Rangers: Automatic for the people

Introduction

8pm on 31st October is when I’m usually wondering if I can eat all the fun size Mars Bars that haven’t been vacuumed up by local youths dressed in Freddy Kreuger or Gary Neville fright masks trick or treating for Halloween.

Instead my email inbox pinged, and something came through about Rangers. Initially I ignored it, couldn’t be important surely, as after all the first team were playing high flying Kilmarnock at the same time.

At half-time, having prised myself away from the match on TV, it appeared that Rangers had published their annual results, a good time to bury bad news perhaps?

Key figures for 2017/18

Income £32.7m (2017 £29.2m) Up 12%

Wages £24.1m (2017 £17.6m) Up 37%

Recurring loss before player sales £9.9m (2017 £3.9m) Up 153%

Player signings £9.7m (2017 £10.3m)

Player sales £1.7m (2017 £0.8m)

Income

The club, like most others, generates its income from three main sources. Matchday, broadcasting and commercial.

Rangers didn’t produce accounts for 2011 and 2012 due to the club being in liquidation and the accountants not being obliged to submit them to the registrar.

Matchday income was up 6%, the main reasons for this were:

  • An early exit from Europe, although this still added an extra home match to the season’s total.
  • Higher average attendances which rose slightly to 49,173.
  • Season ticket prices rose from an average of £314 to £328.

Matchday income contributed 70% of total revenues for the club. Compared to the English Premier League (EPL), this is a far higher proportion than for any club in that competition. Rangers are also far more reliant than Celtic for matchday income as the latter had the benefit of Champions League participation.

Ranger’s matchday income was the second highest within the SPFL which places it is an awkward position. Too far behind Celtic to compete financially, too far ahead of other clubs in the division to be threatened, once it comes to term with the standard of that division, a state that hasn’t been reached yet based on results. The former duopoly in the domestic game has not quite yet been achieved.

If the club had been part of the English Premier League, Rangers’ matchday income figure would have placed it ninth in that division.

Broadcast income rose by 22%, to £4.4 million. Part of the increase was due to a UEFA pay-out for all clubs, although for Rangers it is just £650,000.

In 2018/19 this will rise significantly as the club has qualified for the group stages of the Europa League.

In 2018/19 the total prize money in the Europa League, whilst sneered at in some quarters for being the poor relation in UEFA compared to the Champions League, is £495 million

The SPFL TV deal is worth just £19 million a season split between 13 teams.

Even so, compared to the Premier League, where the side finishing bottom still earned £100 million in TV money, Rangers are paupers compared to those clubs, but kings compared to most of the rest of the SPL.

Rangers also benefited with the payments being made in Euros, as the poond continued to be weak following the decline in the UK economy following Brexit.

Commercial income was up by a third as the club made money from a successful pre-season tour and greater sponsorship and catering.

In the last six years, Rangers have earned overall £290 million less than Celtic. Most of this money has been spent but it gives Celtic a significant advantage of terms of investment in the playing squad and infrastructure, which can help generate greater income from conferencing and catering.

Costs

The main expense for a football club is in relation to players. These consist of two main elements, wages and amortisation. Wages are straightforward enough, amortisation is how the club deals with transfer fees for players bought, by spreading the cost over the contract life. Therefore, when Rangers signed Alfredo Morelos for £900,000 in 2017 on a three-year contract, this works out as an amortisation cost of £300,000 a year for three years. This is subtracted from income when profits are calculated.

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The amortisation charge has increased five-fold in the last two seasons as Rangers have invested in the squad since promotion to the SPFL. The problem they have is that Celtic’s amortisation last season was £8.8 million, highlighting the additional spending power they have.

Wages increased by 37% in 2017/18. This is partially due to the investment in new players, as well as giving new contracts to established players who have performed well in the top tier. The wages bill also probably includes the payoff to Caininha and Murty (Kenny Miller’s will be in next year’s accounts).

The problem Rangers have is that whilst their wages dwarf those of nearly every other club in the division, their fans are only focussed on their local rivals, who paid £250 in wages for every £100 paid out by Rangers.

