QPR FFP Fine: Everything Counts in Large Amounts

Imagine someone stealing £170 million from you, and the culprit eventually is fined a tenth of that sum having spent all the money elsewhere. That’s how Derby County and their fans are feeling following the EFL Financial Fair Play verdict against QPR.

On 24 May 2014, in the 90th minute of the Championship play off final against Derby County, (Sir) Bobby Zamora scored the only goal of the game to achieve promotion for Queens Park Rangers.

Had QPR complied with FFP properly, it is highly unlikely that Zamora would have been part of the QPR team, after the club was relegated the previous season from the Premier League, along with the likes of Rob Green, Joey Barton, Nedum Onuoha on big wages from the higher division.

In 2013/14 QPR signed players of the calibre of Charlie Austin, Danny Simpson, Richard Dunne, Gary O’Neill and Matt Phillips, as well as Niko Krancjcar, Ravel Morrison, & Beoit Assou-Ekotto on loan, as Harry Redknapp did what Harry Redknapp does best with a large amount of someone else’s money.

That season QPR’s wage bill was £195 for every £100 of income the club generated, even though the club earned over £28 million in parachute payments, having been relegated in 2012/13.

The wage bill of £75.4 million was only £3m less than that of the previous season in the Premier League. It works out as an average wage of £39,000 a week. The average total wage bill that season for the other 23 clubs in the Championship was £19 million, a quarter of that of QPR.

QPR’s accounts for 2013/14, published in November 2014, revealed that QPR Holdings Ltd made an operating loss (which is income less the day to day costs of running the club) of over £65 million, which works out at £178,000 a day, whilst in the Championship for 2013/14.

So what about Financial Fair Play (FFP), the rules which were supposed to prevent clubs from spending too much money on players and wages?

Under FFP rules for that season the maximum loss allowed by a Championship club was £3 million, or £8 million if the owners put made up the difference. Clubs that broke the rules were either subject to a transfer embargo (which has impacted the likes of Leeds United, Blackburn Rovers and Nottingham Forest in that division) or if promoted to the Premier League an FFP Fine/Tax is payable, with the proceeds going to charity.

Under EFL rules the fine was based on a sliding scale until losses exceeded £10 million above the FFP limit (which works out as a £6.7 million fine) and then 100% of the losses above this amount

Under these rules we estimate the QPR FFP fine would have been something along the following

Operating loss (65.2)
Add back allowable expenses
Promotion bonuses (estimated) 10.0
Infrastructure costs 1.3
Academy/community (estimated) 4.0
FFP loss (49.9)

This works out as an estimated fine of about £46 million.

The QPR approach was initially one of creative accounting. The owners wrote off £60 million of debt due to them by the club, and this was offset against the losses in the profit and loss account, meaning that in the eyes of the club the loss was only £9 million and that there was effectively no FFP tax to pay.

We’ve argued since day one of FFP that for most rules there are loopholes, accountants and lawyers are well practiced at finding them, and this was phase one of QPR owners’ attempt to avoid any penalties.

This approach was presumably rejected by the EFL, as it makes a mockery of the rules, which were aimed to preventing owners trying to buy promotion through their personal wealth.

QPR’s owners include Tony Fernandes (estimated wealth $745 million), Ruben Gnagalingam ($800 million)  and Lakshmi Mittal ($18.6 billion) then took a different approach, seemingly taking the view that rules applying to other clubs were beneath them.

There was no reference to FFP in the 2014 accounts, but a year later, hidden away in the footnotes, was a reference to QPR challenging the legality of the FFP rules.

Since then, not a lot has happened, apart from time passing, and the advisors on both sides clocking up huge sums in fees as they argued over the small print.

Dragging out a ruling is a classic ploy, raising petty objections (arguing over what constitutes allowable expenses for FFP purposes, or which of the Tellytubbies would win in a fight*) and requesting further information that they know will take time to produce, with the sole aim of delaying any potential decision, and therefore payment, hoping the other side loses the will to keep on fighting and will settle for a smaller sum.

