Podcast 6 February

Kevin and Kieran analyse Everton’s latest numbers after it became the second Premier League club in the last few weeks to publish losses of more than £100m. Kieran interviews someone who works in footbal catering, and reveals which club can’t afford to sell its players.

https://podcasts.apple.com/gb/podcast/the-price-of-football/id1482886394

West Ham 2018/19: Flares’n’Slippers

In January 2020 David Sullivan, West Ham’s controlling shareholder said “Overall, I believe the club’s in a far better state than 10 years ago” so we thought we’d put that to the test with a look at the club’s finances during that period.

Decade of success or standing still? The West Ham that Sullivan and Gold acquired from the former Icelandic Bank owners was certainly in crisis, but have their efforts improved the happiness of fans who now attend the rented London Stadium?

Rebelling fans know West Ham have just announced their accounts for the year ended 30 June 2019, and like events on the pitch last season, disappoint more than excite.

Income

A Football club generates income from three main sources, matchday, commercial and broadcasting.

The matchday income for West Ham in 2018/19 was £27.1 million, which is just £200,000 more than the club’s final season at the Boleyn, and £7 million more than most of the preceding seasons.

Having this amount of matchday income puts West Ham 7th in the Premier League, but a long way behind the ‘Big Six’ that fans thought the club would be challenging when they said farewell to their spiritual and cultural home in 2016.

Every club generates matchday income by (number of matches x average price per ticket x average attendance) and here despite big attendances West Ham are ahead of the provincial clubs but behind the elite.

Relatively low prices at the London Stadium, which has a traditional old school working class fanbase, coupled with fewer matches than those clubs playing in UEFA competitions, meant that West Ham generated only 28 pence per seat for every £1 that Chelsea made last season.

Being tenants at the London Stadium also means that West Ham can effectively only make cash from the stadium for 19 days a season (plus any home cup matches) whereas Spurs can sweat their asset in the form of the new stadium with NFL matches, conferences, catering and concerts.

Every club has a season ticket price policy and West Ham, to their credit, seem to have some available at £299 (£320 for 2019/20) but for some matchdays the cheapest adult tickets are £55 each, which doesn’t include the binoculars needed to see the pitch from these vantage points.

Being able to exploit the modern facilities of the new stadium for commercial gain was another justification for the move in 2016, and this appears to have some merit.

A look at the commercial income totals shows that West Ham have doubled this revenue source over the last decade, with a noticeable jump since moving to the new stadium in 2016/17.

Commercial income follows that of matchday in that West Ham are again ‘best of the rest’ (Everton’s should be treated with caution following their deals with Putin pal Alisher Usmanov) but still far behind the elite.

Keeping up with the Big Six of the Premier League is unrealistic for West Ham unless they can offer sponsors UEFA competition exposure or the attraction of players that have huge social media followings.

A look at Broadcasting income shows a similar story, with West Ham recoding record figures that look good compared to the club’s history, but pale into insignificance when matched against the peer group they want to challenge.

The increase in broadcast income was mainly due to West Ham finishing 10th last season compared to 13th in 2017/18, as each additional place is worth just under £2 million.

The importance of qualifying for European competition is evident from the above table which shows the benefits to the elite clubs for reaching the latter stages of the Champions and Europa League, which can be worth up to an extra £100 million in prize money plus additional gate receipts and sponsor add-ons.

Having European qualification would change things for West Ham but realistically they would have to be regular participants there before competing in the same pond as the ‘Big Six’.

Even if the club did make it to the Europa League, they are now competing for places with Everton, Wolves and Leicester domestically, all of whom have owners who are keen to pour more money into their clubs to secure higher places in the table.

Broadcasting income growth has fallen domestically for the three years starting 2019/20 but the rise in the international rights has offset that, realistically there is limited future growth in traditional TV rights.

Overall West Ham are stuck against the glass ceiling in terms of being the 7th biggest revenue generators in the Premier League but still only earning half of that of Arsenal, the next club in the earnings league.

Costs

Like it or lump it, player related expenses are the highest element of a club’s cost base and generate endless discussion from fans and the media.

Every club needs to pay competitive wages to attract talent, resulting in what Sir Alan Sugar calls the ‘prune juice’ effect of additional money coming into the top of the game quickly exiting at the bottom in the form of player wages and transfer costs.

Year on year in 2018/19 wages increased by over 27% to an average weekly sum of £63,000 for first team regulars.

No one will be surprised that West Ham have the 8th biggest wage bill as they have the 7th biggest income stream, what will disillusion fans is the failure to make more progress on the pitch given that the unpopular owners have invested money on the pitch, albeit poorly.

