TheFootballBusiness

Haaland transfer saga is a grotesque circus we may never see again | Barney Ronay

Barney Ronay — Fri, 02 Apr 2021 19:00:17 GMT

In a time of economic hardship, it is right to feel appalled at the potential sums involved in Erling Haaland’s impending transfer

At this time of year it was a common thing for elegant young men of the 19th century to set off on a Grand Tour of Europe. Shuttered inside his velveteen stage coach, the brave traveller would wind from royal court to ancient city, taking in the rites of passage: harpsichord studies in Bologna, a marzipan banquet in Nîmes, a wonderful six-month tuition in the fine art of Etruscan wrestling from a youth called Hercule on the Istanbul docks.

It was interesting to see Erling Haaland embarking on a kind of modern-day superstar athlete equivalent this week. According to reports first published in Spain, Haaland has been seen winding his way from Dortmund to Barcelona in the company of his father and – more importantly – his agent, the fascinating, reviled, devastatingly effective Mino Raiola.

Liverpool boost as owners confirm $735m RedBird deal for stake in FSG

Andy Hunter — Wed, 31 Mar 2021 18:07:33 GMT

Pandemic has cost club £120m in lost revenue over past year
Deal will enable Liverpool to sign players at pre-Covid levels

RedBird Capital Partners has bought a stake in Fenway Sports Group for about $735m (£533m), Liverpool’s owners have confirmed.

FSG has been in negotiations with RedBird, a private investment firm, for several months as it sought investment to cushion the financial impact of the pandemic, which is understood to have cost Liverpool £120m in lost revenue over the past year. That figure is set to increase and the deal with RedBird, which will become the third-biggest partner in FSG, will enable Liverpool to continue with plans to redevelop the Anfield Road stand and invest in player recruitment at pre-pandemic levels.

Premier League clubs' spending on agents' fees rises to £272m amid Covid

PA Media and Guardian sport — Wed, 31 Mar 2021 13:53:50 GMT

Chelsea the biggest spenders at £35,247,822
In top four divisions, only Gillingham did not pay agents

Chelsea were the biggest Premier League spenders on agents’ fees in the 12 months to the start of February 2021, data released by the Football Association shows.

Guide to England's top four divisions

Gegenpressing – Bundesliga Podcast – Rangnick drama at Schalke, Bayern smash VfB

Futbolgrad — Mon, 22 Mar 2021 22:31:01 GMT

The post Gegenpressing – Bundesliga Podcast – Rangnick drama at Schalke, Bayern smash VfB appeared first on Futbolgrad.

'A huge step forward': WSL announces record-breaking deal with BBC and Sky

Suzanne Wrack — Mon, 22 Mar 2021 00:01:08 GMT

£8m-a-season deal believed to be biggest in women’s football
Kelly Simmons hails ‘a landmark moment for the women’s game’

The FA has announced it has signed a “landmark” multimillion pound deal with Sky Sports and the BBC for the broadcast rights to the Women’s Super League. The agreement, which will run for three years from the 2021-22 season, is believed to be worth around £8m a season and to be the biggest broadcast deal of any professional women’s football league in the world.

Some of the money will be used for central investments, which will include support for and development of refereeing, while the rest will be split among clubs with the WSL receiving 75% and the Championship a 25% share. Some of the money will be merit-based.

Manchester United sign £235m shirt sponsorship deal with TeamViewer

Jamie Jackson — Fri, 19 Mar 2021 13:27:38 GMT

Five-year contract starts from next season
Club believe deal is sport’s most lucrative during pandemic

Manchester United have announced a five-year €275m (£235m) shirt sponsorship deal with TeamViewer, which starts from next season.

Who Will Be the underdogs to Watch at the 2022 World Cup in Qatar?

Futbolgrad — Mon, 15 Mar 2021 21:18:44 GMT

The qualification stage for the 2022 FIFA World Cup in Qatar is already underway in some parts of the world and it’s also due to kick off in a big way in Europe later this year. The draw for the European qualification stage was made in December 2020, creating some potential “groups of death” for […]

The post Who Will Be the underdogs to Watch at the 2022 World Cup in Qatar? appeared first on Futbolgrad.

Gegenpressing – Bundesliga Podcast – Drama at Schalke & Gladbach, Löw quits and American Bundesliga investment incoming

Futbolgrad — Mon, 15 Mar 2021 21:14:27 GMT

The post Gegenpressing – Bundesliga Podcast – Drama at Schalke & Gladbach, Löw quits and American Bundesliga investment incoming appeared first on Futbolgrad.

Premier League hurtling towards £2bn black hole, warns Richard Masters

Paul MacInnes — Fri, 12 Mar 2021 22:00:45 GMT

Chief executive reflects on ‘brutal’ cost of pandemic
League hopes to welcome back fans for final games

Richard Masters, the chief executive of the Premier League, has admitted the current season has proved “brutal” for top-flight clubs and warned of a financial loss heading “towards £2bn”.

Speaking on the anniversary of the suspension of England’s top league, Masters reflected on the impact of the pandemic on football and looked forward to the return of fans, with the aspiration being a “normal Premier League” from the start of next season.

Dynamo Kyiv vs Villarreal – Europe League – Preview

Futbolgrad — Tue, 09 Mar 2021 10:38:33 GMT

Mark Temnycky – Dynamo Kyiv vs Villarreal – Thursday, 11 March 2021 – 17:55 GMT/18:55 CEST – Olimpiyskiy Stadium, Kyiv, Ukraine Having defeated their respective opponents in the UEFA Europa League Round of 32, Dynamo Kyiv and Villarreal will face off in the competition’s Round of 16. Dynamo will host the first leg on Thursday. […]

The post Dynamo Kyiv vs Villarreal – Europe League – Preview appeared first on Futbolgrad.

AS Roma vs Shakhtar Donetsk – Europa League – Preview

Futbolgrad — Tue, 09 Mar 2021 10:37:53 GMT

Mark Temnycky – AS Roma vs Shakhtar Donetsk – Thursday, 11 March 2021 – 20:00 GMT/21:00 CEST – Stadio Olimpico, Rome, Italy AS Roma and Shakhtar Donetsk overcame their opponents in the UEFA Europa League Round of 32. Roma will host the first leg of this tie on Thursday. The Italians performed well in the […]

The post AS Roma vs Shakhtar Donetsk – Europa League – Preview appeared first on Futbolgrad.

Gegenpressing – Bundesliga Podcast – Lewandowski 3 Haaland 2 – Klassiker Analysis

Futbolgrad — Mon, 08 Mar 2021 22:11:39 GMT

The post Gegenpressing – Bundesliga Podcast – Lewandowski 3 Haaland 2 – Klassiker Analysis appeared first on Futbolgrad.

Manchester United borrow £60m as net debt rises amid Covid-19 pandemic

Bryan Armen Graham — Fri, 05 Mar 2021 00:05:20 GMT

Premier League club’s net debt increases to £455.5m
Ed Woodward hopes for ‘full capacity’ crowds next season

Manchester United have confirmed they accessed a £60m draw-down of their available £200m credit line in order to cover a soaring net debt of £455.5m as a result of the coronavirus pandemic. The club have also announced a 2.6% growth in total revenue from £168.4m to £172.8m in the last three months of 2020.

The modest climb was attributed to a 68% increase in broadcasting revenues to £108.7m, a figure helped mightily by United’s return to the Champions League. “Demand for live football remains strong,” the executive vice-chairman, Ed Woodward, said while announcing the club’s second-quarter fiscal results.

Sign of the times: why English clubs are turning to high-interest US loans | David Conn

David Conn — Mon, 22 Feb 2021 08:00:24 GMT

Southampton and Derby are among clubs whose stadiums are mortgaged to MSD Capital in search for much-needed funds

The new-year sale of Burnley to US investors after 139 years of local Lancashire ownership marked a sign of the times for football as Turf Moor, one of the 12 original Football League grounds, was mortgaged to the American private investment firm MSD Capital.

Three more clubs – Southampton, Derby and Sunderland – had taken out multimillion-pound loans from MSD or MSD’s senior partners, and their stadiums, somewhat newer than Turf Moor, were also mortgaged. Of these four clubs, only Southampton have publicly declared the cost of borrowing from MSD, paying 9.14% interest on a £78.8m loan taken out during the pandemic last June: £7.2m interest a year.

EFL confirms takeover of Sunderland by 23-year-old Frenchman Louis-Dreyfus

Louise Taylor — Thu, 18 Feb 2021 18:42:22 GMT

Louis-Dreyfus is the son of the late Marseille owner Robert
New owner says he is proud but recognises responsibility

Kyril Louis-Dreyfus has become the youngest chairman in English football after his protracted takeover of Sunderland was finally approved by the English Football League on Thursday.

National League left hanging in balance as money runs out

Nick Ames — Fri, 12 Feb 2021 18:35:26 GMT

Fifth and sixth tier clubs are struggling to fulfil fixtures after expected mid-season financial support failed to materialise

Late on Thursday afternoon variations of the same email began dropping in a number of National League chairmen’s inboxes and an unseemly situation became that much messier. The message was more or less uniform: the league was either charging its clubs for not fulfilling fixtures over the past week or holding the prospect of sanctions, which could include fines or even expulsion, over them if they opted not to play this weekend.

Nobody’s mind has been changed. The clubs will not be strong-armed and it means, when a decimated schedule is surveyed on Saturday, icy weather conditions tell only a fraction of the story. A disrupted season has reached crisis point, with cash-strapped smaller clubs adamant it should be declared null and void while others aim to press on. The campaign’s continuation is being put to a vote but, in the meantime, temperatures across England’s fifth and sixth tiers are rising amid a standoff wrenching at the domestic game’s very fabric.

Football supporters' groups condemn European super league plans

David Conn — Tue, 02 Feb 2021 09:00:31 GMT

Statement signed by fans’ groups at top clubs
Plans ‘would destroy the European model of sport’

Football supporters’ groups at top clubs across Europe have made a strong collective statement condemning proposals for a European “super league”, describing the initiative as “an unpopular, illegitimate and dangerous scheme”.

The statement from Football Supporters Europe (FSE) has been signed by 139 fans’ groups of top clubs in 16 countries, including the Premier League “big six” – Liverpool, Manchester United, Manchester City, Arsenal, Tottenham and Chelsea. It calls for a more equitable sharing of football’s money as it faces the Covid-19 crisis, and argues that a super league is the opposite of the response required.

Burnley's US takeover has left club £90m worse off and loaded with debt

David Conn — Tue, 02 Feb 2021 09:00:31 GMT

Takeover by ALK Capital has used the club’s own money
Deal has similarities to leveraged buyout of Manchester United

Heady recent wins at Liverpool and Arsenal have helped keep Sean Dyche’s Burnley team eight points above the Premier League relegation zone, but at Turf Moor the air is still clearing over a £170m US takeover which has used the club’s own money and loaded it with debt.

The new chairman Alan Pace, a former Wall Street financier leading the US consortium ALK Capital that bought the club, has been a very vocal proponent of energetic plans to build on Dyche’s achievements and improve the club’s historic home. But he has not explained in detail the deal to buy the club from its long-term local owners and directors, led by outgoing chairman Mike Garlick, who owned 49.24% of the shares, and John Banaszkiewicz, who had 28.2%.

NFL franchise San Francisco 49ers increase stake in Leeds United

PA Media — Mon, 25 Jan 2021 12:31:47 GMT

49ers boost stake in Premier League side from 15% to 37%
Bielsa hits back at suggestions his Leeds players are fatigued

The San Francisco 49ers have increased their stake in Leeds United to 37%, the Premier League club have announced.

Paraag Marathe, the president of 49ers Enterprises who was already a member of the Yorkshire club’s board, becomes the Whites’ vice-chairman and will be “more involved in the decision-making process and day-to-day operations”, Leeds said in a statement.

Covid-19 impact leaves major European football clubs with €1bn loss

Sid Lowe — Thu, 14 Jan 2021 08:00:32 GMT

Pandemic has hit players’ values, says KPMG study
Kylian Mbappé most valuable player at €200m

Twenty of Europe’s biggest clubs lost more than €1bn in revenue over the past year while almost 10% has been knocked off players’ average values as the game struggles with the economic impact of the Covid-19 pandemic, according to a study by the market analyst KPMG.

The European Champions Report, focused on the league winners across the six major leagues and carried out by the Football Benchmark Team, found Juventus, Paris Saint-Germain and Porto had double-digit percentage drops in revenue while Bayern Munich, Liverpool and Real Madrid experienced more modest revenue decline. Madrid and Bayern still posted profits, with the Spanish club boasting the highest income with €681.2m (£607m). They are followed by Bayern’s income of €607.2m, Liverpool’s €557m and PSG’s €540.6m.

The 10 most valuable players in the world

Arsenal take out £120m Bank of England loan to ease Covid-19 cashflow worries

Nick Ames — Thu, 07 Jan 2021 15:21:30 GMT

Club join Spurs and FA in taking short-term loan
Mesut Özil’s future will be decided in ‘the next few days’

Arsenal have taken out a £120m loan from the Bank of England in an effort to ease cashflow issues that have mounted during the Covid-19 pandemic.

The loan, which must be paid back by the end of May along with an undisclosed sum of interest, is designed to cover losses and will not have any effect on Mikel Arteta’s winter transfer plans. It has been provided by the bank’s Covid corporate financing facility, which assists organisations that meet highly specific investment criteria and are deemed to make significant contributions to the economy. Tottenham Hotspur and the Football Association are the only other football institutions to have made use of the scheme.

Wigan Athletic takeover off amid claims bidder reduced offer by almost 50%

Guardian sport — Tue, 05 Jan 2021 13:57:17 GMT

Administrators had been negotiating takeover since September
Club say accepting offer would have led to 15-point deduction

Wigan Athletic’s prospective takeover is off, with the League One club claiming that the Spanish bidders reduced their offer by almost 50%.

An offer fronted by the Leganes owner, Felipe Moreno, was accepted by the club’s administrators in September but the process had dragged on until Tuesday morning, when an official club statement revealed the news.

'Start of an exciting journey': US investor ALK seals Burnley takeover

Agencies — Thu, 31 Dec 2020 08:18:50 GMT

Delaware-based company acquires 84% stake in club
New chairman ‘fully prepared to back’ Sean Dyche

ALK Capital has completed its takeover of Burnley, with the US investor acquiring a controlling 84% stake in the Premier League club.

The Delaware-based ALK, which specialises in investments in the sport and media sectors, said its managing partner Alan Pace would take over from Mike Garlick as Burnley’s chairman.

US finance group ALK Capital closes in on Burnley takeover

Jamie Jackson — Tue, 29 Dec 2020 16:00:35 GMT

Buyout of club’s two major shareholders near completion
Sean Dyche waits to see if deal will lead to transfer boost

The US finance group ALK Capital is expected to complete its takeover of Burnley imminently in a buyout of the club’s two major shareholders that will give the company a near 90% holding.

Mike Garlick, the Burnley chairman, has a 49% share, and the former co-chairman and now director John Banaszkiewicz 28%, with the sale of each of these understood to be close to completion.

Fifa lodges 'criminal mismanagement' complaint against Sepp Blatter

PA Media — Tue, 22 Dec 2020 12:39:34 GMT

Complaint relates to Fifa museum project in Zurich
Blatter’s lawyer strongly denies ‘baseless’ accusations

Fifa has issued a complaint of “criminal mismanagement” against its former president Sepp Blatter.

The complaint, which has been sent to the Zurich prosecutor, relates to the involvement of Blatter and other former officials at the world governing body in the Fifa museum project in the Swiss city.

Top football clubs relying on transfer valuations made by volunteers

Ed Aarons — Sat, 19 Dec 2020 08:00:43 GMT

Lyon and Porto cite Transfermarkt website in fiscal reports
‘Clubs shouldn’t make transfer decisions based on our figures’

Valuations by the football data website Transfermarkt, which can often influence transfer negotiations and have appeared on several clubs’ annual financial reports, are determined mainly by volunteers, according to an investigation.

Transfermarkt, established in 2000 by a Werder Bremen supporter, records more than one billion page views every month and is one of the world’s largest football websites.

Sports Law & Business Conference 2018 Set For Manchester

Aaron Gourley — Fri, 24 Nov 2017 10:29:01 GMT

After the success of last year’s Football Law event, St John’s Buildings, in conjunction with...

The FA Makes Non-Executive Director Appointment

Aaron Gourley — Fri, 24 Nov 2017 10:14:03 GMT

The FA Board has appointed Rupinder Bains as their third Professional Game [PG] non-executive FA...

New Study Into Dementia In Football Commissioned

Aaron Gourley — Thu, 23 Nov 2017 16:39:07 GMT

Following two years of research and development The FA and the PFA have today confirmed...

Everton Move Closer To Bramley Dock Stadium Dream

Aaron Gourley — Thu, 23 Nov 2017 16:00:01 GMT

The Toffee’s moved a step closer to realising their new stadium plans today after Everton...

2018 Sports Technology Awards Judging Panel Revealed

Aaron Gourley — Thu, 23 Nov 2017 10:28:02 GMT

The 2018 Sports Technology Awards, the internationally recognised mark of excellence for tech-led innovation in...

AFC Fylde Expands Positive Pathways Programme

Aaron Gourley — Wed, 22 Nov 2017 16:56:50 GMT

A programme delivered by the AFC Fylde Community Foundation to stabilise the lives of ex-offenders...

Jeff Stelling’s March For Men Wins Major Accolade

Aaron Gourley — Wed, 22 Nov 2017 16:29:28 GMT

Intrepid television presenter Jeff Stelling has been honoured for his ‘unbelievable’ fundraising walk for Prostate...

Stadium Experience Announces New Public Catering Chair

Aaron Gourley — Wed, 22 Nov 2017 16:14:14 GMT

Stadium Experience was established 15 years ago with the aim of promoting stadia as unique...

Sheffield United Set To Fill Up The Senses Of Kop Fans

Aaron Gourley — Tue, 21 Nov 2017 11:35:36 GMT

Blades who are watching the team’s home fixture with Fulham in Kennedy’s Kop will...

Becoming A Female Leader In Football Just Got Easier

Aaron Gourley — Tue, 21 Nov 2017 09:53:56 GMT

Becoming a female leader in football just got easier, as The Football Business Academy continues its...

Chelsea - The Band Wore Blue Shirts

noreply@blogger.com — Tue, 31 Jan 2017 07:13:00 GMT

This season has seen a return to form for Chelsea following the appointment of Antonio Conte. The former manager of Italy is famed for his passion, but also possesses much tactical astuteness, as evidenced by previously leading Juventus to three consecutive Serie A titles. Under his guidance, Chelsea are currently setting the pace and look a very good bet for the league title.

This demonstrates just how quickly things can change in football, as the 2015/16 season was Chelsea’s worst in the Roman Abramovich era with the club slumping to a disappointing tenth place in the Premier League, thus failing to qualify for Europe for the first time in 20 years. This inevitably resulted in the departure of José Mourinho, the self-proclaimed “special one”, with the reins handed to Guus Hiddink until Conte’s arrival.

This dismal performance was matched off the pitch with the 2015/16 accounts revealing a £70 million pre-tax loss, around £49 million worse than the previous season’s £21 million deficit.

In fairness, this was predominately due to £75 million of exceptional expenses, largely £67 million to terminate the Adidas kit supplier contract in favour of a significantly more lucrative deal with Nike, plus £8 million compensation to Mourinho and his team. Without these exceptionals, Chelsea would have reported a profit before tax of £5 million.

Revenue rose £15 million (5%) to a record level of £329 million, as commercial income increased by £9 million (8%) to £117 million following the new shirt sponsorship with Yokohama Tyres.

Broadcasting income was also up £7 million (5%) at £143 million with the higher UEFA deal increasing Champions League distribution by around £20 million, though this was partly offset by the £12 million reduction in Premier League TV money due to the lower league finish. Gate receipts fell slightly by £1 million to £70 million.

"U Got The Look"

In addition, profits on player sales increased by £8 million to an impressive £49 million, principally due to the sales of Ramires to Jiangsu Suring, Petr Cech to Arsenal, Mo Salah to Roma, Oriol Romeu to Southampton and Stipe Perica to Udinese.

In contrast, the wage bill rose by £7 million (3%) to £222 million, while player amortisation also increased £2 million (2%) to £71 million, though other expenses were £11 million lower at £71 million.

It is also worth noting the enormous £29 million loss that Chelsea made on cash flow hedges, as FX movements dramatically reduced the value of their forward currency contracts, presumably due to Brexit. This took their comprehensive loss to £99 million.

For comparison, Manchester United reported a similar £38 million loss on cash flow hedges, while this was not yet an issue for Arsenal or Manchester City, whose accounts closed on 31 May (i.e. pre-Brexit).

Chelsea’s £70 million loss is likely to be the worst financial performances in England’s top flight in 2015/16. The only other club to have announced a loss so far is Everton with £24 million.

In contrast, six of the eight Premier League clubs that have published their accounts to date for last season have reported profits, the largest being Manchester United £49 million, Manchester City £20 million and Norwich City £13 million, followed by Arsenal £3 million, Stoke City £2 million and West Bromwich Albion £1 million.

Although football clubs have traditionally lost money, the increasing TV deals allied with Financial Fair Play (FFP) mean that the Premier League these days is a largely profitable environment with only six clubs losing money in 2014/15. This group largely comprised clubs that have been badly run (Aston Villa, Sunderland and QPR), but also included Manchester United, Everton and, yes, Chelsea.

Chelsea’s loss would have been even higher without the benefit of £49 million profit on player sales, which will certainly be one of the highest in the Premier League in 2015/16, if not the highest.

Of course, Chelsea are no strangers to making losses in the Abramovich era, as they have invested substantially to first build a squad capable of winning trophies and then to keep them at the top of the pile.

Since the Russian acquired the club in June 2003, it has reported aggregate losses of £753 million, averaging £58 million a season, though there has been some improvement since the spectacular £140 million loss in 2005 with Chelsea posting profits in two of the last five years.

The first profit made under the Abramovich ownership was a small £1 million surplus in 2012, though this did owe a lot to £18 million profit arising from the cancellation of preference shares previously owned by BSkyB, while they were also profitable in 2014.

Chairman Bruce Buck has consistently maintained that the club’s objective is sustainability: “It has long been our aim for the business to be stable independent of the team’s results and we continue to reinforce that.”

Chelsea’s figures have consistently suffered from so-called exceptional items, which have increased costs by an amazing £202 million since 2005.

Leading the way are two early terminations of shirt sponsorship agreements £93 million and money paid as compensation paid to dismissed managers £69 million, though the list also includes impairment of player registrations £28 million, tax on image rights £6 million, impairment of other fixed assets £5 million and loss on disposal of investments £1 million.

On the bright side, Chelsea appear to be learning from their mistakes, as the recent pay-off to Mourinho and his coaching team of £8 million was around a third of the £23 million it cost in 2008.

It is not clear whether the £5 million reportedly paid to former club doctor Eva Carneiro following an employment tribunal was included in this year’s accounts or will only be booked next year.

However, it is profit from player sales that is having an increasing influence on Chelsea’s figures. In the nine years between 2005 and 2013, Chelsea averaged £13 million profit from selling players, but this has shot up to an average of £52 million in the three years since then.

Last year included the eye-catching £25 million sale of Ramires to China, while previous seasons featured some other big money moves: David Luiz (PSG) £40 million, Juan Mata (Manchester United) £32 million, Romelu Lukaku (Everton) £28 million, André Schürrle (Wolfsburg) £22 million and Kevin De Bruyne (Wolfsburg) £17 million.

It is notable how much more money Chelsea make from player sales than their direct rivals, e.g. over the last three seasons Chelsea earned £155 million, compared to just £38 million at Arsenal, £35 million at Manchester City and £21 million at Manchester United. Although Tottenham, Liverpool and Southampton also generate substantial sums from transfers, this is more understandable, given their revenue shortfalls.

"Put on your dancing shoes"

Next year’s accounts will be more of the same following the £60 million sale of Oscar to Shanghai SIPG. This trend of players making lucrative moves to China has clearly benefited the club financially, but it has not met with Conte’s full approval, “We are talking about an amount of money which is not right”, though fans of other clubs could be forgiven for thinking that this is a bit rich, coming from a Chelsea manager.

Indeed, led by Marina Granovskaia, one of Abramovich’s closest associates, Chelsea have perfected a model whereby they consistently make money from player sales. As well as the big ticket deals already mentioned, Chelsea have also made extensive use of the loan system with an incredible 35 players currently listed as being out on loan (though I may well have lost count).

Although the club argues that this strategy is simply aimed at giving players experience, it is difficult not to believe that this is primarily a money making exercise. Given that very few of these players have succeeded in establishing themselves in Chelsea’s first team, it would appear that the objective is to develop players for future (profitable) sales, while effectively placing them in the shop window.

"Oh, sit down, sit down next to me"

The most recent example is Patrick Bamford, signed for £1.5 million in 2012, and sold to Middlesbrough this month for a fee of £6 million, potentially rising to £10 million with add-ons, even though he never appeared for Chelsea’s first team. During the last five years the England U21 international has been loaned out no fewer than six times.

From a financial perspective, this is a smart move that has helped Chelsea meet the Financial Fair Play (FFP) regulations, though the moral counterpoint was delivered by FIFA President Gianni Infantino, “It doesn’t feel right for a club to just hoard the best young players and then to park them left and right. It’s not good for the development of the player.”