I have a mate who is a tax accountant in Swansea. If he knows a client is likely to have to pay more tax he writes an appeal letter in Welsh, as he knows there are a relatively few people who speak the language at HMRC, and so it will take a long time to reply, which will drag out the time until payment is made. If a rebate a due, he writes in English at it elicit a speedier response.

Sources close to the events advised PriceOfFootball.com a couple of years agao that a compromise deal was likely, with QPR likely to pay a much reduced fine, and both sides would claim a victory.

Rumours were that at EFL board meetings where the matter was being discussed the members became so nervous that no minutes were kept on the topic, for fear of this being used by the opposition to further find minor points to quibble about (at £1,000 an hour in fees probs).

An independent arbitration panel was created, with both parties seemingly committed to agreeing to the final decision

In October 2017 the arbitration panel published their decision, ruling against QPR and fining them £40 million, who instantly appealed to further delay any cash beng paid over (thus allowing their lawyers and accountants to upgrade from Range Rovers to Maserati brochures), dragging out the process again.

The ruling had consequences for Leicester and Bournemouth too, who had initially piggybacked on QPR’s claim that FFP was illegal. Both clubs settled with the EFL earlier this year and agreed to pay fines of £3.1 million and £4.7 million, less than had been initially forecast.

We now have the final ruling, after a carefully worded press release from EFL, the main points being:

  • QPR have dropped their objection to the previous ruling
  • QPR fined £17 million as an FFP Tax but it being paid in instalments over ten years.
  • QPR have transfer embargo in the January 2019 window
  • QPR pay EFL’s legal costs of £3 million (plus presumably their own costs too).
  • QPR owners convert £21 million of debt into shares.
  • The FFP fine will be excluded from QPR’s losses when calculating the 2018/19 figures.

Is this a fair settlement?

As a result of being promoted, QPR earned £148 million in broadcasting income and parachute payments between 2014/15 and 2017/18. Derby fans will no doubt take the view that this money could have ended up in the coffers of their club had QPR not flouted the rules.

The debts of QPR to the owners were effectively worthless as the club has no means of paying back the owners, so converting one piece of junk paper in the form of debt to another in the form of shares is accounting sleight of hand, no more than that.

The above table shows that prior to the ruling, assuming the club was worth £100 million (which is generous) then the loans due to the owners were last valued at £52 million, meaning their shares were worth £48 million. The total due to the owners if the club was sold would be £100 million.

By converting £22 million of loans into shares, the debt figure falls, and is offset by an increase in the value of the shares. The total value of the owners’ investment is still £100 million.

The aim here is simply to make the headline fine in the media reports appearfar larger than it is in reality. The press release is as best disingenuous , assumes that all football fans are financially illiterate and will swallow the headline figure of 

Charities that could have received £41 million in the FFP tax, (and there has been discussion from QPR fans, rightly, that Grenfell survivors should be top of this list) will now receive £17 million, which, as some will not be received until 2027, is far lower than even this amount in reality.

If, as is rumoured, the £17 million fine is being paid over ten years, and using an imputed interest rate of 7.4% per year (which, according to HSBC, is their small business loan rate), then sticking the figures into a nerd calculator (see below) shows that the cash cost of the fine to QPR is the equivalent of £9.46 million being paid by the club in 2014 as a fine.

The interest rate chosen is by the way far lower than the interest rate which is being charged by QPR owners themselves of 1% a MONTH on some loans , and 2% a MONTH on others.

The comments from Shaun Harvey that ‘the board was conscious that the financial burden placed on the Club was manageable so as not to put its future in doubt’ is best filed under ‘bollocks’.

Tony Fernandes has previously stated that he was committed to the club irrespective of the decision, and he and his partners certainly have the resources to pay the fine and could have put the cash into the club in the form of shares or a loan to do so if they wished.

If you look at QPR’s accounts for recent years, the club borrowed £222 million, mainly from the owners, between 2013-17.

So there would appear to be little reason, apart from sulkiness or a loss of interest in the club, why the owners could not have invested a further £41 million either in shares or interest free loans to allow the correct amount of the fine to be paid.  The claim that by spreading the fine over ten years will allow the club to avoid administraction is yet another smokescreen.