The concern with the wage bill is that West Ham spent £71 on this for every £100 of income, UEFA recommend keeping this to no more than £70 so realistically the club have limited wiggle room in recruiting new players unless some existing ones leave.

Having a new signing does not mean that the whole fee is charged as an expense immediately due to the accounting dark art that is amortisation.

Amortisation is the effective rental cost of a player in relation to the transfer fee paid for his registration.

Numbers for individual transfer fees are difficult to obtain, but amortisation totals give a good long term indicator of the investment in players by the club.

Amortisation is the transfer spread over the contract life so when West Ham signed Haller for £40 million on a five-year contract, this will result in an annual amortisation charge of £8 million a year.

Squad amortisation for 2018/19 was a record £57 million, up 40% on the previous season, again suggesting investment was made, but the decisions made by the recruitment team were unsuccessful.

Overall West Ham’s amortisation cost for the last decade was £270 million, and has increased noticeably in recent years, but this has not turned into better football being seen by fans.

Under a succession of managers West Ham’s recruitment policy looks poor when compared to the amortisation costs of the likes of Spurs or Leicester, with Liverpool’s being only moderately higher too.

Looking at the rapid increase in amortisation costs indicates that West Ham have spent large sums recruiting players from other clubs and paying them handsomely, but the quality of the recruitment must be called into question.

Life in the boardroom at West Ham isn’t easy in the sense that many fans blame Gold, Sullivan and Brady for the lack of progress on the pitch, but this is offset by a 27% pay rise for West Ham’s CEO.

Ed Woodward at Manchester United, another unpopular executive, is the highest paid club CEO but there are now a considerable number earning million pound plus sums each year.

Some West Ham fans may be surprised that the club did make over £12 million profit last season from selling players, nearly all of this is likely to be in respect of Kouyate joining Crystal Palace and Reece Burke going to Hull.

Profits

So overall West Ham went from a profit before tax of £18 million to a loss of £28 million in 2019.

By looking at the above table it’s evident that West Ham’s player policy is the main reason for the reversal of profits is player related.

Owners David Gold and Sullivan have not endeared themselves to fans by charging a further £1.9 million on their £45 million loan to the club though, taking the total interest charges to over £18 million, not a game changer to the club, but high when compared to some other owners, including Mike Ashley at Newcastle, who for all his faults has lent £111 million interest free. .

West Ham managed to fund the loss last season by borrowing money secured on future broadcast rights, whilst this is a common event in the Premier League it will cause problems if the club is relegated.

Losing Premier League status would be challenging for West Ham, but the auditors seem happy with the club’s going concern status and many players have significant relegation wage clauses in their contracts.

Player trading

West Ham signed players for £108 million in the year to 31 May 2019 as Anderson, Diop, Yarmolenko, Fabianski and Co were recruited. Sales were a modest £14 million. Since then the club spent a net £36 million in the summer 2019 window and Bowen, Randolph and Soucek in January 2020.

Over the course of the last decade West Ham spent a total of £444 million on players and recouped about a third of it in sales. What is noticeable is that the club has made many of the player signings on credit, which could be a concern if the club is relegated.

Funding

West Ham have borrowed money from a variety of sources. Gold and Sullivan have lent £45 million and presently charge interest at 4.25%. In addition, there was a £42 million loan from Rights and Media Limited, which was half paid off shortly before the year end and so reduced the liability at the balance sheet date. The loan was then effectively renewed shortly after the year end. David Sullivan candidly admits that 75% of the club’s income is effectively generated between 31 May and 31 July.

The criticisms levelled at the owners are that other club owners have lent money to the club and not charged interest, including the US investors at West Ham, who own 10% of the company. Whilst the interest charged ultimately is relatively insignificant (1.8%) of revenue if the club is not delivering on the pitch then it sticks in the throat of those who have given up what has been a huge part of their lives for an anodyne extension to a shopping centre.

Summary

So, where does this leave West Ham? There is no doubt that the Gold, Sullivan and Brady are unpopular with a large proportion of fans. They hugely overpromised and underdelivered in relation to the benefits of the stadium move. The very big financial gap between West Ham and the ‘Big Six’ is as big as ever. What was so great and identifiable historically about West Ham has been lost in the shape of being representative of East End working class culture has been replaced with a very bland, very corporate and very anonymous ‘matchday experience’ that is for many a price too high. If the club was closer in the Premier League table as it is in the income and wage table then perhaps a lot would be forgiven, but until then it’s going to be a hostile environment and a sense of loss by the fans.