However, even though some might complain that this policy smacks of treating players like commodities (“buy low, sell high”), not to mention ensuring that rival clubs cannot access promising talent, there are (currently) no rules against it and other clubs, such as Udinese, have operated in a similar way for many years without sanctions.

In Chelsea’s case this highlights their recent improvement, as it is has been positive for the last four years, rising from £16 million in 2015 to £35 million in 2016, though still lower than the £51 million peak in 2014.

However, to place that into context, this is way behind Manchester United £192 million, Manchester City £109 million and Arsenal £82 million. United’s amazing ability to generate cash means that their EBITDA (“cash profit”) is more than five times as much as Chelsea and helps explain the Blues’ focus on player sales.

Chelsea have increased their revenue by 29% (£73 million) in the last three years from £256 million to £329 million. The growth is split pretty evenly between broadcasting income, which has increased 36% (£38 million) from £105 million to £143 million, thanks to new TV deals in both the Premier League and the Champions League; and commercial income, which has nearly gone up by nearly 50% from £80 million to £117 million.

Match day receipts have actually fallen slightly from £71 million to £70 million, which underlines why Chelsea are planning to expand their stadium.

Although Chelsea’s £15 million (5%) revenue growth in 2015/16 took their revenue to a record level, it was not that good compared to their major rivals. Admittedly, Manchester United’s £120 million (30%) growth was influenced by their return to the Champions League, but the growth at Manchester City £40 million (11%) and Arsenal £21 million (6%) was also higher than Chelsea.

That said, Chelsea’s revenue should grow in 2016/17, despite a £60 million reduction from the lack of European competition, as they will benefit from the new Premier League TV deal including a higher league position (+£70 million) plus a new commercial deal with Carabao (+£10 million). That should mean a net £20 million increase to around £350 million.

Furthermore, 2017/18 will be boosted by the £30 million increment from the Nike kit deal. On the relatively safe assumption that Chelsea qualify for the Champions League, the 2017/18 figures should be close to £450 million.

As it stands, Chelsea’s revenue of £329 million was the fourth highest in England in 2015/16, though nearly £200 million lower than United’s £515 million. They were also a fair way behind Manchester City £392 million, but quite close to Arsenal £351 million.

Liverpool were within striking distance at £302 million, but there was a significant gap to the remaining Premier League clubs: Tottenham Hotspur £209 million, West Ham £144 million and Leicester City £129 million.

Chelsea remained in eighth place in the Deloitte 2016 Money League, only behind Manchester United, Real Madrid, Barcelona, Bayern Munich, Manchester City, Paris Saint-Germain and Arsenal. This is obviously excellent, but they face three major challenges here (in common with other English clubs):

The leading clubs continue to grow their revenue apace, e.g. Real Madrid and Barcelona have reportedly agreed massive new kit supplier deals worth north of £100 million a season.
The weakening of the Pound since the Brexit vote means that continental clubs will earn much more in Sterling terms, e.g. the latest Money League was converted at €1.3371, while the current rate has slumped to around €1.17. At that rate, the €620 million earned by Real Madrid and Barcelona would be equivalent to £530 million, taking them above Manchester United.
The Money League highlights the increasingly competitive nature of England’s top flight with no fewer than 12 Premier League clubs in the top 30 – even before the lucrative new TV deal.

Eagle-eyed observers will have noticed that the Money League figure for Chelsea’s revenue of £335 million is £6 million higher than the £329 million reported by the football club. This is because they have used the figure from the holding company, Fordstam Limited.

Although this company has not yet published its 2016 accounts, the £319.5 million reported in 2015 is exactly the same as the figure in last year’s Money League. The difference is entirely in commercial income.

If we compare Chelsea’s revenue to that of the other nine clubs in the Money League top ten, we can immediately see where their largest problem lies, namely commercial income, where Chelsea are substantially lower than their rivals that have traditionally been more successful in monetising their brand: Manchester United £150 million, Bayern Munich £134 million (£244 million minus £113 million), Real Madrid £80 million and Barcelona £99 million. The £106 million shortfall against PSG is largely due to the French club’s “innovative” agreement with the Qatar Tourist Authority.

On the plus side, Chelsea look to be fine on broadcasting and not too bad on match day income, though there is room for improvement in the latter category.

The growth in broadcasting income in 2015/16 means that this now accounts for 43% of Chelsea’s total revenue, ahead of commercial income 35%, which has risen from 26% in 2009. As a consequence, the importance of match day income has diminished from 36% to only 21% in the same period, once again reiterating the rationale for the planned stadium expansion.

Chelsea’s share of the Premier League television money dropped £12 million from £99 million to £87 million in 2015/16, largely due to finishing tenth compared to winning the title the previous season. Nevertheless, they earned more three clubs finishing above them (Southampton, West Ham and Stoke City), as the smaller merit payment was more than offset by higher facility fees for having more games broadcast live.

The mega Premier League TV deal in 2016/17 will deliver even more money. Based on the contracted 70% increase in the domestic deal and an estimated 40% increase in the overseas deals, the top four clubs will receive £150-160 million, while even the bottom club will trouser around £100 million.

Although this is clearly great news for Premier League clubs, it is somewhat of a double-edged sword for the elite, as it makes it more difficult (or at the very least more expensive) to persuade the mid-tier clubs to sell their talent, thus increasing competition

The other main element of broadcasting revenue is European competition with Chelsea receiving €69 million for reaching the last 16 in the Champions League, which was €30 million more than reaching the same stage the previous season, partly influenced by the increase in the 2016 to 2018 cycle, namely higher prize money plus significant growth in the TV (market) pool, thanks to BT Sports paying more than Sky/ITV for live games.

In fact, Chelsea actually earned the sixth highest in the Champions League, more than semi-finalists Bayern Munich, because of how the TV (market) pool works. Each country’s share of the market pool is based on the value of the national TV deal, which means that English clubs have prospered from the huge BT Sports deal, though it should be noted that around half of this goes into the central pot, so they do not receive the full benefit.

Half of the TV pool then depends on the position that a club finished in the previous season’s domestic league: the team finishing first receives 40%, the team finishing second 30%, third 20% and fourth 10%. As Chelsea won the title in 2014/15, compared to finishing third the year before, they received a higher percentage in 2015/16 for this element.

The other half of the TV pool depends on a club’s progress in the current season’s Champions League, which is calculated based on the number of games played (starting from the group stages). In this way, Manchester City reaching the semi-final last season adversely impacted Chelsea’s share.

Although some have played down the value of Champions League qualification in light of the massive new Premier League TV deal, it is evident that it is still financially beneficial.

It has clearly helped Chelsea, who have earned €253 million from Europe in the last five seasons, more than any other English club. It has thus become a major revenue differentiator against their domestic rivals with Chelsea earning substantially more than them in this period: City €32 million, Arsenal €77 million, United €95 million, Liverpool €176 million and Tottenham €212 million.

Commercial revenue rose by 8% (£9 million) to £117 million in 2015/16, which was a little disappointing, given that this year included the first year of the five-year shirt sponsorship deal with Yokohama Tyres. The implication is that some of the commercial deals include success clauses, so the lower league place and failure to qualify for Europe bit hard.

In fact, since 2014 Chelsea’s commercial growth of £8 million (7%) has been smaller than all their rivals, notably Manchester United £79 million (42%) and Arsenal £30 million (39%).

Currently, Chelsea’s £117 million is less than half of United’s astonishing £268 million, £90 million below Manchester City’s £178 million and even behind Liverpool’s £120 million.

However, Chelsea’s commercial revenue will increase substantially in the next couple of years. First, they agreed a three-year deal worth £10 million a year with Carabao, a Thai energy drink company, to sponsor training wear from 2016/17.

They then signed “the largest commercial deal in the club’s history” with Nike, which is worth £60 million a year (15-year deal for £900 million), i.e. twice as much as the current Adidas £30 million contract, from 2017/18.

"Boy from Brazil"

The Adidas deal was due to run to 2023, so the six years from 2017 would have brought in £180 million, compared to £360 million from Nike over the same period, meaning a £180 million increase. Although this is reduced to £113 million after considering the £67 million termination fee, it still represents a tidy improvement.

In addition, the Yokohama Tyres shirt sponsorship of £40 million a year is worth more than double the £18 million previously paid by Samsung. All in all, these three kit deals will be worth £110 million per annum, which is £62 million more than the previous £48 million.

These deals will leave Chelsea only behind Manchester United for the main shirt sponsorship and kit supplier deals – and it’s difficult to compete with their massive agreements with Chevrolet £56 million (at the June 2016 USD exchange rate) and Adidas £75 million.

However, the £40 million shirt sponsorship is well ahead of Arsenal – Emirates £30 million, Liverpool – Standard Chartered £25 million, Manchester City – Etihad £20 million and Tottenham Hotspur – AIA £16 million.

Similarly, the £60 million Nike kit supplier deal will be much better than those signed by Arsenal and Liverpool, respectively £30 million (PUMA) and £28 million (Warrior), though these will be up for renegotiation before Chelsea.

Looking further afield new kit agreements reportedly signed by Barcelona (Nike) and Real Madrid (Adidas) are worth £125 million and £115 million respectively (at the current exchange rate), so the bar is continually being raised.

Match day income was £1 million (2%) lower at £70 million, partly due to only staging two domestic cup games, compared to three the previous season. This revenue stream peaked at £78 million in 2011/12, thanks to the victories in the Champions League and the FA Cup.

Chelsea’s match day revenue is at least £30 million lower than Manchester United and Arsenal, though is still pretty good, considering that their grounds are much larger.

This is reflected in the average attendances with Chelsea’s 41,500 miles behind United (75,000) and Arsenal (60,000). It is also lower than Manchester City, Newcastle United, Liverpool and Sunderland.

The reason that Chelsea’s revenue is higher than clubs with higher attendances is that they earn a healthy £2.8 million a game, compared to, say, £2.0 million at Liverpool and £1.8 million at Manchester City. This is partly due to their ticket prices, which, according to the BBC Price of Football survey, are the third highest in England, only surpassed by Arsenal and Tottenham.

That said, Chelsea have again held ticket prices at 2011/12 levels, which means that general admission prices have remained unchanged in nine of the past 11 years. In addition, supporters attending away games in the Premier League over the next three seasons will pay no more than £30 a ticket.

Nevertheless, Chelsea’s revenue shortfall compared to United, Arsenal, Real Madrid and Barcelona helps explain why the club has spent so much time searching nearby locations for a new stadium.

After a couple of false starts, including possible moves to Battersea Power Station, Earls Court and White City, the good news is that planning permission has recently been granted by Hammersmith and Fulham borough council to build a new 60,000 capacity on the Stamford Bridge site.

This will be a complex build with the plan being to dig down to lower the arena into the excavated ground, while the club will also need to demolish Chelsea Village buildings that surround the ground and build walkways over the two rail lines that flank the stadium.

The assumption is that Abramovich will cover the costs, which have been estimated at £500 million, though it could be much higher, e.g. Tottenham’s new stadium will reportedly cost £750 million.

"Hair, he goes, there he goes again"

Chelsea Pitch Owners (CPO) still have to vote on whether to grant Chelsea a longer lease on Stamford Bridge and to give them permission to move away temporarily while the new stadium is constructed, but it would be surprising if they did not give the green light.

The aim is to have the new stadium ready for the 2021/22 season, which would mean Chelsea having to find a temporary home for three years. The club is in discussions with the Football Association to play at Wembley (as are Tottenham), but nothing has been decided. This would cost up to £15 million rent a year, though income might be higher if the crowds increased.

Chelsea have previously highlighted “the need to increase stadium revenue to remain competitive with our major rivals, this revenue being especially important under FFP rules.” In particular, the doubling of corporate seating to 9,000 seats could deliver significant additional revenue with more potentially coming from naming rights or other sponsorship opportunities.

Wages rose by £7 million (3%) to £222 million, driven by a massive increase in headcount, up 104 from 681 to 785. Playing staff, managers and coaches increased by 45 to 137, while administration and commercial staff were 59 higher at 648. The increase would have been even higher if bonuses had been paid at the same level as the league-winning season in 2014/15.

As a technical aside, note that these wage figures have been corrected when they have included exceptional items, e.g. in 2013/14 the reported staff costs of £190.6 million included a £2.1 million credit for the release of a provision for compensation for first team management changes, so the “clean” wage bill was £192.7 million.

Following the revenue growth, the wages to turnover ratio dropped from 69% to 68%, significantly better than the recent 82% peak in 2010. Interestingly, since the start of the new Premier League TV deal in 2013/14, revenue and wages growth is identical at 29%, implying a degree of control.

Nevertheless, Chelsea’s wages to turnover ratio is still the highest of the elite clubs, with the other members of the “Sky Six” much lower: Manchester United 45%, Manchester City 50%, Tottenham 51%, Arsenal 56% and Liverpool 56%.

That said, Chelsea have been overtaken by Manchester United, whose £232 million wage bill is once again the largest in the top flight. However Chelsea remain a fair bit higher than Manchester City £198 million and Arsenal £195 million.

There is then a big gap to the other Premier League clubs with the nearest challengers being Liverpool £166 million, Tottenham £101 million (both 2014/15 figures) and Everton £84 million.

This reflects Chelsea’s stated strategy: “In order to attract the talent which will continue to win domestic and European trophies and therefore drive increases in our revenue streams, the football club continually invests in the playing staff by way of both transfers and wages.”

In the last three seasons, Chelsea’s wages have increased by £50 million, which is in line with Manchester United £52 million and Arsenal £41 million. The anomaly is Manchester City, whose wage bill declined by £39 million in this period, partly due to a group restructure, whereby some staff are now paid by group companies, which then charge the club for services provided.

Although there is a natural focus on wages, other expenses also account for a considerable part of the budget at leading clubs, though there was an unexplained £11 million reduction at Chelsea in 2015/16 to £71 million.

Other expenses exclude wages, depreciation, player amortisation and exceptional items. They cover the costs of running the stadium, staging home games, supporting commercial partnerships, travel, medical expenses, insurance, retail costs, etc.

This means that Chelsea were also knocked off the top of this particular league table, with both Manchester clubs now ahead: United £91 million, City £86 million.

Another cost that has had a major impact on Chelsea’s profit and loss account is player amortisation, reflecting the significant investment in players. Chelsea’s initial wave of purchases under Abramovich saw player amortisation shoot up to £83 million in 2005, before falling away to £38 million in 2010 in line with less frenetic transfer activity. As spending kicked in again, player amortisation has steadily risen back to £71 million in 2016.

The accounting for player trading is horribly technical, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the transfer fee is not fully expensed in the year of purchase, but the cost is written-off evenly over the length of the player’s contract, e.g. midfield dynamo N’Golo Kanté was reportedly bought from Leicester City for £32 million on a five-year deal, so the annual amortisation in the accounts for him is £6.4 million.

This helps explain why clubs like Chelsea can spend so much and still meet UEFA’s Financial Fair Play targets.

Unsurprisingly, this is one of the highest player amortisation charges in the Premier League, only surpassed by big spending Manchester City £94 million and Manchester United £88 million.

The value of Chelsea’s squad on the balance sheet increased to £241 million in 2016, though this understates how much they would fetch in the transfer market, not least because homegrown players are ascribed no value in the books. Chelsea are one of the few clubs to formally acknowledge this factor in the accounts, as they have valued the playing staff at a cool £399 million.

Chelsea’s activity in the transfer market is interesting. For the four years up to 2010 Chelsea’s average annual net spend was just £2 million, before rising to £67 million in the four years up to 2014, then apparently dropping back to £41 million in the last three seasons (excluding this January transfer window).

However, this is a little misleading, as it is partly a result of the increased player sales. If we look at gross spend, it tells a different story with Chelsea averaging around £100 million a season over the last seven years. Last summer alone they splashed £119 million on recruiting David Luiz, Michy Batshuayi, N’Golo Kanté and Marco Alonso.

Even so, their total net spend of £123 million in the last three seasons was comfortably beaten by Manchester City £299 million, Manchester United £275 million and (less predictably) Arsenal £165 million, though it was still a fair way above champions Leicester City £84 million.

Chelsea have no financial debt in the football club, as this has all been converted into equity by issuing new shares. That said, the club’s holding company, Fordstam Limited, does have well over £1 billion of debt (£1,097 million as of June 2015) in the form of an interest-free loan from the owner, theoretically repayable on 18 months notice.

There were some minimal contingent liabilities of £2.4 million, reflecting the fact that Chelsea, unlike most football clubs, pay all their transfer fees upfront, which must be an advantage in negotiations compared to other clubs that have to pay in stages.

Other clubs have to carry the burden of sizeable debt, notably Manchester United who still have £490 million of borrowings even after all the Glazers’ various re-financings and Arsenal, whose £233 million debt effectively comprises the “mortgage” on the Emirates stadium.

The advantage of having a benefactor like Abramovich is demonstrated by the annual interest payments at those clubs: £20 million for United, £13 million for Arsenal. Since 2010 United have paid out more than £400 million in financing costs, while Arsenal have paid £275 million in interest and loan repayments in that period. That is money that could have been spent on transfers or player wages – if their owner had acted like Chelsea’s favourite Russian.

Although Chelsea’s cash flow from operating activities has turned positive in the last four seasons (after adjusting for non-cash flow items, such as player amortisation and depreciation, plus working capital movements), they still require funding from the owner to cover player purchases and investment in improving facilities at Stamford Bridge and the training ground at Cobham.

That amounted to £90 million in the last two years: £43 million in 2016 and £47 million in 2015. In fact, since Abramovich acquired the club, he has put around £1 billion into the club, split between £620 million of new loans and £350 million of share capital. In that period £685 million of loans have been converted into share capital, including £12.5 million last season.

Most of this funding has been seen on the pitch with £753 million (77%) spent on net player recruitment, while another £140 million went on infrastructure investment. A further £46 million was required to cover operating losses with £12 million on interest payments, while the cash balance has increased by £23 million.

Indeed, Chelsea now have healthy cash at bank of £27 million, though this is still a lot lower than United £229 million and Arsenal £226 million. It’s a different approach: Abramovich puts his money into the club, especially the team, while United and Arsenal have to rely on cash generated from their own operating activities – though they do leave an awful lot of it in their bank account.

Given Chelsea’s several years of heavy financial losses, many observers had believed that they would fall foul of FFP, but that has not been the case with the accounts confirming that the club was compliant with both UEFA FFP and Premier League financial regulations.

The club has taken advantage of some of the allowable exclusions for UEFA’s break-even analysis, namely youth development, infrastructure and (for the initial monitoring periods) the wages for players signed before June 2010.

Even though Chelsea are compliant, it is clear that this legislation has been at the forefront of the club’s thinking. The accounts state: “FFP provides a significant challenge. The football club needs to balance success on the field together with the financial imperatives of this new regime.”

"Points of Authority"

Specifically, Chelsea will need to consider the Premier League’s Short Term Cost controls, which restrict the annual player wage cost increases to £7 million a year for the three years up to 2018/19 – except if funded by increases in revenue from sources other than Premier League broadcasting contracts, e.g. gate receipts, commercial income and profits on player sales.

Sound familiar? That’s pretty much been Chelsea’s strategy over the last few years.

It obviously helps if you have an owner with pockets as deep as Abramovich, but that is no longer enough in a football world full of financial regulations, so Chelsea have had to follow a different path.

It might sound a little strange to say this after Chelsea just announced a £70 million loss, but there’s no doubt that there are some clever people at Stamford Bridge, who have found several ways to grow income and thus meet the demands of FFP. At the same time, they have managed to put together a squad that is not only challenging for major honours, but is a good bet to win the Premier League for the second time in three seasons.

Ipswich Town - Stuck In A Moment

noreply@blogger.com — Tue, 24 Jan 2017 06:28:00 GMT

This has been a challenging season for Ipswich Town, as they have been poor in the league and recently suffered a humiliating, televised defeat in the FA Cup against non-league Lincoln City. Manager Mick McCarthy appears to retain the support of the board for the time being, but he has clearly lost many of the fans.

This feels a little harsh on the experienced Yorkshire man, who has arguably enabled Ipswich to punch above their weight during his tenure. When he replaced Paul Jewell in November 2012, Ipswich were bottom of the Championship, but McCarthy successfully guided the club out of the relegation zone to finish in a comfortable 14th place.

Since then he has registered three successive top ten finishes. His first full season in 2013/14 ended in a respectable ninth place, before he led them to the play-offs in 2014/15. Last season Ipswich came a somewhat disappointing seventh, but this was still ahead of many wealthier clubs.

As McCarthy pointed out, “This is the first year that it’s been a struggle.” To an extent, he has been a victim of his own success, as he reached the play-offs on a shoestring budget, getting the most out of a fairly average squad.

"Merry Christmas, Mr. Lawrence"

This reinforced the cautious approach of Marcus Evans, who has frequently spoken of his determination to take Ipswich to the Premier League since he bought 87.5% of the club in December 2007, but has equally often been accused of lacking the ambition to do so.

Evans summarised his philosophy last month: “My view, based on the finances available to us compared to those with parachute budgets and the small group with, often short term, huge owner investment, is for the club to maintain a sustainable and consistent strategy, which I firmly believe provides a foundation each season for a promotion challenge.”

He then outlined the key elements of his strategy, “In summary, a focus on the Academy; a competitive wage structure; careful use of our transfer budget on developing players and a stable management team are factors which I believe provide us with the best chance of promotion out of the Championship, which is one of the toughest - and getting even tougher - leagues in the world.”

Managing director Ian Milne was singing from the same song sheet: “Marcus has gone for sustainability and Mick understands that. You can achieve good things through getting the right people in your club and working as a team from top to bottom.”

"A Grant don't come for free"

While all this is undoubtedly true, the concern is that this conservative stance will mean a continuation of the 15-year groundhog day existence that Ipswich have held in the Championship (or equivalent) since relegation from the top flight in 2002. To paraphrase U2, it feels like Ipswich are “stuck in a moment – and they can’t get out of it.”

Initially, Evans provided his managers with enough funding to be competitive in the transfer market, but this did not achieve the desired objective, as first Roy Keane, then Jewell essentially wasted the owners’ cash with a series of poor choices. Not only did these expensive purchases not deliver on the pitch, but they ended up being offloaded for peanuts, leading to large financial losses arising from misplaced recruitment.

Having had his fingers burnt, Evans opted for a change in strategy: “I wanted to work with a manager who was going to try to and coach and make our players better, rather than give the manager the opportunity (to simply buy players).”

"Don't Luke back in anger"

The owner explained: “You would have hoped that money had resulted in better things, but look at Nottingham Forest – they lost £25 million last year and got nowhere. There are a lot of clubs out there that spent a lot more than Ipswich did and who ended up in exactly the same situation.”

The drive to more sensible cost management was also influenced by the introduction of the Financial Fair Play rules, which essentially aim to force clubs to live within their means.

As a result, in the past few years Ipswich have focused on free transfers, loans and swap deals, while trying to bring through young players from the Academy into the first team. As Milne explained, “We do have a very good scouting network and that enables us to get players at the minimum transfer fee.”

Consequently, Ipswich have averaged annual gross spend of only £0.5 million in the last four seasons (though the January 2017 transfer window has not yet closed), compared to £5.6 million a season in the first three years of the Evans era. In the same periods, average net spend of £4 million has flipped to average net sales of £4 million, an £8 million reduction.

Last summer’s spending was a good example of Ipswich’s policy: two promising young players were acquired in the shape of Grant Ward from Tottenham Hotspur and Adam Webster from Portsmouth at a combined cost of £1.4 million, while there were a couple of free transfers, including the veteran journeyman Leon Best from Rotherham United.

Evans argued that there was also money splashed out on loan fees and wages needed to tempt Premier League clubs to release players, including Welsh internationals Tom Lawrence (from Leicester City) and Jonny Williams (from Crystal Palace) and Conor Grant (from Everton), but Ipswich supporters would justifiably point out that the club failed to replace forward Daryl Murphy, who was sold to Newcastle United.

Ipswich’s parsimony can be seen by looking at the gross spend of Championship clubs this season, when only six clubs spent less than the Tractor Boys. These included two clubs with transfer embargoes (Blackburn Rovers and Nottingham Forest) plus a few “minnows”, i.e. Preston North End, Burton Albion, Rotherham United and Wigan Athletic.

The more meaningful comparison is with clubs seeking promotion, as Evans himself noted, “Newcastle and Norwich spent more than £100 million between them on transfer fees in the August window as they chase an immediate return to the Premier League.” Although this was actually factually incorrect, his point was still valid as Newcastle and Aston Villa have spent £55 million and £52 million respectively. Other big spenders include Fulham £22 million, Derby County £14 million, Wolverhampton Wanderers £11 million and Bristol City £11 million.

Many managers would use this low spending as an excuse for not meeting their objectives, but McCarthy is made of sterner stuff, saying that he won’t “stamp his feet” over the restricted transfer budget given to him by Evans. Instead, he sees it as his job to get more out of the players he’s got.

That said, he would like his achievements to be recognised: “I’ve done a bloody good job under the terms and conditions. I’ve sold Murphy, I’ve sold Mings, and others, and we’ve stayed competitive.”

Despite this prudent policy, Ipswich reported a £6.6 million loss in 2015/16, a £12.1 million deterioration from the previous year’s £5.5 million profit, though this was almost entirely due to a £11.5 million reduction in profits on player sales. These dropped from £12.2 million in 2014/15, due to the sales of Tyrone Mings to Bournemouth and Aaron Creswell to West Ham, to only £0.6 million.

