Birmingham City 2018: The Lion Sleeps Tonight

Introduction

Birmingham City’s parent company Birmingham Sports Holdings Ltd, announced its financial results for the year ended 30 June 2018 in October. We wrote about them at the time and can now slightly refine the figures after Birmingam City Football Club plc sent their accounts to the company registrar.

Key Figures

Income up 7% to £18.8 million

Wages up 69% to £38.0 million

Trading losses up from £16.1 to £38.8 million

Player purchases up from £11.6 to £15.4 million

Income

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

Birmingham’s matchday income rose by 9% last season to £4.9 million last season, which was a quarter of the club’s total revenues. This was a continuation of a continual rise over the last few seasons.

The increase in matchday revenue was on the back of attendances rising 12.4% from 18,717 to 21,042 at the now snappily named St Andrew’s Trillion Trophy Stadium. Last season was the first since the club was relegated in 2011 that crowds have averaged more than 20,000. The excitement of a relegation escape in 2016/17 and the investment in the playing squad by the owners persuaded many Blues’ fans to buy season tickets.

Whilst attendances were up, the club was unable to generate more money from fans, presumably as season ticket prices were frozen for the fifth season in a row.

Broadcast income for clubs in the Championship varies significantly due to some clubs receiving parachute payments. Clubs now receive these for three years (two if relegated in first season following promotion) and this is tapered as 55%, then 45% and finally 20% of the equally shared element of Premier League payments.

For clubs such as Birmingham who are not in receipt of parachute payments, they receive about £6.5 million in the Championship for broadcasting. About £4.3 million of this comes from ‘solidarity payments’ from the Premier League as a share of the PL TV deal, and the remainder from the EFL’s own deal with Sky.

Birmingham’s parachute payments finished in 2015, the main reason why broadcast income has increased since 2016 is down to the more lucrative Premier League TV deal which kicked in in 2017, which increased solidarity payments, as well as being more popular with Sky, as each home match is worth an extra £100,000 if broadcast live.

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 increased by 3% to £6.3 million. This initially feels disappointng as fans might have thought that the ‘Harry effect’  would have generated more interest from sponsors due to the love him or loathe him Redknapp is as a well known ‘face’ (albeit one where all the good looks were clearly on the mother’s side judging by his son Jamie). The other potential cause for the rise in commercial income is the role of owners Trillion Trophy, who may have used their contacts to arrange partnership deals with Hong Kong based sponsors, but this too hasn’t turned to gold.

Commercial income should rise further in 2018/19 due to the naming rights given to the stadium by the owners, although there may be raised eyebrows at the EFL if the sum paid is above normal market rates, and any excess will be disallowed for FFP purposes.

Overall Birmingham’s income rose by 7%. The big discriminator in the Championship is parachute payments, which create a two speed division in term of income and costs.

Birmingham’s overall revenue puts the club about 16^th in the division as a whole for last year, assuming there are no other major changes. This makes it difficult to compete if wanting to compete for a playoff place, unless you are very lucky or take a cavalier approach to FFP.

If the distorting impact of parachute payments is ignored, then Birmingham are about mid table in terms of income generation, which seems about right given the level of their attendances and that they are a ‘big city’ club.

Costs

Birmingham’s main costs, like those of nearly all clubs, were in relation to players, in two forms, wages and amortisation. Birmingham seem to have gambled on making signings for both fees and on Bosman deals in which the club went for broke in terms of offering players terms that would not be matched elsewhere.

Whilst it is easy to blame Harry Redknapp for this, ultimately he doesn’t have the cheque book at the club, instead that is the responsibility of the board of directors, who showed the same amount of restraint as Shaun Ryder given an ‘all you can eat’ ticket in a crack cocaine den

For example, David Stockdale, voted goalkeeper of the year in the PFA awards in 2017, turned down a new contract with Brighton, promoted to the Premier League, and instead opted for a three-year deal with Birmingham. It’s highly unlikely he would reject the chance to play in the PL unless he was given a very good deal at St Andrew’s.

The group paid £202 in wages for every £100 of income, as wages rose by 69% to £38 million.

Birmingham’s wage bill had already risen by 50% in 2017 as another spending spree under the managerial catastrophe in the shape of Gianfranco Zola.

The Championship is a clown car of a division when it comes to wage control, but even by the lunatic standards of Birmingham’s peers, the attitude by senior management to player costs was similar to that of leaving Boris Johnson in charge of a brothel (or more frighteningly, the UK economy…either way everyone would be shafted).

Player Amortisation

Amortisation is how the accountants deal with player transfers in the profit and loss account. This is achieved by spreading the transfer fee over the life of the contract signed.

For example, when Blues signed Jota from Brentford in the summer of 2017 for £6 million on a four-year deal, this works out as an annual amortisation cost of £1.5 million. The amortisation cost in the profit and loss account represents the total for all players signed for fees in previous seasons.

Birmingham’s amortisation cost nearly tripled in 2017/18 due to the club moving from a period of austerity to signing the likes of Jota, Roberts, Colin, Dean and Gardner for seven figure fees.

The increase in amortisation charge meant that Birmingham’s charge in 2018 was higher than that of promoted Brighton and Huddersfield the previous season.

