Bournemouth 2017/18: Boom Boom Ba-Ba Boom

Introduction:

Establishing yourself as a Premier League club, especially with only an 11,000 capacity stadium, is as much as a challenge as promotion from the Championship in the first place.

Down at the Vitality stadium Bournemouth can look forward to their fifth consecutive season in the top flight in 2019/20 although financial results are not as impressive as those on the pitch.

Detailed accounts have just been published which show that the price of recruiting the likes of Ake, Begovic and Defoe came at a significant price and the club made a loss in 2017/18.

Investing in the squad wasn’t enough to prevent the Cherries falling from 9th to 12th in the Premier League, although this was still an impressive performance for a club that spent nearly all its time in the lower leagues.

Eddie Howe’s management has enabled the club to compete with most of the ‘Other Fourteen’ clubs on the pitch and his biggest problem will be preventing some of the star names leaving as players such as Wilson and Brooks attract admiration from wealthier rivals.

Having an accounting period of eleven months in 2016/17 does make some comparisons tricky so bear this in mind when looking at the figures.

Key financial figures for year to 30 June 2018: AFC Bournemouth Limited

Income £135 million (down 1%).

Wages £102 million (up 42%) .

Operating loss before player sales £13 million (previous season profit £15.2 million)

Player signings £56 million (previous season £9 million but distorted by moving year end from 31 July to 30 June)

Player sales £9 million (previous season £3 million)

Owner loans £70 million (up £17 million)

Income:

Overall income for Bournemouth decreased slightly, mainly due to lower prize money from the Premier League.

With a ground capacity a fraction of that of other clubs in the division it was no surprise that Bournemouth had the second lowest matchday income of any club in the Premier League in 2017/18.

Earning so little money from this source does give the club a financial disadvantage and it would benefit significantly from moving to a bigger venue.

Realistically the club cannot generate any more money from matchday unless it increases prices (not popular with fans) the number of matchday events (only likely if get a Europa Cup place) or the number of seats (not feasible at the Vitality).

Everyone knows that the Premier League is a success due to its popularity with TV audiences and this is reflected in the large sums distributed to clubs.

Selling Premier League rights at a loss overseas in the initial years of the division have proven to be a masterstroke and these now bring in about £1.3 billion a year compared to about £1.7 billion for the domestic rights.

Every club has historically received an equal share of the overseas rights but this is set to change after the ‘Big Six’ (Spurs, Arsenal, Chelsea, Liverpool, Manchester United and City) threatened to join a European SuperLeague unless they receive more money from this source in future years.

Many fans will see this as fair because overseas viewers are more likely to tune into matches featuring the Big Six but the relatively democratic way that TV money is distributed in the Premier League.

Broadcast income represents over 88% of Bournemouth’s total and shows just how essential continued existence in the Premier League is to the club.

Lower broadcast income was a result of Bournemouth finishing three places lower in the table than in 2016/17 (each position is worth an additional £1.9 million) and two fewer live TV appearances (each is worth about £1 million).

Earnings from commercial sponsors increased by 45% to over £10 million for Bournemouth but this was still the lowest in the division as the constraints of operating from such a small stadium reduce opportunities to generate money from this area.

Sponsor and commercial income include things such as retail sales, so a move to a new stadium would allow Bournemouth to address this issue.

A club such as Bournemouth has to be realistic in terms of attracting commercial partners as it does not have the global fanbase of the Big Six but a longer period in the Premier League and the attractive football it plays will increase its popularity with these providers of money.

Costs

The main costs for clubs are those relating to players, in the form of wages and transfer fee amortisation.

Having a 42% increase in wages when income decreased appears surprising, but the main players recruited came from Premier League clubs on large salaries.

Unlike the previous season, where Bournemouth lost Matt Ritchie to Newcastle due to a better wage offer despite being in a lower division, existing squad members were offered substantially improved terms of their deals.

Nevertheless, to see any established business’s wage costs rise by 738% in five years in astounding and a testament to the pulling power of the Premier League in attracting viewers.

Despite joining the £100 million a year wage bill club Bournemouth’s average weekly wage (and we fully accept that these are rough and ready figures) of £49,000 a week is slightly below the Premier League average.

Ensuring that Bournemouth’s best players continue to play for the club comes as a price and the club paid out £76 in wages last season for every £100 of income, above UEFA’s recommended benchmark of 70%.

Reversing this upward trend is important if the club wants to break even, although there’s no sign that owner Maxim Demin is concerned about the wage costs and compared to the years before the club joined the Premier League the figures are low.