The wage bill rose by £0.6 million (4%) from £16.0 million to £16.6 million as “further funds were invested in the squad to challenge for the play-off positions.” Other expenses also increased by £0.3 million (6%) to £5.4 million, but player amortisation dropped by £0.5 million (74%) to just £0.2 million.

Revenue slightly decreased by £0.1 million (1%), mainly due to a £0.4 million (9%) reduction in commercial income to £4.4 million, offset by broadcasting income rising by £0.3 million (6%) to £5.4 million. Gate receipts were unchanged at £6.5 million, as the club’s share of receipts from the League Cup tie against Manchester United at Old Trafford compensated for a fall in attendances and the money from the previous season’s play-off appearance.

Although a £7 million loss might not sound overly impressive, it has to be assessed in the context of England’s second tier, where the harsh reality is that most clubs are loss-making, largely as a result of their natural desire to reach the lucrative Premier League.

In this way, none of the Championship clubs that have so far published their 2015/16 accounts has been profitable with some reporting hefty losses: Brighton and Hove Albion £26 million, Hull City £21 million, Reading £15 million and Bristol City £15 million. As Evans lamented, “Wouldn’t it be nice… if you could turn a profit in the Championship, but I’m afraid that’s not the case.”

One way a football club can compensate for operating losses is via player sales, but Championship clubs have struggled to make big money sales with the highest amount reported so far last season being Hull City’s £13 million – and they had Premier League players to offload following relegation in 2015.

However, Ipswich’s profit on player sales of £0.6 million was one of the lowest in the division – in contrast to 2014/15 when their £12.1 million profit was only surpassed by Norwich City’s £14 million. Of course, next year’s accounts will be boosted by the £3 million sale of Daryl Murphy to Newcastle.

Ipswich have only reported a profit once in the Evans era, the £5 million in 2014/15, losing money in the other eight years. However, it is noticeable that the losses have been reducing, effectively capped at £7 million in the past three seasons.

As Milne explained, “In 2012 the annual losses peaked at £16 million and we started to go down a slightly different route.” That was actually the third worst loss in the Championship that year and served as a major wake-up call.

The reason for this large deficit were given by finance director Mark Andrews, “We brought in some experienced players in the 2011/12 season, Paul Jewell’s first season in charge, which kept the playing squad costs high.”

However, Ipswich’s best results in recent times have been boosted by large profits on player sales, as seen in 2014/15. Without the sales of Mings and Cresswell, the reported profit of £5.5 million would have been a loss of £6.7 million, i.e. in line with the £7 million losses in 2013/14 and 2015/16.

It was a similar story in 2011/12 when this activity contributed £10.8 million, largely due to the transfers of Connor Wickham to Sunderland for £8 million and Jon Walters to Stoke City for £2.75 million. Without these sales, Ipswich would have registered another big loss of £14 million.

The owner has said that his funding “would eventually be unsustainable without the benefits of transfer revenues from time to time to offset the club’s running costs.” Interestingly, the club has made more money from cheap, young players rather than experienced professionals. This was acknowledged by Evans: “We lost some good players in the past who were out of contract”, i.e. could leave for very little or even nothing.

To get an idea of underlying profitability and how much cash is generated, football clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation), as this metric strips out player trading and non-cash items. In Ipswich’s case this highlights the changed strategy after 2012, as EBITDA has improved from minus £9 million in 2012 to minus £6 million in 2016 (though this was a million worse than the previous year).

This might not sound overly impressive, as it is still negative, but it has to be put into the context of the Championship, where very few clubs manage to generate cash. Apart from Blackpool with their “unique” approach to running a football club, no Championship has reported EBITDA higher than £1.5 million in the last two seasons (in stark contrast to the Premier League where in the same period every club enjoyed positive EBITDA, except the basket case that is QPR).

Revenue has fallen by £1 million (6%) from the recent £17.2 million peak in 2011, which was boosted by reaching the Carling Cup the semi-final and a profitable FA Cup match at Chelsea.

All revenue streams have fallen since then, especially commercial income, which is 13% (£0.7 million) lower, though this is partly due to a decision to outsource catering (and thus only including net royalty payments in revenue). Gate receipts have rebounded, even though attendances have fallen, partly due to ticket price increases.

Following the slight reduction in 2015/16, Ipswich’s revenue of £16 million remains firmly in the bottom half of the Championship, a long way behind the top three clubs, who all earned more than £40 million. Of course, to a large extent, this only demonstrates the importance of parachute payments for those clubs relegated from the Premier League.

This is clearly a sore point for Evans, “The average parachute club starts with a £20 million per season head start over the rest of us.” He added, “The lack of parity in the game certainly makes it harder to compete. This season there were nine clubs benefiting from parachute payments and there will be something similar next year. That gives them a massive financial advantage.”

If these parachute payments were to be excluded, the gap would obviously reduce, but Ipswich’s £16 million would still be a fair way behind many other clubs, e.g. Brighton £25 million, Leeds United £24 million and Derby County £21 million. Given these stats, Ipswich’s performance in the last three seasons is worthy of some praise.

The mix of Ipswich’s revenue has changed over the years with broadcasting rising from 13% in 2009 to 33% in 2016 and commercial falling from 41% to 27%. However, match day remains the most important revenue stream at 40%, even though it has declined from 46%.

Unsurprisingly, this means that Ipswich are one of the Championship clubs most reliant on gate receipts. In percentage terms only four clubs had a higher dependency in 2014/15: Nottingham Forest, Charlton Athletic, Brighton and Millwall.

Gate receipts were flat at £6.5 million in 2015/16, even though average attendance fell by 644 (3%), as this was offset by one additional home cup game. Nevertheless, Ipswich’s match day revenue is the 9th highest in the Championship, though still around £3 million lower than Brighton £9.4 million and Leeds United £9.2 million.

Ipswich’s average attendance of 18,959 was actually the 8th best in last season’s Championship, but a fair way behind clubs like Derby County (29,663), Brighton (25,583) and Middlesbrough (24,627).

Ipswich’s attendances had been on a declining trend for a number of years, but the charge to the play-offs resulted in an upswing in 2014/15. However, they have started to fall again since then with a further slump this season to 16,789, which means that Ipswich have lost a third of their crowd since the recent 25,651 peak in 2004/05.

Evans is acutely aware of the reduction in spectators: “We can’t deny that attendances have been falling away somewhat this season – an indication of the disappointing results we have had this year.”

He said that the club was “looking at creative ways of getting supporters back to Portman Road.” These include low prices for youngsters (e.g. the season ticket for under-11s has been held at just £10 for nine successive years), interest-free direct debit monthly payment scheme and discounts with local businesses. If Ipswich are promoted to the Premier League, the season ticket will be upgraded at no extra price plus the holder will be given a free season ticket.

However, fundamentally Ipswich’s ticket prices are among the most expensive in the second tier. According to the BBC’s Price of Football survey, no other fans in the Championship pay more for the most expensive season ticket, while Town’s prices for the cheapest season ticket are only surpassed by three clubs (Brighton, Newcastle and Norwich City).

From 2003 to 2013 season ticket prices had remained frozen for seven out of the 11 years. However, prices have gone up every year since 2014/15, including a 1.5% increase for the 2017/18 season (in line with the retail price index).

Ipswich’s broadcasting revenue rose 6% (£0.3 million) to £5.4 million in 2015/16, which was attributed to an increase in the Football League basic distribution. In the Championship most clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to around £4 million of central distributions: £2.1 million from the Football League pool and a £2.3 million solidarity payment from the Premier League. There are also payments for each live TV game: £100,000 home; £10,000 away.

However, the clear importance of parachute payments is once again highlighted in this revenue stream, greatly influencing the top nine earners in 2014/15. Nevertheless, it should be noted that these payments are not necessarily a panacea, e.g. Middlesbrough secured promotion last season, even though their broadcasting income of £6 million was less than half the size of those clubs boosted by parachutes.

Looking at the television distributions in the top flight, the massive financial chasm between England’s top two leagues becomes evident with Premier League clubs receiving between £67 million and £101 million in 2015/16, compared to the £4 million in the Championship. In other words, it would take a Championship club more than 15 years to earn the same amount as the bottom placed club in the Premier League.

The size of the prize goes a long way towards explaining the loss-making behaviour of many Championship clubs. This is even more the case with the new TV deal that started in 2016/17, which will be worth an additional £35-60 million a year to each club depending on where they finish in the table.

Even if a club were to finish last in their first season in the top flight and go straight back down, their TV revenue would increase by an amazing £95 million. They would also receive a further £71 million in parachute payments, giving additional funds of around £166 million. If they survived another season, you could throw in another £120 million.

Of course, if they did go up, Ipswich would also have to spend more to strengthen their playing squad, but the net impact on the club’s finances would undoubtedly be positive, as evidenced by the improvement in the bottom line for those clubs promoted in the past few seasons.

As we have seen, parachute payments make a significant difference to a club’s revenue and therefore its spending power in the Championship. From this season, these will be even higher, though clubs will only receive parachute payments for three seasons after relegation. My estimate is £83 million, based on the percentages advised by the Premier League (year 1 – 55%, year 2 – 45% and year 3 – 20%), including around £40 million in the first year. However, if a club is relegated after only one season in the Premier League, it will only benefit from parachute payments for two years.

There are some arguments in favour of these payments, namely that it encourages clubs promoted to the Premier League to invest to compete, safe in the knowledge that if the worst happens and they do end up relegated at the end of the season, then there is a safety net. However, they do undoubtedly create a significant revenue disadvantage in the Championship for clubs like Ipswich, as Evans has often stated.

It is worth noting that if Ipswich were to be promoted, then they are contractually bound to make additional payments to players, coaches, staff, players’ former clubs, season ticket holders and certain convertible loan note holders. This is not quantified in the latest accounts, but was given as £8.2 million in 2013.

Commercial income fell by 4% (£0.4 million) to £4.4 million in 2015/16, though this is a little misleading, as the match day public catering operation was outsourced whereby the club now receives a royalty based on turnover.

Corporate sales and sponsorship were also slightly down on last year, however merchandise sales exceeded 2014/15, further building on the success of the change of kit supplier to Adidas in 2014 (a four-year deal). This was the first time Ipswich had worked with the German supplier since the glory days 35 years ago when they won the FA Cup and UEFA Cup under Bobby Robson.

The shirt sponsorship is with the Marcus Evans Group, who originally signed a five-year deal in 2008 worth a reported £4 million in total and have subsequently extended this each season.

There is clearly room for improvement in the commercial area, though to be fair only two Championship clubs (QPR and Leeds United) generate more than £10 million a season. This is basically down to results, as Evans admitted: “We work very hard maximising revenues for the club on a commercial basis, but ultimately our product is about what the team delivers on the pitch. And, like any business, if your product is of good quality, you’ll make more money and sell more of your product.”

Ipswich’s wage bill increased by 4% (£0.6 million) to £16.6 million, as full-time headcount was up from 142 to 149, leading to the wages to turnover ratio rising from 97% to 102%.

This was the second year in a row that wages have climbed, a necessary evil for Town, as explained by Ian Milne when commenting on the 2014/15 figures: “The wage bill has gone up this season quite appreciably. People say ‘where has the Tyrone Mings and Aaron Cresswell money gone?’ Well that’s where it is being ploughed into.”

Nevertheless, wages are still 8% below the £18.0 million peak in 2012, when the wages to turnover ratio was as high as 119%. Milne again: “We’re not paying under the market value, but the important thing is that we’re not paying over the market value either – which is something we have done in the past. Back in 2012 (when the club made a loss of £16m) we were paying some very high salaries.”

Clearly, the business model is still not ideal if revenue is not sufficient to cover the wage bill, let alone any other expenses, but almost every club in the Championship has a dreadful wages to turnover ratio with over half of them being more than 100%. In fact, Ipswich’s 102% looks positively reasonable compared to clubs like Brentford 178%, Nottingham Forest 170% and Blackburn Rovers 134%.

The £17 million wage bill was also firmly in the bottom half of the league, underlining the challenge in reaching the play-offs. In particular, it was significantly lower than the likes of Cardiff City, Fulham, Reading, Hull City, Blackburn Rovers and Nottingham Forest, whose wages were all above £30 million. This season it will be even worse with the arrival of big spending Newcastle United and Aston Villa in the Championship.

As Milne observed, “We certainly aren’t the highest spenders in terms of wages. We are paying more than we were, but I suspect it is still quite a bit less than some of the clubs that surround us.”

Of course, a high wage bill is no guarantee of success and it is also true that clubs have been promoted with a low wage bill, e.g. Burnley, but Ipswich’s relatively low wages certainly do not make it any easier.

Other expenses rose by £0.3 million (6%) to £5.4 million in 2015/16, largely as a result of a restatement of the Football League pension fund deficit (in accordance with Financial Reporting Standard FRS102) and general cost increases, but this was still on the low side, compared to clubs like Brighton £16.0 million, Fulham £13.4 million and Leeds United £12.6 million.

The recent lack of spending in the transfer market has been reflected in Ipswich’s profit and loss account via player amortisation, which has fallen from £5.1 million in 2009/10 to just £0.2 million in 2015/16.

In the same way, the lack of big money buys from other clubs has impacted the balance sheet with the value of player (intangible) assets decreasing from £6.4 million in 2010 to £0.3 million in 2016.

The accounting for player trading is fairly technical, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the transfer fee is not fully expensed in the year of purchase, but the cost is written-off evenly over the length of the player’s contract, e.g. Grant Ward was bought from Tottenham for a reported £600,00 on a three-year deal, so the annual amortisation in the accounts for him is £200,000.

To place this into perspective, Ipswich’s player amortisation of £0.2 million is one of the lowest in the Championship, only ahead of Rotherham United. The highest player amortisation is obviously found at clubs recently relegated from the Premier League, namely Hull City £21 million, QPR £16 million, Cardiff City £11 million and Fulham £11 million.

Net debt fell by £0.7 million from £87.2 million to £86.5 million, as gross debt was reduced by £1.6 million from £88.2 million to £86.6 million, but cash also dropped by £0.9 million from £1.0 million to £0.1 million. Nevertheless, debt has shot up from the £36 million in 2008, which was largely taken on by Evans when he bought the club.

Almost all the debt is owed to various Marcus Evans’ companies, mainly through a mixture of loans and convertible loan notes. There are also £8 million of preference shares, which pay a fixed dividend of 7% per annum (provided there are profits available for distribution). To date, the club has accrued £4.8 million for these dividends. Against that, interest has not been charged on the Loan Notes 2026 from July 2014.

Of course, many clubs in the Championship have built up substantial debt, but Ipswich’s £87 million is only surpassed by five other clubs: QPR £194 million, Brighton £171 million, Cardiff City £116 million, Blackburn Rovers £104 million and Hull City £101 million.

The club has emphasised that it is not in debt to any financial institution, as explained by finance director Mark Andrews, “''Most Championship clubs are carrying debt but the majority of debt carried at Ipswich Town is not external, it is owed to the Marcus Evans Group.”

Milne added, “Marcus is very happy with the debt level – it’s all owed to him, none of it is owed to banks or anything like that. He, like a number of owners, doesn’t expect to get any of it back unless we get in the Premier League.”

This is indeed true, but there is still a degree of risk associated with such an arrangement, as the annual accounts noted: “the club remains dependent upon ongoing financial support from its principal shareholder.”

From a cash perspective Ipswich basically balance the books, but only because Evans increases his loan each year, as the cash flow from operating activities remains stubbornly negative. In the last decade Evans has provided £46.3 million via £32.8 million of loans and a £13.5 million increase in share capital. Financing has also come from £7.4 million of net player sales and a £1.5 million reduction in the cash balance.

However, the lack of investment over the last eight years is striking with just £0.2 million being spent on infrastructure improvements in the Evans era, i.e. virtually nothing on the stadium. Instead, almost all of the funding has been used to simply cover the club’s operating losses.

Former chief executive Simon Clegg explained Ipswich’s dependency on the owner a few years ago, “We only survive because Marcus Evans can afford to put in £4 million or £5 million of his own money every year to keep the club afloat”, while Evans repeated the mantra last December, “I am committing sums of £5 million and more per annum, at the start of each season towards the annual budget.”

That was certainly true in the past, but the cash flow statement shows that only around £400,000 of additional loans were received by the club in each of the last two seasons (net £250,000 after loan repayments), as the difference was largely compensated by player sales.

That may have changed this season, but Milne noted in a slightly worrying statement that, “You can’t keep expecting the owner to keep throwing money at things.”

Either way, Ipswich’s cash balance as at 30 June 2016 was down to just £91,000, one of the lowest in the Championship, though in fairness none of the clubs is sitting on a cash mountain.

One accusation against Evans’ ownership is that there has been a lack of transparency around the club’s affairs, epitomised by HMRC issuing a winding-up order in February 2016 for non-payment of tax, though this was subsequently dismissed – and described by Milne as “a storm in a tea cup”.

Yet the main charge is that the owner lacks ambition. The man himself has argued that this is not the case, effectively laying the blame at the feet of Lady Luck: “When I took over here I was hoping we would get to the Premier League in five years. I never had a firm expectation though. I realised that in football there are so many factors outside of your control.”

In fairness, Evans’ cautious approach has to be considered preferable to that applied by some owners (Bolton Wanderers, for example), especially for a club like Ipswich Town that experienced administration in the not too distant past.

"Hard to Berra"

In any case, he cannot simply buy success, as Ipswich need to comply with the Financial Fair Play (FFP) regulations. Evans had been a keen supporter of this initiative, “It is a key objective of the Board to reduce ongoing losses in order to meet the Football League’s FFP rules.”

However, he has become increasingly disillusioned, “FFP, which was brought in to level an increasingly uneven playing field hasn’t worked.” This is not just due to the advantage that parachute payments bring to clubs facing a cap on losses, but the application of the regulations.

Evans again, “At the moment it appears to be a total farce. However, let’s wait and see if the Football League does its job. I appreciate that legal wheels sometimes grind very slowly.”

Under the new rules, losses will be calculated over a rolling three-year period up to a maximum of £39 million, i.e. an annual average of £13 million, assuming that any losses in excess of £5 million are covered by owners injecting equity. A higher loss one year can be compensated in later years, e.g. via player sales, or might even become irrelevant (if the club is promoted).

"No Tears for Sears"

Basically, the allowable losses have increased, which is likely to encourage Ipswich’s rivals to spend even more, making the division even more competitive. For Ipswich to challenge, Evans would have to inject equity to maximise allowable losses.

It should be noted that FFP losses are not the same as the published accounts, as clubs are permitted to exclude some costs, such as depreciation, youth development, community schemes and any promotion-related bonuses.

These barriers help explain Ipswich’s focus on youth development, as explained by Evans: “I am 100% committed to the Academy and have recently invested over £1 million in new infrastructure and additional staffing. I believe our efforts of the last years are starting to pay off.”

Despite failing to secure the coveted Category One status, a number of talented players have emerged from the Academy over the last couple of years, e.g. Andre Dozzell, Teddy Bishop, Josh Emmanuel and Myles Kenlock. Furthermore, Town had three players in the England squad at last summer’s U17 European Championship.

"Teddy Picker"

Evans recently underlined his commitment, to Ipswich Town “I will continue to do everything I can to ensure that the success we want is just around the corner and that we are promoted.” However, he put his finger on the main issue in the very same statement, “There are those that feel my investment plan has no chance of success.”

This is a reference to the feeling that it is unlikely that a club like Ipswich could be promoted to the Premier League without the benefit of substantial investment, particularly in a world of ever more lucrative parachute payments to clubs relegated from the top flight.

It would indeed be a major surprise if Ipswich were to go up, especially given their current lowly position. Stranger things have happened, but not too often.

Everton - Pressure Drop

noreply@blogger.com — Mon, 16 Jan 2017 06:20:00 GMT

Although Everton reached two domestic cup semi-finals in 2015/16 (something the club had not done since 1984), their performances were disappointing in the Premier League, as they finished 11th for the second successive season. As chairman Bill Kenwright observed, “Ultimately, our final league positions over the last two seasons were not good enough.”

This culminated in the decision to sack manager Roberto Martinez, replacing him with former Dutch international Ronald Koeman, who was tempted to leave Southampton for the project at Everton.

This was a clear statement of intent by new majority owner, Farhad Moshiri, an Iranian billionaire, who bought a 49.9% stake in the club for a reported £85 million in February 2016 after selling his Arsenal shareholding to business partner Alisher Usmanov.

Moshiri explained his managerial choice thus, “For our club to compete in the north-west of England, which is the new Hollywood of football with Guardiola, Mourinho, Klopp, we needed a star to stand on the touchline, so I got Koeman.”

The club also brought in a new director of football in the shape of Steve Walsh, who had been responsible for some astute player recruitment at surprise champions Leicester City by scouting the likes of Riyad Mahrez, N’Golo Kanté and Jamie Vardy.

"Rom, if you want to"

Everton had been looking to secure new investment for many years, but Kenwright is convinced that he has found the perfect investor: “I’m more positive now about the future of our great club than I’ve been during my time as Chairman. I have absolutely no doubt that in Farhad Moshiri we have found someone not only with the wherewithal - and we all know how important that is these days - but also with a deep understanding of the game and a growing appreciation of all things Everton.”

This new investment is key to Everton’s future prospects and should represent a substantial change after years of caution and thrift. Certainly, Moshiri is talking a good match: “The way to compete is to build a big stadium, to increase our merchandising and commercial income. That is what we will do.”

He added, “We needed a strong balance sheet, so I paid off the debts. We are now very flexible financially. We have no restrictions to spend.”

Before his departure, the ebullient Martinez said, “financially we can compete against anyone in world football”, which seemed a bit over-the-top, but for the first time in ages Everton do appear to have a solid plan. As part of the new strategy, Moshiri will clearly make funds available to strengthen the squad, which will give the Blues a fighting chance on the pitch.

The need for new investment was highlighted by the publication of Everton’s financial results for the 2015/16 season, which included a hefty loss of £24.3 million, considerably higher than the previous season’s £4.6 million, though the bottom line was adversely impacted by a significant £11.3 million exceptional payment “to former employees and other costs in relation to the change in coaching staff in the year”.

This obviously included paying out the remainder of Martinez’s contract. It is not clear whether the reported £5 million compensation paid to Southampton to secure Koeman’s services is also included, but my guess would be that will only be reflected in next year’s figures, given that the Dutchman signed his Everton contract on 14 June, i.e. after the 2015/16 accounts were closed. Furthermore, Martinez’s pay-off was reported in the media to be in the region of £10-12 million.

Revenue fell £4 million (3%) to £121.5 million from a record £125.6 million in 2014/15, when Everton reached the last 16 in the Europa League. This contributed to commercial income decreasing by £4.6 million (18%) to £21.4 million, as the club “missed out on performance bonuses from its partners and commercial revenues from UEFA.”

"Have I told you, Leighton?"

The absence of European football also meant that gate receipts were £0.3 million (2%) lower, though this was largely offset by reaching the semi-finals of the FA Cup and Capital One Cup. Broadcasting income was slightly higher at £82.5 million, due to Everton being shown live one more time.

Costs continued to grow with the wage bill rising £6.5 million (8%) to £84 million and player amortisation up £3.3 million (17%) to £22.4 million. Other expenses also increased by £1.5 million to £30.4 million.

In contrast, profit on player sales rose £4.5 million to £7.8 million, while net interest payable was £2.7 million lower at £3.7 million. It should be noted that the 2014/15 interest was restated following the transition to Financial Reporting Standard 102.

These financials were noting to write home about, as confirmed by chief executive Robert Elstone, “The results reflect a challenging year for the club. Performance on the pitch directly impacted commercial income with key deals reduced as a result of the club’s finishing position.”

Traditionally, football clubs have lost money, but the environment has largely changed in the Premier League these days, thanks to the combination of surging TV money and Financial Fair Play regulations, which has meant that top-flight English clubs have never been richer.

In fact, Everton are one of only two clubs that have so far published 2015/16 accounts that have reported a loss. The other one is Chelsea, and they would also have been profitable without £75 million of exceptional payments (mainly the termination fee for their shirt sponsorship deal).

At the other end of the spectrum, we find the two Manchester clubs with United and City announcing healthy pre-tax profits of £49 million and £20 million respectively. The other Premier League clubs that have released 2015/16 accounts to date were also profitable: Norwich City £13 million, Arsenal £3 million and Stoke City £2 million.

This continues the trend of the 2014/15 season, when only six of the 20 Premier League clubs made losses. This group largely comprised clubs that have been badly run (Aston Villa, Sunderland and QPR), but also included Chelsea, Manchester United and, yes, Everton.

In fairness, one of the drivers for Everton’s poor financial performance has been the lack of profits from player sales. This activity can have a major influence on a football club’s bottom line, as shown in 2014/15 by Liverpool (£56 million) and in 2015/16 by Chelsea (£49 million).

In contrast, Everton only generated £8 million of profit from this activity, mainly due to the transfer of Steven Naismith To Norwich City, though this was higher than the £3 million reported in 2014/15.

Of course, Everton have more often than not lost money, reporting losses in eight of the last 11 years. They were consistently loss-making between 2006 and 2012 (with a cumulative £45 million loss in those seven years), though they did at least restrict their annual losses to manageable levels. There was then some improvement in 2013 and 2014 before a return to losses in 2015 and 2016.

