West Bromwich Albion: Dazed and Confused.

It’s of little consolation to West Brom fans as their club is facing relegation, but the club’s holding company have just published their financial results for 2016/17 revealing record profits. A few months later though it was the night of the long knives in the boardroom and the club’s boardroom big cheeses were shown the door.

Summary of key figures (West Bromwich Albion Holdings Limited)

Income £137.9 million (up 40%)

Broadcasting income £118.7 million (up 51%)

Wages £79.1 million (up 7%)

Profit before player sales £26.7 million (Loss of £5.2 million in 2016)

Player purchases £37.4 million (£28.2 million in 2016)

Player sales £19.8 million (£6.3 million in 2016)

Borrowings: None

Income

The Baggies have been in the Premier League (PL) since 2010/11, and their income has broadly been linked to new PL broadcasting deals, which are negotiated every three years.

The impact of the new TV deals that commenced in 2014 and 2017 have been the biggest drivers of extra income for the club. The problem the club has is that it is constricted by a 27,000-seater stadium and not being one of the ‘Big Six’ in terms of commercial appeal. Such is the success of the PL in selling broadcasting rights that West Brom are in the top 30 revenue generating clubs in the world in 2016/17.

Eighteen clubs who were in the Premier League last season have reported their results to date. Only car crash Sunderland, probably too busy setting the club coach’s sat nav to Accrington, and Crystal Palace, whose owner also controls a company called ‘Smoke and Mirrors Limited’ have failed to do so.

All Premier League clubs are reporting higher income for 2016/17 than in the previous season. The average income of the 18 clubs that have reported to date is £239 million, up 31% from £182 million the previous season. The average in the Championship is just £28.6 million.

West Brom are in a bunch of eight clubs who are in the £117-138 million income bracket.

The main reason for the increase in overall income in the Premier League for 2016/17 was the new Sky/BT domestic TV deal, worth £5.1 billion over three seasons.

The Premier League divide money into five pots. Three of the pots cover the domestic TV deal, and they are split 50% evenly, 25% based on the number of TV appearances (every club is guaranteed a minimum of ten of these) and 25% based on final league position. Each place up the table is worth just under £2 million.

Overseas broadcasting income and centrally agreed commercial deals are split evenly between the twenty clubs. This arrangement is likely to come under fire in the summer as the ‘Bix Six’ want to grab a bigger slice of this pie for themselves. Their argument is that overseas TV fans would rather watch one of their clubs than that of a team such as West Brom, and so they ‘deserve’ more money.

Whilst this argument is true in terms of the number of viewers, it ignores the fact that the ‘Other 14’ can compete against most clubs in Europe apart from the elite for players (all 20 EPL clubs are in the top 35 richest in Europe) and thus can put up a decent performance against the Big Six.

This partly explains why West Brom won at Old Trafford, Burnley won at Stamford Bridge, Swansea beat Liverpool and many clubs have turned over Arsenal.

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

Matchday Income

Matchday income fell by 12% to £6.8 million. This was due to average attendances falling 3% to 23,876 and non-existent cup runs.

Overall in the Premier League, matchday income counts for £1 in every £7, but for West Brom it is only £1 in every £20.

West Brom had the second lowest matchday income total in the division, but still managed to survive in the Premier League for many seasons. This suggests that in the Premier League it is case of spending money wisely, rather than just spending it quickly, that counts.

Ticket prices seem to have fallen since West Brom’s last season in the Premier League, with matchday income averaging £283.51, about 9% lower than in 2016. This works out at £14.92 per match, which may surprise some Baggies fans, but remember this is the average of adults, seniors and kids, and is also net of VAT.

The reduction in prices may be a combination of fewer hospitality packages being sold as the club was pragmatic if unexciting under Tony Pulis, and the capping of away fan prices in the Premier League.

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Broadcast Income

Broadcast income for Premier League clubs is linked to deals signed by the PL. West Brom benefitted in 2016/17 from finishing 10th in the table compared to 14th the previous season, but more importantly from the new domestic BT/Sky deal.

Premier League TV money is divided into 5 pots, splits as follows:

For domestic rights there are three pots.

