Hull City 2018: Eye of The Tiger

Introduction

Hull City Tigers Limited were the first club to submit their accounts to the government registrar for the 2017/18 season and reported a £24 million profit before tax in the business review. Both the above look good, but things happen for a reason, and there’s more to the early publication and impressive profit than perhaps meets the eye.

In the strategic report the board say the following…

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Hull finished 18th last season, yet scored 70 goals, which was only surpassed by three teams, and conceded 70 too, which was only surpassed by four. They currently lie 21st after nine games, and the former Scunthorpe United physio has not managed to improve their fortunes.

Income

Every club must split its income into at least three categories to comply with EFL League recommendations, matchday, broadcasting and commercial.

Hull’s matchday income fell by 35% last season to £5.1 million, which was 9% of the club’s total income.

This was mainly due to a fall in attendances from 18,062 to 12,447. Attendances were the lowest for many years, reflecting poor performance on the pitch along with a deteriorating relationship between owner Assem Allam and a section of the fanbase.

A final position of 18th, following relegation the previous season from the Premier League was far below expectations.

Since Allam acquired the club attendances have been up and down like a newlywed’s knickers, broadly in line with the division in which the club has been playing, this makes it difficult to work out the size of the club’s ‘core’ fanbase.

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The attendance figure is confusing, as the stated attendances given out during the season averaged 15,622. The 3,000+ difference could be due to the number of non-shows from fans, mainly season ticket holders, unhappy about the running of the club. Since the Allam’s acquired Hull

Compared to the rest of the division the previous season, Hull’s matchday income was mid table.

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Broadcast income for clubs in the Championship varies significantly due to parachute payments. Hull received over £41 million from the Premier League, out of total broadcast income of £45.6 million. This sum will fall by about £10 million in 2018/19, and unless the club is promoted back to the Premier League will then decline to about £6.5 million in the Championship (or should the worst occur, £700,000 in League One).

Hull generated over 80% of their income from TV monies, this is broadly in line with figures since Allam bought the club but could change dramatically next season.

Hull have been in the Premier League or in receipt of parachute payments throughout the decade, resulting in TV income contributing £305 million out of the £401 million the club have earned as income during the Allam era.

Parachute payments are a double-edged sword, clubs need to have them as an insurance policy when in the EPL as even with relegation wage clauses many would go into administration if they were unavailable. The research suggests that they are worth about 6-8 points of an advantage on average to clubs who are receiving them. This has not stopped clubs in recent years being promoted whilst not in receipt of parachute payments though, as fans of Huddersfield, Brighton, Blackpool, Watford and Palace etc. will testify.

Commercial income fell by over 60%, reflecting the difficulty the commercial department has when selling packages to sponsors when the opponents are the likes of Burton and Reading compared to Manchester United and Liverpool.

The poisonous relationship between the board and the fanbase was also a contributory factor as sponsors are reluctant to have their brand associated with a business that is unpopular.

It’s very difficult to plan for any business when income levels are erratic, and Hull’s recent bouncing between divisions alongside an owner who seems to have fallen out of love with the club has restricted the ability of the management team to create a strategy for stability.

Costs

Player costs

Hull’s main costs, like those of nearly all clubs, were in relation to players, in two forms, wages and amortisation. Initially Hull appear to have excellent wage control compared to the rest of the division, as they managed to halve staff costs compared to the previous season due to a combination of relegation clauses and player sales.

The club paid out only £55 in wages for every £100 of income, broadly the same as the previous season. The downside to this was that this meant recruiting players who weren’t able to compete for a top six place.

In the Championship in 2016/17 practically every pound in income was paid out in wages. Hull have the lowest wage to income ratio in the division in 2018/18, which will be of little comfort to fans, whilst keeping Allam and the bank manager happy.

Player Amortisation

This is how a club deals with player transfers in the profit and loss account by spreading the cost over the contract period. For example, when Hull signed Kevin Stewart from Liverpool in the summer of 2017 for £4 million on a three-year deal, this works out as an annual amortisation cost of £1.33 million. The amortisation cost in the profit and loss account represents the total for all players signed for fees in previous seasons.