As we have seen, this is partly due to the declining impact of player sales in the last two seasons. Indeed, the £28 million profit in 2014 was almost entirely down to the sale of Marouane Fellaini to Manchester United. It is fair to say that in many years Everton have effectively subsidised their underlying deficit with the sale of a major player, despite Kenwright claiming that Everton are “not a selling club.”

Over the last decade, Everton’s aggregate loss before tax was £33 million, but this would have been significantly worse without £113 million of profits from player sales in the same period.

Next year’s accounts will benefit from the £47.5 million sale of defender John Stones to Manchester City, which will help Everton swing back into the black (along with the additional money from the new TV deal).

The club has noted that the balance sheet “substantially undervalues” players such as Romelu Lukaku and Ross Barkley, especially as no cost is ascribed to home grown players. Of course, Everton would almost certainly want to retain such talent, but they would boost their profits if they were to sell.

In Everton’s case this highlights their operational difficulties in the past two seasons, as their EBITDA has fallen from £25 million in 2013/14 to just £7 million in 2015/16 (excluding exceptional payments). The major improvement in 2014, following many seasons of cash break-even, was largely due to the first year of that Premier League TV deal three-year cycle, so we could anticipate a similar jump in 2016/17 with the new TV deal – at least £9 million based on the operating profit projection at Everton’s AGM.

This is much-needed if we look at EBITDA in the Premier League, which shows that Everton are a long way behind the elite with Manchester United leading the way with an astonishing £192 million, followed by Manchester City £109 million and Arsenal £82 million. In other words, United’s cash profit is an incredible 27 times as much as Everton’s.

The only Premier League clubs with lower EBITDA than Everton were Stoke City, Sunderland, Swansea City and Aston Villa, which is a shocking state of affairs for a club of Everton’s history. No wonder that Moshiri has been welcomed with open arms, as he will definitely grow the club’s revenue.

Everton made great play of the fact that 2015/16 was the “third successive year we posted turnover in excess of £120 million.” That’s one way of looking at it, but another less charitable view would be that revenue has essentially been flat for the last three seasons.

Since 2013 revenue has grown by £35 million (41%), though most of this is down to the increasing TV deal (£27 million), which is thanks to the central Premier League negotiating team, as opposed to the club’s board. In fairness, commercial revenue has grown by £8 million in this period, while gate receipts were unchanged at just under £18 million (though this is a bit misleading, as it does not take into consideration the club’s restatement of the revenue categories in 2014).

At the recent AGM Everton projected revenue of £172.5 million in 2016/17, a year-on-year increase of £51 million, almost all of which is driven by the new Premier League broadcast deal. The club’s challenge has been to differentiate itself from other clubs by growing commercial income. Although they have been unsuccessful in the past, Moshiri will surely change that for the better.

The importance of revenue growth is clear when we compare Everton’s £122 million to the Premier League elite, e.g. Manchester United earned more than half a billion, which is almost £400 million higher than the Blues. That’s an enormous financial advantage – every season.

In fact, the top four clubs all earn well above £300 million: United £515 million, Manchester City £392 million, Arsenal £351 million and Chelsea £329 million, while Liverpool and Tottenham generated £298 million and £196 million respectively in 2014/15. Little wonder that Moshiri referred to “a mini league emerging this year of six clubs”

Although it could be argued that Everton are not doing too badly in revenue terms, as they are the 8th highest in the Premier League, there is a distinct bunching of clubs in the £100-120 million range. In other words, Everton’s financial advantage over the other clubs is nowhere near as much as their disadvantage compared to the top six.

Moshiri acknowledged this when speaking about Koeman’s objectives: “He achieved eighth and seventh with Southampton. He needs to improve on that, but it is a very difficult landscape now.”

One point worth noting is that Everton’s revenue would be around £8 million higher if the gross revenue from the outsourced catering and kit deals were to be added back.

On the bright side, Everton had the 18th highest revenue in the world in 2014/15, which represented the club’s joint highest position in the Deloitte Money League. That’s obviously a fine accomplishment, but it does not really help Everton much domestically, as no fewer than 17 Premier League clubs feature in the top 30 clubs worldwide by revenue.

As Deloitte observed, “This is again testament to the phenomenal broadcast success of the English Premier League and the relative equality of its distributions, giving its non-Champions League clubs particularly a considerable advantage internationally.”

One technical aside: Everton include the commercial elements of TV deals within commercial income, even though most other clubs classify it as broadcasting income, and Deloitte have duly reduced commercial and increased broadcasting (though the total revenue is the same).

All these reclassifications make it difficult to analyse Everton’s revenue mix, but a couple of things are clear. First, match day has become progressively less important with only 15% of total revenue coming from this stream. Second, like so many Premier League clubs, there is huge reliance on TV money, which generates just under 70% of their turnover.

That might sound a little concerning, but it is fairly common business model in the Premier League. For example, in 2014/15 nine clubs actually had a greater reliance on TV money than Everton, with three of them (Burnley, Swansea City and WBA) earning 80-85% from broadcasting. This dependency will further increase with the blockbuster 2016/17 deal.

In 2015/16 Everton’s share of the Premier League TV money rose 3% (£2 million) from £81 million to £83 million, due to being broadcast live on one more occasion (18 vs. 17). The distribution of these funds is based on a fairly equitable methodology with the top club (Arsenal) receiving £101 million, while the bottom club (Aston Villa) got £67 million.

Most of the money is allocated equally to each club, which means 50% of the domestic rights (£21.9 million in 2015/16) and 100% of the overseas rights (£29.4 million). Merit payments (25% of domestic rights) are worth £1.2 million per place in the league table and facility fees (25% of domestic rights) depend on how many times each club is broadcast live.

There was also £4.5 million of commercial revenue awarded to all Premier League clubs, though I suspect that Everton might have reported this within commercial income, even though most other clubs classify it as broadcasting income. This would help explain why Everton’s total broadcasting income in the accounts was only £82.5 million, even though their Premier League distribution was £83.0 million.

"The Liberty of Mason Holgate"

Either way, Elstone was right to draw attention to the new TV deal stating in 2016/17: “We are also benefiting from the increased revenues under the significant new broadcast deal” The AGM projected an increase in broadcasting income to more than £130 million, based on 55% growth in the Premier League deal (70% domestic and 40% overseas). The importance of success on the pitch was also emphasised, as each league place under the new deal would be worth an additional £1.9 million, compared to £1.2 million for the previous deal.

Former Everton manager Roberto Martinez welcomed the new TV deal, as he believed that it would give the middle-tier clubs greater chance of success: “The new television contract has given an opportunity to every club to do something different. They can look at themselves, thinking this is the first time that we have been able to spend a certain amount of money, and suddenly you develop a belief that allows you to be competitive.”

Another way of looking at this is that Everton earned more from broadcasting in 2014/15 than Bayern Munich, Borussia Dortmund, Atletico Madrid, Roma, Milan and Paris Saint-Germain – even before the £45-50 million increase in 2016/17.

Everton have only qualified once for Europe in recent years, earning €7.5 million from the Europa League in 2014/15. This was a lot less than the €20.9 million that Tottenham received for reaching the same stage the following season.

Not only did the new UEFA television deal deliver 38% more money in 2015/16, but a greater proportion was allocated to the Europa League, so that prize money for this competition shot up by 71% (even though the rewards are still much higher in the Champions League).

Regular qualification for Europe would be highly beneficial for Everton, as can be seen by the money earned by English clubs over the last season. Chelsea lead the way with €253 million, largely thanks to their Champions League triumph in 2012, but maybe a better comparative would be Liverpool, who earned €77 million in this period, i.e. €69 million more than Everton.

This only relates to the broadcasting income, but additional revenue would also come from more gate receipts and higher commercial income via success clauses in commercial deals.

Everton’s gate receipts fell by £0.3 million (2%) from £17.9 million to £17.6 million in 2015/16, largely due to the absence of European competition, though the impact of this lost revenue was reduced by increased revenue form reaching the semi-final of both domestic cup competitions compared to third round exits in 2014/15.

The average attendance fell slightly to 38,132, though this was only the second time in 20 years that consecutive seasons posted averages above 38,000. Moreover, this season attendances have rebounded above 39,000, which would be the highest attendance since 2003/04.

Elstone commented, “We’re delighted to be projecting an average gate in excess of 39,000. We look set to be full for every game in 2016/17. Of course, the reason we’re full is almost 32,000 season ticket holders.”

This is partly due to Everton’s admirable commitment to affordable pricing. The club froze ticket prices in 2015/16, while they actually reduced all season ticket prices by 5% for the 2016/17 season, representing a free game compared to the previous season.

They have continued this trend by announcing that all season ticket prices will be reduced or frozen for the 2017/18 season and have introduced a 12-month payment option. The maximum season ticket price is £565, ensuring that no adult will pay more than £30 a game. There is also a new £380 season ticket for 22-24 year olds, so youngsters will only pay £20 a game.

Elstone explained the club’s philosophy: “We feel confident that our current pricing structure represents great value for money and holds up well when compared to our rivals. Most importantly, it makes football at Goodison affordable for young fans.”

As a result of these pricing initiatives, Everton’s match day revenue of £18 million will continue to lag behind the top six clubs: Manchester United £107 million, Arsenal £100 million, Chelsea £70 million, Liverpool £59 million, Manchester City £53 million and Tottenham £41 million.

Elstone confirmed the impact on the financials, “The outcome of this affordable pricing strategy is a significant drop in what we generate from each seat for each game”. However, he added, “We were conscious of the substantial uplift in the value of our media rights next season.”

"Working for the Yannick Dollar"

Of course, a new stadium would be a game changer for Everton. It would be a wrench to leave Goodison Park, one of the most atmospheric grounds in England, but it is simply not fit-for-purpose in the modern era with its limited capacity and inadequate facilities.

As Moshiri said, the club needs a new stadium that “rewards the loyalty and passion of our fans.” He continued, “We need a big stadium, no question about it. We have done the hard bit, because the club was restricted to move or expand Goodison by banking covenants, but I have paid the debts, so we are free to do what we want and we have the finances to do it.”

There have been a few false dawns with three other proposed stadium moves coming to nothing: first King’s Dock in 2003, then “Destination Kirkby” in 2009, most recently Walton Hall. However, it now feels like it could really happen.

"Enola Gueye"

There are two potential sites: Bramley Moore Dock and Stonebridge Cross in Croxteth. The dock site is clearly the club’s preferred option, as confirmed by Mayor Joe Anderson at Everton’s AGM, “Everybody in this room wants the waterfront site. This is the most exciting opportunity this club has had in decades.”

Elstone also favoured this site, though he did sound a note of caution: “The opportunities are much greater at that site, but so are the costs. We have to find answers to some of the uncertainties and risks, because it is the biggest decision the club will ever make.”

He continued, “(There has been) solid progress on many fronts, most encouragingly in our partnership with Liverpool City Council and its desire to support our efforts to find the money to make the stadium viable. We are optimistic about the new stadium prospects. It’s an optimism tempered by some significant issues that need to be resolved before we can move forward.”

The final word (for now) on the new stadium goes to Moshiri, which is fair enough, as he may well end up funding most of the required £350 million plus: “In our mind, we know where we want to go. We are committed.”

Everton’s reported commercial income dropped 18% (£4.6 million) from £26.0 million to £21.4 million in 2015/16, comprising £9.3 million for sponsorship, advertising and merchandising plus £12.1 million for other commercial activities. The fall was due to the absence of commercial revenue from the Europa League.

As we saw earlier, it is not completely clear what the club has included within commercial income and the Deloitte like-for-like figure for 2014/15 was adjusted downwards to £20.1 million, as they excluded the “commercial” element of broadcasting income. This meant that Everton had the lowest commercial revenue of any club in the Money League Top 20.

That said, the comparisons are a bit misleading, as Everton have outsourced their catering and kit deals. If they were to report these revenues gross (like most other clubs), their commercial income would rise by £8 million.

"Don't cry for me, Argentina"

Whatever it consists of, Everton’s commercial income of £21 million pales into insignificance compared to heavyweights such as Manchester United, who generate an amazing £268 million from this activity. That comparison might be a little unfair, but it is worth noting that Tottenham earned £60 million (in the 2014/15 season).

It is clear that Everton need to address their commercial shortcomings, as Elstone acknowledged, “We will continue to look for growth in all areas, in particular, as we approach the mid-point of the final year of the current Chang partnership, with a clear focus on our main sponsor opportunity.”

It is therefore very encouraging (“great news” per Elstone) that the club has “signed up £75 million in new revenues” in the past few weeks. The chief executive noted that the two deals already finalised will run over a five-year period, implying £15 million a year.

Elstone spoke of “a 300% increase in the value of our shirt sponsors”, which would suggest that the new deal would be worth £21.2 million a year, given that the current deal with Thai beer producer Chang is worth £5.3 million a year (£16 million over three years).

That would represent a notable increase, but there have been some suggestions that Elstone’s comments could have been misconstrued, e.g. if the 300% increase referred to the total value of the deal, that would imply £64 million over five years, meaning an annual value of £12.8 million. My guess is that the increase refers to the combined value of the front of shirt and additional sleeve sponsorship, but we should soon know.

Either way, it’s solid progress on the commercial front with talk of Kenyan online sports betting firm SportPesa being the new shirt sponsor. One possibility for a more lucrative deal would be to give the new partner first refusal on stadium naming rights.

Encouraging stuff, but to place this into perspective, the leading clubs have secured much higher shirt deals: Manchester United (Chevrolet) £56 million, Chelsea (Yokahama) £40 million, Arsenal (Emirates) £30 million, Liverpool (Standard Chartered) £25 million.

The club has also announced a significant new sponsorship deal for the Finch Farm training ground and academy. This is with USM Holdings, the holding company of Alisher Usmanov, Moshiri’s business partner. The fact that Usmanov is helping out his mate has raised some eyebrows, as the Russian remains an Arsenal shareholder, and it is likely that the deal would be reviewed for “fair value” by UEFA (assuming it is deemed a “related party” transaction) if Everton qualify for Europe.

Everton’s kit supplier deal with Umbro was described as a club record and is reportedly worth £6 million a season, which would be twice as much as the previous Nike contract, though the accounts suggest that it might not be so high in reality.

This is again a long way behind the deals at other clubs, e.g. Manchester United (Adidas) £75 million, Chelsea (Nike) £60 million, Arsenal (Puma) £30 million, Liverpool (New Balance) £28 million.

It will also be interesting to see if Moshiri reviews the 10-year Kitbag deal, which provides a guaranteed £3 million a year plus royalties for running the retail operation. Elstone has described this as a good arrangement that “de-risks Everton in a notoriously difficult business sector”, but it does betray a lack of ambition.

Everton’s wage bill rose 8% (£6.5 million) to £84 million, following continued investment in the squad, with the additions of Tom Cleverley, Aaron Lennon, Ramiro Funes Mori, Gerard Deulofeu and Mason Holgate. In addition, new contracts were awarded to James McCarthy, Kevin Mirallas, Mo Besic, Brendan Galloway and Bryan Oviedo.

Furthermore, the average number of employees increased from 274 to 315, including playing, training and management up from 98 to 108, youth academy up from 38 to 47, marketing and media up from 32 to 41 and management and administration up from 71 to 81.

The wage growth increased the wages to turnover ratio from 62% to 69%. Elstone said that this was still “below the Premier League average”, which does not seem to be the case based on reported figures, though it is accurate if we add back the outsourced commercial revenue, which reduces Everton’s ratio to 65%.

Following last season’s growth Everton’s wage bill is essentially “best of the rest”, i.e. the highest of those clubs outside the top six. However, it is still dwarfed by the elite clubs: Manchester United £232 million, Chelsea £222 million, Manchester City £198 million and Arsenal £195 million.

This disparity was noted by Koeman: “We have a lot of ambition and we like to do the best that is possible. But you have to look to the big clubs with the possibilities and the players they have. Nobody expected Leicester to win last season, but that will not happen again.”

Clearly, Moshiri will try to increase the wage bill to better compete. Indeed, Elstone has already advised, “Projected wages are set to increase significantly in the current season, reflecting a further commitment to player recruitment and new contracts for existing players.” The AGM forecast a wage bill of £111 million for 2016/17, an increase of £27 million.

However, Everton will need to consider the Premier League’s Short Term Cost controls, which restrict the annual player wage cost increases to £7 million a year for the three years up to 2018/19 – except if funded by increases in revenue from sources other than Premier League broadcasting contracts, e.g. gate receipts, commercial income and profits on player sales.

One thing that is quite striking in Everton’s accounts is the growth in other operating costs, rising from £22 million to £30 million in the last three years without any substantial explanation.

This seems quite high for a club of Everton’s size, especially as the retail and catering businesses have been outsourced, which means that other operating costs should be lower than other clubs (as net profits are reported in revenue).

Another cost that can have a major impact on the profit and loss account is player amortisation, which reflects investment in transfers. Basically the more that a club spends, the higher its player amortisation. In this way, Everton’s player amortisation has doubled from just £11 million in 2013 to a £22 million peak in 2016, reflecting increased spending in the transfer market.

The accounting for player trading is fairly technical, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the transfer fee is not fully expensed in the year of purchase, but the cost is written-off evenly over the length of the player’s contract, e.g. Romelu Lukaku was bought for a reported £28 million on a five-year deal, so the annual amortisation in the accounts for him is £5.6 million.

Nevertheless, Everton’s player amortisation of £22 million is not that high for the Premier League and is obviously miles behind the really big spenders like Manchester City (£94 million), Manchester United (£88 million) and Chelsea (£71 million), though it should further increase next year following this summer’s acquisitions.

For the period between 2009 and 2014, despite Kenwright’s protestations, Everton were a selling club, averaging annual net sales of £7 million. However, the last three seasons have seen a return to spending, with average net spend of £21 million, including the club’s record purchase of Lukaku from Chelsea.

Last summer Everton splashed out £45 million to bring in Yannick Bolasie, Ashley Williams, Idrissa Gueye and Maarten Stekelenburg, though they recouped the outlay in one fell swoop by selling John Stones to Manchester City. As Kenwright put it, “While we may not have finally done the amount of business in the summer transfer window we would have liked, we still added considerable strength and experience to our squad.”

Despite the higher spending over the last three seasons, Everton’s net spend is still mid-table in the Premier League, a long way below the two Manchester clubs (City £299 million and United £275 million), though it was higher than Liverpool £55 million.

However, Everton have been one of the most active clubs in the January transfer window, already purchasing midfielder Morgan Schneiderlin from Manchester United for a fee rising to £24 million and 19-year-old forward Ademola Lookman from Charlton for £11 million. They have also reportedly made offers for Standard Liege forward Ishak Belfodil and Atalanta midfielder Franck Kessié.

Everton’s net debt rose by £23.5 million from £31.3 million to £54.8 million with gross debt increasing by £17.6 million from £40.0 million to £57.6 million and cash falling by £5.9 million from £8.7 million to £2.8 million.

At the time of the accounts, the debt comprised three elements: (a) 25-year loan of £20 million with Prudential, which bears a high interest rate of 7.79%, leading to annual payments of £2.8 million; (b) a short-term loan of £35 million with Rights and Media Funds Limited (formerly JG Funding), securitised on Premier League TV money, at a 5.2% interest rate; (c) overdraft with Barclays of £2.7 million.

This is all irrelevant now, as Moshiri provided an interest-free loan of £80 million with no agreed repayment data after the account were published. This was used to repay all of the external loans and to pay the exceptional items.

Hopefully, this will bring to an end Everton’s use of opaque loans taken out with mysterious offshore corporations that started with Vibrac, who are based in the British Virgin Islands, though the accounts did note that the club had secured similar funding via a facility repayable on 14 July 2017.

Everton’s debt is by no means one of the highest in the Premier League with four clubs having debt above £100 million, namely Manchester United £490 million, Arsenal £233 million, Sunderland £141 million and Newcastle United £129 million.

Everton also have contingent liabilities of £35 million (£18 million dependent on future appearances and £17 million loyalty bonuses if certain players are still with the club on specific dates), up from £20 million the previous season.

The high interest rate on Everton’s loans has meant that their financing costs have been among the largest in the Premier League. Although nowhere near as much as the interest paid by the likes of Manchester United and Arsenal, this has certainly not helped the club’s finances. The good news is that Moshiri’s interest-free loan should save them around £5 million a season.

This unwelcome burden is emphasised even more when reviewing the cash flow over the last eight years. In that period, Everton generated £84 million of cash, mainly from operating activities £56 million, though this was supplemented by additional loans (net) £18 million and the sale of the old training ground £9 million.

Around 40% of this cash (£34 million) was required for interest payments, which was only £7 million lower than the £41 million (net) spent on players, leaving only £10 million on infrastructure investment.

Looking ahead, there is a sense of optimism around Everton’s future following Moshiri’s investment. Obviously money is no guarantee of success, but it does make it more likely.

There are still some issues with Moshiri pointing out that the club will be somewhat restricted by FFP: “It is not the same as when Chelsea and Manchester City began their projects, which was before Financial Fair Play.” It’s also still not clear whether the Iranian will ultimately become the outright owner of the club.

"Williams, it was really nothing"

However, at least the club now has stronger backing, whereas for the past few years Everton have struggled to compete due to a lack of financial resources. In the shape of Moshiri, they evidently have a man with a plan, including reduction of external debt, increased commercial income and, of course, a new stadium.

Let’s leave the last word to him: “Bill and previous managers kept the club close to the elite for many years, but now we need to look at a sustainable base to be among the elite. It takes time, but we are committed, that’s why we’re here.”

He added, “It’s not enough to say you are a special club – we don’t want to be a museum. We need to be competitive and to win.”

Brighton and Hove Albion - Knockin' On Heaven's Door

noreply@blogger.com — Mon, 12 Dec 2016 06:21:00 GMT

It was another case of “so near, yet so far” for Brighton and Hove Albion last season, as the Seagulls missed out on automatic promotion to the Premier League only on goal difference, while a spate of untimely injuries led to defeat in the play-off semi-finals by Sheffield Wednesday, who had finished a full 15 points behind them in the league table.

Chairman Tony Bloom captured the feelings of the Albion fans: “The 2015/16 season was one of the most remarkable and exciting in my 40 years as a Brighton and Hove Albion supporter. The team, under Chris Hughton’s astute leadership, gave us a season to savour – and although we twice missed out on taking that final step to the Premier League, it has laid the foundation for our current season.”

This is the third time in the last four seasons that Brighton have reached the Championship play-offs, only to fall in the semis. This consistency on the pitch is all the more impressive, as it has been achieved under different managers: Guy Poyet in 2013; Oscar Garcia in 2014; and Hughton last year. The only blip came in 2015, when the club slipped back under the far-from-flying Finn Sami Hyypia.

"Many Happy Returns"

Of course, for those with longer memories it is great news that Brighton are still around to mount a challenge, given that they only avoided dropping out of the Football League to the Conference by the skin of their teeth in 1997 with a final day 1-1 draw at Hereford United.

There then followed years of struggle, exacerbated by the problems of finding a suitable ground after the Goldstone was sold to property developers, leading to exile in Kent and a ground share with Gillingham. The club returned to Brighton two years later to the Withdean, an old council-owned athletics stadium where the facilities were far from ideal.

It took 12 years, but finally Brighton moved to the magnificent new Amex stadium in 2011, coinciding with promotion to the Championship. The major investment required to build the stadium (and indeed a superb new training centre) was funded by Bloom, a lifelong fan who became chairman.

He has continued to finance the club, as can be seen by the 2015/16 accounts, which revealed a massive £25.9 million loss, £15.4 million worse than the previous season’s £10.4 million loss. To put that into perspective, that means that Brighton lost more than £2 million a month or around £500,000 every week.

The club said that this underlined Bloom’s commitment and in particular the ambition to reach the Premier League, while the chairman himself explained the strategy: “Our increased losses result directly from an ongoing and growing investment in our playing squad.”

This explains the main reasons for the higher loss, as wages shot up £6.7 million (33%) from £20.6 million to £27.4 million, while player amortisation (the annual cost of transfer fees) also rose £1.4 million (60%) from £2.4 million to £3.8 million. Moreover, the desire to retain players meant that profit from player sales fell £7.5 million from £8.7 million to just £1.2 million.

In addition, other expenses also increased by £1.1 million (7%) from £15.0 million to £16.0 million, largely due to higher costs associated with running the stadium.

The sizeable cost growth more than offset the £1.0 million (4%) increase in revenue from £23.7 million to £24.6 million, mainly due to broadcasting income rising £0.9 million (18%) to £5.9 million, though commercial income was also up £0.5 million (8%) to £9.4 million, driven by catering and events. On the other hand, gate receipts fell £0.4 million (4%) to £9.4 million, primarily due to no home cup ties.

Other operating income was up £0.4 million, thanks to other grants received.

In fairness to Brighton, almost all clubs in the Championship lose money and are reliant on owners’ funding. In 2014/15, the last season where all clubs have published their accounts, losses were reported by 18 of the 24 clubs – in stark contrast to the Premier League where the new TV deal, allied with wage controls, has led to a surge in profitability.

The club that made most money in the Championship that season were Blackpool – and their model is not one to be recommended, as it culminated in relegation to League One. As Bloom noted, “Any Championship club without parachute payments wishing to compete for promotion will inevitably make significant losses.”

That said, Brighton’s loss of £26 million in 2015/16 is likely to be one of the highest in the division. Only two clubs reported higher deficits in 2014/15: Bournemouth £39 million, though their loss was inflated by £9 million promotion payments and an £8 million fine for failing Financial Fair Play (FFP); and Fulham £27 million, but this was impacted by £11 million of exceptional impairment charges.