  • 50% of the money is split evenly between all 20 clubs (called the ‘Basic Award’)
  • 25% is split based on the number of times a club appears live on TV, with each club being guaranteed ten matches, and an extra £1 million for each additional appearance
  • 25% is based on final league position, with the bottom team receiving £1.9 million, and every place above that being worth an additional £1.9 million. Therefore, by finishing four places higher in 2016/17 than the previous season West Brom earned an additional £7.6 million, which is more than they earned through matchday income.

Overseas TV rights are presently split equally between all 20 clubs, but a bunfight is likely to take place this summer as the ‘Big Six’ (Manchester United and City, Liverpool, Arsenal , Chelsea and Spurs), already far richer than the other clubs, want more of this money as they claim they are main reason why overseas broadcasters pay so much for PL rights. The Big Six’s argument conveniently ignores that they earn additional broadcasting rights from appearing in European competitions.

If the Big Six are to be successful, they will need 14 votes at the meeting of club owners in the summer. Expect to see tantrums and threats of joining/creating a European Super League should they not get their way.

The PL’s central advertising/commercial contracts are also split evenly between all 20 clubs.

The present domestic deal lasts until 2018/19, so it is likely that West Brom’s broadcast income peaked last season. If the club is relegated then the PL’s snappily named rule D.25, more commonly called parachute payments, applies.

West Brom would therefore receive 55% of the basic award (£35.3 million in 2016/17) and overseas broadcasting money (£39.1 million in 2016/17) next season, which works out at £41 million.

Commercial Income

Commercial income in the Premier League is a case of the haves and the have nots. Here the Big Six mop are to an extent able to name their price, as it is a seller’s market and the likes of Manchester United have a strategy of signing deals in individual countries for individual products, such as an official tractor partner in Japan.

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For clubs such as West Brom the outlook is different. Here the buyers can play the likes of The Baggies, Bournemouth, Everton, Stoke etc. off against each other when negotiating shirt and commercial deals, so the prices are far lower. In addition, smaller clubs have limited overseas appeal as football tourists and plastic fans only tend to ‘support’ the major clubs. Accordingly, Manchester United make £22.10 from their commercial activities for every £1 generated by West Brom.

A screenshot of a cell phone Description generated with very high confidence West Brom’s commercial income increased by nearly 6% in 2016/17, mainly due to a new shirt sponsorship deal with generic Chinese online casino operator UK-K8.com.

Cost

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

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West Brom’s wages have grown steadily over the last give years, and the average wage is (we estimate) about £38,000 a week. Their total wage bill is broadly where you would expect it to be for a club that has been a constant feature of the Premier League for the last decade, above that of promoted clubs and below that of clubs with bigger stadia and resources.

The riches of the Premier League TV deal meant that West Brom only paid out £57 in wages for every £100 of income. If the club is relegated to the Championship the outlook is different. In the last season for which there are full records clubs paid out an average of £101 for every £100 in wages, which leaves nothing to pay for the other other running costs…including player signings.

One reason why West Brom’s wages to income ratio has fallen is due to a variant of Financial Fair Play (FFP) called Short Term Cost Control (STCC). This restricts wage growth to £7 million a season plus any money the club generates itself from matchday and commercial sales. For a club such as West Brom this gives a significant challenge.

Under the new ownership of the club, the highest paid director has taken a significant reduction in pay. Under the former regime this person, presumably the CEO, was earning over a million pounds per year. This fell to ‘only’ £181,000 in 2016/17.

In February 2018 the club however sacked the CEO and the chairman. The following month the new CEO, Mark Jenkins, claimed to be ‘shocked’ at the state of the club’s finances, especially in relation to wages.

Amortisation (skip this bit unless you want a quick and dirty accounting lecture) is how clubs deal with transfer fees in the profit and loss account. When a player signs for a club the transfer fee is spread over the life of the contract. Therefore, when West Brom signed Jay Rodriquez for £12 million from Southampton on a 4-year deal, the amortisation charge works out as £3 million a year (£12/4). The amortisation fee in the profit and loss account includes all players who have been signed for a fee (assuming they are still in their initial contract).