As for the transfer embargo, the club has sufficient notice to accelerate signings by a few months. The terms of the embargo are more on the lines of  one player in and one player out rather than an inability to sign anyone. So this is a light tap on the wrists, along with the rest of the ruling.

Sadly, if you’re a Derby fan, as far as the EFL is concerned, grab your ankles.

For other clubs thinking of showing two fingers to the rules, the EFL has shown as much backbone as a jellyfish.

*Tinky-Winky, anyone who says different is clearly insane.

Derby County: Respectable?

If we have one pet hate here at the Price of Football it’s clubs who announce their results on the club website via a press release, but don’t publish them. Such behaviour usually is accompanied by a greatest hits tour of many impressive increases in some key financial figures, but not all the information is disclosed. The local newspaper writes up the press release in good faith, and the fans swallow the narrative as dictated by the club.

The club relies on everyone then losing interest in the finances (and rightly so, we don’t love our clubs because of their balance sheets after all) and later the accounts are sent to Companies House, but no one shows any interest is them, apart from saddo blog writers.

A textbook example of this is what has happened at Derby County in their financial year ended 30 June 2017.

Their press release showed the results of the club for the year but failed to include that about 100 employees appear to have been transferred to different companies, so the comments on the wage bill, whilst being legally correct, were at best disingenuous, and certainly misleading if you were trying to compare like to like.

What the press release failed to mention was the activities of Derby’s parent company, the snappily named SevCo 5112, which now controls the club’s academy, catering and communications activities via newly created companies.

It’s a bit like me telling the wife I’ve been out for an evening for the lads for a few pints and a curry but omitting to mention the £500 of gambling losses at a local casino and the two lost hours in a cocaine and hooker related orgy.

To make murky matters even murkier, SevCo’s accounts only cover 10 months in 2016/17, instead of a full year. Perfectly legal, and no doubt there’s a logical reason for this to be done, but it muddies the waters further.

Summary of key figures (Derby County Football Club Ltd)

Income £28.7 million (up 29%)

Broadcasting income £7.9 million (up 41%)

Wages £34.6 million (up 4%)…or should it be an annualised £39.8 million, up 12% (Sevco 5112)?

Loss before player sales £23.3 million (down 15%)

Player purchases £21.2 million

Player sales £23.2 million

Borrowings £143.7 million (SevCo)

Income

In the Championship the amount of total income is effectively split between those clubs that do and do not receive parachute payments.

Derby’s overall income was the third highest for a non-parachute payment receiving club. but this was not enough to get the club into a playoff position, although Brighton and Huddersfield, both of whom were not in receipt of parachute payments, were promoted, and Sheffield Wednesday made the playoffs.

Only Newcastle (surely Mike Ashley has nothing to hide?) and recently sold Barnsley have yet to announce their results for 2016/17. Most clubs are showing higher income than in the previous season. The average income of the 22 clubs that have reported to date is £28.6 million. This compares to an average of £22.9 million the previous season.

The main reason for the increase in overall income is due to a combination of higher parachute payments, a new TV deal in the Premier League, which drips down to the Championship in what are called ‘Solidarity Payments. Championship clubs earn about £4.3 million a year from solidarity payments, plus their earnings from the Football League TV deal which are worth a minimum of a further £2 million. Championship clubs also pick up £100,000 for each home game broadcast on Sky, and £10,000 for each away game.

The English Football League (EFL) negotiated a flat percentage of all future TV deals with the Premier League (PL) a couple of years ago. This at the time seemed to be a great deal, but subsequently the PL sold its domestic rights for 10% less in 2019-22 than the current three-year arrangement generates.

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

Derby have shown growth in the all three income areas, but to give some context, their total income of £29 million is still nearly £20 million less than their final season in the Premier League in 2003/4, when income was £48.6 million.

Matchday income in 2016/17 was up 4.5%. Initially the club stated that average attendances for 2016/17 were an impressive 29,085, just, 2% lower than the previous season when the club were knocked out in the playoffs.

A recent press release contradicts the initial attendance figures, and the average figure for 2016/17 is restated at 27,885. Presumably the club either increased ticket prices in 2016/17 or had more hospitality tickets sold.