Brighton could have reduced their loss by accepting some of the lucrative offers received for their top talents, but Bloom noted that the club made a conscious decision “to retain our key players” and “not to cash in on our key assets”.

Consequently, there were no significant player disposals in the 2015/16 season, leading to only £1.2 million profits, probably driven by additional clauses from earlier player sales, as the contingent receivables on transfers have fallen from £2.1 million to £0.8 million in the latest accounts. In comparison, £8.7 million was booked in the previous season, mainly from the sales of Leo Ulloa to Leicester City and Will Buckley to Sunderland.

Although Championship clubs rarely sell players for big bucks, at least compared to the Premier League, this was a useful money-spinner for Brighton in 2014/15 with only four clubs generating more money from this activity. In contrast, the 2015/16 profit of just over £1 million is likely to be one of the smallest in the division.

Of course, losses are nothing new for Brighton. In fact, the last time that they made a profit was back in 2007/08 – and that was less than £1 million and only arose because of a £3.6 million exceptional credit, due to a change in the accounting for the Falmer stadium expenses. Since then, the club has made cumulative losses of £88 million.

Moreover, the losses have been growing. Since promotion to the Championship, Brighton’s total losses have amounted to £71 million, averaging £14 million a season. As finance and operations director David Jones confirmed, “We’ve lost money every year we’ve been (at the Amex).”

Jones added, “While we’re getting a competitive team on the pitch, we’re going to continue to lose money with the revenue streams that we’ve got.” The difference with the top flight is colossal. Jones again, “If we were in the Premier League, we would be able to be a sustainable business that makes an annual profit.”

If they are not promoted, it will be interesting to see what the board decides regarding player sales. Traditionally Brighton have made very little from the transfer market , though there was a change in stance in 2013/14 when the club sold Liam Bridcutt to Sunderland and Ashley Barnes to Burnley, followed by the even more profitable sales in 2014/15.

This summer Brighton could have made a lot of money if they had accepted all the offers they received, e.g. Dale Stephens (Burnley), Lewis Dunk (Fulham) and Anthony Knockaert (Newcastle United). That could have brought in £15-20 million, though obviously would have damaged Brighton’s prospects of promotion.

The current strategy is to “speculate to accumulate”, but as Bloom has admitted, “It would be ridiculous for me or any owner to say that a player is never for sale. There’s always a price for any player.”

Brighton’s strategy is more clearly seen by the club’s alternative presentation of the profit and loss account, which highlights the 29% (£7 million) increase in the football budget in 2015/16.

Chief executive Paul Barber, who has overseen a “pretty radical and dramatic programme of reducing our costs” explained the approach as follows “It gives us more opportunity to put more into the football budget, which should improve our chances of promotion.”

In this way, administrative and operational costs have been cut by 22% since 2012, which has meant that Brighton’s different managers have benefited from a significant increase in the football budget over this period of around 134%, as it has grown from £13 million to £31 million.

Bloom praised his team for “ensuring we remain operationally efficient”, but the reality is that Brighton’s underlying profitability has still been getting worse, as seen by the reduction in EBITDA (Earnings Before Interest, Depreciation and Amortisation).

This metric is considered to be an indicator of financial health, as it strips out once-off profits from player trading and non-cash items. It has been consistently negative at Brighton, but has declined in the last eight years from minus £3 million in 2008 to minus £18 million in 2016.

Unsurprisingly, a negative EBITDA is far from uncommon in the Championship with 21 clubs generating cash losses, though only Nottingham Forest have worse underlying figures than Brighton. In stark contrast, in the Premier League only one club reported a negative EBITDA, which is again testament to the earning power in the top flight.

Brighton’s revenue surged from £7.5 million in 2011 to £24.6 million in 2016 following promotion from League One to the Championship, exacerbated by what can be described as the "Amex effect" with gate receipts being more than four times as much as Withdean, increasing from £2.3 million to £9.4 million.

In addition, the new stadium has brought more commercial opportunities, leading to income climbing from £3.1 million to £9.4 million. The club could negotiate better deals with sponsors in the higher division (up from £0.8 million to £5.5 million), increase retail sales, e.g. from the stadium megastore (up from £0.5 million to £1.3 million) and make more from catering, i.e. pies and the famous Harveys beer (up from £35k to £1.3 million).

However, the growth since the first season back in the Championship in 2012 is less impressive, amounting to just 11% (£2.5 million) in four years. The fact is that it is difficult to substantially grow revenue streams without another promotion to the top flight.

Brighton’s revenue of £25 million places them around 7th highest in the Championship, but the clubs with the three highest revenues in 2014/15 (Norwich City, Fulham and Cardiff City ) were more than 60% higher with £40-52 million.

Bloom is acutely aware of the challenge this poses: “Our player budget is the highest it has ever been, so we have certainly invested, but we absolutely can't compete financially with relegated clubs like QPR, Burnley and Hull with their parachute payments.”

He’s not wrong, as two of the three clubs he named were promoted back to the Premier League last season, once again proving that money talks in football. Jones reiterated his chairman’s message, noting that this factor “presents difficulties when trying to assemble a playing staff that can compete with clubs coming down from the Premier League, whose TV parachute payments can inflate their revenue to around £40 million.”

Excluding the impact of the parachute payments made to those clubs relegated from the Premier League (£26 million in first year after relegation) Brighton’s revenue would be one of the highest in the Championship. This season the disparity between “the haves and the have nots” will be even larger, as the relegated clubs include Newcastle United and Aston Villa.

Even Chris Hughton has commented on this hurdle, when discussing Newcastle: “They’ve come down with parachute payments, they are a massive club and they are doing their very best to make sure they go straight back up again.”

The majority of Brighton’s revenue comes from the stadium with gate receipts contributing 38%, up from 30% at Withdean, though this is only just ahead of commercial income 38%, following the relatively higher growth rate in the last few seasons. Broadcasting is up to 24%, though this is much lower than the Premier League, where TV money accounts for 70-85% of total revenue at half the clubs.

Clearly, Brighton are more reliant on match day income than most. In fact, in 2014/15 only two clubs were more dependent on this revenue stream: Nottingham Forest and Charlton Athletic.

Despite improved results on the pitch, gate receipts fell for a second consecutive season, decreasing 4% (£0.4 million) from £9.8 million to £9.4 million, largely due to a lack of home cup ties.

Nevertheless, this is still likely to be the highest match day revenue in the Championship in 2015/16, as the only team ahead of them in 2014/15 was Norwich City, who were promoted to the Premier League last season. It will be another story this year, due to the arrival in the second tier of Newcastle and Villa with their large crowds.

Average attendance slipped slightly from 25,640 to 25,583, partly due to the knock-on impact of the disappointing 2014/15 season, but this was still the second highest in the Championship, only surpassed by Derby County 29,663, though ahead of all three promoted clubs: Middlesbrough 24,627, Hull City 17,199 and Burnley 16,709.

Since the move to the Amex, attendances had been steadily rising from the 7,352 at Withdean, as the new stadium finally met latent local demand for tickets. Brighton’s potential has been highlighted this season by three games selling out (Norwich, Villa and Fulham). In fact, the club has in excess of 22,000 season ticket holders and 1901 Club members.

Ticket prices are among the highest in the Championship. According to the BBC’s Price of Football survey, Brighton has the second highest cheapest season ticket (only below Norwich) and the third highest most expensive season ticket (behind Ipswich and Fulham). However, the survey did note that tickets include a travel subsidy to and from the ground for fans by public transport or use of the park-and-ride option, valued at £4 per game for adults.

It is also worth mentioning that Brighton supporters are happier with their match day experience than any others according to a Football League study, partly due to the magnificent facilities that are second to none, including free wi-fi and VIP padded seats. The club is also good to away fans, lighting the concourse in their colours and having their local beer on tap. The only fly in the ointment is the appalling “service” from the dreaded Southern Rail.

The good news is that the club froze most ticket prices in 2015/16 and have restricted price rises in 2016/17 to no more than a couple of pounds per match. Barber said this was to reward fans for “the ongoing loyalty and support they’ve shown to the club.”

Brighton’s broadcasting revenue rose 19% (£0.9 million) from £4.9 million to £5.9 million in 2015/16, which was attributed to an increase in the Football League basic distribution plus the club being shown more times on live TV.

In the Championship most clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to around £4 million of central distributions: £2.1 million from the Football League pool and a £2.3 million solidarity payment from the Premier League. There are also payments for each live TV game: £100,000 home; £10,000 away.

This might not sound much, but Barber argued, “TV income is extremely important for all clubs, including ours”, adding, “without revenue from Sky TV, ticket prices would go up.”

The size of the prize goes a long way towards explaining the loss-making behaviour of many Championship clubs. This is even more the case with the new TV deal that started in 2016/17, which Barber described as “astonishing”. This will be worth an additional £35-60 million a year to each club depending on where they finish in the table.

Of course, if they did go up, Brighton would also have to spend more to strengthen their playing squad, but the net impact on the club’s finances would undoubtedly be positive, as evidenced by the improvement in the bottom line for those clubs promoted in the past few seasons.

The other point worth emphasising is that if a club is relegated after only one season in the Premier League, it will only benefit from parachute payments for two years.

Commercial income grew by 5% (£0.5 million) from £8.9 million to £9.4 million, comprising commercial sponsorship and advertising £5.5 million, catering and events £1.3 million, retail £1.3 million, academy grant £0.9 million, other income £0.3 million and women and girls £0.1 million. The main driver for the growth was a £0.4 million increase in catering and events, primarily as a result of the Rugby World Cup matches hosted at the Amex.

In the new world of FFP, Bloom has said that the club “had to adapt and move quickly to establish a sharper commercial focus. We had to focus on the inherent value of our brand.” The club’s success in this area is reflected by Brighton having one of the highest commercial revenues in the Championship, only behind Norwich City and Leeds United in 2014/15.

This is despite the fact that Brighton now only report the net catering commission in revenue, whereas in previous seasons all the gross revenue was included in revenue with the expenses shown in costs.

"Back on the Shane gang"

What has been particularly impressive in recent years is the increase in sponsorship, though it remained static in 2015/16, largely due to the contractual cycles. American Express are not only shirt sponsors, but also naming rights partner for the stadium and the training ground. This multi-year agreement, signed in March 2013, was described by Barber as “the biggest in the club’s history.”

Similarly, Barber said that the 2014/15 Nike deal, replacing Errea after 15 years as the club’s kit supplier, represented “a significant increase on our existing commercial arrangement.”

Interestingly, the club has applied for planning permission for a 150 room hotel alongside the stadium, though the City Council has to date rejected the application. Barber said that this “would have been a valuable addition to our non-matchday revenue.” They remain “hopeful of a successful outcome”, which is just as well as they have to date spent over £2 million on this development.

Brighton’s wage bill shot up by 33% (£6.7 million) from £20.6 million to £27.4 million in 2015/16, “in order to be as competitive possible and give ourselves the best possible chance of success on the pitch.” This would have included high wages for the returning Bobby Zamora, even though he arrived on a free transfer.

It is worth noting that since 2012, the first year back in the Championship, the wage bill has grown by £12.7 million (87%), while revenue has only increased by £2.5 million (11%).

This is all seen on the pitch, given the significant reduction in administrative and operational expenses. For example, in 2015/16 the number of players rose from 61 to 73, while other staff were flat at 197.

Despite this growth, Brighton’s £27 million wage bill is still only the eighth highest in the Championship, so promotion would indeed be a fine achievement. As a comparative, the top three in the Championship in 2014/15 were Norwich City £51 million, Cardiff City £42 million and Fulham £37 million.

Barber understands this challenge: “We haven’t got anywhere near the biggest budget in the division. We’re probably 10th or 11th. So we’ve had to spend wisely, and eke out every ounce of value from every deal.”

That said, it would be no surprise if Brighton’s wage bill further rose this season, as they have been extending contracts for a number of important individuals, including Hughton, Beram Kayel, Solly March and Conor Goldson, though this will ensure a decent price if they are sold.

The remuneration for the highest paid director, who is not named, but is surely Paul Barber, has increased from £558k to £578k. This is a lot of money, but Barber is really a Premier League level chief executive, who has been pretty successful in cutting operational expenses and renegotiating many of the sponsorships.

Brighton’s wages to turnover ratio increased (worsened) from 87% to 111%, the highest since 2009 when the club was in League One. This is not exactly great, but it is by no means one of the highest in the Championship. In 2014/15 no fewer than 11 clubs “boasted” a wages to turnover ratio above 100% with the worst offenders being Bournemouth 237%, Brentford 178% and Nottingham Forest 170%.

The (relatively) prudent approach is evidently the one that Brighton want to follow, especially in a FFP world, as noted by Bloom: “While we do want to play at the highest level, we cannot simply open our cheque book and start spending without care or attention.”

Other expenses rose by 7% (£1.1 million) from £15.0 million to £16.0 million, which is by far the highest in the Championship, ahead of Fulham £13.4 million and Leeds United £12.6 million.

This is the other side of the coin of moving to the Amex, as this year’s increase was largely due to stadium expenses: maintenance, running costs and security. There are also some costs that are exclusive to Brighton, as Barber note, “The contribution that the club makes to the cost of travel has grown, meaning that we have a large seven-figure transport bill that other clubs don’t have.”

Non-cash expenses have also been on the rise with depreciation and player amortisation increasing from just £237k in 2009 to £8.7 million in 2016, reflecting the club’s investment in infrastructure and the playing squad.

In 2015/16 depreciation was unchanged at £4.9 million, which is more than twice as much as any other club in the Championship, the next highest being Derby County £2.1 million. This represents the annual charge of writing-off the cost of the stadium and the training ground. These are depreciated over 50 years, i.e. 2% of cost per annum.

Player amortisation was 60% (£1.4 million) higher at £3.8 million, following the strengthening of the squad, but this not out of the norm in the Championship. The highest player amortisation in 2014/15 was found at clubs recently relegated from the Premier League, namely Norwich £13 million, Cardiff £11 million and Fulham £11 million.

However, to place this into perspective, even these clubs are miles behind the really big spenders in the top tier like Manchester City (£94 million) and Manchester United (£88 million). This is partly because there is no amortisation required for those players who have been developed at the Academy, e.g. Dunk and March in Albion’s case.

The accounting for player trading is fairly technical, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the transfer fee is not fully expensed in the year of purchase, but the cost is written-off evenly over the length of the player’s contract, e.g. Irish international defender Shane Duffy was bought from Blackburn Rovers for a reported £4 million on a four-year deal, so the annual amortisation in the accounts for him is £1 million.

Over the years, Brighton have not been a big player in the transfer market, often registering net sales, though they have increased their gross spend recently, averaging £5.6 million in the last two seasons, compared to just £0.9 million over the previous nine seasons.

It is striking that there have been no meaningful sales in this period, as Barber explained, “Our key objective this summer was to retain our best players which, despite a lot interest and a number of offers for different players in our squad, we have managed to do.”

They also wanted to strengthen the squad in key areas this summer, so recruited Shane Duffy and Oliver Norwood, who made a good impression at the Euros with the Republic of Ireland and Northern Ireland, and the returning Steve Sidwell. They have also made good use of the loan market, bringing in prolific goal scorer Glenn Murray from Bournemouth and full-back Sebastien Pocognoli from West Brom.

"A French Kiss in the Chaos"

Last season they also bought well with Anthony Knockaert, Tomer Hemed, Jiri Skalak, Conor Goldson, Liam Rosenior, Jamie Murphy, Gaetan Bong and Uwe Hünemeier all making decent contributions.

However, it is apparent that Brighton have not gone overboard in terms of spending, especially compared to some of their principal rivals who are really “going for it”. To illustrate this, in the last two seasons Brighton had net spend of 11 million, while they were comfortably outspent by Derby County £26 million, Norwich City £23 million and Sheffield Wednesday £21 million.

Not to mention Aston Villa and Newcastle United who have somehow found themselves in the Championship despite substantial net spend of £47 million and £43 million respectively. As Hughton said, “There are big spenders in this division. We can’t compete with what Newcastle and Aston Villa are doing. What we have done has been sensible.”

Therefore, Brighton have to box clever, as Bloom explained: “There are other clubs in the division who have spent significantly more than us. So we just have to make sure we recruit smarter and that the team dynamic overcomes the financial disadvantage we've got against certain other clubs.”

Although holding onto players was clearly the strategy for this season, Bloom recently indicated at a fans’ forum that things might be different next season, so this may well be Brighton’s best opportunity to get promotion.

Brighton’s net debt rose by £25.6 million from £140.5 million to £166.1 million with the £23.0 million increase in gross debt to £170.6 million compounded by cash falling by £2.6 million to £4.5 million.

Debt has been rising over the past few years, so much so that Brighton now have the largest debt in the Championship, substantially more than other clubs, e.g. Cardiff City £116 million, Blackburn Rovers £104 million and Ipswich Town £88 million. However, it is entirely owed to Bloom, is interest-free and can be regarded as the friendliest of debt.

The cash flow statement reveals that Bloom has also converted £22 million of loans into share capital, including £11 million in 2015/16, which means that Bloom actually stumped up £34 million last season. Furthermore, since the accounts were published, he converted an additional £8 million of loans into shares, i.e. a running total of £30 million.

Adding the £80 million that Bloom has funded via share capital (including the debt conversions) to the £171 million of debt means that Bloom has put in a total of £251 million – that’s a cool quarter of a billion.

Just pause to let that sink in for a moment. One. Quarter. Of. A. Billion. Pounds.

As David Jones commented, “That’s a massive amount of money for an owner to have to subsidise a club for. And when you consider we’ve got one of the highest two or three attendances in the Championship, some of the best sponsorship deals, we’re still needing the owner to help us with that kind of subsidy. It’s substantial.”

Looking at how Brighton have used these funds since Bloom took charge, the majority (£155 million) has gone on investment into infrastructure (including £103 million on the stadium and £32 million on the training centre), while £83 million has been used to bankroll operating losses. Hardly any money was spent on new players in this period with a net outlay of less than £5 million.

There were a couple of interesting corporate actions after the accounts closed. Authorised share capital was doubled from £100 million to £200 million – potentially paving the way for a significant debt conversion? In addition, the club created £40 million of Convertible Unsecured Loan Notes.

Being so dependent on one individual can be a concern, but Bloom comes from a family of Brighton supporters: “I have absolutely no intention of selling. I think I will be here for many years to come.”

"Hands Held High"

He continued: “Our ambition remains for the club’s teams, both men and women, to play at the highest level possible – and as chairman (and a lifelong supporter of the club) I will do everything I possibly can to achieve that and I remain fully committed to that goal.”

Bloom is seriously wealthy from his property and investment portfolio (plus money earned from poker and other forms of gambling), but Brighton are very fortunate to have such a generous benefactor.

As Jones said, “If you’re an ambitious Championship club and you don’t have the benefit of parachute payments, then you’re going to need an owner that’s prepared to subsidise you substantially.”

"Sound Czech"

However, Bloom would not be able to simply buy success, even if he wanted to, as Brighton need to follow the Football League’s FFP regulations. Under the new rules, losses will be calculated over a rolling three-year period up to a maximum of £39 million, i.e. an annual average of £13 million, assuming that any losses in excess of £5 million are covered by owners injecting equity (hence the £8 million debt conversion in July 2016).

These limits are much higher than the previous £6 million a season, so are likely to encourage clubs to spend even more, making the division even more competitive.

Brighton have confirmed that they will comply with these rules in 2015/16 (“as we have done each season”), which might seem strange, given that the reported £26 million loss was twice the £13 million limit.

"Another Dale in my heart"

This is because FFP losses are not the same as the published accounts, as clubs are permitted to exclude some costs, such as depreciation, youth development, community schemes and any promotion-related bonuses.

Brighton’s depreciation was £5 million, which implies that they have spent £8 million on their academy and the community in order that the FFP loss was lower than the £13 million limit in 2015/16. Even though these activities represent a major investment for the Albion, it seems unlikely that the expenditure would be that high, but it is difficult to see how else the club could have complied.

Going forward, the assessment is calculated over a three-year period, which means that a higher loss one year can be compensated in later years, e.g. via player sales, or might even become irrelevant (if the club is promoted).

Either way, Bloom was right when he said it is “a delicate balancing act for the board, as we strive to achieve our ultimate aim.”

"Spanish Steps"

The last time Brighton were in the top flight was way back in 1983, but this club is clearly ready for the Premier League. As Bloom said, “That’s what we built the stadium for, that’s what we built our magnificent training ground for.”

Bloom appears just as happy with the situation on the pitch: “To compete at the top end of the Championship, it’s important to have a manager who knows how to win at this level and to possess a strong group of quality players. We have both, and while this doe not guarantee promotion, it gives us an excellent chance.”

Given what happened last season, nobody at the Amex is taking anything for granted. Barber spoke for everyone: “We’ve made a really strong start. But we also know that this is the toughest division in the world and that nothing has been achieved at this point.”

Bayern Munich - Elevation

noreply@blogger.com — Tue, 06 Dec 2016 06:47:00 GMT

Bayern Munich won the double of the Bundesliga and the German Cup in 2015/16, obviously a fine feat, but not that surprising for Germany’s most successful club. In total, the Bavarians have won the league no fewer than 26 times and the cup on 18 occasions, though Karl-Heinz Rummenigge said that it was still a “historic achievement” to top the Bundesliga four years in a row.

The Bayern chairman was impressed: “If I were to assign grades for the 2015/16 season, I’d give the coach and the team an A. Even in our greatest eras we were lucky to win the championship three times on the bounce at the most.” He added, “The days of FC Hollywood are over – and that’s good. We make headlines on the pitch now.”

The story was almost as good in Europe. Rummenigge again, this time on the Champions League: “We’ve advanced to the last four for the fifth time in a row. That too is unprecedented in terms of continuity at FC Bayern.” Indeed, in that period Bayern have reached the final twice and won the trophy in 2012/13 by beating Borussia Dortmund at Wembley.

However, the traditional giants are showing some signs of vulnerability this season after Pep Guardiola departed for a new challenge with Manchester City in the Premier League to be replaced by experienced Italian manager, Carlo Ancelotti. Guardiola won seven trophies in his three years in Germany, including two doubles, but Ancelotti’s team has not had things all their own way this season.

They currently sit behind newly promoted RB Leipzig in the Bundesliga and have failed to top their Champions League group following an embarrassing 3-2 defeat at Russian minnows FC Rostov. As Rummenigge admitted, “A new era is about to begin. Everyone has chased us over the last few years. Now we’re doing the chasing!”

"Radio, Radio"

Off the pitch, Bayern’s dominance remains unchallenged, as they have just announced record profits and revenue for the 2015/16 season. Profit before tax shot up by €23 million (72%) from €31 million to €54 million, though profit after tax “only” rose by €9 million (39%) from €24 million to €33 million, due to a higher €21 million tax charge.

Revenue increased by a massive €118 million (25%) from €474 million to €592 million, just shy of the €600 million threshold. All revenue streams grew, though commercial income led the way, increasing by €65 million (23%) from €278 million to €343 million, driven by sponsorship, up €56 million (49%) to €170 million, and merchandising, up €6 million (6%) to €108 million.

Broadcasting income actually rose more in percentage terms (39%) or by €42 million from €106 million to €148 million with the growth split fairly evenly between the Bundesliga (€21 million) and the Champions League (€16 million). Match day income was up €12 million (13%) to go above €100 million for the first time (€102 million).

However, much of the revenue growth was eaten up by a rise in expenses. Wages increased by €33 million (15%) from €227 million to €260 million, while other expenses rose €39 million (25%) from €185 million to €224 million and player amortisation was up €9 million (15%) to €70 million.

Player sales also fell €15 million from €50 million to €35 million. Incidentally, I am using the Deloitte definition of revenue here in order to facilitate comparisons with other European clubs, so have excluded this €35 million of transfer income. Adding this to my revenue of €592 million gives the €627 million announced in Bayern’s press release.

As another technical aside, note that these are the consolidated group accounts for FC Bayern München AG, which include the Allianz Arena München Stadion GmbH and other subsidiaries.

Whichever way you look at it, deputy chairman Jan-Christian Dreesen was justifiably proud of these results: “The 2015/16 fiscal year has been fantastic for FC Bayern, in terms of both sports and finances.”

Of course, making money is nothing new to Bayern Munich, as this is the 24th year in a row that they have been profitable. Traditionally, the club invests almost all of its profits into the squad or stadium development, but their profits have been steadily rising recently, averaging €37 million over the last three years (before tax).

Rummenigge boasted, “This combination is what makes FCB unique. We have the greatest success in our sporting endeavours, and we pay for it all by ourselves.”

That’s very impressive, though it should be noted that it is far from unusual for German clubs to make profits. In fact, 11 out of 18 Bundesliga clubs were in the black in 2014/15 (with 13 of 18 profitable in the preceding season).

Indeed, many of Bayern’s rivals across Europe have also posted large profits in recent times, e.g. in 2015/16 Manchester United reported a pre-tax profit of €59 million (at a Euro exchange rate of 1.20), Real Madrid €43 million and Barcelona €36 million. Moreover, these are not necessarily “flash in the pan” performances, as Real Madrid and Arsenal have been profitable since 2002, while Barcelona have reported profits the last five years.

One factor behind Bayern’s growing profits is that they now make more money from player sales, averaging €42 million in the last three seasons, compared to just a €13 million average in the previous seven seasons.

