Swansea City: Soul Train

Introduction

Huw Jenkins, Swansea’s chairman, who made millions when the club was acquired by American investors in 2016, has resigned. Reading between the lines it appears that there are conflicts in terms of day to day running of the club.

The club’s finances are clearly an issue, as is the strategy of the majority shareholders Jason Levien and Steve Kaplan in terms of how the club is going to deal with the aftermath of relegation.

Swansea haven’t yet published their accounts for 2017/18, but were there warning signs in the previous year?

Key Financial Highlights for year ended 31 July 2017

Turnover £128 million (up 31%)

Wages £99 million (up 21%)

Pre-player sale losses £22 million (up 12%)

Player sale profits £37 million (up from £6 million)

Player signings £64 million (up from £16 million)

Income

Swansea, like all clubs, have three main sources, matchday, broadcasting and commercial.

The club reduced season ticket prices in 2014/15 which explains why matchday income fell that season and since then the amount generated from fans has been broadly static as ticket prices have been frozen.

Given the relative scarcity of large corporate sponsors in the area, a limited stadium capacity and the club not being located in an affluent area it is of little surprise that Swansea are close to the bottom of the table when it comes to matchday income.

This is also reflected in the relatively low average sums generated from each fan by the club from matchday. The big English city clubs, with the added attraction of UEFA cup fixtures were generating 3-5 times as much from each fan compared to the Liberty Stadium.

Broadcast income is allocated in a relatively democratic method in the Premier League (although the ‘Big Six’ of Manchester United, Manchester City, Arsenal, Spurs, Chelsea and Liverpool, three of which have US owners, one Russian, one Middle East and one Bahamas are doing their best to skew the money further towards themselves) and is by far Swansea’s biggest paymaster.

The large rises in 2013/14 and 2016/17 were due to new BT/Sky deals coming on stream. The Big Six generate more money from TV due to three factors, participation in Champions/Europa League, appearing more often on BT/Sky (each appearance is worth £1 million once a club appears more than ten times) and prize money linked to the final position in the table.

Swansea’s broadcast income fell by about £10 million in 2017/18 due to being relegated and so receiving less ‘merit’ money.

In 2018/19 Swansea’s broadcast income will fall to about £45 million, followed by £35 million, £14 million and £7 million if they remain in the Championship, so cost cutting will be a feature of the club unless the owners invest.

Swansea have done well to nearly double their commercial income since 2013. Part of this is due to signing shirt sponsorship deal with betting companies, who are prepared to pay more than companies in other industries for the benefit of exposure globally on television. Expect this figure to fall in 2018/19 as Championship matches attract much lower TV audiences than the Premier League. LeTou were estimated to be paying Swansea £4.5 million in 2017/18 but this will fall substantially this season/.

Like most clubs, Swansea generate the greatest proportion of their income from broadcast revenues, with £86 out of every £100 coming from BT/Sky . This is fine so long as the club was a member of the Premier League.

Every club in the Premier League is looking to increase income but with TV deals having perhaps reached a ceiling and grounds already full the burden for growth is falling upon commercial departments.

Swansea fans are realistic enough to know that they are in the bottom ten clubs each season whose overall income is fairly close to one another and to an extent determined by merit and facility broadcast fees. These clubs are the ones most likely to be in the relegation mix each season so realistically start each season with a 30% chance of being relegated.

Costs

The most significant costs for a club are in relation to player wages and transfer fees and here Swansea have been notable for their willingness to pay decent wages by Premier League standards, with an average weekly wage of £47,000 in 2016/17, which is towards the top end of the bottom half of clubs in the Premier League .

The problem with such an approach is that the club pays out so much of its income in wages that there is little left to pay the other running costs.

Dividing wages by income gives a ratio that is used by analysts to assess whether a club is spending too much on player remuneration and Swansea had the second highest ratio in the Premier League in 2015, 2016 and 2017.

Without knowing much about the internal workings of the club one person who seems to do reasonably well from Swansea’s tenure in the Premier League is the highest paid director.

£12,000 a week isn’t excessive by Premier League standards, (the median amount paid is £620,000) but you would expect someone on such a wedge to be capable of making good recruitment and commercial decisions.

Every player signed for a fee also adds to costs in the profit and loss account via transfer fee amortisation, which is calculated by dividing the amount paid over the contract period. So, when Swansea signed Sam Clucas from Hull for an estimated £12 million on a four-year deal this works out as a £3 million amortisation charge each year.

Swansea’s amortisation cost has more than doubled since 2013 as the club tried to further establish its position as a Premier League club.

Despite the investment in the likes of Ayew, Bony and Clucas in 2017/18 Swansea’s amortisation cost was slightly lower than some of their peer group in the bottom ten and this may be an indicator why the club was relegated in 2018. There is a case for saying amortisation highlights the medium/long term investment in new players.

If the amortisation charge is added to wages, then it is possible to look at the total investment in players as a proportion of income.

In Swansea’s case this is quite alarming as the club was paying £96-£102 in these costs for every £100 of income. This left virtually nothing remaining to pay the rest of the bills and therefore either player sales or owner funding was required to balance the books.

