Aston Villa and FFP

 

 

It’s the hope that hurts you most

Executive Summary

Villa easily satisfied FFP in 2016/17 due to parachute payments and player sales despite spending £88 million on players.

They should easily satisfy it in 2017/18 as player trading position reversed and sold more than they bought.

Will need major belt tightening in 2018/19 as parachute payments fall from £34m to £15m and FFP loss limit falls from £61m to £39.

If you want the long version read on…

Introduction

There’s nearly as many questions about Financial Fair Play (FFP) these days as there is about Katie Price’s love life, and the answers are usually equally confusing.

I’ve been asked to look at Villa’s FFP position, and this will involve an element of guesswork in places, as some figures are not yet published or have never been in the public domain.

The Rules

In the Championship FFP is based on a rolling three-year period, with the aim of keeping losses to an ‘acceptable’ level.

Presently the rule is that a club can have an FFP loss of £13 million for every season it is a member of the Championship within the three-year period, and £35 million for each season in the Premier League.

Therefore, for Villa, for 2016/17 the allowable FFP loss was £83 millon (2x£35m + £13m) falling to £61 million in 2017/18 and £39 million in 2018/19.

The known losses

According to Villa’s accounts, the club lost £81.3 million in 2015/16 and £14.4 million in 2016/17 giving a grand total of £95.7 million, so it initially looks as if an FFP breach had occurred, but we now enter the world of murky accounting and additional FFP rules.

Good costs

To add to the confusion, some costs are excluded when calculating FFP losses. This is because they are considered ‘good’ as they represent an investment in the future of the game or its facilities.

These costs include:

  • Academy running expenses
  • Community support schemes
  • Infrastructure costs (usually depreciation on the stadium and training facilities etc)
  • Promotion bonuses to staff should the club go up to the Premier League.

Looking at Villa’s accounts for 2016/17

  • The club has a tier one academy, it looks as if this cost was £5.9m for Villa. (£5m in 2015/16)
  • Community support was £2m (£2.2m in 2015/16)
  • Infrastructure cost (depreciation) was £2.9m (£48.5 million in 2015/16 due to a bit write off of the value of Villa Park).

This means that Villa could have had an FFP loss of £31.8 million (£61m allowable three-year loss less £29.2m FFP loss incurred in last two years) for 2017/18.

Squeaky bum time

Have Villa managed to get in under this figure of £31.8 million for 2017/18?

I would say they have, but there is not a lot of room to spare.

In 2016/17 the loss of £14.4 million was AFTER selling players at a profit of £26.6 million. Villa have made significant sales in 2017/18 and it looks as if they’ve made a profit on these of a further £15 million.

Now for the bad news, Villa’s broadcast income for 2017/18 is down by about £7 million from £41 million to £34 million due to a reduction in parachute handouts. It’s likely the club’s other income will fall by £2-3m too as commercial deals expire.

The wage bill will still be high, and the figure for 2016/17 of £61 million was the third highest in Championship history, only beaten by Newcastle (who were promoted) in 2016/17 and QPR in 2013/14 and are now facing an FFP fine of between £40-50 million.

Expect the wage bill to be trimmed a bit but Villa have recruited John Terry and signed some loan players who are on big money. I’ve gone for a 10% reduction in wages to £55 million

Villa also spent a fortune on players in 2016/17 of £88 million on players. The cost of these are spread over the length of the contract signed. So if we assume players are on four year deals this is a cost of £22 million a season unless the player is sold.

These two costs put together are likely to be in the region of £70 million, and expected income is about £65 million, taking into account the fall in parachute payments.

Villa’s overheads in 2016/17 were £91 million excluding amortisation, of which £61m was wages, so lets assume that if there have been cutbacks for 2017/18 there are £25m of non-wage overheads.

Putting this together we have

£’m
Income 62
Wages (55)
Amortisation (22)
Other overheads (25)
Estimated accounting loss (40)
Add back:
Gain on player sales 15
Allowable FFP costs 10
FFP loss (15)

Therefore over the three years to June 2018 Villa will have a rolling FFP loss of £44.2 million, well within the £61 million limit.

2018/19

This is where I fear Villa will face its biggest challenge. The allowable three-year FFP loss will fall to £39 million from £61 million and parachute payments from £34 million to £15 million. Put those together and it’s a financial squeeze of £41 million.

In addition, they may struggle to get players on big wages such as Ross McCormack off the payroll. Even if he goes out on loan Villa will be picking up the majority of the tab.

It suggests that the club may have to sell Grealish and Chester to ensure they don’t exceed the limit.

Aston Villa: Burning Sky

Aston Villa 2016/17 

Introduction: 

Aston Villa Football Club Ltd announced their financial results, which were published in the local newspapers, and fans sighed with relief.

The fears that the club was heading into a Financial Fair Play (FFP) meltdown seemed overstated, as the losses of £7 million quoted in the papers appeared to give wiggle room in terms of the £39 million losses allowed over three years.