The 2015/16 player sales of €35 million included the sale of Xherdan Shaqiri to Inter €15 million, Sebastian Rode to Dortmund €12 million, Bastian Schweinsteiger to Manchester United €9 million and Dante to Wolfsburg €4.5 million. The previous season was even better at €50 million, thanks to selling Toni Kroos to Real Madrid €30 million and Mario Mandzukic to Atletico Madrid €22 million.

Next year’s accounts should also include a reasonable contribution from player sales following Mario Götze’s €22 million return to Dortmund plus Pierre-Emile Hojberg’s move to Southampton €15 million.

Bayern highlighted the growth in EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which rose by €31 million (28%) from €111 million to €143 million. This has more than doubled from the recent low of €69 million in 2011.

It should be noted that Bayern’s definition includes transfer income, but the growth was even better using the more generally accepted definition of recurring income, i.e. excluding lumpy profits from player sales. This metric improved by €46 million (75%) from €62 million to €108 million.

That’s very good, but to place it into perspective, Manchester United announced 2015/16 EBITDA of €230 million, i.e. more than twice as much, so it’s not surprising that they could pay so much money for Schweinsteiger and still leave him in the stands.

Despite a blip in 2014/15, due to the lack of competing in the UEFA Super Cup and FIFA Club World Cup, Bayern’s revenue growth has been mighty impressive, as the €302 million increase since 2009 means that the revenue has more than doubled in the last seven years.

Over 60% (€183 million) of that growth has come from commercial operations, largely sponsorship (€97 million) and merchandising (€71 million), but the two other principal revenue streams have also shot up: broadcasting by €78 million (112%) and match day by €41 million (68%).

In Germany Bayern’s revenue places them in a league of their own. Not only is the gap large, but it is getting larger. Since 2009, their closest challenger, Borussia Dortmund, managed to grow their revenue by an impressive €179 million, but this was still €123 million less than Bayern’s growth in this period.

The situation is even worse for the other German clubs. Since 2009 Schalke have only grown revenue by €95 million, while Stuttgart’s revenue was flat and Hamburg’s actually fell. This has resulted in Germany only having three clubs in the Money League top 20, compared to five clubs in 2009. This has inevitably led to concerns that Bayern’s financial supremacy will be bad for competition in Germany.

It’s a different story in Europe with Bayern battling to keep pace with the other elite clubs. Indeed in 2014/15 Bayern actually slipped two places in the Money League to fifth, their lowest position since the 2006/07 season. However, it should be noted that Bayern are one of only three clubs to be ever present in Deloitte’s annual rankings.

Bayern found themselves around €100 million behind Real Madrid and Barcelona, so the significant 2015/16 revenue growth was required to keep up with the Spanish giants, not to mention repelling the threat of the newer clubs like Paris Saint-Germain and Manchester City, who sandwiched Bayern in last year’s table.

For 2015/16, on a like-for-like basis, Bayern’s growth to €592 million has made inroads into the top clubs’ advantage. Real Madrid still lead the way with €620 million, though this is only €28 million ahead of Bayern, closely followed by Manchester United €618 million and Barcelona €612 million.

We should make clear the importance of exchange rates here, as I have used €1.20 to the £, while it is entirely possible that Deloitte might use an average 2015/16 rate of around €1.30 when they publish the next edition of the Money League, which would obviously have a favourable impact on Manchester United’s Euro figures.

Returning to the 2014/15 Money League, if we compare Bayern’s revenue with the other clubs in the top ten, we can see that they enjoy a substantial commercial advantage over almost all clubs, but they are lagging behind in broadcasting income.

As we have seen, this already rose significantly in 2015/16, while there is further scope for improvement in this revenue stream from the new Bundesliga TV deal starting in 2017/18, which should be worth at least an additional €30 million to Bayern.

From a domestic perspective, Bayern’s gap to the second club (Borussia Dortmund) was €193 million in 2014/15, which was only surpassed in France, where PSG were €371 million ahead of Marseille. However, the gap is much smaller in Italy, England and Spain.

Moreover, the gap to the 3rd placed club in Germany (Schalke) was €254 million, which is a huge competitive advantage. This is much more than the gaps in England and Italy, though the difference is even higher in Spain and France.

Following Bayern’s impressive 2015/16 revenue growth, the gap to Dortmund has now widened to an astonishing €307 million: €592 million vs. €285 million. In other words, Bayern now earn more than twice as much as their closest domestic competitor.

As we have seen, the largest revenue category at Bayern is commercial income, which accounts for more than broadcasting and match day combined. That said, commercial’s share of 58% has dropped from the 60% peak two years ago, thanks to the growth in broadcasting taking that category’s share up to 25%. As a consequence, match day has diminished in importance to just 17%, even though it does bring in more than €100 million.

Only one other club in the Money League top 20 had commercial income contributing more than Bayern, namely Paris Saint-Germain with 62%, thanks to the French club’s “innovative” deal with the Qatar Tourism Authority, which is apparently worth €200 million.

Indeed PSG was the only club with higher commercial revenue than Bayern with €297 million, though Bayern were ahead of clubs like Manchester United €264 million, Real Madrid €247 million and Barcelona €244 million.

And that was before Bayern’s 2015/16 growth in commercial revenue from €278 million to €343 million, comprising sponsoring and marketing €170 million, merchandising €108 million, Allianz Arena €39 million and other commercial activities €26 million. Bayern do have the advantage of being the most supported team in the largest commercial market in Europe, but that’s still some going.

Although commercial deals are very important to all German clubs, Bayern still earn significantly more than the others. In fact, the commercial gap to Dortmund, which had narrowed in 2014/15, rose to €191 million last season, the highest ever difference between the two.

Bayern’s returning president Uli Hoeness said that Dortmund would need to have a more consistent track record of winning trophies if they hoped to match Bayern’s global appeal, but that is a tough ask, given their revenue shortfall.

Bayern have been boosted by strategic partnerships with three major German companies (Adidas, Allianz and Audi), who all have an 8.33% stake in the club with the other 75% owned by the fans.

Adidas has a long-standing relationship with Bayern, extending their kit deal in 2015 until 2030, even though it had a further five years to run. This was for a reported €900 million, which is worth €60 million a season, up from the previous €25 million. Allianz have also extended their stadium naming rights deal for a further five years to 2041 at around €6 million a season, while Audi is a main sponsor and automotive partner.

That’s great news, but it is still far below Manchester United’s €90 million deal with Adidas (and, for that matter, the new kit deals at Real Madrid and Barcelona, which are worth €120-150 million according to various press reports). On the other hand, it is considerably higher than Dortmund’s latest kit deal with Puma, which is worth only €15 million.

In addition, Deutsche Telekom have extended their long-running shirt sponsorship deal, first established in 2002, to 2023, reportedly increasing the annual fee to €30 million (though some reports have this as high as €35 million).

Although the highest in Germany, It’s a fair way behind other leading European clubs, e.g. Manchester United’s Chevrolet deal is worth around €70 million, while Barcelona have just signed an agreement with Rakuten for €55 million.

As well as Bayern’s four main partners, the club also has a raft of other big name partners, split between 9 platinum, 5 gold and 11 official, including DHL, Gigaset, Goodyear, Hypovereinsbank, Lufthansa, SAP, Paulaner Coca-Cola and Giorgio Armani.

"Mats Entertainment"

The Allianz Arena is another major money-spinner for Bayern. They initially shared ownership with TSV 1860 Munich, but have fully owned the venue since 2006, leasing it back to their former partners since then. As well as annual stadium naming rights of €6 million, Bayern benefits from all other activities staged at the Arena, including concerts and German national team matches.

Perhaps the most staggering figure is from merchandising sales, which has nearly tripled since 2009 to €108 million. This means that nearly a fifth of Bayern’s revenue is generated by shirt sales and the like. In fact, according to consultants PR Marketing, Bayern have averaged sales of 1.2 million replica shirts in the last five years, a figure only surpassed by Manchester United, Real Madrid and Barcelona.

Internationalisation is a key element of Bayern’s plans, both in America and Asia. They have opened a new office in New York, while a tour to China in the summer of 2015 was preceded the launch of an official online store and a content sharing agreement with Chinese state broadcaster CCTV.

Where Bayern (and other German clubs) have lost out is in broadcasting revenue. Their total of €106 million in 2014/15 was not too bad, but it was only around half of the €200 million earned by Real Madrid and Barcelona, who benefited greatly from their individual domestic deals. It was even behind the likes of Manchester United, Tottenham Hotspur and Everton, even though none of those clubs managed to qualify for the Champions League.

More encouragingly, Bayern grew their broadcasting income by 39% (€42 million) to €148 million in 2015/16 with increases coming from both the Bundesliga (€21 million) and the Champions League (€16 million).

The increase in Bundesliga distribution to €72 million was largely due to Bayern’s successful performances in international club competitions over the previous five seasons and the resulting improvement in their UEFA coefficient ranking, as well as the increase in income from international TV rights.

TV revenue in Germany is divided among clubs via a points system, which ranks clubs proportionate to their league positions over the past five seasons. Performance is weighted in favour of the more recent years, so last season a factor of 5 was applied to 2014/15, 4 to 2013/14, 3 to 2012/13, 2 to 2011/12 and 1 to 2010/11.

However, a form of equality is then applied, as the club with most points from this algorithm only receives twice as much money as the club that has the lowest number of points. In this way, Bayern received €40 million in 2015/16, while bottom club Darmstadt received €20 million.

Nevertheless, television income is not very high in Germany, as can be seen from the 2014/15 Money League, where Bayern were only 12th, Borussia Dortmund 18th and Schalke 20th. Rummenigge said, “It’s a dramatic disadvantage. The DFL has to make sure the German top clubs remain competitive among the elite teams in Europe.”

To place the Bundesliga TV deal into context, Aston Villa, who finished last in the Premier League in 2015/16, received around €80 million TV money, which was higher than the €72 million Bayern received for winning their league.

It is therefore good news that the Bundesliga recently announced a new domestic TV rights deal with Sky and Eurosport for the four years from 2017/18 to 2020/21, which will significantly increase the money by 85% from €2.5 billion to €4.6 billion, working out to €1.160 billion a season. As the league advised that total rights would be worth €1.4 billion, that implies that the international rights will also rise to €240 million a season.

According to projections, Bayern’s share of the TV revenue should rise to around €100 million a season (though the distribution model will also change), but this is still a lot less than the money earned in England. The new Premier League deal is likely to deliver €150-200 million to the top four English clubs, depending on the Euro exchange rate.

The new Bundesliga total of €1.4 billion will take it ahead of Serie A (€1.2 billion) and Ligue 1 (€0.8 billion), but they will still lag behind La Liga (€1.5 billion) and obviously be miles below the Premier League (€3.4 billion).

It is also worth noting that these TV rights cover the two top German leagues with 80% of the domestic deal going to Bundesliga 1 and 20% to Bundesliga 2.

However, the Bundesliga’s chief executive, Christian Seifert, noted, “We are now number two behind the Premier League (in terms of domestic rights).” Although he described the TV market as challenging, Seifert did emphasise the growth prospects: “Germany is the biggest single market in Europe, but pay TV still does not have the market position of other countries. There is a lot of potential though.”

Some believe that the relatively low amount paid for international rights can be ascribed to Bayern’s dominance, which has made the league boring, but Seifert argued that overseas interest was not purely in the title winners: “Last year we saw very competitive games to decide who will play in the Champions League, who will play in the Europa League or relegation.”

The news is much better for Bayern in Europe, where they received €64 million for reaching the semi-finals in the Champions League. That said, it was still less than four clubs who did not progress as far as Bayern, i.e. Juventus, Paris Saint-Germain, Chelsea and Roma, thanks to the more beneficial TV pools in Italy, France and England.

A club’s share of the market pool is based on the value of the national TV deal and the number of clubs from that country who reach the group stages. Thus, Bayern are adversely impacted by Germany’s €68 million TV pool being less than half England’s €143 million, while Italian and French clubs benefited from only two clubs reaching the group stage.

Half then depends on the progress in the current season’s Champions League, while half depends on the position that the club finished in the previous season’s domestic league (1st place 40%, 2nd place 30%, 3rd place 20% and 4th place 10%).

As a result, Bayern only received €26 million from the TV pool in 2015/16, even though they reached the Champions League semi-final, compared to Juventus €53 million, Roma €48 million, Manchester City €46 million, Chelsea €45 million and PSG €40 million.

Little wonder that Bayern are strong supporters of UEFA’s proposed change in the TV pool distribution system, so that each country will retain much less from its national TV deal than the current arrangement (reportedly down from around 50% to 15%) with the vast majority going into the central plot in future. With a completely straight face, Rummenigge observed, “I am pleased that we have managed to reach quick and simple decisions for the good of football.”

Despite the disadvantages of the TV pool, the Champions League has still been a lucrative revenue stream for Bayern in recent times, earning them €256 million in the last five season, around €100 million more than Dortmund in the same period.

The other German clubs were even further behind: Bayer Leverkusen received €117 million, Schalke €101 million, Wolfsburg €61 million and Borussia Mönchengladbach €39 million.

Bayern’s match day income rose 13% (€12 million) from €90 million to €102 million in 2015/16, partly due to the capacity at the Allianz Arena being raised to 75,000 in the second half of the 2014/15 season.

Their average attendance was only below Dortmund’s incredible 81,178 in Germany, though a fair way ahead of Schalke 61,386. In Europe, Bayern were only surpassed by Barcelona 78,250 and Manchester United 75,300, but ahead of Real Madrid 67,700.

Despite Germany’s reputation for low ticket prices, Bayern’s match day revenue of €90 million was actually the sixth largest in the world in 2014/15, even before last season’s increase, though the likes of Arsenal, Real Madrid, Barcelona and Manchester United all generate €115-130 million.

In fairness, the Bundesliga only has 18 clubs, so Bayern play two fewer home matches a season compared to the other major leagues. Their average revenue per match of €3.6 million is substantially more than any other German teams (Dortmund €2.5 million, Schalke €1.9 million), but is still a fair way below the money earned by Manchester United (€5.4 million) and Arsenal (€4.9 million).

Bayern’s wage bill rose 15% (€33 million) from €227 million to €260 million in 2015/16, but the wages to turnover ratio still fell to a very impressive 44%, the lowest for many years, following the significant revenue growth, and way below the 50% targeted by the Bundesliga.

Again, it is interesting to contrast the wage bill with Dortmund, whose €140 million is around half as much as Bayern’s, despite a 19% increase in 2015/16. In fact, the €120 million gap between Bayern and Dortmund is as high as it has ever been. In fairness to the Bavarians, their revenue is also substantially higher, but that does not make it any easier for Dortmund (or anyone else) to compete.

Using the same exchange rate as Deloitte’s Money League, Bayern had the 8th highest wage bill in world football in 2014/15, along with one of the lowest wages to turnover ratios (only beaten by Dortmund in the top 15 clubs).

However, that gap should be much smaller now, as the wage bills at the English clubs will be impacted by the weakness of Sterling. It should also be noted that the Spanish giants’ figures are inflated by sports, such as basketball and handball.

The other staff cost, player amortisation, rose 15% (€9 million) from €61 million to €70 million. This has sharply grown from €33 million in 2011, reflecting Bayern’s increasing activity in the transfer market.

However, this is still not particularly high for a leading club. As a comparison, player amortisation at big spending Manchester United and Real Madrid is over €100 million. That said, it is considerably higher than the €32 million booked by Dortmund.

To explain this concept, transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract. As an example, Mats Hummels was reportedly bought from Dortmund for €35 million on a five-year deal, so the annual amortisation in the accounts for him will be £7 million.

Traditionally, Bayern Munich have been the big spenders in the German transfer market, often acquiring the strongest players from rivals, e.g. Mario Götze, Robert Lewandowski and Hummels from Dortmund; Manuel Neuer from Schalke.

However, Rummenigge was keen to emphasise the club’s two pillar system: “We sign crucial players like Robert Lewandowski and Arjen Robben, but we also aspire to nurture our own talents.”

That may be the case, but Bayern’s outlay on players has been on the rise: averaging €31 million 2005-09; €53 million 2009-13; and up to €68 million 2013-16. Recruitment has been good with the club bringing in the likes of Arturo Vidal (Juventus), Douglas Costa (Shakhtar Donetsk), Joshua Kimmich (Stuttgart), Mehdi Benatia (Roma), Juan Bernat (Valencia) and Xabi Alonso (Real Madrid).

However, the net spend has actually fallen in the last four seasons: from €44 million to €24 million, as Bayern have earned good money from the sales of Kroos, Mandzukic, Götze, Luiz Gustavo, Mario Gomez, Hojberg, Shaqiri and Rode.

Despite these sales, Bayern’s net spend of €95 million over the last four years is still miles higher than almost all other German teams – with one important exception, as new boys RB Leipzig have actually spent most in the Bundesliga with a cool €100 million in this period.

To show how far ahead these two clubs are, the next highest spending clubs (on a net basis) have shelled out less than half: Hamburg €43 million and Dortmund €42 million. In fact, over the last four years no fewer than eight Bundesliga clubs had net sales, as opposed to spend. Moreover, all other Bundesliga clubs combined only spent a net €78 million – less than either Bayern or Leipzig.

Although the football club has had no debt for a while, the group did have debt from the Allianz Arena company, which was used to finance the stadium, though this was paid off 16 years ahead of schedule. As Rummenigge explained, “In 2005 we borrowed exactly 346 million euros in a 25-year plan, which was meant to last until 2030. Now we have paid the stadium off after only nine years. I'm very proud of that.”

This meant that bank debt was completely eliminated in 2014, having been as high as €167 million in 2009. At the same time cash balances have been over €100 million for the last few years.

We will not know whether this is still the case in 2015/16 until the detailed accounts are published, but we can see that current assets (including cash) have risen by 29% (€51 million) to €227 million, so the chances are that cash has increased. On the other hand, total liabilities (including debt) have also grown 67% (€68 million) to €171 million.

The (early) clearing of the debt is undoubtedly a splendid achievement, as recognised by former Bayern great Paul Breitner, “Bayern are self-sufficient. We are independent and we are the only major club in the world that does not have any debts and is in a secure financial situation.”

Again, we will have to wait for Bayern’s detailed accounts to see a cash flow statement, but the club’s power can be seen from previous reports. In the ten years up to 2015 Bayern generated €540 million of cash from operating activities. However, they were also boosted by €200 million from new share capital.

Unfortunately, Bayern do not analyse their €475 million net investment in assets between players and infrastructure, but it is likely that the vast majority of this expenditure has been for improving the squad.

What is notable is that more than a quarter of a billion Euros was used to repay loans. Another €35 million was used to pay dividends, an increasing trend. In fact, the next dividend payment has been increased to €12 million, up from €7.5 million.

Now that the stadium debt has been repaid, it has given Bayern even more cash to spend on transfers. It is not entirely clear exactly how much more, but Uli Hoeness once claimed that they would have an additional €25 million budget each year once the debt had been cleared.

Hoeness is once again Bayern president, having been elected unopposed at the recent AGM. He had resigned in February 2014 after being found guilty of tax avoidance via an undeclared Swiss bank account, though he was released after serving half of his prison sentence due to good behaviour.

"Street Fighting Man"

Bayern make great play of their independence with Breitner saying, “We do not need any sheikhs or oil tycoons.” Deputy chairman Dreesen sang from the same sheet: “We pay everything through our own efforts. The main thing is we’re one of the very, very few clubs at the top of Europe that are completely independent.”

That said, there is little doubt that the club’s strategic shareholders have been instrumental in the club’s success, developing a virtuous circle, whereby each Bayern trophy means more sales for the sponsor (especially Adidas), which in turn means more money for Bayern. Not to mention the funding made available by direct investment, such as Audi paying €110 million for an 8.33% stake in 2014.

Perhaps the biggest threat to Bayern’s position in Germany is the way clubs have started to get round the “50+1” rule, which dictates that members must own a minimum of 50% of the shares plus a deciding vote, theoretically preventing a club from being subject to the whims of an individual owner and taking on excessive debt.

"Look Sharp!"

However, RB Leipzig, owned by Austrian energy drink manufacturer Red Bull, have implemented a scheme whereby a member must pay €800 a year (compared to Bayern’s €60) and they reserve the right to reject any application without justification. This means that Leipzig only have 17 members (and most of them are Red Bull employees) compared to 284,000 at Bayern.

This may not break the letter of the rule, but it is clearly against the spirit, though what other option does an “upstart” club have if it wants to mount a genuine challenge to Bayern’s financial dominance?

Though not entirely convincing, Hoeness seemed to welcome the emergence of RB Leipzig, “The more I think about it, it is good to have really good rivals. Good for us and the competition.”

"Calling Captain Autumn"

Captain Philippe Lahm followed a similar line after Bayern’s recent defeat to Dortmund, though his remarks were heavily laced with sarcasm: “It’s wonderful for the league, exactly what everybody had wished for.”

This was a reference to people becoming fed up with the predictability of Bayern winning the Bundesliga. Indeed, before he knew he was joining, Ancelotti had observed, “Bayern win the league with their hands in their pockets.”

A large part of that success has been due to their financial strength, as acknowledged by Dreesen: “FC Bayern is in outstanding shape, operating at the highest Champions League level in financial terms. Our club is in a superb position. That’s been the case for the last few years, and that's more than ever true for 2016. Our entrepreneurial objective is the maximisation of sporting success alongside financial prudence.”

He added, “Our increasing financial power will be used primarily to make the regular investments required in our first-team squad in order to ensure we remain competitive among the elite teams in Europe.”

Bayern’s appetite for more Champions League success is obvious, as Rummenigge admitted, “We long for it.” Whether they have enough firepower to win again in Europe is another question. Their excellent 2015/16 financial results will certainly do their prospects no harm, but it will still be difficult for Ancelotti to add to his three (managerial) victories in Europe’s flagship tournament.

UEFA Champions League - Safe European Home

noreply@blogger.com — Tue, 22 Nov 2016 06:17:00 GMT

The importance to a football club’s bottom line of qualifying for Europe has been evident for many years, as the money distributed to teams competing in UEFA’s competitions can have a significant impact on their revenue.

This is even more the case with the latest cycle of UEFA’s TV deals that has seen the total funds available for distribution to clubs rise by 38% in 2015/16 from €1.270 billion to an amazing €1.756 billion. The lion’s share of €1.345 billion went to the Champions League, but the Europa League also received a much larger proportion than the previous arrangement, amounting to €411 million.

Despite the steep growth in the Premier League’s TV deals, Europe is still important for English clubs, as seen by Manchester City earning more than any other club with €84 million, followed by Real Madrid €80 million, Juventus €76 million, Paris Saint-Germain €71 million, Atletico Madrid €70 million and Chelsea €69 million.

In other words, City received more money for reaching the Champions League semi-finals than Real Madrid did for actually winning the trophy. This puzzling anomaly is down to the high value of the British TV deal, which means that English clubs can earn more than teams from other countries who progress further in the tournament.

This was also demonstrated in the Europa League, where the top earners were Liverpool €38 million and Tottenham Hotspur €21 million, followed by Villarreal €16 million, Lazio €15 million, Fenerbahce €15 million and Borussia Dortmund €14 million.

The amount earned by Liverpool for reaching the final showed that clubs can now generate useful cash from the Europa League. The Reds’ distribution of €38 million was the 14th highest overall in Europe last season, i.e. more than the money earned by 19 clubs that qualified for the Champions League group stage.

The discrepancy between different countries’ receipts is highlighted by comparing the top two earners. Manchester City’s €84 million total was geared towards the TV pool €47 million (56%) with prize money €37 million (44%), while it was the opposite for Real Madrid, who earned more from prize money €54 million (67%) compared to the TV pool €26 million (33%).

The contrast is just as stark for the Europa League, e.g. Villarreal received €16 million for reaching the semi-final, split between prize money €8 million (49%) and TV pool €8 million (51%); while Tottenham received €21 million, i.e. €5 million more, for only reaching the last 16, split between prize money €6 million (28%) and TV pool €15 million (72%).

This is linked to the huge British TV deal with BT Sports, who paid a hefty €299 million a season for the 2015-18 three-year cycle. This is more than double the €132 million paid by the combination of Sky Sports and ITV for the previous agreement.

As a result of the higher deal, English clubs did much better (at least from a financial perspective) in 2015/16 with Manchester City leading the way, as their revenue increased by €38 million (84%) from €46 million to €84 million. Similarly, Chelsea’s revenue rose by €30 million (76%) from €39 million to €69 million, while Arsenal’s revenue grew by €17 million (47%) from €36 million to €53 million.

Liverpool’s revenue was also 11% higher, even though they competed in the Europa League, as opposed to the more lucrative Champions League the previous season. Tottenham’s revenue was an astonishing 244% (€15 million) higher for going one round further in the Europa League.

Last Five Years

To emphasise the value of the Champions League to the leading clubs, it is worth exploring how much they have earned in the last five years. At the top of the pile are Juventus with €281 million, which is perhaps somewhat surprising, given that they have only reached the final once in that period, but is again testament to the might of the TV pool.

Next come Real Madrid €277 million (winners in 2014 and 2016), Bayern Munich €256 million (winners in 2013), Chelsea €253 million (winners in 2012) and Barcelona €246 million (winners in 2015). All to be expected.

However, this table also highlights a core element of the strategy of the nouveaux richesclubs, i.e. spending for success, as we find Paris Saint-Germain and Manchester City in sixth and seventh places with €228 million and €222 million respectively.

