West Ham 2018: Plastic Passion

Introduction:

Getting to the London Stadium was supposed to be a game changer financially for West Ham, according to the club’s owners, David Gold and David Sullivan.

Once the move was completed the additional capacity, combined with the greater opportunities for developing sponsorship and commercial agreements should have given the club the extra income to allow West Ham to break through the glass ceiling of the ‘Big Six’ clubs who had taken nearly all of the Champions League places this decade.

Local fans however have not been happy with the move, leading to an uneasy relationship with the owners that manifested itself last season on occasion with demonstrations and hostility towards the board of directors.

During the first two years in the London Stadium there have also been conflicts between the club and the landlords, as well as grumblings from the London Mayor that West Ham had a deal that was too generous to the club.

As the results for 2017/18 came out, has the club moved on to a new level, or has the move been more trouble than it was worth?

Key figures for year to 31 May 2018: WH Holding Limited

Income £176.3 million (down 4%).

Wages £106.6 million (up 12%) .

Operating profit £22.0 million (down 55%)

Player signings £60.9 million (down 25%)

Player sales £57.7 million

Shareholder loans £54.5 million.

Income:

Nearly all clubs split their income into three main sources, matchday, broadcasting and commercial, for comparative purposes, and West Ham are no different.

Despite having now spent two years in the London Stadium, which had a capacity of 57,000 last season compared to the Boleyn Ground, where I saw my first ever football match in 1971, matchday income last season was lower than in the final season of the 35,000 seater iconic ground that was West Ham’s home for so long.

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Second season syndrome is often evidenced by lower attendances, but this wasn’t the case for West Ham as tickets sold out for every game, but even so matchday income fell £4 million as there were four fewer fixtures played due to non-participation in the Europa Cup and less domestic cup progress at home.

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Unless West Ham can either further increase the stadium capacity (potential is 66,000), increase prices or achieve a good UEFA competition run it is difficult to see how West Ham can narrow the gap with the clubs above them, especially with Spurs, should their new stadium materialise this season, having a ticket pricing structure aimed at lightening wallets.

Longer term West Ham could potentially sell more tickets to the prawn sandwich element of the fanbase, who are prepared to pay higher prices for hospitality tickets and all that goes with that the commercialisation of the game.

Lowering season ticket prices at the London Stadium was one of the cornerstones of the owners’ rationale behind the move away from the Boleyn, but once reduced, it is difficult to see how prices can then be increased to narrow the matchday income gap with the clubs above West Ham.

In the case of broadcast income, West Ham still remain an attractive proposition to the TV companies, with 17 Premier League matches being shown live domestically in 2017/18, the highest of any team in the bottom half of the division.

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Variances from season to season only tend to arise during the three-year period of a TV deal if the club finishes in a different position to the previous season, so the fall from 11th to 13th resulted in a slight fall from this income source.

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Another way of increasing broadcast income is to make progress in UEFA competitions, as the sums available to clubs for these rights are worth up to £100 million a season and this has created a glass ceiling for clubs such as West Ham keen to break into the ‘Big Six’ who have vacuumed up nearly all of these riches in recent years.

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No one was expecting West Ham’s commercial income to fall last season, so the 6% decrease caused eyebrows to raise as this was the area the owners hoped to grow the most with the stadium move

A reason given for the decrease is that the commercial income for 2017 contained ‘one-off factors’ which were behind the 25% increase that year, presumably linked to the move away from the Boleyn.

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Relative to other clubs West Ham are way behind the self-styled ‘Big Six’ who have the advantage of being able to sell commercial packages to sponsors wanting regular Champions/Europa League exposure, as well as more lucrative overseas pre-season visits to where their football tourist fanbases are located.

Everton’s commercial income being higher than that of West Ham may surprise some Hammer’s fans, but this is partially due to a lucrative training ground naming rights deal with the business partner of Everton’s owner.

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Due to the sums paid by TV companies for broadcast rights, this source represented 2/3 of West Ham’s total income for 2017/18, but this is a lot less than for some other clubs who are effectively little more than entertainment slaves for BT and Sky.

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Income overall for West Ham at £176 million puts them into the top half in the Premier League, and it is difficult to see them being overtaken by the clubs below them, equally it is unlikely to see how they can move to the £300 million a year gang who dominate Champions League places.

Costs

Largest costs for clubs are those relating to players, in the form of wages and transfer fee amortisation.

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Despite all income types falling in 2017/18, the wage bill increased by over 12% as a combination of new players and new contracts for existing squad members proved to be expensive.

Oberving individual player wages is not really within our realm but based on a formula that seems to generate decent benchmark figures, the average West Ham player is paid about £51,000 a week, but this is surprisingly below smaller clubs such as Southampton and Crystal Palace.

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Some comfort can be gleaned by looking at the club’s wages to income ratio, although this has increased it is still within the £60 of wages to £100 of income threshold that is deemed to be ideal for a Premier League club.

Experts divide transfer fees paid over the contract period to calculate something called amortisation and this fell by 10% in 2017/18 despite West Ham breaking their transfer fee record by signing Arnautovic for £20 million on a five-year deal, which gives an amortisation cost of £4 million (£20 million/5) per year.

