Chelsea 2017/18: The Lion Sleeps Tonight

Introduction

…so where do the electrified fences go Ken?

Chelsea had an up and down season in 2017/18, winning the FA Cup but not qualifying for the Champions League.

The club’s financial structure is complicated, Chelsea Football Club Limited is owned by Chelsea FC plc, which is owned by Fordstam Limited, which is funded by Lindeza Worldwide Limited (based in the British Virgin Islands) and Camberley Investments Limited (based in Middlesex), which are owned by Roman Abramovich.

This analysis looks at Chelsea FC plc, mainly because Fordstam Limited tends to publish its accounts a few months later.

Key Figures

Turnover £443 million (up 23%)

Wages £244 million (up 11%)

Pre player sale losses £41 million (down 23%)

Player sale profits £113 million (up 63%)

Player signings £290 million (up 174%)

Income

Chelsea, like all clubs, have three main income sources, matchday, broadcasting and commercial.

Matchday income rose by 13%, mainly driven by Champions League participation increasing the number of fixtures at Stamford Bridge compared to 2016/17 where the club finished 10th and so didn’t play in a UEFA competition.

Compared to other Premier League clubs, Chelsea’s matchday income is impressive, but there is a significant gap to Arsenal and Manchester United above them. Liverpool, who were Champions League finalists and had the benefits of a full year at the increased capacity Anfield, should overtake Chelsea when their accounts are released. Spurs, if when they move into the new stadium which has a capacity of 60,000 and high ticket prices, are likely to also leapfrog Chelsea.

The decision of Roman Abramovich to cancel the move to a new stadium puts an effective cap on Chelsea’s ability to generate money from matchday sales, although the club is very good at extracting cash from the 41,000 who attend there at present.

Chelsea’s broadcast income rose by over a quarter, despite the club finishing fifth compared to being Champions the previous season and so earning less Premier League TV prize money.

The reason for this is that by being in the Champions League Chelsea picked up €65 million in prize money from UEFA, partly due to making it to the last 16 and partly due to BT paying a huge sum for the broadcasting rights, a large portion of which then goes to clubs from BT’s ‘domestic’ leagues in England and Scotland. This, thanks to Brexit uncertainty decreasing the value of sterling, was worth about £59 million to Chelsea.

Chelsea had the second highest broadcast income, although they are likely to drop to third when Liverpool publish their figures, which will include €81 million for reaching the Champions League final.

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Chelsea’s commercial income rose by 24% as the new kit contract with Nike, worth an estimated £60m a year, came into fruition early after the club had previously bought adidas out of their contract.

Whilst Chelsea’s growth here is impressive, they are still some way around Manchester United, which is in a league of its own when attaching the badge to sponsor products and City have unusually lucrative deals with Middle East partners. Chelsea are a big enough club to be able to have separate sponsorship deals for both first team and training kit and this too will help in terms of their commercial growth.

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Broadcast income contributes over half the total in the Premier League, which is why the clubs are so compliant when kick off times are rearranged for the benefit of the cameras

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Chelsea have a fairly even split of income between the three segments, but difficult to see how matchday can grow whilst located at Stamford Bridge. The overall growth in income is impressive compared to other clubs who have reported their results to date.

Costs

The most significant costs for a club are in relation to player wages and transfer fees and in both respects Chelsea saw significant increases in 2018.

The wage bill rose 11% in 2018. This would have been partly due to paying additional sums to players and management for qualifying for the Champions League, the failure to do so the previous season resulting in the wage total falling for the first time since 2012. The A screenshot of a cell phone Description automatically generated

The good news from Chelsea’s perspective is that the wage rise was lower than that of income, which is unlike what was experienced by most other Premier League clubs.

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Compared to the remainder of the ‘Big Six’ Chelsea are where most would expect to see them, trailing the two Manchester clubs but ahead of Arsenal (and the gap is likely to grow given their lack of CL exposure this season) and Liverpool, who may shortly replace Chelsea as the 3rd highest wage payers due to significant investment in their squad and improved contracts for star players. Spurs having a lower wage bill than Everton may surprise many, especially Toffees fans.

Amortisation is how clubs deal with transfer fees in the accounts. The fee paid is spread over the contract length, so when Chelsea signed Morata for £60 million on a five-year contract in 2017, the amortisation cost is £12m a year (£60m/5). By dealing with transfers like this is helps to reduce volatility in the accounts from having one big transfer window followed by a couple of small ones and shows the medium term impact of a club’s transfer policy as the total amortisation cost applies to the whole squad (excluding players from the academy and Bosman signings who cost nothing).