This gap is likely to drop in 2018/19 as Celtic’s wages are likely to fall as Champions League bonuses will not be paid, and the recruitment of Gerrard and new players will increase Rangers’ costs. Even so there is likely to be a significant difference between the two clubs.

Whilst paying higher sums to players does not guarantee better performance, in the main there is a link between wage totals and final league position. It’s possible but rare for this not to be the case, Leicester City winning the English Premier League in 2016 being an example.

Rangers total wage bill puts it about par with a mid-table Championship club in England, as the club has the 37th biggest total in the UK.

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One group who are not benefitting from the higher wage bill are the directors, for the past three seasons they have not taken payment for their roles at the club.

Because wages increased faster than income, Rangers wage control percentage rose from 60% to 74%. This means for every £100 of income the club paid out £74 in wages, this compares to £58 for Celtic.

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A good target rate for clubs is often claimed to be 60% or lower, which Rangers achieved the previous season but were unable to maintain.

Rangers had an additional cost of £3.3 million for 2017/18 in ‘impairment’ costs. This is where the club has signed players in the past who turned out to be pish a bit rubbish, and so the club wrote down their values. Rangers fans will no doubt have a good ideas as to the identity of these flops.

How much Rangers spent in the year on legal fees is unknown, but the club does have a few ongoing cases.

Profits and losses

Profit is income less costs.

There’s no ‘correct’ profit figure, different vested parties will have different viewpoints, so it’s best to look at a few to get an overall picture.

The first is operating profit. It is total income less all day to day operational costs of running the club.

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Rangers’ made an operating loss of £12 million in 2017/18, as higher wages, amortisation and impairment already mentioned increased player related costs.

The problem with operating loss is that it can be distorted, especially by player disposals. It therefore makes sense to also calculate profit before player sales and other one-off items such as redundancy payments and contract disputes.

This is referred to as EBIT (Earnings Before Interest and Tax). This removes the volatility in relation to selling one player in a single season at a huge gain as has already been seen.

Stripping out these figures reduced Rangers’ losses to £9.9 million. Over the last six years Rangers have sold players at a profit of £2.5 million, a relatively small sum which reflects that they were playing in the lower echelons of Scottish football during this period.

Celtic have made a profit of over £100 million during the same period (including the Dembele sale this summer), reflecting that they’ve been able to buy better players at a young age and sell on at a profit after showcasing them in Europe.

One final profit figure adds on player amortisation and depreciation of the stadium and other long-term assets to the EBIT total. This is called EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation).

This is the nearest figure to a ‘cash’ profit total, used by analysts when they are working out how much cash a business is generating or haemorrhaging each year.

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This loss of £4.2 million is in many respects the most disturbing, as if a club is losing cash from trading then the owners (or a bank) will have to stick their hands into pockets to fund these losses.

English Premier League clubs average an EBITDA profit of £61 million, on the back of the TV deals south of the border.

Player Trading

Ranger’s player trading is big by Scottish standards but still trails their rivals. They can outbid most other Scottish clubs, but with the arrival of Steven Gerrard also seem to be looking to pick off players from England who are perhaps not getting a game and fancy playing in front of nearly 50,000 people for home matches.

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The board have backed managers in the last couple of seasons since promotion, whether that money has been spent well is still uncertain, although as always for every success there is a turkey.

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Since June 30th Rangers have also spent a further £6 million on additional players.

Funding

Rangers’ previous financial history means that the club finds it difficult to borrow from banks, and so is dependent upon directors and friendly parties to lend the club money to make up the shortfall from regular operations and player trading.

Over the last six years the board has funded the club by pumping in over £53 million.

At 30 June 2018 the loans element had risen to £21 million.

The net debt (borrowings less cash) total has risen significantly since Rangers promotion to the SPFL. It will have halved following the share issue recently, but has a high chance of returning to an upwards trajectory as the running costs under Steven Gerrard are likely to exceed income, unless relative European success is achieved.

Rangers fans who had hoped that the club had generated over £12 million from a much publicised share issue will be disappointed.

90% of the share issue was used to convert loans to shares, which is swapping one piece of paper for another, rather than generating fresh money for the manager. The club did borrow a further £2million but this will require repaying.