Looking at amortisation, it is possible to get a broader feel for a club’s longer-term transfer policy rather than just a couple of windows of buying a selling within an individual season.

Luckily for the present season, with Spurs signing no players during the 2018/19 window, and West Ham making substantial investment in the squad, the Hammers should jump to 7th in the amortisation table, suggesting that the owners have backed the manager in the transfer market.

Ever since moving to the London Stadium the club have been involved in a rent dispute with the owners and for 2017/18 the rental cost rose 25% to £2.9 million.

Reviewing the profit and loss acount one other major cost for the club is loan interest, which was about £75,000 a week during 2017/18, about half of which was in respect of loans from Messrs Gold and Sullivan.

Selling the Boleyn Ground in 2016/17 generated a one-off profit of £8.6 million for the club, which reduced overall costs (although the new owners, Boleyn Phoenix Limited then seemed to sell it to Barrett Homes immediately for £19 million profit for themselves, this seems strange for such a shrewd property trader such as David Sullivan).

Directors’ pay

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West Ham’s CEO Karren Brady saw her pay package stabilise at about £900,000 in recent years, reflecting the faith that Gold and Sullivan see in her, although according to some West Ham bloggers she has substantial other income streams too.

By the standards of the Premier League Brady earns about the average amount, although eyebrows will be raised at the lack of payments to executives from some other clubs, with Arsene Wenger and Michel Platini seen muttering ‘financial doping’ to anyone who is prepared to listen.

Profits and Losses

Profit is a bit like love or deciding which is the hardest Tellytubby, in that it is difficult to agree on a universal definition.

Broadly profits are income less costs, and the headline figure for West Ham was an £18.3 million profit last season, or £350,000 a week. This figure is distorted by a couple of factors though.

In 2016/17 the club’s headline profit before tax included the gain on the sale of the Boleyn Ground as well as £28 million from selling Payet and Tomkins. Similarly in 2017/18 the club made £30 million by selling the likes of Andre Ayew, Sakho, Fletcher and Randolph.

Stripping out the above distortions gives something called EBIT (earnings before interest and tax) profit, which is a more balanced look at what recurring profits would be without the one-off impact of player sales and similar non-trading transactions.

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This shows that instead of a profit, West Ham actually lost about £120,000 a week in 2017/18, as the investment in player wages and the decrease in income combined to reduce profits by about £17 million.

If non-cash costs such as player amortisation are stripped out, the position however improves, and West Ham have an EBITDA profit (Earnings Before Interest, Tax, Depreciation and Amortisation).

EBITDA is an important profit measure as it is the closest to a ‘cash’ profit that analysts use to assess a business and shows how much the club has to invest in player acquisitions from its day to day activities. West Ham have made over £207 million in EBITDA profit over the last six years.

Whilst Gold and Sullivan correctly can claim that they haven’t paid themselves a penny in wages since acquiring the club in 2010, they have lent it money as the previous Icelandic Bank owners went bust. Gold and Sullivan have charged interest at between 4-6 % on these loans since then. They claim that this is less than would be charged by commercial banks, and so they are doing the club a favour. Other ‘local’ owners of Premier League clubs, such as the Coates family at Stoke, Tony Bloom at Brighton and Dean Hoyle at Huddersfield have all lent money interest free.

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Gold and Sullivan however have charged the club nearly £17 million in interest charges and have taken out over £14 million of this out in the form of cash since August 2017.

Player trading:

According to the accounts West Ham spent over £60 million in 2017/18 on player signings, substantially less than the previous year. This doesn’t necessarily buy you a lot in the present Premier League market though.

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The net spend was just £3 million though.

Compared to their peer group, West Ham’s spending was at best described as modest in 2017/18.

Since the end of the season the board have backed new manager Manual Pelligrini with a net £89 million on new signings such as Felipe Anderson.

Funding the club

Clubs usually have a choice between third party loans (which attract interest payments) owners loans (which may or may not charge interest) and shares (which occasionally pay dividends).

In the case of West Ham the club have focussed on interest bearing borrowings.

Gold and Sullivan did initially bail out the club but have not lent anything since 2013. Since then the club have taken on overseas investments and also borrowed money on a short term basis which is then repaid when the Premier League forward the first instalment of the annual broadcasting payments.

Conclusion

West Ham’s promises of a financial boost following the move to the London Stadium has not to date materialised, although the uneasy relationship with fans that resulted in hostility towards the board has been reduced to simmering resentment as results have improved under Pelligrini.

Whilst there is scope for income to increase if the capacity of the London Stadium is allowed to reach its maximum potential, realistically the gap between the club’s finances under the present owners, and that of the ‘Big Six’, is likely to result in the annual battle being with the likes of Everton. Leicester and whoever else is showing some short term form (last year Burnley, this year Wolves and Bournemouth) for the less than coveted title of ‘Best of the rest’. Whether fans who have sacrificed their historical home at Upton Park will think this is a price worth paying is yet to be determined.

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