Hull’s amortisation cost fell by over 60% in 2017/18 due to the club selling players signed for the Premier League season being moved on. A close up of a map Description generated with very high confidence

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Even with the decrease in 2017/18 Hull’s amortisation figure would have been in the top half dozen compared to the Championship the previous season.

Adding amortisation and depreciation together gives us total player cost of just over £43 million, which is 77% of income.

This again compares well financially to the other teams in the division but does nothing for the fans who were watching the team week in week out last season at the arse end of the table.

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One cost that is a bit unusual is that of property rent. Since the Allam’s took control of the club this has increased every year (apart from 2014) by 10% a year. It would be interesting to find out who is the landlord, and for how many further years there is this step increase in rent costs, which have almost doubled since 2011.

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Profit

Profit is income less costs, but it contains lots of layers and estimated figures. Hull, like all clubs, show a variety of profit measures in their accounts, so they need a bit of explanation.

Operating profit is income less all the running costs of the club except loan interest. It is a ‘dirty’ profit measure in that it includes one-off non-recurring costs that are a bit bobbins when trying to work out long term sustainable profitability.

The good news for Hull is that during the period of the Allam ownership the club has made operating profits on nearly £26 million. How much of this is due to the skill of the owners is questionable.

Total operating losses in the Championship in 2016/17 were £260 million, so Hull’s finances appear to be far healthier than those of their competitors. If these profits were invested wisely in the playing squad then the club should have been in a strong position to compete this season, but this does not appear to be the case.

A bit driver of Hull’s financial success here is profits from player sales. The likes of Clucas and Maguire have been major income sources for the club. Over the last four years Hull have made £83 million in profits from player sales, without these the club would have made a loss.

Stripping out player sale profits and other non-recurring items (redundancies, legal cases, debt write offs etc.) gives a more valid profit measure called EBIT (Earnings Before Interest and Tax).

For Hull this was a loss of over £100,000 a week in 2017/18, despite the benefits of parachute payments.

Hull’s EBIT profits mirror the club’s seasons in the Premier League, which were profitable, and the Championship, which were loss making.

Nearly every club in the Championship has significant EBIT losses, which were £392 million in 2017, as many owners gambled on spending big to try to secure promotion to ‘the promised land’ of the Premier League, which in reality is a series of severe spankings by big clubs interspersed with celebrating like a loon when beating the likes of Swansea and Bournemouth.

If non-cash costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club expenses other long-term asset such as office equipment and properties over time) then another profit figure called EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) is created. This is liked by professional analysts as it is the nearest thing to a cash profit figure.

We have calculated Hull’s EBITDA profit at £7.5 million (although Hull put on their accounts that it is £8.2 million), which shows that the club is generating cash from its day to day activities, although as said before, this is mainly driven by parachute payments.

Hull have made total EBITDA profits of £83 million under the Allam regime.

Once trading costs have been paid, many clubs also have to pay interest on their borrowings. Hull historically have had a mixture of bank loans and those from Allamhouse Ltd, the holding company owned by Assam Allam.

The interest cost in 2018 was about £50,000 a week and has totalled £21 million since Allam took over. It is not possible to work out how much, if any, of this interest has been paid to AllamHouse. In most sets of accounts there is usually a footnote called ‘related party transactions, which details transactions with owners, but this does not appear in the Hull City accounts.

Player Trading

Hull spent £16.9 million on new players in the year to 30 June 2018, which may come as a surprise to fans.

The large spend on players is why the amortisation charge in the profit and loss account is so high. Fans often point out that clubs also sell players and that net spend is a better measure of a club’s investment in talent.

The Allam’s initially did invest in the squad, but it’s noticeable that in the last three years sales have exceeded purchases, this may be connected to their alleged gradual loss of interest in the club.

Clubs selling players in the Championship is a common issue though as trading losses have to be minimised.