The club’s attendances have been healthy for the last few years, but it appears that they have increased ticket prices during that period. If the attendance figures are to be believed the club made £311 per fan from matchday receipts, not a rip-off figure, but it has increased by over a third in the last five years.

Derby therefore had the seventh largest matchday income total in the division, although we anticipate this falling to eigth when Newcashley United finally publish their results.

Broadcast income was up 41% to £7.9 million. The baseline figure for clubs in the Championship is about £6.3 million, plus an additional £100,000 for every home, and £10,000 for every away game that is broadcast live on Sky. Derby are always popular with Sky as they generate decent viewing figures.

The impact of parachute payments for the top six clubs in the chart is very evident. Recently relegated Norwich earned £7.50 from broadcasting for every £1 earned by non-parachute payment clubs.

Derby’s commercial income rose by an impressive 44% to £12.4 million. This heading covers a multitude of activities, which to be fair to club they have laid out in the accounts well.

Some figures do cause eyebrows to raise. Merchandising is the same as the previous season, sponsorship increased by £2 million apparently due to a joint venture with a company called Delaware North Companies UK Limited who operate hospitality for the club, and another company called Stadia DCFC Limited to ‘monetise sponsorship, social media and non EFL TV rights’.

What seems strange is if these new companies were set up, why is the football club taking credit for the revenue from these sources?

Costs

The main costs at a football club are player related, wages and transfer fee amortisation. Here things get confusing.

According to the football club accounts, wages increased by a relatively modest 4% to £34.6 million in 2016/17. Immediately after the wage note is a table that summarises the number of employees.

On the face of it the club has either made redundant, or has had resignations from, 99 employees in 2016/17. Most noticeably is the reduction in players and apprentices, until a trawl through Companies House reveals the existence of a company called Derby County Academy Limited, created in May 2016. The contracts of the apprentices and youth coaches etc. have been transferred to this new company. Perfectly legal, but it makes a mockery of the club’s press announcement that wages rose by 3.4% if so many former employees are now working for another company in the group.

Derby County Academy Limited take advantage of a legal loophole to avoid showing that company’s income, wage bill and employment totals, so we therefore scrutinised the accounts of parent company SevCo 5112.

It therefore seems that SevCo 5112, which owns the Academy, Sponsorship and Stadium companies as well as Derby County Football Club Limited has expanded operations, and that’s great, job creation is to be applauded.

SevCo 5112’s wage bill decreased in 2016/17, but the accounts only cover a ten-month period. If the wage total is extrapolated for a year it works out

SevCo 5112’s wage bill decreased in 2016/17, but the accounts only cover a ten-month period. If the wage total is extrapolated for a year it works out as £39.8 million, which is an increase of 12%. There’s nothing wrong with this, you would expect wages to increase if there are more people employed after all. It’s the lack of transparency from the club’s press release that concerns us when it stated…

What the club have said is true in relation to Derby County Football Club Limited, but it is also incomplete. If the club is incomplete in relation to this issue, it begs the question are there other key activities and transactions that it would rather not disclose in the press release, which instead focussed on the far more entertaining and salacious tale of the club suing a former executive, who in turn is counterclaiming against the club.

It’s therefore tricky to get a true handle on what has happened in terms of wages at Derby. If we use the SevCo totals, then the following trend arises.

Wages at the overall operation therefore seem to have trebled over the last five years. This shows a commitment to investing in players who will be of the calibre to help the club achieve promotion.

SevCo 5112 paid out £137 in wages for every £100 in income, which is effectively why Mel Morris says the wage bill in unsustainable. Derby are not along though in paying out wages that would not be tolerated in other lines of business, over half the clubs in the Championship pay out more money in wages than they generate in income. This is under the auspices of Financial Fair Play (FFP). It is scary to think what would happen if FFP didn’t exist.

Amortisation is how clubs deal with transfer fees in the profit and loss account. For most clubs when a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when Derby signed Matej Vydra from Watford for a record £8 million on a four year contract the amortisation charge would normally be  £2 million a year for four years (£8m/4). The amortisation fee in the profit and loss account therefore includes all players who have been signed for a fee (assuming they are still in their initial contract).