The audit report gives a warning signal about the future.

Rangers need to raise over £7.5 million during the next two seasons to stay afloat. That money could come from (a) loans from owners, (b) a successful run in the Europa Cup, or (c) player sales. The uncertainty makes planning for the future very uncertain.

Conclusion

Rangers are in a tricky situation. Fans have been patient to date but will expect regular silverware at some point. The club is dependent upon a board that is still given to infighting and a lack of unity, apart from when it comes to picking a dispute with outsiders (such as Sports Direct and the Takeover Panel). Chairman Dave King, who seems to have modelled his stewardship of the club using the handbooks of Ken Bates, Mike Ashley & the Oystons at Blackpool, but without the pleasant element of their characters, seems to have a smoke and mirrors approach to the club’s troubles.

How much additional funding is available is uncertain, but unless Rangers repeat their achievement of 2008 in making it to a UEFA cup competition final (a match I attended as live in Manchester, which will stick in the memory for a long time for the sights in the centre of the City at 6am when I went to work), or at least make major progress in the competition, then it would appear that significant further funds will be needed to keep the club trading.

If the owners are willing to continue to provide such funding then all is good, if not then the Gerrard experiment may have a limited shelf life, and the club could be plunged into another financial crisis.

The numbers

Glasgow Rangers 2016/17: Orange Crush

Introduction

I’ve only ever seen Rangers play once, which was at the 2008 UEFA Cup final. It’s fair to say that there was a discrepancy between the number of people who came to Manchester for the event and those who had tickets. The following morning I was on a breakfast TV show, and had to walk around and over hundreds, if not thousands, of Rangers fans who had decided to sleep al fresco on the streets following the match.

2016/17 saw a return after four years to the Premiership, Joey Barton scrapping with team mates, lawsuits against former directors and Mike Ashley, three managers, fan groups buying shares in the club, fan groups falling out with each other after buying shares in the club and occasionally some football.

Rangers accounts are…err… comprehensive, clocking in at 59 pages. Having said that, there are some excellent disclosures that put other clubs to shame, showing a degree of transparency at times that is a credit to those who prepared the information. The financial statements touch upon the ongoing disputes with enemies both within and external to the club.

The club’s recent history is  a source for fiery debate in Scotland, and the legal status of Rangers International Football Club plc provokes incendiary comments on social media from polarised views on both sides of the divide.

None of the name calling is of any interest to us at the Price of Football, we are non-partisan.  As someone who works in higher education though, it is nice to see so many people from East Glasgow enrolling on night courses on Scottish Insolvency Law in recent years.

Suffice to say a club called Rangers ended up applying to join the Scottish Third Division,  and schools in small towns such as Elgin, Peterhead and Alloa had to introduce seventeenth century Irish history into the curriculum for the impending visit by the club and its fans.

The accounts don’t really answer the question as to how big are Rangers, as the numbers reveal a paradox when comparing to clubs south of the border.

Income

Unlike clubs in the English Premier League, some of whom have 80% of more of their income from broadcasting rights, Rangers are reliant mainly on matchday income as a source of revenue. This is unlikely to change until the club starts not only competing but also progressing in UEFA competitions.

Rangers total income rose by just over 31% in the year to £29.2 million. This is some way behind Celtic’s total (for 2016, they have not yet published their 2017 figures) of £52 million, but way above that of the next largest Scottish club, Aberdeen (£13.4 million). Rangers third place finish in 2016/17 is poor compared to the club’s financial advantage over every SPL club except Celtic.

Compared to England, the income total places Rangers between Wolves and Leeds in the English Championship, but behind small clubs in the Premier League such as Bournemouth and Crystal Palace.

Promotion back to the Scottish Premiership (SPL) in 2016 led to an increase in average attendances at Ibrox from 44,359 to 48,893, of which over 43,000 were in the form of season tickets.

Such attendances drove matchday income to £21.6 million, far in excess of any club in the Championship, and would put the club in the top half of the English Premier League (EPL).

Admittedly Rangers matchday totals includes ‘hospitality’, of which there is probably copious amounts at Ibrox to help the locals give vocal backing to the team.