However, there’s a problem, and it’s a sizeable one. Aston Villa Football Club Ltd doesn’t cover all of the activities of Villa, and certain costs, most notably player wages, are excluded from the costs. The accounts being reviewed by media sources and fans alike are not the ones used to determine the true extent of Villa’s finances.

To see the true picture, it is necessary to take a look at the snappily named Recon Group UK Limited, (previously Recon Sports Limited, previously Reform Acquisitions Limited), controlled by the forever positive owner Tony Xia, via his investment vehicle, Zheijiang Ruikang (Recon) Investment Co Ltd, based in China.

Recon Group’s profit and loss account showed a more worrying operating loss of £41.1 million (£791,000 a week in old money), and it was only the sale of some players that brought this down to a more palatable loss of £14.5 million.

The previous year the losses were £81.3 million before player sales, although some of the calculations were perhaps best filed away under the heading of ‘creative’.

All is not lost however for Villa, as despite what was a fairly dreadful 13th place finish in the Championship on 2016/17, they are now in the running for promotion back to the, if not promised, land of the big bucks TV deals that is the Premier League.

Profit and Loss account

Profit is the difference between income and costs, so we will start with a look at the former.

Income

Villa’s total income for 2016/17 was £73.8 million, a lot of money, but 32% down on the previous season, and the lowest for a long time.

Only half a dozen clubs who played in the Championship have reported financial data to date, but Villa are presently second behind fellow parachute payment recipients Norwich. We would expect Newcastle to take the top spot whenever Mike Ashley deigns to reveal that club’s details.

The above graph shows the impact that parachute payments have on a club’s income, with Villa receiving £421 for every £100 generated by local rivals Birmingham City, and £253 for every £100 of promoted Brighton.

Clubs generate income from three sources, matchday, broadcast and commercial, so how have Villa suffered as a result of relegation?

Matchday

Villa had about 9,000 empty seats for each home game in the Premier League in 2015/16, and average attendances fell further in the Championship,  albeit to a still creditable 32,000.

Gate receipts were down 14% to £10.7 million, which is about the same amount that Sky are currently paying for each match they broadcast live.

Villa’s matchday income is high by Championship standards, and compares well to provincial clubs in the Premier League, such as Stoke (£7.2 million), but is some way behind clubs that Villa might benchmark itself against, such as Newcastle (£25m) and West Ham (£27m).

Broadcasting

Villa were in some ways lucky to have survived as long as they did in the Premier League before being relegated, as their parachute payments benefitted from the new deal that commenced in 2016/17.

Villa earned £65 million from TV in 2015/16, which was the final season of the previous three-year deal. Parachute payments are however linked to the season in which Sky and BT pay the Premier League, and so Villa (as well as Norwich and Newcastle) had the blow cushioned due to the new £5.1 billion deal commencing in 2016/17.

This meant that TV money fell to ‘only’ £48.1 million last season, still a drop of just over a quarter, but the decrease would have been far greater had the club been relegated a year earlier.

Parachute payments last for three years in the Championship, decreasing year by year. As can be seen, Villa need to return to the Premier League within that timeframe to avoid a big hit when the parachute runs out.

Commercial

This more than halved last season. Sponsors want their logos and billboards to be seen in the globally popular Premier League, and many have relegation clauses built into long term deals that they sign with clubs.

Villa’s income was down to £15 million in 2016/17, which still compares well to the rest of the Championship, but is far lower than the average in the Premier League of £55 million.

Costs

A football club’s main costs are in relation to players, and Villa are no exception in this regard.

The wage bill for 2016/17 was £61.5 million, down from £93 million the previous season in the Premier League, giving a wage to income ratio of 83%, which meant that Villa were paying out £83 in wages for every £100 of income they generated.

In order to get the wage bill down there were significant job losses at Villa, with full time employee numbers falling from 543 to 401, mainly in the commercial and merchandising departments.

In the Championship the previous season the average wage bill was £23 million, compared to £112 million in the Premier League.

Whilst this seems a high figure, the Championship is such an ill-disciplined division that the previous season paid out more in wages than it generated.

That figure of 83% is kept low by parachute payments.

The other cost relating to players is that of player amortisation. This is how the club deals with the transfer fee when a new player is signed. The fee is spread (amortised) over the life of the contract. Therefore when Scott Hogan joined Villa for £15 million on a four and a half year contract, this worked out as an amortisation cost in the profit and loss account of £1.67 million last season (6/54 months x £15 million), which will be £3.33 million in 2017/18 as his fee will be amortised for a full year.

All of the amortisation fees for the whole squad are added together and included in costs. This came to nearly £24 million for 2016/17. This is far higher than the other clubs in the division.

Profit

Profit, schmofit, fans don’t give a hoot about it, and rightly so. We go to matches to forget about dreary dull work related things, but then some pen pushing dullard invented FFP, and now it impacts upon the game and the team we love.