Derby’s total amortisation charge has risen steadily in recent years, reflecting the brakes slowly being removed from the transfer budget. They are in the top half of the division in relation to this cost, but some way behind clubs with parachute payments.

If the amortisation costs are added to wages, then total player costs for Derby in 2016/17 were £152 for every £100 of income. This again suggests the club is relatively ambitious in terms of spending whatever it takes in terms of player investment to get back into the Premier League.

We then however come to ‘The Derby Way’ ((c) Mel Morris). Derby’s amortisation charge is based on (cost-residual value)/contract length. It looks as if Derby have managed to reduce their amortisation charges each year by allocating what is called a ‘residual value’ to players. This is an estimate of their  market worth of players when they are no longer required.

The problem with this (and here we enter accounting nerd territory) is that this appears to go against the accounting rules, which state that the residual value should be zero unless certain conditions apply.

Unless Derby can show that they have commitment by third parties (i.e. other clubs) to buy players a year or two in advance then clause (a) does not apply.

Football players do not seem to fall into the realm of being in an active market either because they are not homogenous (i.e. identical) as Tom Ince is different to Bradley Johnson ,  and there are not willing buyers and sellers at any time so Derby appear to be in breach of the rules.

Should anyone care about this? Well…by applying residual values it allows Derby to effectively increase or decrease the annual amortisation charge, and this could have an impact on FFP compliance.

Derby’s amortisation charge as a proportion of player costs is lower than that of any club in the Championship. If they have a lower cost here…then they have a higher profit figure.

Over a long period of time figures even themselves out, but by adopting such a policy, which appears to be in breach of accounting rules too, Derby have the ability to increase or decrease losses in individual years to satisfy FFP…that doesn’t mean they have done it though!

Profits and losses

Profits (or more commonly for non-Premier League football clubs losses) are income less costs. The bad news for Derby is that the club lost a lot of money last season from day to day trading.

The good news is that they managed to sell Hendrick, Ince and Hughes, which brought in a profit of nearly £16.2 million, which offset the operating losses.

Operating losses are income less the running costs of the club (wages, maintenance, insurance, amortisation etc. and they are before deducting interest costs and player sale profits. In 2016/17 this worked out as £23.3 million, or £448,000 a week. This is £4.5 million lower than the previous season but remember this excluded the wage bill for the 99 employees whose contracts appear to have been transferred to other companies. are now still a lot of money to find on a regular basis.

If we look at SevCo’s profit and loss account for the ten months to June 2017, this shows an operating loss of £27.7 million, which works out as £630,000 a week. If this was extended to twelve months, it would work out at £32.7 million

Their total operating losses for the last five seasons of Derby/SevCo are over £87 million, and this excludes one off costs of £6.4 million during that period too.

Fortunately for Derby the sales of Ince, Hughes and Hendrick cushioned the financial blow to an extent (although Derby fans would probably rather have kept their best players).

The sale of Tom Ince raises another eyebrow. The sale was announced on 4 July 2017, but Derby’s profit and loss account ended on 30 June 2017.

https://www.derbytelegraph.co.uk/sport/football/transfer-news/highest-transfer-fees-received-derby-168528

The sale of Will Hughes took place on 21 June, which suggests the club was keen to dispose of both players to reduce their stated losses.

Derby have struggled to sell players on a regular basis at a profit historically, which suggest poor recruitment, but 2016/17 was a huge improvement.

If the club fail to be promoted this season via the playoffs (and we hope they are successful, on the grounds that they are not managed by Neil Warnock), expect to see interest in Vydra after his spectacular goal scoring record in 2017/18.

Under FFP rules, Championship clubs can make a maximum FFP loss of £39 million over three years in the Championship. Derby have a pre-tax loss of just £33 million over the three-year period, helped by profits on player sales and £12 of income from some accounting sleight of hand in 2016 that we expect will be disallowed for FFP purposes.