Broadcasting rights, whilst better in the SPL than the Championship, are still miniscule at £3.6 million compared to the £100 million minimum in the EPL.

‘Other’ income including shirt sponsorship (£1.5m) and commercial income (£0.3m) are also up significantly by 43%. Rangers should benefit in 2017/18 from having greater control over their merchandising in future years, following the resolution of a dispute with Sports Direct. This can be a significant sum for a club with such a committed fan base. Celtic, for example, had merchandise sales of over £12.5 million in 2016.

Costs

Rangers have had the second highest wage bill in Scottish football for a number of years. Even when they were playing against the local amateur teams in the third division the wage bill was over £17 million, more than the total of the bottom two Scottish divisions put together.

Wage costs were brought under control slightly in subsequent years, but promotion to the SPL resulted in a 35% increase in total wage costs.

Rangers’ unusual (but welcome) breaking out of player from other wages shows that player wages took up £10.4 million (59%) of total staff costs. This is quite low compared to English clubs, where player wages are usually in the 80-85% of total staff costs range.

This means that player wages as a percentage of total income was only 36% (29% in 2015), and total wages to income 60% (59% in 2016), a figure that would make many English owners jealous (in the Championship wages were 101% of wages in 2016).

Part of the reason for the good wage control was due to highest earner Joey Barton being only paid for a couple of months before getting a free transfer to Ladbrokes, and Kenny Miller was old enough to claim a pension and so wasn’t officially on the payroll.

How the other £7 million wages are distributed at Ibrox is not disclosed. If the club has an in house legal team I’d expect that they have been very busy in recent years and will have been paid accordingly.

In past years the highest paid director at the club has been on a significant sum, especially if viewed solely in the role of running a lower division Scottish football club.

As boardroom regimes have come and gone at Ibrox that particular cost has diminished, and directors have not rewarded themselves for the last couple of seasons. This is in contrast to Celtic, where the directors took home over £1.6 million in 2016.

Rangers did disclose that ‘key management personnel’ costs were £455k for the year. This is presumably the combined costs of Mark Warburton and the Yoda like Pedro ‘The dogs bark and the caravan keeps going’ Caixinha.

Other costs rose by 30% to £12.3 million, this is not fully disclosed, but increased repairs, stewarding, policing and travel for an overseas pre-season tour have contributed.

Rangers invested significantly in the squad in 2016/17 following promotion, with £10.3million being spent according to the accounts. This might cause a few eyebrows to raise amongst Rangers fans, as apart from £1.8 million for Joe Garner from Preston most signings were thought to be for no more than low six figure sums or free transfers. Perhaps Mike Ashley managed to sign himself for the club for £5 million in one of his more creative moves, as the numbers otherwise look very strange.

Alternatively there may have been some payments in relation to previous signings that were conditional on Rangers being promoted to the Scottish Premiership.

Celtic, by means of a benchmark, spent £8.8 million on players in 2015/16.

Equally baffling is the amortisation charge on these transfers of ‘only’ £1.6 million. Amortisation is the cost of the players spread over their contract period, so we would expect this figure to be much higher (£10.3/4 = £2.6 million, plus amortisation of the existing squad)  if players were on an average of a four-year contract.

Rangers showed a cost of £3 million in respect of resolving one of their many disputes. This particular one was with a man who is as unpopular in Newcastle as he is at Ibrox, Mike Ashley. The settlement did however allow Rangers to have greater control in terms of selling and making profits from merchandise sales. Rumours that all you can eat restaurants in Glasgow were celebrating as Ashley severed his ties with the city, as they lost money every time he visited, have yet to be confirmed.

Profitability

Profits are income less costs. Rangers losses more than doubled in the year to £6.3million (£2.7 million 2016). Excluding the Mike Ashley payoff, the losses are broadly the same as the previous season.

Losing £120,000 a week is substantial, although half of it is a one off cost. For Rangers to turn to profitability they will need to make progress in Europe, as it is not realistic to increase their other income streams, and for that they will need to invest in the playing staff, or get a manager who can manage.

