortisation charge jumped accordingly.

Putting these two costs together highlights how much Wednesday ‘went for it’ in 2016/17, as for every £100 of income generated, there was a £152 cost in terms of wages and amortisation.

The problem that this gives Wednesday is that many of the players involved will be on multi-year contracts, and therefore it will be a challenge to reduce such costs.

Overall, Wednesday spent £1.91 for every £1 of income in 2016/17, split as follows:

Losses

Losses are income less costs. Last season this was £20.7 million, up from £9.7 million the previous season. This leads to two key questions (a) are such losses sustainable, and (b) what are the Financial Fair Play (FFP) consequences.

The owner of Wednesday, Dejphon Chansiri family, is estimated to be worth at least £700 million, so the money is there, assuming he wants to keep spending it.

In terms of FFP, the present incarnation (called Profitability and Sustainability) limits clubs to a loss of £39 million over three seasons.

Looking at Wednesday’s recent accounts, the club has lost money every year, but the total for the last three years comes to £34.3 million. Some costs, such as infrastructure, academy and community schemes, are excluded from the FFP calculations. A conservative estimate of these would be about £8 million, so Wednesday’s FFP losses are probably about £26 million over the last three years.

If this is the case, whilst Wednesday don’t have a huge amount of wiggle room for 2017/18, the club should satisfy FFP this season. The manager will however be unable to spend a huge amount in the transfer market in summer 2018.

Player trading

Wednesday, as already mentioned, have spent significant sums by their standards in the last two seasons.

There’s no doubt Chansiri has backed managers in the transfer market, and that has contributed towards two appearances in the playoffs. The lack of success in the current season is of greater concern, and there will be less opportunity to sign players in the forthcoming transfer window unless they are funded by player disposals.

It looks as if player contracts contain substantial bonuses should the club be promoted, with player bonuses of £7.5 million and payments to former owners of over £1 million. Compared to the £100 million of TV money, this is relatively insignificant.

Debt

Chansiri has put substantial sums into the club, and at the end of the financial year was owed about £38 million in loans on top of £45 million invested in shares. His benevolence appears at present to be unconditional, so Wednesday fans should not worry about the owner wanting to sell up or stop supporting the club financially.

Summary

Wednesday are in a slightly awkward position, having spent heavily in the last couple of seasons on player recruitment and not being rewarded by promotion.

At the same time, rumours of their impending financial implosion appear to be vastly overstated.

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