Being second only to Everton, who spent money wildly on players in 2017/18 in the wage control table is a cause for concern although Bournemouth are not alone in being above the 70% UEFA danger sign.

It is not just players who have benefitted from the generosity of the owner, the highest paid director saw their income rise by 8% to £1,356,000, which puts the club into the top half of the table by Premier League standards.

Rather than show the full transfer fee of a player in the year he signs as a single expense that year, football clubs use an accounting method called amortisation.

Dividing the transfer fee cost over the contract length gives the annual amortisation charge, so when Bournemouth signed Nathan Ake from Chelsea for £20 million on a five year contract this works out as an annual amortisation cost of £4 million (£20m/5).

Premier League clubs spend a lot of money on players and this is reflected in high amortisation charges as evidenced by Bournemouth’s total increasing from £1m when in League One to £27m in the EPL.

If the cost of player purchases is spread over the life of a contract you might intuitively expect similar from player sales, but this is not the case.

Large profits on player disposals arise when they are sold because this is calculated as the sale price less the accounting value (cost less total amortisation) and all of this sum is shown in the year of sale.

Over a period of years profits on sales even out but they can be very volatile in a single season, often dependent on whether the player was sold a few days before or after the club year end.

The strategy of Bournemouth appears to be one of trying to hold onto their players and this has resulted in relatively modest profits and losses on disposals in recent years.

The large profit in 2015/16 relates to Matt Ritchie who was sold in July 2016 and as Bournemouth used to have a 31 July year end this appeared in the 2015/16 accounts.

In addition to profits on player sales Bournemouth made over £5 million from loan fees in respect of players given to other clubs.

Clubs with significant borrowings such as Bournemouth may have significant finance costs but all of the sums lent are from the owners and are interest free.

Profits and Losses

Profit, if you ask the right accountant, is what you want it to be, and there are as many types of profit as there are types of Brexit.

A simple definition is that profit is income less costs, and if this figure is negative it is called a loss.

The headline figure for Bournemouth was a loss of £9.1 million before taking into consideration finance costs and tax. Taking such a profit figure as a measure of success is okay, but it includes some items which are volatile (such as player sales gains, redundancy costs and player write-downs).

Stripping out the above distortions gives something called normalised EBIT (earnings before interest and tax) profit, which is a better measure of profits generated by day to day activities excluding the non-recurring transactions.

Bournemouth’s EBIT is lower than the operating profit for two reasons. There was a small profit on player sales and income of £2.9 million due to the EFL reducing the FFP fine relating to 2014/15 from £7.6m to £4.5m. Bournemouth says this is due to the EFL agreeing that ‘there was no wrong doing by the club’ but surely if this is the case then the fine would have been wiped out altogether?

The club’s share of Richard Scudamore’s leaving present from the EPL is also shown as a non-recurring fee, which seems a bit strange as this is being paid over three years and there is no guarantee that Bournemouth will be in this division for all of them.

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Bournemouth’s EBIT losses worked out at £240,000 a week in 2017/18 and they are modest by Premier League standards.

If non-cash costs such as player amortisation are stripped out, the position however improves, and Bournemouth have an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) profit of £15 million.

EBITDA is an important profit measure as it is the closest to a ‘cash’ profit that analysts use to assess a business and shows how much the club has to invest in player acquisitions from its day to day activities. Bournemouth were failing to break even in the lower leagues using this measure but since promotion have generated £60 million to use in player trading.

Player trading:

Bournemouth had a significant 2017/18 in terms of player purchases as Ake and Begovic were the main recruits, but not too much should be read into 2016/17 as the finances ran from 1 August 2016 to 30 June 2017 and so did not include the traditionally busy transfer month of July.

At 30 June 2018 the total squad cost was £126 million which is far lower than their market value.

Summary of figures

Compared to their peer group, Bournemouth’s spending is very modest.

Funding the club

Clubs usually have a choice between third party loans (which attract interest payments) owner loans (which may or may not charge interest) and shares (which occasionally pay dividends).

In the case of Bournemouth, the club have focussed on owner loans. Bournemouth borrowed a net £3 million in the year and at 30 June 2018 owed Maxim Demin controlled AFCB Enterprises in the British Virgin Islands tax haven’t £46 million and the American Peak6 Football Holdings a further £24 million.

Since the year end Peak6 have sold their investment to Maxim Demin.