In England consistency has been rewarded with the three clubs ever present in the Champions League leading the way: Chelsea €253 million, City €222 million and Arsenal €177 million. Manchester United would have been higher if they had qualified for Europe in 2014/15, but they still earned €159 million.

Despite qualifying for the Champions League in 2014/15 and reaching the Europa League final in 2015/16, Liverpool are a long way back with €77 million, while Tottenham’s Europa League residency has earned them only €41 million.

In Germany Bayern’s Champions League exploits have earned them €256 million, almost €100 million more than Borussia Dortmund’s €162 million. Europe has allowed the Bavarian giants to put even more distance between them and their domestic rivals.

All of these have earned much less: Bayer Leverkusen €117 million, Schalke 04 €101 million, Wolfsburg €61 million and Borussia Mönchengladbach €39 million (the latter two almost all from 2015/16).

The gap between the top club and the others is even wider in Italy, as Juventus’ €281 million is around €150 million more than the next club Milan, whose €129 million was restricted by not qualifying for Europe in the last two seasons. Juve’s performance is even more impressive, given that they did not even qualify for Europe in 2011/12.

Milan’s place in the Champions League has been taken by Roma, who have earned €116 million in that period. The next highest are Napoli €100 million and Lazio €51 million. Inter’s recent difficulties are highlighted by the nerazzurri only earning €45 million from Europe in the last five years. This is less than the €49 million they earned in 2010/11 when they defeated Bayern Munich to win the Champions League.

Spain is all about the big two with Real Madrid €277 million and Barcelona €246 million a long way ahead of Atletico Madrid €179 million, who are in turn much higher than Valencia €89 million, Sevilla €69 million and Athletic Bilbao €51 million.

Sevilla are an interesting case, as their reward for winning the Europa League three times in a row is clearly much less than qualifying for the Champions League. Following a change in the rules, Sevilla’s victory in 2014/15 gave them a place in the following season’s Champions League, so their 2015/16 €35 million revenue is split between €21 million from that competition and €14 million from dropping down to the Europa League.

France demonstrates Paris Saint-Germain’s domination, as their €228 million is €150 million more than Lyon’s €78 million, closely followed by Marseille €73 million and Monaco €69 million.

Paris Saint-Germain’s competition has been weakened by the other French Champions League spots being shared among their domestic rivals, e.g. Lille and Montpellier have also featured in this period. In fact, PSG only earned €2 million in 2011/12, so their earnings in the last four seasons have been really high.

Portugal demonstrates the rivalry between Benfica €111 million and Porto €98 million, while the others are nowhere: Sporting €31 million, Braga €22 million, Estoril €5 million and Belenenses €4 million.

Galatasaray’s “welcome to hell” has been worth €98 million, even though there was no revenue in 2011/12, a long way ahead of Trabzonspor €37 million, Besiktas €27 million and Fenerbahce €26 million.

UEFA Distribution Model

As we have seen, the amount of revenue available to distribute to the clubs increased significantly in 2015/16 by €487 million (38%) from €1.270 billion to €1.756 billion, but this masked a couple of interesting developments.

First, UEFA decided to give proportionally more to the Europa League, whose pot rose by 71% (€171 million) from €240 million to €411 million, while the Champions League fund “only” rose by 31% (€315 million) from €1.030 billion to €1.345 billion. The Europa League has always provided a platform for smaller clubs to compete in Europe, but now has the added bonus of being financially worthwhile (though obviously still no match for the Champions League money).

In UEFA’s terms, clubs in the Europa League now receive about €1 every €3.3 received by clubs in the Champions League, compared to €4.3 under the old arrangement. This might be considered a step in the right direction, but, put another way (and rather less impressively), the Europa League still only has 23% of the total pot, albeit up from 19% the previous season.

"At The Height Of The Fighting"

Second, UEFA has endeavoured to reward success more by increasing the amount allocated to prize money compared to the TV pool. In 2014/15 the split was 52% for prize money and 48% for TV pool, but the 2016/17 budget is essentially a 60:40 split in favour of prize money.

UEFA’s 2016/17 estimate provides a useful break-down of how the distribution model works. Based on gross commercial revenue of €2.350 billion, 12% (€282 million) is required to cover organisational and administrative competition-related costs, while solidarity payments have been significantly increased to €200 million, comprising €82 million for those clubs participating in the qualifying rounds and €118 million to national associations for club development projects.

After these deductions, we are left with €1.868 billion of net commercial revenue. Of this, €149 million (8%) is reserved for “European football”, i.e. remains with UEFA, which gives a €1.719 billion pot for distribution to the clubs. This is equivalent to the €1.756 billion in the 2015/16 season, which was higher than expected due to more commercial revenue proceeds than budgeted.

Champions League

Looking at the payments by country for the Champions League, it’s a case of the rich getting richer, as the payments are dominated by the Big Five leagues (Spain, England, Germany, Italy and France). They accounted for 71% (€949 million) of the total €1.345 billion pot.

Spain earned the most with €254 million, closely followed by England €245 million, though Spain’s money was largely due to success on the pitch with €105 million from prize money, nearly twice as much as England’s €54 million. In contrast, England’s share of the TV pool of €143 million was considerably higher than Spain’s €89 million.

Italy were also boosted by a relatively high TV pool of €112 million, while their prize money was just €23 million. Germany’s €52 million prize money was almost the same as England, but their TV pool was less than half at €68 million.

Champions League – Prize Money

In 2015/16 each of the 32 teams that qualified for the Champions League group stages was guaranteed a minimum participation fee of €12 million - even if it lost every single game. This was a significant 40% increase on the 2014/15 fee of €8.6 million.

In addition, the performance bonuses in the group stage were increased by 50% to €1.5 million for each win, though stayed at €500,000 for a draw. So if a team were to really put the pedal to the metal and won all six of its group matches, it would get €9 million on top of the participation fee.

If a team qualifies for the last 16, it is awarded €5.5 million, while there is additional prize money for each further stage reached: quarter-final €6 million, semi-final €7 million, final €10.5 million and winners €15 million.

Therefore, the maximum that a club could have earned (by winning all its group matches and lifting the trophy) was an impressive €54.5 million (not counting the TV pool), up from €37.4 million in 2014/15. The prize money for 2016/17 has been tweaked upwards again, so the maximum will rise to €57.2 million this season.

Clubs involved in the play-offs shared a total of €50 million: €2 million for each winner and €3 million for each club that was eliminated. Teams defeated in the qualifying rounds received: first qualifying round €200,000; second qualifying round €300,000; third qualifying round €400,000. In addition, each domestic champion that did not qualify for the group stage received another €250,000.

As we have seen, Spain earned much more money from prize money in the Champions League than any other country with their €165 million, far ahead of England €102 million and Germany €100 million. This is a fair reward for the two Madrid clubs reaching the final, meaning that the winners Real Madrid trousered €54 million with their city rivals Atleti earning €48 million, while Barcelona got €31 million for reaching the quarter-finals.

The two other semi-finalists, Bayern Munich €39 million and Manchester City €37 million, helped boost Germany and England. France and Italy were a long way back earning just €48 million and €47 million respectively, partly due to their third clubs not reaching the group stages.

Champions League – TV Pool

In addition to prize money, clubs received a share of the television money from the TV (market) pool, which amounted to €578 million for the Champions League in 2015/16. Each country’s share of the market pool is based on the value of the national TV deal, which means that English clubs have prospered from the huge BT Sports deal, though it should be noted that around half of this goes into the central pot, so they do not receive the full benefit.

Half of the TV pool depends on the position that a club finished in the previous season’s domestic league. For countries with four clubs, the team finishing first receives 40%, the team finishing second 30%, third 20% and fourth 10%. If only three clubs reach the group stage, the share would increase to 45%, 35% and 20% (for national associations ranked 1 to 3, i.e. Spain, England and Germany).

For countries with only two representatives through to the group stage, the share is 55% and 45% (for national associations ranked 4 to 6 and 13 to 16). If only one team gets through to the group stage, they would take 100% of that country’s TV pool.

In other words, from a purely financial perspective a club would hope that the other clubs from its country would be eliminated in the qualifying and play-off rounds, as the available money would then be divided between fewer clubs.

The other half of the TV pool depends on a club’s progress in the current season’s Champions League, which is calculated based on the number of games played (starting from the group stages).

Thanks to BT Sports’ exclusive “game changer” of a deal, England’s TV pool was the highest in Europe at €143 million. Nevertheless, the club that earned the most from the TV pool in 2015/16 was Juventus, whose €53 million was higher than Manchester City’s €47 million, despite only reaching the last 16. This is because the Italian TV pool of €112 million was only shared between three clubs compared to the four in England.

It was even worse for the Spanish clubs, where €89 million was shared between five clubs after Sevilla were awarded a place in the Champions League for winning the Europa League in 2014/15. German clubs were hit by the “double whammy” of having the lowest TV pool of €68 million, allied with having to share this sum between four clubs.

England’s TV pool increased by a hefty 52% (€49 million) from €94 million to €143 million in 2015/16. Manchester City earned the most with €47 million, even though they only finished second in the Premier League in 2014/15, due to their achievement in reaching the semi-final when no other English club got beyond the last 16.

One little known fact is that English clubs receive less from the TV pool when a Scottish club (usually Celtic) qualifies for the group stage, as they are awarded 10% (based upon the population split), because there is no separate Scottish broadcasting deal with UEFA.

If an English club were to enjoy a perfect season, I estimate that they could earn around €113 million from the Champions League: the maximum prize money for winning the trophy and all six group games would be €57 million; while the TV pool could be as high as €56 million. This assumes: (a) they won the Premier League the previous season; (b) the other English clubs were all eliminated at the group stage.

Bayern Munich only received €26 million from the TV pool in 2015/16, even though they won the Bundesligathe previous season and reached the Champions League semi-final, highlighting just how low the German TV deal is. Moreover, last season this only increased by 4% to €68 million.

Spain’s TV pool rose by 6% (€5 million) from €84 million to €89 million, but the most earned was only €27 million by Barcelona, as this had to be shared between five clubs including Sevilla from the Europa League.

This demonstrated a new rule, whereby a club that qualifies for the Champions League by winning the Europa League (i.e. like Sevilla) or indeed the Champions League, but would not have qualified via their position in the domestic league, does not receive any money from the first half of the TV pool.

The Italian TV pool grew by an impressive 19% (€18 million) in 2015/16 from €94 million to €112 million. The last two seasons' payouts show how Juventus and Roma have benefited from the inability of Italy’s third club to reach the group stages, first Napoli in 2014/15 and then Lazio in 2015/16.

Even though a new rule introduced last season meant that a club eliminated in the play-offs would be allocated 10% of that country’s TV pool, the vast majority of the large Italian TV pool was still shared between just two clubs.

It was a similar story in France with Monaco eliminated in the play-offs in 2015/16, thus receiving 10% of the French TV deal, which increased by 11% (€7 million) from €68 million to €75 million. Lille received nothing for losing their play-off in 2014/15, as the rules were only changed the following season.

Paris Saint-Germain have benefited from regularly winning Ligue 1, but the relatively small differential between first and second place (55% vs. 45%) has resulted in good payouts to Monaco and Lyon in the last two seasons.

Europa League

The payments by country show a more equitable revenue distribution in the Europa League. The share received by clubs from the Big Five leagues was still the highest, but only 52% (€216 million) of the total €411 million, compared to 71% of the Champions League money.

The Europa League features clubs from many more countries than the Champions League, e.g. in 2015/16 24 countries were represented in the Europa League (group stages onwards), compared to 16 in the Champions League group stages.

England led the way with €63 million, ahead of Spain €47 million, though again this was more down to the TV pool (England €44 million vs. Spain €20 million) with Spain once again doing better on the pitch, resulting in higher prize money (Spain €22 million vs. England €14 million).

Europa League – Prize Money

The allocation of prize money in the Europa League is much the same as the Champions League, though the sums involved are clearly smaller and there are a couple of other differences.

In 2015/16 each of the 48 clubs involved in the group stages received a participation fee of €2.4 million, up from €1.3 million the previous season. In addition, there was €360,000 for each win and €120,000 for each draw in the group stage, up from €200,00 and €100,000 respectively.

One difference in the Europa League, presumably to encourage clubs to give their all in this secondary tournament, is an additional bonus for teams that qualify for the knock-out stages, with the group winners earning €500,000 and runners-up €250,000.

"One More Time"

Clubs receive a further €500,000 for reaching the last 32, €750,000 for the last 16, quarter-finalists €1 million and semi-finalists €1.5 million. The Europa League winners collected €6.5 million and the finalists €3.5 million.

Thus, the maximum that a club could receive is €15.31 million, 55% up from the previous season’s €9.9 million. That’s now a pretty good incentive, compared to the €6.2 million prize money awarded to the 2011/12 winners Atletico Madrid.

One other difference to the Champions League is that only clubs eliminated in the play-offs receive a payment (of €230,000). Teams defeated in the qualifying rounds received: first qualifying round €200,000; second qualifying round €210,000; third qualifying round €220,000.

Europa League – TV Pool

The allocation of the TV pool in the Europa League is again similar in principle to the Champions League, as half is based on performance in the previous season’s domestic competitions and half on the progress in this season’s Europa League, but there are some subtle differences.

The percentage split for the first half again depends on the number of teams qualified from a country, but if a domestic cup winner reaches the group stage, then that club receives a higher share for this element. For example, if four clubs qualified, then the cup winner would receive 40% with the other three clubs getting 20% apiece; if no cup winner, then each of the four clubs would receive 25%.

OK, that’s relatively straightforward, but the second half of the TV pool is more complicated. First, it is divided up between each round of the Europa League: group stages 40%, last 32 20%, last 16 16%, quarter-finals 12%, semi-finals 8% and final 4%.

The stage money is then split into as many portions as there are countries represented by at least one club in the round concerned, proportional to the value of the relevant country’s TV deal. Each country’s share is then split equally among all the country’s clubs participating in that round.

Let’s take the England TV pool in 2015/16 as an example. As the total TV pool was €183.1 million, €91.6 million was available for participation and €91.6 million for performance. England contributed around 20% of the TV pool, so their share of the first (participation) half was 20% of €91.6 million, i.e. €17.9 million. As there was no cup winner qualified from England, this was split evenly between Liverpool and Tottenham, resulting in €8.9 million each.

For the second (performance) half, I have estimated England’s share of the TV pool in each round. The assumptions are pretty solid in the latter stages of the tournament, e.g. the final is a simple carve-up between England (62%) and Spain (38%), but the earlier stages require more guesswork.

In the group stage, England’s share was divided evenly between Liverpool and Tottenham, while Manchester United were added for the last 32 and last 16, having dropped down from the Champions League, which meant one-third for each club.

From the quarter-finals onward, Liverpool were England’s only remaining representative, so they took 100% of England’s share. This success resulted in Liverpool earning the substantial sum of €26.4 million from the TV pool.

"Everybody's Happy Nowadays"

Other Factors

As anybody who has opened a newspaper recently will know, Brexit has had a dramatic impact on the exchange rate. In particular, the weakening of the Pound against the Euro has significantly increased the UEFA revenue in Sterling terms.

To illustrate this impact, Manchester City’s 2015/16 distribution of €84 million would be worth £72 million at the current exchange rate of 1.17, compared to just £60 million at the mid-2015 rate of 1.44. As the saying goes, every cloud has a silver lining.

In addition to the TV money from UEFA, clubs playing in Europe also benefit from additional match day revenue. Not every club analyses this revenue stream between different tournaments, but as an example of how much this can be worth, Roma’s €52 million match day revenue in 2015/16 included €29 million from the Champions League.

Furthermore, participation in the Champions League should boost a club’s sponsorship revenue, both in the short term through contractual bonuses, and longer term by strengthening the attractiveness of the brand through increased exposure and a better profile.

However, there can also be a downside, as shown by Manchester United’s kit supplier deal with Adidas. This is worth an astonishing £750 million over the next 10 years, i.e. £75 million a year, but if United fail to participate in the Champions League for two or more consecutive seasons, then the payment for that year would reduce up to 30%, i.e. £22.5 million.

"When the Angel sings"

Here’s To Future Days

To place the €1.756 billion from UEFA’s competitions into perspective, it is still considerably less than the €3.3 billion a season from the new Premier League TV deal. Incredible as it may seem, this means that the bottom placed club in the English top flight will earn more than the Champions League winners this season.

Nevertheless, European money still makes a difference for the elite clubs and there’s little sign of the gravy train slowing down with UEFA predicting a 30% rise in revenue for the next 2018-21 cycle. That’s useful, but what is really thought-provoking is that there are plans to change the distribution model.

First, the big four leagues (England, Spain, Germany and Italy) will each receive four guaranteed places in the Champions League group stages, thus taking up half of the available 32 places. This is no big deal for Spain, England and Germany, as their four representatives invariably qualify for the group stages. However, Italy are the big winners here, as they currently only have three places – and also have a disastrous record in the play-offs.

"Love don't Costa thing"

In addition, the distribution of the TV pool will be amended, so that each country will retain much less from its national TV deal than the current arrangement (reportedly down from around 50% to 15%) with the vast majority going into the central plot in future. So far, so good, as a more even distribution of the richer countries’ TV wealth is probably no bad thing and should help boost competitive balance.

However, here’s the rub: the future split will be based on individual clubs’ UEFA co-efficient, which has been modified to include credit for historical performances. Again, this just happens to favour Italian clubs like Milan and Inter, who have not even qualified for the Champions League recently, but can boast several trophies in their glorious past.

It will also prove advantageous to the old establishment, e.g. Manchester United would do better out of the new approach to co-efficients than their “noisy neighbours” Manchester City.

The new model has unsurprisingly drawn criticism, not least from the European Professional Football Leagues (EFPL), leading to the European Club Association (ECA) promising to increase the "support" to the Europa League by €60 million.

"New Gold Dream"

ECA chairman, Karl-Heinz Rummenigge, boasted, “I am pleased that we have managed to reach quick and simple decisions for the good of football.” That’s one way of putting it, Kalle.

In fairness to UEFA, they are caught between a rock and a hard place, as the leading clubs carry the persistent threat of forming a breakaway Super League, but this proposed change still leaves a sour taste in the mouth.

That man Rummenigge, also Bayern Munich’s chief executive, had shown his hand back in 2013, when he complained, “The highest prize is the Champions League, but it is a competition where there are no guarantees, and the things you take for granted in domestic football don’t always work.”

Hence, the desire of the leading clubs to make Europe’s premier tournament as much of a closed shop as possible. As The Clash once sang, it is indeed a “Safe European Home”, at least for a privileged few.

Good housekeeping at Manchester United – explaining the May 2015 refinancing

noreply@blogger.com (andersred) — Mon, 01 Jun 2015 14:25:00 GMT

In the decade since the purchase of Manchester United by the Glazer family, the debt placed on the club has been “refinanced” four times. This week marked the latest of these refinancings.

A refinancing is where old debts are swapped for new debts. They are the corporate equivalent of switching mortgages or consolidating credit card debts into a single loan. The aim is usually to make the debt more affordable, sometimes by locking into a cheaper interest rate, sometimes by extending the life of the loan, sometimes both.

This post explains what United have done on this occasion. It is intended to explain what’s going on in layman’s terms.

The previous situation

Before this latest change, Manchester United plc (acting through two of its subsisidiary companies) had a $315.7m (£206m) “Secured Term Facility” (a bank loan) with Bank of America Merrill Lynch International Limited and $269.2m (£176m) of US dollar bonds called “8 3/8% Senior Secured Notes due 2017”. There was also a “Revolving Credit Facility” (essentially an overdraft) with a group of banks. The Revolving Credit Facility has never been used.

The Secured Term Facility paid an interest linked to LIBOR (a benchmark interest rate) plus a “margin” (markup) based on the level of United’s debt compared to its profits. The maximum margin was 2.75% if net debt was more than 4x EBITDA (cash profits) and the minimum margin was 1.5% if net debt was less than 2x EBITDA. This financial year net debt will be around 3x EBITDA meaning the total interest rate (using 3 month LIBOR of 0.29% and a margin of 2.25%) will be c. 2.54% per annum. The interest cost is therefore c. $8.0m or £5.2m. The Term Facility is repayable in one amount in 2019.

The Senior Secured Notes are the remaining bonds that were originally issued in 2010. They pay a fixed interest rate of 8.375% per annum and therefore cost $22.5m or £14.7m. The notes are repayable in one amount in 2017.

The total debt today is $585m or £382m. The annual interest cost is c. $30m or £20m.

After the refinancing

United are changing both elements of the debt and increasing the size of the Revolving Credit Facility.

The Secured Term Facility, still with Bank of America Merrill Lynch, is being reduced from $315.7m to $225.0m. The repayment date is being extended from 2019 to 2025. The interest rate margin range is reduced from 1.5% - 2.75% to 1.25% - 1.75%.

The $269.2m of Senior Secured Notes are being redeemed (paid off) and $425m of new Secured Notes are being issued. The new notes are repayable in 2027 not 2017. Crucially, the interest rate on the new notes is 3.79% rather than 8.375%.

The total amount of debt is increasing from $585m (£382m) to $650m (£425m). The extra £43m will be available for the club to use. None of this debt requires repayment or refinancing for another 10 -12 years. Following the refinancing, the interest bill will fall from around $30m/£20m per annum to around $20m/£13m.

Thoughts

This refinancing is an unequivocally good thing for Manchester United.

The amount of debt has increased slightly but the increase provides more cash for the club.

Crucially, the interest cost is now very low for a club of United’s profitablity. Even in this season of no Champions League football the club will make over £100m of EBITDA. An interest bill of £13m is therefore covered over 7x. Back in 2008 over 70% of EBITDA went on interest, next year it is unlikely to be 10%.

Around 75% of the interest is at a fixed rate for the next twelve years. Even if rates rise (as they must do at some point), United will be protected from much of the impact.

The financial story of Manchester United is no longer about the debt. It is about how effectively and wisely United spends its money.

United - buying players on the never-never

noreply@blogger.com (andersred) — Wed, 18 Feb 2015 15:06:00 GMT

Work and family commitments have prevented me from blogging for almost a year for which apologies.

I haven’t given up and intend to post the occasional blog as and when there is time.

Thanks for your patience!

Andy

_________________________________________________________________________________

We all know that the summer 2014 transfer splurge was unprecedented for Manchester United, reflecting the parlous state of the squad after years of under investment and the car crash season with David Moyes at the helm.

The accounts for the six months to 31^st December 2014 show £120.8m of purchases occurred after 1^st July 2014. This is in addition to the £60.7m spent in the three months up to 30^th June 2014. In total we now know that Herrera, Shaw, Rojo, Di Maria, Blind and Falcao (well the fees associated with his loan) cost Manchester United £181,511,000 last summer.

There were sales as well of course. Danny Welbeck, Kagawa, Vidic, Evra and Buttner were all sold and many others sent out on the loan. The accounts show the sales brought in £22.2m in cash. That still leaves an extraordinary net spend of £159.3m. [Note: an earlier version of this blog incorrectly stated receipts of £75.4m, which was the original book cost of the players sold. Apologies].

Except United didn’t have £159.3m to spend. At 30^thJune 2014, United’s cash balance was £66.4m. And the club didn’t spend all that money in any case.

The last few sets of accounts show Manchester United are increasingly buying players on credit, from the clubs that sell them. Transfer fees are agreed but payments are staggered over time, with the vast majority due within a year or 18 months.

Whilst other clubs have frequently “funded” transfer with these deferred payments, this is a new practice for United. Less than five years ago, United only had £11m of outstanding transfer fees due to other clubs. Things really began to change in the 2013/14 season when the figure leapt from £33m to £82m. In this latest spending splurge it has risen again from £82m to £126m at the end of September 2014, before falling back to £116m by the end of 2014.

It’s important to understand that these huge figures owed to other clubs don’t include extra payments based on player appearances or other targets. These “contingent payments” are set-out elsewhere in the accounts and would add another £29.7m to the amount owed if all the payments became due, taking the total to £146m.

United is owed transfer money by other clubs of course, but this only amounts to £13.7m. The fact of the matter is that Manchester United owe over £100m in transfer fees to other clubs, more than a whole year’s cash profits.

Does any of this matter or is it just another financial “innovation” from ex-investment banker Ed Woodward?

Accepting credit from the people you buy from is as old as the hills and a sensible way to fund any business. But the £100m+ owed has to be paid over the next one to two years. That’s going to put pressure on the club’s cash flow, making it even more imperative to get back into the Champions League and even more problematic if we don’t. Future transfers won’t be affected if selling clubs continue to accept stage payments on this scale, but that can never be guaranteed.

The new Premier League and Champions League deals promise ever higher revenue in the years to come, which for a Manchester United with debts of £380.5m, which owes other football clubs over £100m and only had cash in the bank of £37m at the end of 2014 is just as well…..

Edit at 19:32
A few people on Twitter have queried whether there is anything noteworthy about this sudden expansion of football creditors. For me the key thing of interest is that it's a new approach.

Take 2012/13 when we signed RVP, Kagawa, Buttner, Powell and Zaha. The accounts show spend of £51.2m and how much did we owe other clubs? £33.6m, up from £28.9m the year before.

LUHG

Baron Capital's stake in Manchester United - getting the numbers right

noreply@blogger.com (andersred) — Thu, 13 Mar 2014 21:32:00 GMT

This post is a brief apology for bad maths.