Premier League Ownership Investment: Love, profit, vanity or insanity?

Premier League Funding

Football clubs can broadly arrange their finances in one of three ways, bank lending, owner loans or shares.

In terms of the Premier League all three methods have been used. The following analysis is from the most recent documents filed by clubs at Companies House.

Liverpool

League leaders Liverpool are owned by the American Fenway Sports Group (FSG), who also own baseball team Boston Red Sox.

FSG acquired Liverpool in October 2010 for an estimated £300 million. The club paid off existing loans due to the previous owners of £105 million.

Since then FSG have lent the club almost £100 million as well as borrowing £56 million from banks to help fund stadium expansion at Anfield.

Liverpool have a borrowing facility of £150 million from the bank but sales of the likes of Suarez, Sterling and Coutinho have allowed Liverpool to stay significantly below that sum.

If the club goes ahead with further expansion to take Anfield up to 60,000 capacity then they may need to borrow more.

The loans are at very low interest rates (1.24% from FSG and 2.24% from the banks).

Manchester City

Manchester City were acquired by Sheik Mansour’s Abu Dhabi United Group in 2008. The owners initially lent money to the club at an interest rate of 10% but these loans were quickly converted into shares, upon which no interest is payable.

Abu Dhabi United accelerated City’s growth by underwriting large losses as the club invested heavily in players, manager and infrastructure. These losses peaked at £197 million in 2011.

Manchester City are part of City Football Group, which owns clubs in the USA, Australia, China, Japan, India and Uruguay. The success of the multi club model was evidenced recently when American tech company SilverLake bought 10% of City Football Group for £389 million.

Spurs

Spurs historically have been cautious in terms of issuing shares and borrowing, but the decision to build a new stadium at White Hart Lane necessitated change. Spurs have mainly taken the bank borrowing route with a £537 million loan facility arranged with a consortium of Bank of America, HSBC and Goldman Sachs. In addition majority shareholder ENIC, controlled by Joe Lewis in the Bahamas, have provided a further £50 million.

The interest rate on the loan is modest so Spurs will be paying about £15 million a year, which will be more than covered by the additional matchday, hospitality and commercial income generated by the 62,000 multi-function stadium, which has already been used for hosting NFL fixtures.

Chelsea

The Chelsea company structure resembles that of a matryoshka doll, which is befitting given that Roman Abramovich is from Russia.

Chelsea Football Club Limited is owned by Chelsea FC plc, which in turn is owned by Fordstam Limited, which is funded by Camberley International Investments Limited, (CII) controlled by Mr Abramovich.

In 2018/19 Abramovich lent £247 million to the club, which seems at odds with the stories that he had lost interest in Chelsea following the refusal of the British government to renew his investor visa. He had historically rented an executive box at Stamford Bridge for £1 million a year but has not been seen at the stadium now since 2017.

In total Abramovich has lent the club £1.38 billion interest free since acquiring it in 2003. The club’s stadium expansion/move has been put on hold indefinitely though, which does mean that Chelsea are some way behind its peer group in the ‘Big Six’ in terms of capacity, which in term impacts upon its ability to generate revenues.

Manchester United

Manchester United were acquired by Malcolm Glazer in 2005 via a Leveraged Buy Out (LBO), at a time when the club had zero debt and cash in the bank. An LBO arises when an investor borrows a substantial sum to buy a company and uses the cash generated by the business to pay the loans.

Initially banks were wary of lending to a business they were not convinced was risk free and this was reflected in very high interest rates and some of the loans being Payment In Kind (PIK) where the borrower pays neither capital nor interest, and the interest cost is added to the value of the loan.

Manchester United are another example of a complex ownership structure, involving a myriad of companies registered in both the UK and Cayman Islands. The club had a share listing in New York in 2012, part of which was used to pay off £200 million of loans. United have approximately £500 million of loans outstanding but these have been renegotiated at much lower interest rates.

The Glazer family have not invested sums into the club themselves. Manchester United is the only Premier League club that regularly pays a dividend to shareholders, and this returns about £22 million to them each year.

Arsenal

Arsenal’s owner Stan Kroenke controls the club via US company KSE UK Inc. Kroenke has come under criticism from Arsenal fans for his perceived reluctance to invest money in the playing squad, instead concentrating on reducing the club’s debt levels.

Arsenal moved from Highbury to The Emirates stadium in 2006, with loans peaking shortly thereafter at £415 million. Since then the debt has halved as the club has made regular repayments to lenders.