West Brom’s amortisation total of £17 million is 30% higher than the previous season, and over five times the figure of 2013. It shows that the club decided in 2014/15 to invest more significantly in players, signing the likes of Ideye, Livermore, Chester, Rondon and Chadli for £10million plus fees.

However, compared to the rest of the division, West Brom are relative paupers. Their amortisation charge for 2016/17 was by far the lowest in the Premier League.

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The danger of such an approach is that by trying to survive in the Premier League by spending less on players may be successful in the short term, it is likely to drag the club down over a longer period. The West Brom hierarchy may point out that they finished a creditable 10th in 2016/17 and thought they could repeat the success with a lack of investment in players but the club is playing with fire taking such an approach.

Profits and losses

Profits are income less costs. West Brom made record profits before player sales in 2016/17 of £26.7million

This was mainly due to the club only spending £5 million of the extra £40 million TV money on wages. The previous season, when West Brom finished 14th in the Premier League, the club loss £100,000 a week.

After a long period of time in which nearly all clubs were loss making, partially due to Alan Sugar’s ‘prune juice’ effect, where any increases in TV income went straight through the club into player wages, the Premier League is now far more lucrative.

West Brom had the sixth highest profit in the Premier League using this measure, but it does perhaps suggest once again that the club was setting itself up for a fall by not investing in players.

If you strip out the impact of player amortisation and depreciation (the cost of the stadium and training facilities spread over several years, then another profit measure, called EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) arises. This is popular with analysts looking at businesses as it is the nearest thing they can find to a sustainable cash equivalent of profit.

Once again West Brom did well here, comfortably mid table.

Under Financial Fair Play (FFP) rules, Premier League clubs can make a maximum FFP loss of £105 million over three years. West Brom clearly have little to fear in this regard. In the Championship the club will be allowed to have lost £83 million in the three years to 2018/19 if they are relegated.

Player trading

Accounting for player trading is a financial quagmire. 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, which is based on the player’s accounting rather than market value, is shown immediately in the profit and loss account.

This creates erratic and volatile figures in the profit and loss account, so these are best separated out from the rest of the financial results.

If we instead focus on the actual purchase and sales, West Brom have the following figures:

The above table shows that over the last five years West Brom have bought players for £96.3 million and generated sales of £44.2 million, a net cost of £52.1 million over the period.

West Brom’s spending in 2016/17 was a record sum for the club, but pales into insignificance in relation to the big Manchester and London clubs. By being the fourth lowest spender on signings in the division and regularly being towards the bottom of the table in this regard for many years it means that the club cannot afford too many poor signings if they are to stay in the Premier League.

The club then spent a further £41 million in 2017/18, but this has not been enough to prevent a dismal season, under first of all Tony Pulis, the man who was accused of fraudulent behaviour at his previous club Crystal Palace https://www.telegraph.co.uk/football/2016/11/28/tony-pulis-accused-fraudulent-behaviour-high-court-judgment/ and was accused of trying to blackmail the owner of Gillingham when he was manager there. https://www.theguardian.com/football/2001/apr/27/newsstory.sport1

Pulis was replaced by Alan Pardew, whose name is an anagram of Warped Anal.

Under Pardew West Brom only had one victory, against a very poor Brighton, in eighteen games in charge.

Debts to and from the club

West Brom didn’t sell many players before the 2017/18 window, and so were only owed £13.4 million by other clubs for players at 30 June 2017.

The club did owe other clubs nearly £23.4 million for player transfers, but this is chicken feed compared to the likes of Manchester United who owe over £180 million.

Perhaps more importantly the club is debt free, with no borrowings from either banks or the club owners. The owners have not put any money into the club though for many years, but the club still had nearly £40 million in the bank at 30 June 2017.

Summary

West Brom have shown that a club can survive for many years in the Premier League on a relatively modest wage bill.

They have had a strategy, which to be fair has worked for many years, of spending less on transfers than their peer group. It now, unless Darren Moore can pull off the greatest escape of all time, as if this approach has finally caught up with them. At the start of each season they have been in the dozen or so clubs who ‘could’ get relegated for some time, and this looks like being the season when gravity finally wins.

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