Rangers have claimed that their EBITDA profits (which exclude non-recurring items, depreciation and amortisation, are £110,000. We’ve done our own calculations and arrive at a loss of about £700,000. There’s no agreed definition for this category of loss, it just depends on the assumptions used. What is important is that Rangers losses are looking far lower than a few years ago.

Debts

Whilst Rangers do have a fair amount of debt (£14.4m), most of this is in the form of loans from directors and friendly parties. These loans are due for repayment in July and December 2018, and July 2019 It’s not possible to see how such repayments will be made, so we anticipate lenders will roll over the debts to a later date. Alternatively, Rangers might issue shares to investors which are used to pay off the loans.

Rangers have other outstanding legal issues, which may or may not increase the level of indebtedness.

Conclusion

To a certain extent Rangers are boxed in. Celtic have had the benefit of Champions League participation, which, even if they are regularly knocked out in the group stages, gives them a minimum £25 million a year advantage in terms of income, which can be used for player recruitment and wages.

Celtic benefit from the market pool in terms of Champions League distribution, which is where British clubs take more money out as a result of BT Sport paying such a huge sum to broadcast the competition.

The Europa League is a more realistic option for Rangers at present, but it is long haul before it starts to be lucrative for competing teams.

Whilst there is regular talk in the media of both Old Firm clubs playing in England, there’s no realistic chance of this occurring. English teams probably don’t want the competition, and there could also be a breach of UEFA rules.

Rangers therefore need to hope that they can secure investment, from a benefactor, rather than an investor wanting a financial return, to be able to topple Celtic and then have the riches that Champions League membership brings. But the club has seen in recent years promises from some of those at the top turn to dust.

Five Year Financial Summary

Rangers International Football Club plc 2013 2014 2015 2016 2017 Year
£’m £’m £’m £’m £’m Change
Income
Matchday 13.2 12.4 11.6 17.3 21.6 24.9%
Broadcast 0.8 1.0 1.2 2.1 3.6 71.4%
Other 5.1 4.2 3.7 2.8 4.0 42.9%
Total Income 19.1 17.6 16.5 22.2 29.2 31.5%
Operating expenses
Staff costs 17.9 14.4 13.3 13.0 17.6 35.4%
Other costs 13.5 10.8 10.0 9.4 12.3 30.9%
EBITDA (12.3) (7.6) (6.8) (0.2) (0.7)
Player amortisation 1.7 0.9 1.0 0.8 1.6
Depreciation 0.8 1.3 2.1 1.6 1.6
EBIT (14.8) (9.8) (9.9) (2.6) (3.9)
Non-recurring income (costs) 16.2 0.0 0.0 (0.8) (2.5)
Gain on player sales 0.0 0.4 1.2 0.1 (0.4)
Total Costs 17.7 27.0 25.2 25.5 36.0
Operating profit/(loss) 1.4 (9.4) (8.7) (3.3) (6.8)
Net interest paid 0.2 0.1 0.1 0.0 0.0
Profit before tax 1.2 (9.5) (8.8) (3.3) (6.8)
Tax (0.3) (0.2) 0.0 (0.1)
Profit after tax 1.2 (9.2) (8.6) (3.3) (6.7)
£’000 £’000 £’000 £’000 £’000
Highest paid director 716 378 225 0 0
£’m £’m £’m £’m £’m
Total player cost 19.6 14.9 13.1 13.7 19.6
Wages/Income % 94% 82% 81% 59% 60%
Total player cost/income % 103% 85% 79% 62% 67%
Balance Sheet Highlights
Player trading
Player additions 1.6 0.3 0.3 1.7 10.3
Player sales 1.0 0.5 1.3 0.1 0.8
Net player addition/(disposal) 0.6 (0.2) (1.0) 1.6 9.5
Post year end player trading
Net cost (income) 0.0 0.0 0.7 3.0 (0.2)
Cash 11.2 4.6 1.1 3.0 2.8
Borrowings 1.7 2.4 9.2 9.0 14.4
Net debt/(cash) (9.5) (2.2) 8.1 6.0 11.6
Position 3D 1 L1 1 C 3 C 1 P 3