Conclusion

Bournemouth continue to defy the odds in terms of reasonable finishes in the Premier League, an attractive style of play and developing good young players.

The level of investment in the squad in 2017/18, especially in terms of player wages, is not sustainable at the present rate of growth and could result in a breach of FFP rules.

An overreliance on broadcast income is only a genuine problem if the club is relegated and there appears to be little chance of that happening provided the club holds onto its best players.

Bournemouth 2016/17 and FFP Fine: Every Breath You Take

Introduction:

Bournemouth have just agreed a fine of £4.75 million with the English Football League in relation to a breach of FFP rules, a couple of years after initially showing an expected fine of £7.615million, so we thought we’d take a more detailed look at how this arose and the state of the Cherries’ finances.

Overview

Income £136.5 million for 11 months to 30 June 2017 (2016 £87.9 million for year to 31 July 2016)

Proportion of income from broadcasting 91% (2016 85%)

Wages £71.5 million (£59.6m)

Profit before player sales £15.2million (loss £6.1m)

Highest paid director £1,226,000 (£1,074,000)

Player signings £9.3 million (£69.8m)

League position 9th (16th)

Income

For reasons best known to themselves, Bournemouth chose to reduce their accounting period to 11 months. Lots of clubs mess around doing similar issues (Manchester City, for example, had 13 months for 2016/17). It makes our job a wee bit harder, but we will try and compare on a twelve month basis when calculating percentages.

Clubs generate income from three main sources, broadcasting, matchday and commercial. Bournemouth, constrained by the 11,000 capacity of their stadium, are more reliant than most clubs on one source.

Broadcasting income:

Bournemouth benefited from a record finish in the Premier League of 9th, compared to 16th the previous season. This earned them an extra £13.3million in prize money to £124.2 million, as the TV riches are partially split on final league position. In 2017/18 they ‘only’ earned £111.2 million as they finished 12th (and appeared on TV less often too).

Bournemouth also benefitted from the first year of a new three-year domestic broadcast deal from BT and Sky, which increased the total money earned by the English Premier League (EPL) by about £700 million.

The big gap between the ‘Big Six’ clubs (although this season joined by Leicester) and the rest is because in addition to the broadcast money from EPL participation, they also earn money from UEFA tournaments. Leicester pocketed £72 million from their progress in the Champions League.

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The combination of a higher league finish, higher overall broadcasting rights and a small stadium meant that Bournemouth became the first team in the history of the Premier League to earn more than 90% of their income from this source, with £90.99 in every £100 coming from broadcasting.

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Matchday Income

Matchday income is number of tickets sold per match x average ticket price. Here Bournemouth are at a disadvantage.

Average attendances for 2016/17 were 11,182, effectively identical to the previous season. Whilst every match was a sellout, the capacity of the Vitality Stadium (Dean Court to you and me) of 11,360 meant the club was always going to struggle to compete against other clubs in this regard.

It will therefore come as no surprise that AFCB had the lowest matchday income of any club in the division.

Matchday income generated £605.6 million for Premier League clubs in 2016/17, but Bournemouth’s share was only 0.85% of the total.

Bournemouth’s matchday income actually fell in 2016/17 by 4.2%, mainly due to the cap on ticket prices for away fans, and less progress in cup competitions.

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Bournemouth generated £456 per fan from matchday income in 2016/17, about mid-table, and this works out as just over £22 per match to watch the team, which is considerably lower than some of the ‘glamour’ clubs in the division who have a far larger proportion of prawn sandwich eating fans.

Commercial income.

Whilst commercial income fell by 10%, this was mainly due to the accounting period being only 11 months long compared to 12 the previous season.

The club have realistically gone as far as they can go from this income source until they move to new premises.

The club have the second lowest level of income from this source, only beating that of the Premier League’s most boring club (from a sponsor perspective), Watford.

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Such is the dominance of broadcast income though, that despite being in the relegation places for matchday and commercial revenues, Bournemouth had the 13th highest overall income in the division. They may even have overtaken West Brom had they produced a twelve month set of accounts.

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A look at the club’s income for 2014/15, the year they were subject to the EFL FFP fine, shows income of only £12.9 million for the season, which was the sixth lowest in the division.

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Costs

The main costs for any football club are player related, and are split between wages and amortisation.

Bournemouth’s wage bill for 2016/17 was £71.5 million for 11 months, which works out as a 22% increase on an annualised basis.

Bournemouth’s wages on an annualised basis are still some of the lowest in the division, which reflects the club’s policy of not being held to ransom by player demands, as evidenced by Matt Ritchie being allowed to leave to go to Championship Newcastle, who offered him a shedload more money.