There are lots of types of profit, so we will whizz through them to reveal the good, the bad and the ugly issues in relation to Villa’s accounts.

Bear in mind the FFP loss limit in the Championship is £39 million over 3 seasons starting in 2016/17, so the target is broadly £13 million per season.

Operating profit

This is club’s income less the day to day running costs. In the case of Villa, this was £14.5 million in 2016/17, which is £278,000 a week. This is far better than the previous season, when the figure was a buttock clenching £88.3 million.

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Villa’s operating losses for the last six years total £208 million. Whilst it appears anecdotally there’s not a lot of love for former owner, the splendidly named Randy Lerner, he was underwriting the majority of these losses.

The £14.5 million is broadly in line with the FFP limit for one season, so it looks as if Villa are without too many worries…but

  1. Remember Villa were in receipt of parachute payments, which will drop from £41 million in 2016/17 to £33 million in 2018/19, and then £14 million in 2019/20.
  2. The loss is after taking into account gains on player sales. Villa were active in the transfer market and sold the likes of Gueye, Traore, Gestede, Clark, Ayew, Westwood and Sinclair for a profit of £26.6 million. It’s unlikely that they will be able to generate such profits year in year out.

As can be seen from the above, gains on player sales are difficult to predict and are very erratic, and never guaranteed.

  1. The 2015/16 accounts were distorted by the dark arts of accounting, when the club effectively booked a number of costs early. Without wanting to make making this tedious elegy even more tedious, they wrote down the value of Villa Park and the squad by £82 million. This had the effect of reducing costs in 2016/17 and beyond.

EBIT

If we add back the gain on player sales and adjust for one off distortions such as those above, we get something called Earnings Before Interest and Tax (EBIT). EBIT is seen as a better indicator of profit, as it focuses on sustainable/recurring income and costs.

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Villa’s EBIT losses don’t make for good reading though, and show just how important player sales are to make ends meet.

EBITDA

If we are going to exclude player sales from our calculation of profit, it makes sense to also exclude the cost of players signed in the profit and loss account too. If we add back player amortisation, and also the infrastructure costs of depreciating the stadium and training facilities etc, every year, we get Earnings Before Interest and Tax (EBITDA). Eagle eyed Villa fans may see the club refer to this in its alarmingly brief review of the business in the annual report.

EBITDA is the flavour of the month for many analysts, as it focuses on sustainable profits and excluded non-cash items such as player amortisation too. As such it is seen as the ‘purest’ measure of profit/loss by many who do this nonsense for a living.

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The good news for Villa is that EBITDA losses were down in 2016/17 compared to the previous season. The bad news is that the losses are still significant at £14.4 million.

FFP FFS

All of the above nonsense is fine, but what about FFP? This is calculated in a different manner to the accountants, and some costs deemed to be ‘good’ such as infrastructure, academy and community schemes are excluded.

The accounts don’t show FFP profit, but we’ve spend a bit of time trawling through the small print, and the news is good for Villa.

£’m
Accounting loss pre-tax (14.5)
Infrastructure 2.9
Community developement 2.0
Youth development 5.9
FFP loss (3.7)

It therefore seems that Villa were well within the FFP limit last season, which does give Steve Bruce some wiggle room, at least until parachute payments disappear, or the club is promoted before that happens.

Player activity

One of the accusations levelled at Randy Lerner was that he didn’t spend enough money in the transfer market. A look at Villa’s transfer activity over the last few years shows the following

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The sums spent by Lerner were fairly modest by Premier League standards, but remember we was also underwriting the trading losses we’ve seen above at the same time.

Tony Xia spent a record amount of £88 million last season, the highest by any club in the history of the Championship. Spending money is one thing, spending it wisely is another.

Brighton and Huddersfield were promoted on the back of fairly modest signings, and Villa fans will point to a number of turkeys that joined the club, which contributed to the final league position of 13th.

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More worryingly, those signings come with hefty wage packets for a number of years, so getting rid of players on good contracts can be a challenge, as Birmingham City know with Nicola Zigic, who stank out St. Andrews on £50,000 a week in the Championship for a number of years. Villa would appear to have a similar issue with Ross McCormack, whose main contribution last season, on the back of his £12 million transfer from Fulham, was in keeping the local Deliveroo rider busy with regular orders from Greggs.

Steve Bruce has been unable to replicate the same level of expenditure in 2017/18, as the club is wary of FFP. A nosey into the small print of the accounts shows that the club only spent £2.9 million on players in the current transfer year, and sold others for £22.4 million.

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Summary

Villa went for broke financially in 2016/17, and it didn’t work out very well. They’ve had to cut back significantly during the present season, but do have the benefits of signing some decent players in the past who have discovered the form that made them so expensive in the first place. A return to the Premier League this season is essential, given the significant reduction in parachute payments that the club faces in 2018/19.

Data Set

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