Investment

Club owners can invest three ways, sponsorship, lending or buying shares. The club has not issued any shares since being taken over but has borrowed a total of £111 million from both the owners and banks. The bank loans have now been paid, off, leaving outstanding loans of £63 million to Allamhouse.

The bank loan of £21 million was repaid during the last year. This will make the sale of the club easier as there are fewer secured creditors to deal with .

Summary

Hull’s finances as a club receiving parachute payments look very solid and far better than almost any other club in the Championship. The goose that lays those particular golden eggs is about to stop though, and the club’s income is likely to fall by at least £10 million this season and a further £30 million in 2019/20.

For this reason it is probably best for all concerned that the club is sold to owners who can have a constructive relationship with fans and agree a reasonable set of expectations.

Continuing to call the club Hull City Tigers Limited, after failing to get the FA to rubberstampt a name change to the club is both petty and provocative.

The first thing any new owner should do if wanting to win hearts and minds is to change the company name back to Hull City AFC (or similar) Limited.

The biggest problem in relation to Hull is agreeing a sale price. The Allam’s have put money in, although their motives and commitment are confusing.

As a Premier League club Hull City was probably worth about £170 million according to our calculations. As a Championship Club on gates of 12,000 a true value is probably around £35 million. The Allams will probably want to recoup at least the £63 million that is owing to them (plus whatever they paid for the shares) and bridging this gap will be very difficult as the club simply isn’t worth the higher sum.

Data Set

Hull City 2017: Marooned in Flamingoland

Introduction
They came, they saw, they went back to the Championship. If ever a club in recent years deserves the ‘Yo-Yo’ label, it is Hull City. In the ten seasons commencing 2007-8 the club has been promoted and relegated three times.

Hull were promoted via the playoffs in May 2016, but spent the summer in limbo, with a clear conflict between the owner Assem Allam and manager Steve Bruce, presumably over recruitment.

Mike Phelan took over as caretaker, and on the back of a victories in the first two matches the club made the decision to appoint him as manager on a full-time basis.

It’s doubtful whether any other £100 million a year business would make decisions on the fly in such a manner. Somewhat predictably, Hull’s season went into a nosedive, and they had one win in the next 18 matches, leading to Phelan being sacked.
Hull spent £32 million in the transfer market, mainly on cast offs from other Premier League clubs (Ryan Mason, Will Keane, James Weir), loanees and unheard of foreign signings.

Hull’s relatively conservative transfer policy has resulted in some more established Premier League clubs questioning the distribution of broadcasting revenues and parachute payments to relegated clubs.

Whilst Hull didn’t lose many of the players during the summer window, by the time January arrived the vultures were picking over the relatively few bones left, with top scorer Robert Snodgrass and Jake Livermore jumped ship for West Ham and West Brom respectively in £10 million plus deals.

New manager Marco Silva managed to improve results compared to Phelan, taking the club out of the relegation zone, but defeats to already relegated Sunderland, and fellow strugglers small London club Crystal Palace, sent Hull down.

Silva left for Watford, and Hull’s manager became the splendidly named Leonid Slutsky, who we think used to play Spock in the original Star Trek.
Income


Hull’s figures in recent years highlight the impact that promotion to the Premier League can make. In 2012/13 the club’s total income was £17 million, of which £5.9 million was their final parachute payment after being relegated from the Premier League in 2010.

Income for 2016/17 was nearly £117 million, due to the popularity of the Premier League with broadcasters. A new three-year TV deal with Sky and BT commencing in 2016/17 along with recently boosted overseas rights. Hull’s TV income, despite relegation, was £94 million, or 80% of total revenue. All clubs in the Premier League benefited by on average £35 million due to the new deal.

Because Hull were relegated immediately after being promoted in 2016/17, they will only receive parachute payments for two seasons.

Gate receipts were marginally up in 2016/17, 10% to £7.9 million, but other match day income, presumably corporate boxes and perhaps perimeter advertising (clubs are notoriously vague as to what appears in individual headings) quadrupled from £2 to £8 million.