One figure that is very odd in relation to Chelsea is that of directors’ pay. This has varied from year to year considerably.

Chelsea’s amortisation cost increased by over 40%, reflecting the impact of signing Morata, Bakayoko, Drinkwater, Rudiger, Zappacosta, Emerson, Giroud, Barkley and some other bench warmers and Carabou Cup regulars.

This large investment meant that Chelsea now have the second highest amortisation cost in the Premier League, more than twice that of Liverpool and nearly three times the figure for Spurs.

The amortisation cost, combined with wages, meant that it was costing Chelsea £83 for every £100 of income last season in overall player costs, which didn’t leave a huge amount to pay the other costs of running the club, which you would think would have to be under tight control…but if so would have thought incorrectly.

Chelsea’s ‘other’ costs include everything from electricity, transport and matchday expenses. These are now costing the club over £2 million a week and seem to be rising rapidly every year, with the exception of 2016 when the club only finished 10th in the Premier League.

One cost that is not a burden to Chelsea is finance costs. Other clubs, such as Manchester United and West Ham, pay interest to their banks and owners respectfully, but Roman Abramovich has never taken money out of the club in this regard.

Profits

There are as many types of profit as there are Pringles flavours. In the Chelsea press release the focus was on profit after tax of £62 million. This is correct and brings the total losses after tax under Roman Abramovich to ‘just’ £677 million, which will buy you a two up two down in Hammersmith these days.

A look at the above profit and loss figures shows there has been much volatility in relation to Chelsea’s profits and losses from year to year. This is mainly due to one off transactions which distort the numbers, such as profits on player sales, the cost of sacking managers and legal disputes and settlements, such as last year spending £6m on buying back retail and licencing rights from the rights holders in 2018.

Most analysts ignore finance, tax and one off costs to create something called EBIT, which is the club’s underlying profit, and for Chelsea in 2018 this converted the profit of £66 million into a loss of £41 million.

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The EBIT figure shows that running Chelsea is a frighteningly expensive business and therefore the club needs to generate income from an additional source, and that source if player sales.

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Chelsea made a profit of £113 million last season from player sales (Costa, Matic, Ake, Cuadrado, Begovic etc) which helped to offset the day to day losses. This policy is loosely connected to their approach of harvesting young players and then loaning them out to other clubs in the hope of some of them having significant values that can generate money in future years. This policy is presently under UEFA’s scrutiny as it is seen as being anti competitive.

If player transfer sales are to be excluded from profit, then there is a case for excluding transfer costs too, which leads to another form of profit, called EBITDA. This is popular with analysts (try reading the Financial Times Lex column, it is a regular there) as it is a trading cash profit equivalent.

The good news for Chelsea is that their EBITDA is a positive figure and a high one at that too, due to Chelsea’s big amortisation cost.

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The EBITDA profit at £94 million shows the club is generating nearly £2 million a week in terms of cash, which can then be used to invest in player transfers.

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All clubs in the Premier League generate a positive EBITDA, but some are juggernauts and others also rans. Chelsea are certainly generating cash, but trail some way behind most of their peer group.

Player Trading

As has already been mentioned, Chelsea bought a lot of players in 2017/18, most can be filed under ‘meh’, but the fees paid were a record for the club.

The general perception is that Chelsea have paid over the odds for many players last season, and this may be linked to the club’s dislike of committing itself to add on fees for international caps, number of appearances and so on. As a consequence the sums paid tend to have all of the above factored into the initial price.

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Chelsea may have to pay an extra £4.7 million for transfers but this pales into insignificance compared to clubs such as Manchester United who potentially have a £66.4 million cost.

Spending nearly £300 million on players should improve the quality of the squad, but it’s difficult to conclude that the acquisitions have enhanced Chelsea, although Everton fans may be of the same opinion given that they outspent Manchester United last season (and signed Wayne Rooney on a Bosman) for relatively little improvement on the pitch.

The above figures show that clubs with a scattergun approach to signings don’t tend to get value for money.

In a somewhat pithy footnote to the accounts Chelsea did spend a further £125 million in summer 2018 on players, it’s unclear whether this sum includes the payoff to Conte, estimated at £9 million, which takes the amount Abramovich has spent on managerial changes under his reign to just over £80 million.

Funding

Clubs get funding from three sources, bank loans, owner loans (which may or may not be interest bearing) and shares issued to investors.

Chelsea are funded by Fordstam Limited, Abramovich’s personal company, which hasn’t yet published its results, although the Chelsea press release did say this company made a profit of £24.9 million last year.