The club presently have good control over wages, paying out just £52.42 in wages for every £100 of income, which is lower than the Premier League average.

The issue in relation to the EFL fine arose when the club was in the Championship in 2014/15, with a £30.4 million wage bill. This meant that Bournemouth spent £237 in wages for every £100 in income, which on the face of things blew a whole in the club’s FFP compliance.

This was a far higher proportion of income than any other club, although the Championship is a notoriously unruly division, with the wage bill regularly equalling or exceeding total income.

On an actual wage bill basis, AFCB were not at the top of the table, as clubs with parachute payments from the Premier League were able to bear larger contracts.

Bournemouth did however have the largest wage bill for clubs not in receipt of parachute payments, just ahead of Forest (who also had FFP sanctions as a result). Bournemouth did not break out how much of their wage bill that season was in respect of promotion bonuses to staff. This is important for FFP purposes, as promotion costs are excluded.

Looking at other clubs who have gone up in recent years though, we would expect the promotion costs to be in the region of £9 million, which brings Bournemouth’s recurring/sustainable wage bill down to about £21 million. This is still considerably higher than the club’s income, but not excessive by Championship standards.

The executives of Bournemouth have also done well as a result of promotion.

Compared to where they were in League One, the highest paid director at the club has had a 542% pay rise in the last five years…which is nice.

The other player related cost is amortisation. This arises when a club pays a transfer fee, which is then spread over the contract length in the profit and loss account. Therefore when Bournemouth signed Benik Afobe from Wolves in January 2016 for £10 million on a 4½ year contract, this works out as an annual amortisation cost of £2.22 million a year (£10m/4.5).

Bournemouth’s amortisation expense has increased as you would expect since the club moved from League 1 to the Premier League since 2013.

In the context of the Premier League, Bournemouth are where you would expect them to be, even adjusting for their 11 month accounting period. Relative low spenders along with a spine of a team from the lower leagues means they are close to the bottom of the table.

One thing that is mysterious in relation to Bournemouth’s accounts is the heading ‘other costs’. This increased by

This has increased by nearly 50% compared to the previous season in the Premier League, but the club give no clue as to what makes up this figure.

Profits

Profits are income less costs. There are a variety of different means of determining profits, many of which are tainted by the dark arts of accountancy.

The club announced in the strategic report an operating profit of £16.1 million, compared to £5 million the previous season. Operating profit is total income less total costs of running the club except loan interest and tax.

The only problem with such a figure is it contains some items which are either volatile from one year to another (such as gains on player sales) and others which are one-offs (such as FFP fines).

We therefore prefer to use something called normalised EBIT (Earnings Before Interest and Tax) which adjusts for the above items.

This profit measure shows that Bournemouth had their most successful year in the club’s history in 2016/17, mainly on the back of the increased broadcasting revenues. It also highlights the issue that has occupied those who snipe at the club in terms of the losses made in 2014/15 when the club was promoted to the Premier League and the FFP fine arose.

FFP profit is however a law unto itself. In 2014/15 clubs were allowed a maximum FFP loss of £6 million. Some costs are excluded from FFP, such as infrastructure (£2m in 2015), promotion bonuses (estimated £9m), academy (£2m est.) and community schemes (£0.6m est).

If these costs are added back to the operating loss then we arrive at the following estimate of an FFP loss.

Under EFL rules clubs promoted are subject to an FFP fine (as a transfer embargo is not feasible when clubs move to the EPL), which is calculated on a sliding scale as follows:

This gives an FFP fine estimate which is in within a gnat’s testicle difference from the figure shown in the Bournemouth accounts for 2014/15 of £7.615 million.

To give Bournemouth credit the club held its hand up, admitted that it had exceeded the allowable profits and set aside a sum (but did not appear to pay) the sum in the accounts.

Enter two flies in the ointment, both Queen’s Park Rangers (from 2013/14) and Leicester City (2014/15) were also subject to EFL potential fines when promoted. They took a different approach to Bournemouth and instead tried to claim that FFP was illegal and therefore fines unenforceable. Bournemouth therefore awaited how these two clubs were dealt with before handing over the money, and to an extent that seems a fair approach to take.

The fact that they knew the FFP rules whilst members of the Championship appeared to have bypassed the clubs’ respective owners. QPR have a potential fine of about £40 million from the season in which their income was £38 million and wages were £73 million, resulting in a loss of £65 million. Since then their lawyers, esteemed London firm Cockwomble, Wankpuffin and Co, have used every wriggling, prevaricating and filibustering scheme known to man to try to weasel out of paying the sum due.