Additionally, some costs, such as infrastructure, academy and community schemes, are excluded from the FFP calculations. Derby have a category one academy, which costs about £5-6 million a year to run according to our sources, so this, combined with other allowable costs and player sales, means that Derby are within the FFP limit for the three years ending June 2017.

Player trading

The accountants treat player trading in a weird way in the financials. We’ve already shown that when a player is signed, his transfer fee is spread over the life of the contract. When the player is sold, the profit is shown immediately, and it based on the player’s accounting value, not the original transfer fee.

This creates erratic and volatile figures in the profit and loss account.

If we instead focus on the actual purchase and sales, the following arises

Over the last five years Derby have bought players for £65.1 million and generated sales of £26.3 million.

If Derby are promoted to the Premier League there are additional transfer fees and player bonuses of £16.6 million.

Debts to and from the club

The best way to look at Derby’s debts is to focus on the accounts of SevCo 5112 Ltd in conjunction with those of the football club.

The easy bit is player transfers, where the club is owed £20.4 million for players sold (likely to be for the players we have mentioned before) and owe other clubs about £17.2 million.

The football club is owed £13.7 million from ‘group undertakings’. Our suspicion is that Derby County Football Club Limited is still paying the wages and costs of the new companies that have been set up when employees were transferred to these new entities. This is because the likes of the academy generate no/little income themselves to pay the bills (we’d like to be able to prove this, but the academy company also takes advantage of a legal loophole to avoid showing its profit and loss account).

SevCo 5112 owed Mel Morris over £95 million at 30 June 2017, and he’s subsequently given them a further £21 million to keep them afloat since that date. This appears to be interest free, which is good to see. Gold and Sullivan at West Ham charge interest of 4-6% on their loans.

SevCo have other loans of about £45 million on top of Mel Morris’s generosity.

SevCo has received £161 million since 2015 from investors in the form of loans and shares.

Group Structure

If anyone is still reading this, things are about to get a bit messy in terms of the corporate structure of the club in recent years.

In the beginning there was God (also known as Brian Clough to Rams fans) and all of Derby County’s finances could logically be found in the accounts of Derby County Football Club Limited. This company was founded in 1896, and every year produced its results, which showed the finances of the club completely.

In 2008 the club was purchased by American based General Sports and Investment, who ran Derby through a company called Gellaw 101 Limited, which in turn was owned by Global Derby (UK) Limited. This had relatively little impact on the accounts of Derby County Football Club Limited as the other companies effectively didn’t trade.

Global Derby (UK)

Getlaw 101 Ltd

Derby County Football Club Ltd

Derby County Football Club Limited was then purchased by Mel Morris in September 2015 via the delightfully named Sevco 5112 Limited. The accounts for 2015/16 for Derby County Football Club seemed in line with the previous season in terms of all the figures.

However, and this is where things get a real pain, some new companies were set up by SevCo 5112 Ltd, which is perfectly reasonably, as similar things happen at other clubs, and included the likes of:

Club DCFC Limited (events and catering)

Stadia DCFC Limited (sports and broadcasting)

The Derby County FC Academy Ltd (academy)

It looks as if these new companies have costs in the form of employees and running expenses, but generate little income themselves, as this seems to go through the books of Derby County Football Club Limited. Perfectly legal, but it all comes out in the wash when looking at the accounts of SevCo 5112 Limited. It’s just a shame that this is ignored in the press release and by the local media, who perhaps (a) couldn’t care loss as they are Rams fans who just want to see the club promoted and/or (b) don’t want to upset the club by sticking their noses in as fear being denied access for interviews, as happened at Middlesbrough this season.

The Gazette refuses press passes for Middlesbrough FC home matches as stand-off over club’s ‘ban’ on two of its reporters continues

Summary

Derby have invested heavily in players in the past couple of seasons and have a decent chance of promotion via the playoffs. Mel Morris has backed managers in the transfer market, but by his own admission this cannot continue indefinitely.

The attempt to control the narrative by not releasing the full accounts for the club and the holding company in the press release does the club’s reputation no favours. People can only make informed decisions and judgement when given full information.

Data Set

Note: The wages for 2017 are for SevCo 5112 annualised.