Like all businesses, Swansea have to also pay for everything from electricity, transport and insurance as overheads and these have risen substantially in the last five years. This is an area the club must address in the Championship as by 2017 the club was spending £1/2 million a week on such costs.

Profits

In finance you have to be careful when discussing profits as there are as many types of profit as there are ex-members of The Fall.

Expenses are usually subtracted from income to arrive at profit, but some expenses are erratic in nature and sometimes excluded when trying to determine a club’s underlying financial health for the season.

Simply deducting all day to day costs from revenue, before considering borrowing expenses, meant that Swansea could claim to have made a record £79 million last season.

A look at the above profit and loss figures shows there has been much volatility in relation to Swansea’s profits and losses from year to year. This is mainly due to one off transactions which distort the numbers, such as profits on player sales and in the case of Swansea paying up the contracts of a variety of sacked managers and their entourages.

Most analysts ignore finance, tax and one-off costs to create something called EBIT (Earnings before interest and tax) which represents the club’s underlying profit, and for Swansea in 2017 this converted the profit of £14 million into a loss of £22 million. The main reason for this decline was the combination of lower income and higher player related costs that have been already highlighted. Swansea have been dependent upon player sales to balance trading losses that averaged £380,000 a week in the last three seasons, despite record levels of broadcast income.

The EBIT figure shows that running Swansea is a frighteningly expensive business and therefore the club needs to generate income from an additional source, and that source if player sales.

Swansea made a record profit of £37 million in 2017 player sales (Ayew, Williams etc) and this is likely to have been eclipsed in 2018 as Sigurdsson and Llorente were sold.

If player transfer sales are to be excluded from profit, then there is a case for excluding transfer amortisation costs too, which leads to another form of profit, called EBITDA. This is popular with analysts as it is a trading cash profit equivalent.

This is possibly the most revealing figure about Swansea as it suggests that the club has a strategy of breaking even at least in terms of EBITDA profit. This does mean that the club has to also break even in terms of player trading unless it wants to borrow from banks or the owners stick their hands in their pockets. However, Swansea’s relatively loose wage bill control resulted in the club having the lowest EBITDA profit in the Premier League.

Player Trading

Swansea spent a record amount on new players in 2016/17 but also had record revenues from sales, which resulted in a net spend of £22 million. According to Transfermarkt the net spend the following season was £8 million.

Swansea seem to have had a policy of re-signing player whom they had previously sold at a profit, but this has not been successful on the pitch as the likes of Bony and Ayew failed to impress on their return to the club.

Funding

Clubs get funding from three sources, bank loans, owner loans (which may or may not be interest bearing) and shares issued to investors.

Swansea are controlled by Steve Kaplan and Jason Levien, who have a 70% majority stake between them. When the deal was brokered a lot of people made a lot of money and the romantic element of Swansea’s rescue from near bankruptcy and rise through the divisions looked slightly grubbier as a result.

David Conn Guardian Sale of Swansea

The sale of the club in 2016 seems to have been the start of the club’s decline on the pitch as relations between the Supporter’s Trust and the new owners have fractured. Kaplan and Levien’s motives are unclear, but they presumably perceive Swansea as a franchise and want a return on their investment.

Since acquiring the club there is no evidence of substantial investment by the new owners. There’s a case for saying this shouldn’t be necessary given the riches of the Premier League, but it’s an uncomfortable situation to be in when so many people

Conclusion

Swansea are in a tricky position, they have not invested in the playing squad since relegation and are using player sales and parachute payments as a means of generating cash. Matchday prices have been reduced to try to ensure that attendances do not fall significantly but the club appears to be budgeting for life as a Championship club rather than gambling on a quick return to the Premier League.

The club’s business model in the Premier League was a dangerous one, spending more on wages than their peers worked for a while, but some poor managerial and player choices had led to a fire sale and a desperate need to get players off the wage bill now the club are in the Championship.

Kaplan and Levien’s motives for running the club are mysterious. They appear to want Swansea to be self-financing, which is understandable to a degree, but having spent £70 million buying control in the club in 2016 it is difficult to see how they will get their money back as the club is likely to be valued at half that sum or less outside of the Premier League.

It’s probable that their aim was to generate some income from dividend payments from the club whilst it was in the Premier League or alternatively flip the club and sell it on to another ‘investor’ with the moral compass of  an alleycat for a handsome profit, but neither has materialised to date.

The Championship is a bear pit of a division, with clubs averaging trading losses of £330,000 a week, which have to be funded somehow. Player sales can only assist here for a limited time as ultimately the pool of players who can be sold at a profit diminishes as wage levels fall.

Huw Jenkins’ cryptic comments and the silence from the owners suggests that finance-based arguments led to his resignation and fans are no doubt fully aware of the profit that Jenkins made when selling his stake in the club in 2016 (and the £4 million of dividends paid to shareholders prior to that).

Good governance for any business requires transparency and honest communication and these both appear to be in short supply in SA1 at present.