Our snouts close to the EFL advise that the League became so paranoid about the constant stream of queries, points of order and delaying tactics from Cockwomble, Wankpuffin and Co that whenever QPR was discussed at EFL meetings it was agreed that no notes would be included in the minutes of the meetings to try to reduce the ambulance chasers from finding yet another excuse to push back judgement day. Even though the case went to arbitration in 2017 and QPR lost, there has been an appeal to further drag out the outcome (whilst of course the lawyers have their meters still ticking, and Range Rover Sport brochures are looking decidedly thumbed).

Leicester agreed to a fine of £3.1 million in February this year, after their lawyers Sue, Grabbit and Runne advised the club to reach a settlement. It is probably on the basis of the calculations and appeal used by Leicester that Bournemouth have managed to have their FFP fine reduced from £7.6m to £4.8m.

Our view here at Price of Football towers has been unchanged since FFP was first introduced. It discriminates against smaller clubs (such as Bournemouth) who have less ground capacity than others and also against all clubs that are not in receipt of parachute payments.

FFP also encourages clubs to get creative with their accounting policies (see our blog on Derby County if you fancy the tedious details) as compliant auditors with the spines of jellyfish and legal firms (and yes we know there are good ones too) with the moral compass of Gary Glitter in a flooded cave full of Thai schoolboys see FFP as an opportunity to fill their boots with fees.

As such we think that the rules are a waste of space in the Championship, where EBIT losses in 2016/17 were a staggering £392,000,000…and that is with FFP in place.

Player Trading

Rant over, and back to The Cherries. Bournemouth have been relatively cautious in the transfer market compared to their peers, but still spent record levels by the club’s own standards.

The club did have a spending spree in the first season in the Premier League, but care should be taken when looking at the 2016/17 figures, as by reducing the club’s year end from 31st July to 30th June to “align internal financial reporting dates with the financial year”, which is management-speak for complete and utter bollocks, it also meant that player signed in July 2017, which is a major period in the transfer window, were effectively excluded from the numbers.

In the small print to the accounts it does reveal that the club spent a further £39.8 million on players before the accounts were signed off.

In the year they were promoted, transfer spending of £13.2 million was not excessive in a division that spent a total of £157 million on players that season.

The only slight concern is that a lot of the transfer purchases appear to be on instalments, which might cause problems should the club fall out of the Premier League. At 30 June 2017 the club owed £22.8 million for transfers, and remember this is before they spent money the following month in the window.

Ownership

AFCB’s owner, Maxim Demin, remains a mystery. He’s certainly put his hand in his pocket and loaned the club about £35 million. Demin’s ownership is via a company called A.F.C.B Enterprises in the British Virgin Islands (nothing to do with Virgin boss Richard Branson, or, for thinking about, the country’s most well known non-virgin connected to football, Katie Price).

The club’s other shareholder, US based Peak6 Football Holdings are owed a further £19 million. Both these loans are interest free, unlike those of the battery powered device salesmen at West Ham, who have charged the club over £14 million in interest since they took over the club.

Demin’s motives are unclear, but whilst he continues to support the club, and is keen to allow it to expand via a stadium expansion, fans probably don’t care too much.

Conclusion

Bournemouth generate a lot of resentment, and we think that most of it is fairly harsh. Thunderbird pilot lookalike manager Eddie Howe is fairly inoffensive, if a bit of a media darling, but the claims that the club somehow cheated their way to promotion in 2014/15 are excessive and unwarranted.

They were fairly open about their ambitions, and spent money well, unlike the approach taken by Aston Villa in 2016/17, who laid a trail of £50 notes to anyone who had a Panini Card collection and wanted to wear a claret and blue shirt, spunking a quite ridiculous £88 million on players that season.

Bournemouth were promoted to the Premier League because they played the best football in the division that season. Spending money a bit excessively by FFP purposes certainly helped their recruitment, but it didn’t give them a competitive advantage over many ‘bigger’ clubs in the division and those in receipt of parachute payments, it merely reduced the advantage those clubs had over The Cherries.

The biggest deceipt of FFP is that it makes fans think it is something to do with ‘fairness’ and that compliance with the rules is somehow egalitarian and honourable, but in reality its aim, especially at the higher levels of football, is there to lock in the differential between existing large and small clubs.