In the Chelsea cash flow statement it revealed that the club borrowed a net £37 million from Fordstam in 2017/18. Whilst the club made a profit in the year, this was insufficient to pay for the net player investment of £150 million, which was why the club had to go cap in hand to the owner.

How much is owed to Abramovich in total will be revealed when Fordstam’s accounts are revealed.

Conclusion

For most clubs winning the FA Cup, making the knockout stages of the Champions League and finishing 5th in the Premier League would be a pretty good achievement. In the world of Roman Abramovich this wasn’t good enough and so Conte paid the price.

Record profits of £61 million are unlikely to be repeated in 2019 due to the UEFA Europa League being less lucrative than the Champions League and lower profits on player sales.

The biggest fly in the ointment is Roman Abramovich and his intentions. He has invested a huge amount in the club and clearly has some affection for it, but his lack of appearances at the ground for the last year and the decision to not go ahead with a new stadium leaves Chelsea falling behind the rest of the pack potentially in future years.

In previous seasons he has paid £1m a year for his private box, but the decision to not renew it for 2017/18 will further the whispers that he is looking for an exit route.

Using the Markham Multivariate Model (Google it if you want more details) we value Chelsea presently at about £2.8 billion, but that value is likely to fall if the club cannot maintain the level of profits on player sales and qualify for the Champions League.

Chelsea: Suffer Little Childreni

Introduction: Oh Manchester, so much to answer for…

Chelsea announced their financial results recently, and since then manager Antonio Conte has been muttering about not being able to compete in the football transfer and wages markets with the two big Manchester clubs. Is this true, and what are the state of Chelsea’s finances? Time to take a peek.

On the face of it, being Premier League Champions in 2017, progress through the group stages of the Champions League, semi-finalists in the League Cup and presently in the FA Cup, you would think there would be plenty to cheer about.

Income

Clubs have three sources of income. In 2016/17 Chelsea’s total income rose by 9.8% to £361 million, which is impressive given the club did not have the benefit of qualifying for European competition. As always, the devil is in the detail.

The increase in income of £32 million is behind that of both United (£66 million) and City (£82 million). Even Arsenal managed an increase of £70 million. So, it appears that Chelsea are struggling to keep up with the other ‘big’ clubs (Liverpool have yet to announce their results, and Spurs, who have not won the title in over 50 years, don’t really compete with the clubs already mentioned financially).

If we extend this growth comparisons over five years, Conte’s comments appear to have greater validity.

Clubs generate income from three sources, matchday, broadcast and commercial, so how have Chelsea performed?

Matchday

After four years of static matchday income, due to Stamford Bridge being at capacity every match and no price increases, there was a 9.4% fall in 2016/17. This was due to a lack of European competition, which usually would generate a minimum of three home matches.

At £65m, Chelsea’s matchday income is the third highest in the Premier League, but may have been overtaken by Liverpool (who had £62m in 2016). The gap between Chelsea and the two clubs above them shows the urgent need for a new stadium with increased capacity. If the rumours are true and the stadium will have 28% of seats sold to the prawn sandwich brigade this could catapult Chelsea easily into the £100 million a season club for this type of income.

Broadcasting

Broadcasting income was up 14% and tops £150m for the first time. This is due to the impact of the new domestic TV deal with BT/Sky. Chelsea’s UEFA TV monies were €69 million the previous season when the club was eliminated in the last 16. They should make at least that sum this season, as they earn extra due to being English Champions, although, due to the complicated formula used to determine UEFA payouts, will be hoping that the other English clubs are knocked out of the competition as quickly as possible.

The failure to qualify for Europe in 2016/17 put Chelsea at a £30-40 million disadvantage, enough to cover Alexei Sanchez’s wages and amortisation cost in the profit and loss account for a year.

Commercial

Chelsea’s commercial income grew by a solid 14% to £133 million. This seems good enough, but it pales compared to the peer group mentioned by Conte.

Whilst Chelsea have done well to increase their income by over £50 million in five years, they started off far behind United and City, and have fallen further behind. All clubs struggle to compete with United for sponsor appeal.

Intuitively Chelsea might expect their commercial income to be on a par with that of City. The reason why it is not normally elicits a call to the North London branch of The Samaritans from a man with a French accent, muttering something about ‘financial doping’.

This issue has implications for financial fair play too, as clubs are limited a £7 million increase in wages each year, plus any money generated by matchday, commercial income and gains on player sales.