Kroenke bought out the other shareholders of Arsenal for £600 million to take the club private in 2018. His critics have used this to accuse him of having money to fund share purchases but being reluctant to spend on players to help win trophies.

Research indicates that on field success in terms of trophies is closely correlated to wage levels and here Arsenal have fallen behind their peer group. Kroenke’s critics have accused him of being content to sacrifice on pitch performance for a better looking balance sheet.

Under Arsene Wenger the club finished either 3rd or 4th in the Premier League for ten seasons from 2005-6 onwards, sufficient to qualify for the Champions League but in the eyes of fans not investing enough in players to challenge for major trophies.

Everton

Everton recently announced record losses of £112 million as new owner Farhad Moshiri has underwritten an attempt to break into the regular group of clubs who compete for Champions League places.

The losses are a result of paying higher transfer fees and wages than in previous years. Moshiri was previously a shareholder at Arsenal, but sold his shares and used the proceeds to buy 49.9% of Everton for an estimated £175 million in 2016.

Since then Moshiri has increased his shareholding to give him greater control, but more importantly for the club has lent £350 million interest free via an Isle of Man company. In addition Moshiri’s business partner Alisher Usmanov has paid £48 million for innovative naming rights schemes for the training ground and a potential future stadium at Bramley-Moore Dock.

West Ham

West Ham have been owned by David Sullivan and David Gold since 2010. The club’s previous owners, an Icelandic bank consortium, had financial trouble following the global economic crash.

Under Gold and Sullivan West Ham have moved to the London Stadium after selling the Boleyn Ground. They lent the club money upon which interest of £18 million was charged over the years. The loan balance of £45 million is still outstanding. This has angered some West Ham fans who feel that the interest charges would have been better spent on the playing squad. The owners argue that the interest rates they have charged, of between 4-6%, are lower than would have been charged by a bank and so the club has saved money.

Brighton

Brighton owner and lifelong fan Tony Bloom acquired the club when it was in League One and playing at a local athletic track. He then underwrote the move to a new stadium at Falmer as well as new training facilities in a combination of shares and interest free loans. Despite promotion to the Premier League in 2017 Bloom has continued to bankroll the club, with a total commitment of £362 million by the end of 2019.

Podcast 23 January

Kieran talks Kevin through his number crunch of the average weekly wages at each Premier League club since 1993. They also examine the difference between the prize money in the Women’s FA Cup compared to the men’s version, the size of the new kit deal between Nike and Liverpool, the significance of the Sunderland owner putting the club up for sale, and why some Championship clubs are charging more than those in the Premier League for away tickets. https://play.acast.com/s/priceoffootball/6d457b09-cb48-4da7-a09f-7c74396f45fb

Football Transfers and Creative Accounting: Protect me from what I want

It’s the disease of the age, It’s the disease that we crave.

When Derby County published their response to the EFL charges for financial misconduct on Friday 17th January 2020, it included reference to ‘the newly notified charge of intangible fixed asset amortisation’.

The nonsense below is all about the said subject, but extended to how clubs can increase or decrease costs in the accounts in relation to how they account for players.

The Basics

When a club signs a player, they will often pay compensation to the previous club for his registration certificate lodged at the football authorities, this is what is commonly called a transfer fee and is either negotiated between the two clubs or embedded in the player’s contract.

The buying club then spreads the cost of the transfer fee over the period of the contract signed by the player, so when Harry Maguire signed for Manchester United in summer 2019 for £80 million on a six year deal this works out as an annual amortisation cost of £13.3 million (£80m/6).

The total amortisation fees for the whole squad are treated as an expense in the accounts, and importantly, ARE included in Financial Fair Play/Profitability & Sustainability (P&S) calculations.

Amortisation costs for many clubs in higher divisions are usually the second biggest expense after that of player wages, as shown by the figures below for Everton.

The creatives

Under P&S rules clubs are assessed over a three year period, so sometimes it may be beneficial for them to accelerate or decelerate costs in a particular year, so ensure they stay within the limits during a particular three year assessment period.

Here are possible methods that could be used, all of which have been approved by the clubs’ respective auditors.

  1. Player impairment

All fans have seen players who they quickly write off as rubbish and a waste of money. This applies in the accounts too.

In 2015/16 Aston Villa were relegated from the Premier League, which allows a P&S loss of £105 million over three years, which then tapers down to £39 million over three years in the EFL Championship.

It is therefore in Villa’s interests to put as many costs into their 2015/16 accounts to be absorbed by their Premier League P&S limit.

Villa achieved this by charging an extra £79.6 million as a cost in the expense for impairment of the stadium and players (called ‘intangible assets’ in the accounts).