‘Other’ income, which includes commercial and retail, benefited from Hull’s promotion too. The sad thing in relation to this is that Hull ditched our favourite shirt sponsors, Flamingoland, home of the Mumbo Jumbo extreme ride, for a generic betting organisation.

Costs

As always the biggest outlay for a professional club is in relation to players. Hull’s wage bill more than doubled to £61 million, partly due to signings, but also due to pay rises for the existing squad.

Hull are only the third Premier League club to publish their results, so it’s not possible to directly compare with their peers, but it would have been bottom three compared to the Premier League the previous season.

Given the increase in income due to the TV deal mentioned above, we would expect wages to rise for most clubs. Premier League club owners have tried to restrict all of this money ended up in players’ wage packets via the pompously named Short Term Cost Control (STCC rules), which restrict the increased amount spent on wages to £7 million PLUS any extra non-TV money earned by the club.

Whilst wanting to appear noble, the aim of STCC is to increase the profits for the owners of clubs, by restricting the amount that goes to players.

The other main player cost is player registration amortisation. Whilst this is a non-cash expense, it is linked to the amount Hull have paid in respect of transfers, spread over the contract life period. At £32.6 million, it is a sizeable sum, but will fall in 2017/18 as Hull have offloaded some players.
Combining the two player costs shows that Hull have struggled in the Championship to deal with the demands of the division.

On the plus side in 2013 and 2016, when Hull were in the Championship and total player costs exceeded income, the club was promoted both times. These figures therefore include promotion bonuses (£10.4m in 2016, not disclosed in 2013).

One other cost that is noticeable in Hull’s books is the interest expense. The vast majority of Hull’s loans are due to the owner and/or Allamhouse Ltd, a company owned by the owner.


The interest rate on the loans, calculated very crudely by us, is not particularly high, and likely to be much lower than that charged by a bank.

Profits
Profit represents total income less the costs of running the club. The profits after tax belong to the owners, and can either be reinvested into the club or paid out in the form of dividends (very rare though, except for Manchester United) .

Hull are a perfect example of why English clubs in the Premier League are attractive to owners. In that division they make a lot of profit for owners, as well as being high profile outfits that are seen globally by TV viewers.

There are a variety of profits that tend to be analysed.
Profit before tax is as it says on the tin.

Operating profit is income less all costs except tax and finance costs.

EBIT is the same as operating profit, adjusted for non-recurring items such as gains on player sales (which, whilst arising each year, tend to be volatile and unpredictable) and legal claims.

EBITDA is the same as EBIT but has the non-cash expenses of depreciation and amortisation added back. This is a proxy for the sustainable ‘cash’ profit made by the club.

Hull’s figures show the price to be paid for playing in the Championship, as well as the rewards of the Premier League. Promotion in 2016 resulted in a boost of over £55 million to Hull’s profit before tax, with the other metrics improving too. Over the five year period of the analysis the club made a profit of just over £10 million. Nothing too excessive, but still enough for a good Saturday night out in Hull city centre.
Conclusion
Hull banked a lot of money in 2016/17 from their one season in the Premier League. As well as selling their crown jewels in the January 2017 window, the remaining good players in the shape of Harry Maguire, Tom Huddleston, Sam Clucas and Andrew Robertson departed in summer 2017. This could be part of a strategy to streamline the wage bill.

Their replacements have not fared well, and Hull are presently hovering near the relegation zone in the increasingly cut throat Championship. The only positive from this is that is Hull continue to perform poorly we could see a return of Flamingoland as the shirt sponsor.

One area of possible concern is the relationship between the club and its owner. Since failing to get the football authorities to change the club name to Hull City Tigers,  Assem Allam has been throwing his toys out of the pram with a series of Trump like inflammatory statements.

In the last year, Hull have increased, then decreased, the number of shares that they have in issue. Whether this was due to a potential sale or part sale of the club is uncertain, but Hull are best filed under ‘watch this space’ in terms of ownership for the foreseeable future.