Chelsea managed to extend their sponsorship income in 2016/17 by finding a separate sponsor for their training kit, a trick first spotted by Manchester United a few seasons ago.

The club may have had penalty clauses activated by some sponsors, and will have lost out in terms of perimeter advertising, due to the lack of European football.

Costs

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

Wage costs fell for Chelsea in 2016/17. The club will have had to pay out win bonuses for lifting the Premier League trophy, but against that there will have been no match fees for Champions League fixtures, and some big earners (such as Mourinho J.) were no longer on the payroll.

Wage control in most industries is usually applauded, but football is not most industries. In the rarefied market for elite players, wages usually rise every time there is a new TV deal, as the Alan Sugar ‘prune juice’ impact is applied, Chelsea’s figures are at odds with this viewpoint.

Other clubs have increased their wages over the last five years. Chelsea were on a par with both Manchester United and Arsenal five years ago, but United have spent big, as shown the sums they have paid to the likes of Ibrahomovic, Pogba and Sanchez. United’s wage bill has increased by nearly £80 million over this period compared to just £43 million for Chelsea.

The other cost is that of amortisation, which is how a club expenses players signed in the profit and loss account. When N’Golo Kante signed for Chelsea in summer 2016 from Leicester for £30 million on a five-year contract, this works out as an amortisation cost of £6 million (30/5) per year. Chelsea’s total amortisation charge for the whole squad in 2016/17 was just under £90 million, an increase of 25% on the previous season. It’s high by Premier League standards (the average was £35 million in 2016), but significantly lower than the Manchester clubs.

Adding both wages and amortisation together gives the total football player cost for the season.

United and City are neck and neck, Chelsea are about £75 million a season behind.

One common metric used to look at the effectiveness of player cost control is to compare wages (or wages and amortisation) as a percentage of total income. The lower the percentage,  the more effective the control, and the greater the scope for future investment in players.

The above reveal that Chelsea presently have the poorest wage control of its peer group, and Manchester United, as resented as they are by fans of other clubs, run the tightest ship. If you factor in what United have paid to banks over the years in interest payments though, it’s advantage over the other clubs is eroded.

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.

Chelsea in their press release stated a profit of £15.3 million for 2016/17. This is however after considering gains on player disposals, including that of Oscar. These gains totalled £69.2 million.

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, Chelsea’s EBIT (which is ‘recurring’ profit before interest and tax) was a loss of £53.4 million, slightly higher than £46.2 million the previous season.

Adding back the non-cash expenses in the form of depreciation and amortisation gives an EBITDA profit of £46 million, which is over 30% higher that the previous year’s £35.1m.

Comparing to the peer group, United made an EBITDA profit of £200m, City £105 million and Arsenal £145m, reflecting that Chelsea are weaker than the other elite clubs in this regard.

All the elite clubs are well within FFP limits.

Player activity

Chelsea spent over £100 million on players in 2016/17, including Kante, Luiz, Batshuayi and Alonso. This is a major investment but isn’t keeping up with the noisy Mancunian (or as my mum likes to call them, Manchurian) neighbours at the top of the Premier League, it was even less than Arsenal spent in the same season.

In terms of disposals, Chelsea sold players for £98 million, to give a net spend for 2016/17 of £8m.

Hidden in the footnotes to the Chelsea 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 the club must pay to players and former clubs if certain achievements (appearances, trophies, international caps etc.) are met. This was £3 million and compares to £111 million for Manchester City and £45 million for United at the end of June 2017.

This suggests that Chelsea have a different approach to the two Manchester clubs when signing players, aiming for a set fee with little based on future performance.

Chelsea had a spending spree in Summer 2017, mainly on signing Morata, Bakayoko, Drinkwater, Rudiger and Zappacosta for £212 million, which suggests that Antonio Conte’s comments were perhaps wide of the mark. A number of players left the club too, bringing in £63 million.

Summary

Roman Abramovic these days seems to want to make Chelsea break even financially, but that will be insufficient if he also wants to win trophies such as the Premier and Champions League.

The proposed stadium is essential if Chelsea are going to compete in terms of income against the two Manchester clubs, but its going to be a few years before the constraints of playing at Stamford Bridge are overcome.

Conte’s comments (which are echoed to a degree by Arsene Wenger) do appear valid. Chelsea cannot compete with the two Manchester clubs as they cannot match them in terms of income, which in terms gives the ability to pay wages and sign players…unless Abramovic decides to pursue a more expansive strategy. He’s already sunk over a billion into the club, but it may take almost as much again to fund a new stadium.

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