This works as follows. If you sign a player for £30 million on a five year contract the amortisation cost is £6m a year, a tough cost to have to deal with in the Championship. However, if the club was relegated at the end of the first season there is nothing to stop it from assessing the player’s value and conclude that he is worth, say, £10 million.

This would mean that his book value at the end of year one would fall from £24 million (£30m less one year’s amortisation of £6m) to £10m, which would result in a £14 million impairment charge.

However in subsequent years the amortisation charge would be just £2.5 million a year (£10m book value spread over the remaining four years of the contract), which is useful for P&S purposes in the Championship.

When Villa did this the £35 million impairment charge in 2016 would (if remaining contract lengths were on average 3 years) have reduced costs by nearly £12 million a year in the Championship.

Sometimes the reason for an impairment is clear and the decrease in value is understandable (due to long term injury, the fee initially paid was too high or the player is Mario Balotelli). Impairment does however give clubs licence to accelerate player costs into an earlier year.

  1. Contract extensions

Amortisation is the registration fee spread over the contract period, so if you extend the contract you reduce the annual cost.

Example: Sign a player for £20m on 1 January 2019 on a four year contract. At the end of 2019 give him a two year contract extension.

Amortisation charge in 2019 = £5m (£20m/4)

Amortisation charge 2020 onwards £3m ((20-5m)/(3+2))

This reduces FFP losses by £2m a year.

Therefore by extending a contract a club can reduce costs in a single year.

  1. Player sale profits

These are calculated by comparing the transfer fee receivable to the book value of the player. Even when a player is sold at what fans may think is a loss for accounting purposes it can work out at a profit.

Example: A player is signed for £40 million on a five year contract on 1 January 2018. He’s not been a success so is sold for £26 million on 1 January 2020. At that date his accounting book value is £24 million (£40m – 2 years amortisation at £8m a year) so book a profit of £2m on the deal.

It’s always important to check the sale date though, as these can be confusing. In the Derby County accounts for the year ended 30 June 2017 the club included the profit on the sale of Tom Ince to Huddersfield Town, which contributed towards FFP for that year. That’s all well and good but the sale of Ince did not take place until July 2017, which is in the 2017/18 accounts in theory.

By having a player sale just before or after the year end a club can increase or decrease profits in the year that suits it best.

  1. Residual Values

The issue that appears to be irking the EFL most of all is Derby’s use of residual values for players. All other Premier League and Championship clubs amortise player contracts on a straight line basis to a zero value at the end of the contract. This is because players can leave on a Bosman deal at the contract end so the ‘selling’ club received no fee.

Derby changed their accounting policy in 2017 for player registration fees to include the ‘ consideration of active market residual values’. Prior to that Derby ignored residual values similar to other clubs.

This might seem an insignificant comment, but this allows a club to reduce amortisation fees (and therefore costs for FFP). A player signed on a £30m four year deal costs £7.5 million annually in amortisation.

If the club gives him (say) a £12 million residual value at the end of the contract (which ignores he can leave on a Bosman) then the amortisation cost falls to ((£30-12m)/4) = £4.5 million a year.

A look at Derby’s accounts shows that for 2017/18 the club had transfer fees and registration intangible assets that were £52.5m at the start of the year and £62.2m at the end. This gives an average of £57.3m. The amortisation fee for the year was £6.6 million. This means that Derby were effectively spreading transfer fees over 8.7 years, which seems very long for contract length, and is far longer than the average for the division of about 3.7 years.

Derby’s defence is that the EFL had already signed off on the issue and that they should have been aware of it. I can confirm the latter having written to the EFL in June 2018 on the very subject which generated this response from…supporter services.

Given that the EFL have been aware of the issue since June 2018, it does seem odd that the charges have been made at Derby in January 2020.

Podcast 16 January

In this show Kevin and Kieran look at how Chelsea won the Europa League, finished in the top four domestically but still needed to borrow £247 million from Roman Abramovich as they racked up huge losses.

Plus a look at what happens when UEFA ride into town, the situation at Southend where wages have gone unpaid, why Spanish and Italian games are being played in Riyadh and much more.

Podcast 13th January

It’s another one of our listener’s questions (or should that be reader’s wives) shows in which we look at the demise of Chesterfield since relegation to the National League, whether another Leeds United style implosion could arise if a club leaves the Premier League and exactly what did (and did not) the auditors do at the FAI. https://podcasts.apple.com/gb/podcast/spireites-the-next-leeds-united-and-the-fai/id1482886394?i=1000462328392