Adding amortisation and depreciation together gives us total player cost of nearly £48 million, which was higher than that of relegated Hull, who had the benefit of parachute payments to cushion the blow. This resulted in Blues having a total player cost of £243 for every £100 of income, and that’s before paying for heat, light, insurance, medical costs and so on. This relationship has more than tripled since 2015.

Again this heavy investment in players has resulted in Birmingham having the highest such cost in the division.

The Championship overall had player costs of £122 for every £100 of income, which meant that club owners, or banks, had to not only pay for part of player costs, but also for rent, electricity, maintenance and all other running costs.

Profits and losses

Profit is income less costs, but it contains lots of layers and estimated figures. Birmingham, like all clubs, show a variety of profit measures in their accounts (although in Birmingham’s case they are mainly losses), so they need a bit of explanation.

Operating profit is income less all the running costs of the club except loan interest. It is an unreliable profit measure in that it includes volatile one-off non-recurring costs such as gains on player sales and redundancy packages for managers that make calculating the underlying profitability of the club difficult.

The scary news for Blues’ fans is that the holding company made an operating loss of £703,000 a week in 2017/18, over £36 million, whereas the club was breaking even in 2015 on this profit measure.

Total operating losses in the Championship in 2016/17 were £260 million, but even so Birmingham’s figures are at the extreme end of the scale.

Whilst Birmingham’s losses in 2018 were close to those of Newcastle and Brighton the previous season, both those clubs ended up in the Premier League and paid out promotion bonuses of about £10 million each, whereas Birmingham finished 19th.

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 Birmingham the EBIT losses exceeded operating as the club had gains on player sales of over £2 million from selling Ryan Shotton and Kerim Frei.

Having said that Blues’ EBIT losses are not as high as those of local rivals Villa in 2017 under the head scratching ownership of Tony Xia.

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 celebrating defeats at the Etihad when Manchester City score less than three goals against you and getting giddy when beating the likes of Cardiff and Huddersfield.

If non-cash costs such as amortisation and depreciation (depreciation is the same as amortisation except this is how a club charges a cost for other long-term assets such as buildings) are excluded 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, and it is more likely to be positive than the likes of EBIT.

Despite adding back these costs, Birmingham has an EBITDA loss of over £30 million. This shows that the club was haemorraghing about £600,000 a week in cash from its day to day trading.

Birmingham had EBITDA losses that exceeded those of any club in the Championship in 2017.

In addition, if a club has loans then the loan interest is then deducted to arrive at profit before tax. Birmingham’s interest cost in 2018 was about £0.9 million.

FFP losses

The summer has been one of rumour and counter-rumour in relation to Birmingham’s FFP situation.

In the accounts the club has admitted the following

Under EFL FFP rules, a club is allowed a maximum loss over 3 seasons of £39 million. However, FFP starts with profit before tax but the losses exclude the following

• Infrastructure costs such as depreciation
• Academy costs
• Women’s football costs
• Community scheme costs

Birmingham have a category 2 academy, which is estimated to cost about £1.5 million a year, so looking at the three years to June 2018 gives a rough FFP loss of over £50 million, and therefore have exceeded the allowable limit by £11 million.

This cavalier approach to FFP in 2018 resulted initially in Birmingham being given a ‘soft’ transfer embargo, in which the club was not supposed to sign players for a fee, and any free transfer signings were restricted to an annual salary of ‘only’ £600,000 a year.

This embargo was not publicised to in theory allow the club to recruit players without everyone knowing the extent of the club’s financial problems…although in practice, football, being the open gossip factory that it is, was circulating rumours all summer that something was amiss at the club.

If the figures above are accurate (and they do contain guesstimates) then it is clear why other clubs in the Championship who have followed the soft embargo rules (likely to be Sheffield Wednesday and Villa, possibly Derby too) were so hacked off with Birmingham when they signed Kristian Pedersen for £2.4 million.

This is the reason why Birmingham are under a threat of a points deduction, as the EFL have unlimited punitive powers and want to make an example of someone as other clubs have abided by the rules.

Player Trading

Birmingham spent £15.3 million on new players in the year to 30 June 2018, after years of having a policy of a negative net transfer spend.

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.

Accusations will be made pointing the finger at Harry Redknapp for the large spending on players, but there should be someone within the club hierarchy who sets a budget limit, and this seems to have been absent at Birmingham.

At 30 June 2018 Birmingham owed other clubs £8 million for outstanding transfers and another £5.7 million is payable if certain conditions are satisfied (such as promotion to the Premier League).

Investment and funding

Club owners can invest three ways, sponsorship, lending or buying shares. The renaming of the stadium in the summer of 2018 suggests Trillion is trying to reduce FFP losses by using this route, although the EFL will be doing their best to ensure only a ‘market’ rate is allocated to when calculating the allowable loss.

The club borrowed about £39 million in 2018 to fund the £800,000 a week that was lost due to wages and other costs exceeding income.

Funding a club this way is feasible on a long term basis, but usually only if the owner is willing to write off the sums and is ridiculously rich, as has been seen with the likes of Manchester City and Chelsea. There’s little evidence that Birmingham’s owners have the same mindset.

Summary

Birmingham gambled on Harry Redknapp weaving some magic in 2017/18 and that the consequences of non-promotion wouldn’t apply to them. This might have been because they saw the EFL taking a soft line with QPR, Bournemouth and Leicester for FFP abuses in recent years.

Whether the EFL do have teeth is still to be seen, but there will be many other clubs watching with close interest.

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