Earlier this week I noticed Manchester United had made a "13G filing". This is an American regulatory declaration required when an investor has taken a significant stake in a quoted company.

The filing said that Baron Capital Group Inc and various related companies and funds now own 9,581,636 "A" shares in Manchester United, 24.07% of the total number of "A" shares in issue.

I didn't bother looking up how many "A" shares there were in issue (something I had written about on this blog), but remembering that 10% of the total shares in United were available on the stock market, I assumed that these were all the "A" shares. I therefore tweeted:

For those asking, Glazers own 90% of @ManUtd, 10% available on stock market. News today is one investment firm has 24% of that 10%.
— Andy Green (@andersred) March 10, 2014

Well I should have looked up the figures, because that isn't right.

There are actually 39,807,000 "A" shares in issue of which 16,666,667 were floated on the NYSE and the balance are owned by the Glazers. The "A" shares are themselves c. 24% of the total number of "A" and "B" shares in the company.

So Baron Capital owns 24% of "A" shares and therefore owns more than 5.5% of the club. What's more noteworthy perhaps is that the firm has hoovered up over 57% of the shares available on the NYSE, which goes a long way to explaining the strength of the share price in recent weeks.

Before anyone gets too excited, Baron Capital aren't looking to takeover United, they just think the shares are cheap. Are they right? I don't think so, but stock markets are always about matters of opinion.

Anyway, apologies from me for not looking things up properly. Apologies too to Bloomberg and the Associated Press who both quoted my incorrect calculation.

We should all be extra embarrassed for reporting that a 13G filing showed an investor had 2.4% of a company. Why? Because 13G filings are only used when an investor has bought more than 5% of a company. Ooops.

LUHG

Manchester United – the potential financial cost of failure

noreply@blogger.com (andersred) — Tue, 21 Jan 2014 20:44:00 GMT

It’s crystal clear that a Champions League place, that sad modern non-trophy victory we’ve watched Arsenal "win" in recent years, is the most Manchester United will achieve in the league this season.

But what if even a top four finish or, whisper it, the Europa League, prove out of reach? How much would United’s profitability be harmed?

This post looks at how much the club earned last year from the Champions League, how much a Europa League spot would provide instead and the implications of no European football at Old Trafford for the first time since the Berlin Wall came down.

The lessons from LFC

In the long-term, repeated failure to qualify for the Champions League would damage the club’s ability to negotiate the sort of commercial contracts that have been so important to United’s finances in recent years. In the short-term I do not see significant risk to commercial revenue from one (or even two) seasons on the sidelines. If this seems blasé, the evidence from Liverpool is that such damage takes a very, very long time to have an impact.

In 2011/12, the last season for which we have figures, Liverpool FC had the 6^th highest commercial revenue in European club football (of course City, with the fifth highest, have the benefit of a suspicious number of Abu Dhabi companies queuing to give them money). Liverpool, who haven’t played in the Champions League since 2009/10, had higher commercial income than Arsenal that season. Furthermore the club’s decline hasn’t prevented more deals being signed since 2012, with companies like Chevrolet and Garuda.

Where United may be vulnerable if the current slump persists, is the very fact that the club has pushed the boundaries when it comes to sponsorship. Manchester United have identified numerous industry “verticals” where football clubs have never attempted to find commercial sponsors, hence the official “office equipment supplier”, “medical systems partner”, “savoury snack partner”, “motorcycle partner in Thailand”. These deals are unproven for the “partners” and may be more vulnerable if the football club isn’t on the top stage for several seasons.

TV cash

The most obvious impact of not finishing in the top 4 (or implausibly winning the Champions League to ensure qualification, hello Chelsea), is the loss of TV income.

In 2012/13, United earned £31.3m in CL broadcasting revenue, which accounted for 8.6% of the club’s income (the third most important source after PL TV money and the Nike contract).

The bloated Europa League is the financial poor relation of the Champions League. A club getting from the group stage all the way to the semi-finals in 2012/13 would have earned €4.7m (around £3.8m) before payments from the competition's market pool. For a club from a large nation like Italy, Germany or England, the market pool payment could add €3-4m more. The most United could earn from actually winning the Europa League (hardly a certainty obviously) would be around €14m (about £11m), a loss of £20m compared to 2012/13. A more plausible run to the quarter finals would bring in around £7m, a loss of £24m.

Europa League (to the quarter-finals): £24m lost income

No European football: £31m lost income

Matchday

At United, Champions League matches command premium prices for season ticket holders and members. Cup games, including European matches are however included in seasonal hospitality packages. What would happen to hospitality prices if there was no European football for a season is one of the great uncertainties in analysing the financial impact on United. I find it hard to believe the club could hold the prices of executive seats and boxes whilst the number of home games falls from a “normal” 29-30 per season to as potentially few as 19 or 20 (the exact number in a season with no European football obviously depends on the draws for the domestic cups).

The Europa League clearly lacks the appeal of the Champions League, and another factor to consider in the event that United ended up in the second tier competition, would be whether the EL would be included in the daft “Automatic Cup Scheme” that compels season ticket holders to buy their ticket for cup games even if they don’t want to/can’t attend. When the club ended up playing in the competition in 2011/12, the games were excluded from the ACS, to much relief from many fans. Would the management be so generous if the Europa League was the only European football on offer?

There is also a possible impact on summer tour revenue if United had to play in July Europa League qualifiers (although there would be home gate receipts to compensate). All these uncertainties make it very hard to predict accurately the impact on Matchday revenue of either time in the Europa League or no European football at all.

One useful way to consider the sums involved is to look at how Matchday revenue has changed in recent years in response to the changes in the number of home games. A home game generates around £3.8-3.9m of revenue.

Assuming a season with no European football at all and two home cup games, to make a total of 21 home games, the impact would be around £20-25m of lost income. In my view a season in the Europa League might be expected to cost around half that figure from lower attendances.

Europa League (to the quarter-finals): c. £10m lost income

No European football: c. £20-25m lost income

Cost savings

The current terrible season means of course no substantial bonuses for the playing squad, which could save the club around £7m compared to the title winning year of 2012/13.

Fewer cup games saves the club money on match day staff, policing and other related costs. In total, a season with no European football could see cost savings of £2-3m from a locked up Old Trafford.

No European football: c. £2-3m cost savings

The Glazers, the share price and investment

Manchester United’s owners and the club’s board are not stupid and the possibility of one or more years out of the Champions League has no doubt crossed their minds.

The SEC filings the club has had to publish since the IPO show that the scenario is part of the club’s planning. The club can actually be released, twice (in non-consecutive years), from the covenants built into its “Revolving Credit Facility” (think of these as the financial rules governing United's emergency overdraft) if it fails to qualify for the Champions League.

One season, or even two, of failure to qualify for the Champions League doesn’t destroy the Glazers’ business model which envisages ever more commercial relationships and ever greater TV deals. What it definitely does do is make the already expensive shares look very expensive.

A fifth place league finish this season means the club will make EBITDA (cash profits) of around £120m (depending on what happens in the Champions League knock-out stages). At the current share price that values the club at 15x EV/EBITDA ("EV" is "enterprise value" which is market capitalisation plus net debt). No Champions League football, even allowing for more commercial growth (such as the Chevrolet contract and a new kit deal) pushes that multiple up to around 19x. For a company where profitability is failing and which needs to invest more cash to remain competitive that is very expensive.

Europa League (to the quarter-finals): EBITDA down c. £30m in 2014/15

No European football: EBITDA down c. £45m in 2014/15

The big question the owners and Ed Woodward face if things continue poorly on the pitch, is whether they will properly back David Moyes and invest in the squad. The club proudly stated in the IPO prospectus that average annual net transfer spend over the last 15 years (from 1997/98) had been £14.3m (or £20.1m excluding Ronaldo, which one shouldn’t). That level of spending is far too low for any major club, let alone one that has let its engine room decline over years, a decline masked by the genius of the manager.

There is no shortage of cash to strengthen the playing side. At 30th September the club had over £80m in the bank. This season the club will generate at least the same amount again. Debt is down to a manageable level. There really are no excuses.

LUHG

Debt down, fan communications restored - where next for MUFC?

noreply@blogger.com (andersred) — Mon, 18 Nov 2013 11:56:00 GMT

Apologies for the lack of regular posts. Work and family have to take priority over football finance….

The beginning of a new phase?

In some ways this week marks something of a watershed in the saga of the Glazer family’s ownership of Manchester United.

In Moston, FC United of Manchester are beginning the building of their own ground, more than eight years after their formation in the wake of the Glazer takeover of MUFC (I heartily recommend Danny Taylor’s piece on FCUM published in today’s Observer).

Two hundred miles south, the week saw the first formal meetingsince 2005 between the management of Manchester United and the Manchester United Supporters Trust. The club’s meeting with MUST follows one with IMUSA and an interview by Edward Woodward with UWS.

Woodward himself has apparently told the club’s Fans Forum that he would consider the introduction of safe standing. There are early signs the end of the Ferguson/Gill era may herald a new approach by the club to its core domestic support.

The financial background to all this is radically different from 2005 too.

The decline of the financial importance of the match going fan

In the year of the takeover, United generated revenue of £157m of which Matchday income was the largest element at 42% of the total. This year (2013/14), revenue will be around £425m and Matchday will be the smallest element at barely over 25%.

Total gate receipts in 2012/13 were £54.2m, 15% of the club’s revenue. Although ticket prices have risen on average 55% since the takeover, the importance of normal season ticket holders and members has declined at the expense of the execs, corporate box holders and other hospitality clients. It is unlikely that ticket income from the c. 60,000 non-exec supporters contributes more than 10% of the club’s revenue these days. This dramatic reduction in the financial importance of normal match going fans should put to bed once and for all any ideas of boycotts or similar actions against the owners (the idea of which I have entertained in the past).

The change in the club’s revenue should also be an opportunity. There is now absolutely no need for, and little financial merit in, the sort of price increases the club put through after the takeover. The expansion of executive facilities, the building of the quadrants and the price hikes added c. £40m per annum to United’s revenue between 2005 and 2009, around 25% of the 2005 total and roughly the annual interest bill in those years. Season ticket prices haven’t moved up for several years, and there is no need for them to do so. The daft ACS could also comfortably be abolished. The extra revenue from those who are forced against their will to buy certain cup tickets is absolutely irrelevant to the club’s finances.

The financial state of the club after the debt gamble

The Glazer family took a huge gamble when they conducted a leveraged buyout of MUFC. A quick look down the East Lancs Road shows how far a major club can be set back by excessive debt. Three years after the takeover, the financial crisis hit and the PIKs began to run out of control. Only the genius of Alex Ferguson and the sale of Ronaldo to Real Madrid allowed the whole rickety show to remain on the road.

But now that phase is over. The club has over £83m of cash in the bank and net debt is down to £277m. That latter figure is roughly 2x EBITDA, down from almost 6x (including the PIKs) in 2010. The annual cost of the debt burden has fallen from £72m (including the PIKs) or £42m (excluding the PIKs) in 2010 to around £20m this year. The £600m of interest costs, fees etc will never be recovered but the risk of damage to the club a la Liverpool FC is effectively over. Because of the exploding value of TV rights, a smart commercial strategy and a once in a life time manager the gamble has paid off for the Glazers.

Where next?

The departure of Fergie and the reduction in debt means Edward Woodward faces a very different set of challenges and opportunities to those David Gill faced during most of the post 2005 period. The club can genuinely afford to compete with the likes of Barcelona, Bayern, PSG and City in the transfer market if it wishes, but showed little ability to make its financial muscle work for it in the summer window.

For match going fans the signs of early promise must be followed up with concrete action. As the financial importance of the season ticket revenue falls, the importance of the Old Trafford “brand” increases. Whilst that has a tacky sound to it, it provides the opportunity for supporters to be aligned with the club. Proper singing sections of German style rail seats behind the Stretford End and Scoreboard goals, an end to the ACS, and at the very least a continued freeze in prices are all comfortably affordable by the club and would boost the atmosphere for the benefit of everyone. No subsidy by supporters is necessary for rail seating, it is a win-win.

In the next two to three years, it is very likely the club will start paying dividends to shareholders again. There is an inevitability about this after the IPO in New York. However unwelcome for fans, dividend payments didn't hamper the club in the plc days and don't have to this time.

Looking further into the future, the irony of a football club trying to build brand loyalty whilst at war with some of its most loyal fans is laughable. Supporter engagement through fan groups and yes, an element of ownership, helps bind fans to their club, even one the size of United. Perhaps David Gill had spent too long in the trenches of United fan politics to realise this. Over to Ed….

LUHG

The history of Manchester United's debt

noreply@blogger.com (andersred) — Fri, 24 May 2013 15:37:00 GMT

Last night United announced to the New York Stock Exchange that it was repaying around half of its outstanding bonds using a new bank loan from Bank of America. This will reduce the club's interest bill from around £31m per year (pro-forma post the IPO) to around £21m per year.

This blog sets out how United's debt has risen and fallen since the 2005 takeover and how much it now costs.

The history

For completeness, the table below shows flow of borrowings and repayments from the original takeover up to the most recent (March 2013) accounts. Initially the debt sat in either a subsidiary of Red Football Limited or Red Football Joint Venture Limited. Following the pre-IPO reorganisation, MU Finance Limited holds the debt for the new parent, Manchester United plc.

The table above can be more easily summarised in this graph, which shows the total gross debt at each stage.

The story is one of rising debt after the takeover as the preference shares accumulated rolled up interest. These were repaid in the 2006 refinancing, adding to the debt on the club itself and bringing in the famous PIKs. By June 2010 after the bond issue, total debt including the PIKs had spiralled to a terrifying £753m.

The story thereafter is well known. The PIKs were mysteriously repaid (at a cost of £249m) in late 2010. The club spent around £90m (the Ronaldo cash) buying back the bonds it had just issued. Last year another £63m of bonds were repaid from the element of the IPO proceeds that the Glazers didn't keep.

By the end of March this year, the debt (made up overwhelmingly of the remaining bonds plus a small MUTV loan and the mortgage on the freight terminal) was down to £367.6m. The figure oscillates with the movement between £ and $.

The costs

As I have frequently pointed out, the interest bill from all this debt has totalled c. £350m since the takeover and the total cost (including fees, derivative losses and debt repayments) is almost £600m. Paying interest has taken far more of the club's cash than has been spent on transfers.

The annual interest cost is falling however, both in absolute terms and as a proportion of profits. From over 80% of EBITDA (cash profits) going on interest in 2006, next year the figure will be around 12%.

The future
I have predicted before that the club would refinance as quickly as possible (there are penalties on repaying bonds early but these expire over time).

Over the next three to five years the club should generate enough cash to pay the remaining sum off. It is tax efficient to keep some debt, and future dividends may take priority over further repayment.

The reduction in the amount and cost of United's debts is an unequivocal good thing.

The question for supporters is who benefits? Will David Moyes be given significant funds? Will ticket prices continue to be frozen (or indeed will the club contemplate reversing some of the 50% plus hikes they implemented after the takeover)? Or will the extra cash from TV deals, commercial income and a lower interest bill flow out of the club in dividends.

Most major football clubs reinvest the bulk of their money back into fans and football. In England at clubs like Arsenal, Liverpool and United, profit still remains the focus. On the weekend the German model is on display at Wembley, that's too often the English way of football.

LUHG

£500m of costs later, could we see a debt free Manchester United again?

noreply@blogger.com (andersred) — Fri, 08 Feb 2013 10:55:00 GMT

For almost eight years, Manchester United has been subject to a financial experiment to see whether a highly leveraged buyout could “work” on a football club. The only other experiment, at Liverpool, ended in a failure that continues to hurt that club to this day. At United, the Glazers’ purchase of the football club with borrowed money has been hugely costly both financially and emotionally, driving a schism between the club and its core support, sometimes even setting fans against each other.

In the last six to twelve months, there have been major developments which mean that the eight year experiment is probably nearing its end. A combination of unexpectedly high growth in TV deals, new commercial revenues (especially new shirt and kit deals), the impact of new regulation on the behaviour of other clubs and the pay down of significant bond debt means we are entering a new phase in United’s finances where it very possible that debt is virtually eliminated in the next few years.

Although undeniably a good thing, supporters should not become too excited about the prospects of a debt free Manchester United. The club has made it clear on its IPO roadshow that it doesn’t expect to spend more on transfers than it has historically. There is no sign whatsoever that the ticket price hikes that followed the Glazer takeover will be reversed. The club continues to refuse (against the advice of government and Parliament) to engage with supporters’ groups. The listing on the New York stock exchange means the owners will continue to prize profits over football. But financially, a big change is underway. This post explains that change.

The story so far: stacking up debt 2005-2010, paying down debt 2010-2012.....

As this blog has described in detail over the last few years, huge debts were loaded onto Manchester United when the Glazers bought the club. By June 2010 these had escalated to over £784m.

The infamous PIK loans were mysteriously repaid in late 2010. At roughly the same time the Glazers started using the cash earned from selling Ronaldo and signing the Aon shirt deal to repay a significant amount of the bonds that had been issued in February 2010. Finally, in August last year, half of the IPO proceeds were used for debt reduction (the other half going to the Glazer family of course). In total, the bond debt has fallen from £509m in June 2010 to £360m at 30th September 2012.

The next chapter..... rapid revenue growth AND higher profit margins

There can be no doubt that United’s media and commercial income is going to rise very significantly in the next three to four years. Unusually in football finance, I believe the club will capture more of this extra income than usual, in other words profit margins will rise above their historic level. This will generate significant cash, allowing debt to be largely eliminated.

Three sources of highly certain revenue growth

There are a number of factors which mean the club’s revenue growth is highly likely to accelerate in the next three years:

Chevrolet. The new shirt deal adds £11.6m pa for the next two years (on top of what Aon pay) and then a further £11.9m pa (for a total of £43.5m pa) from the 2014/15 season.

Premier League rights. We have already seen the value of domestic live PL rights rise 70% in the next three year cycle. Total domestic rights (including highlights, online etc) will probably increase around 60% and we are awaiting the outcome of the international sales processes. Taken together, a rise of at least 50% in PL TV income is virtually guaranteed in 2014. Assuming only low growth from the CL and owned rights (MUTV), that would still drive media revenue up 35%.

Nike renewal. The long running Nike contract is beginning to pay out back ended profit share AND is up for renegotiation. Looking at other kit deals, an increase of £25m on the current £35-38m pa looks very achievable. Some analysts think the deal will double in value and they could easily be correct.

These three areas alone will add almost £110m to revenue by 2015 (35% of the 2011/12 figure). To put that in context, that’s the equivalent of doubling matchday income.

Other, less certain, sources of growth

Whoever thought of it, the commercial strategy of targeting diverse product categories and geographies has been revolutionary. There remains considerable potential to add new “partnerships” in a number of industry “verticals”. The club have identified 40 industry sectors where it is believed it can sign a global partner, compared to 13 such contracts currently. Add regional partnerships and I see no reason why such sponsorship income should not double again over the next four years, adding another 12% to 2011/12 revenue.

The same argument applies to the new media and mobile segment. Emerging market telecom companies appear to value the “content” link with United and there are plenty more territories to go for.

My forecast is that revenue will increase by over £150m (c. 50%) over the next three years (assuming top 4 PL finishes and CL quarter finals each year), and that of this increase, over £110m (35% growth) is virtually certain, with and the balance is very likely to occur.

Rising margins

If a huge increase in revenue can be forecast with some confidence, there remains more uncertainty over costs. Since the beginning of the PL era, United have reported stable EBITDA* margins in a tight range, throughout the plc and Glazer eras. In other words, costs have tended to rise in line with revenues.

[*EBITDA – “earnings before interest, tax, depreciation and amortisation” – is effectively cash profits before transfers. It is calculated by deducting cash costs from revenue. In 2011/12 cash costs totalled £228.7m and comprised wages and salaries (£161.7m or 71%) and other operating costs (£67m or 29%).]

I believe this pattern of stable margins will change in the future, and that margins will rise sharply above 40%. For this to occur, United’s wages to income ratio will have to fall. United will have to hold onto more of its revenue gains than has historically been the case.

Why margins will rise

The suggestion that a company that has consistently earned margins within a tight range is about to make a step change in profitability should always be treated with great scepticism. This is true even if new revenue sources are supposedly “high margin” (as sponsorship deals are), as such margin can easily leak away to other stakeholders – in this case players and agents.

On this occasion, however, I believe there are new factors that mean United will not have to pass on as much of every extra pound earned in income to the playing squad as it has in the past, in other words that margins can rise sharply.

There are two primary reasons behind this, firstly that much of United’s revenue growth is unusual to the club and not something competitors can replicate, and secondly that Financial Fair Play will effectively work to slowdown wage growth, forcing other clubs to “bank” rather than “spend” their own incremental revenue.

Factor 1: "United only” vs. collective revenues

The first point is very straightforward, if United can grow its income faster than other clubs, it can hang on to more of it. There is an important distinction to be made between collective revenue increases (such as bigger TV deals) and “United only” revenue gains (such as the DHL training kit deal). It is the former that tend to “leak” into player wages because by definition all clubs (or in the case of the Champions League, all major competitors) receive the same income boost. The last PL international rights deal gave every clubs c. £7m extra pa and pretty much without fail they all went and spent it on transfers and salaries. By contrast, if United sign a unique £7m sponsorship deal, the club has far more chance of retaining the cash. Much of the club’s expected revenue growth is going to come from “uncommon” sources; the new Nike deal, the Chevvy deal, the mobile partnerships etc, etc.

At United, the strength of the relationship between wages and (mainly collective) media income since 2000 can be seen in the chart below. The r-squared is 0.69.

By contrast there is not a very strong relationship between total revenue growth, (which includes the expansion of Old Trafford, commercial growth, ticket price rises etc) and wage growth as can be seen below (the r-squared is only 0.26).

Factor 2: FFP and Premier League regulation will change behaviour

Second and more importantly, both FFP and the new Premier League rules are coming and will inevitably change behaviour. The new regulations do not have to work perfectly to have an impact, rather they just have to alter the way other clubs operate. The main impact will be that clubs that risk breaching the rules will “bank” rather than spend additional revenues they earn. Thus the new PL deal will see a large number of clubs not thinking “let’s use this to boost the squad”, but rather “let’s hang on to this money to improve our UEFA breakeven result”. Both City and Chelsea need the £30-40m pa in extra PL revenue to have a hope of complying with FFP. If they spend the windfall, they will fail the test. The Premier League rules are specifically designed to dampen down wage inflation by limiting the amount of additional TV money that can be spent on player salaries.

This is a totally new dynamic in English and European football where previously every extra penny earned (and more) was spent on players. In the longer term, both sets of regulation makes the next Oligarch/oil sheikh takeover less likely too. If a loss of only €45m is permitted each year, it becomes impossible to repeat a Chelsea/City/PSG and initially run up €150m+ losses. In the last fifteen years a new big spending club has come along every few years. This is likely to end and as in any other market, the lack of disruptive new competitors should boost margins.

Wages are still going up, just less quickly than revenue

Despite the dampening effects of regulation, it would be naïve to believe that football wages will stop rising. I would expect United’s wage bill to continue to grow substantially over the next few years (in my forecast I have assumed 24% up to 2015, only slightly slower than the 31% seen in the last three years). The key thing to note is that this wage growth is far slower than forecast revenue growth. With income rising c. 50% as described above and costs by only half this, EBITDA would rise 112%, taking margins from 29% last year to over 40% by 2014/15.

Margins over 40% would generate over £100m of surplus cash per year

EBITDA and margins are just a means to an end when looking at a company. Cash is king.

For United, many of the main cash outflows below the EBITDA line are quite certain. Interest this year (post the IPO debt reduction) will be c. £33m. Tax paid will rise as tax losses are used up and profits rise, but in a predictable way. The big uncertainty is transfer spending, and I have assumed £40m net this year and £30m thereafter. Add in £10m per annum of capex and the huge turnaround in “free” cash flow driven by the higher EBITDA becomes clear.

On these forecasts, United will be generating £80-100m of free cash flow in two to three years, and thus there is the opportunity for substantial debt repayment and/or dividends.

I have assumed a 50/50 debt pay down and dividend split from 2014 onwards. This leads to a sharp fall in the club’s net debt position. Net debt would fall from c. £344m at the end of the last financial year (pro-forma for the IPO) to under £200m in three years. If no dividends were paid, the figure would be near £100m.

When measured against the size and profitability of the company, debt at this level is of no material consequence. The remaining bonds will be easy to refinance well before they are due to be repaid in 2017 at a significantly lower rate than the current 8.75%.

Even if margins don’t break-out, cash flow will rise sharply

Even if margins don’t expand from the historic range, United will generate very significant cash flow in the years to come. If we apply a flat margin of 33% (the average in the last five years) to consensus revenue forecasts, free cash flow in 2015 is still £67m, allowing £25-30m of annual dividends to paid and net debt to fall to 1.1x EBITDA by 2016.

Summary and thoughts

If United continue to qualify for the Champions League and make it out of the group stages, we can say with a high degree of confidence that revenue will rise by at least 35% over the next three years, and is likely to rise by 50% or more.

It is also likely in my view that EBITDA margins will break out from their historic range and could exceed 40%.

If this occurs, United would generate £80-100m of surplus cash each year from 2014/15 and be able to pay material dividends (a yield of almost 2%) AND repay most of the club’s debts. Even if EBITDA margins are only maintained at the average level of the last five years (c.33%), free cash flow generation would still be around £50-70m per annum, allowing substantial debt pay downs.

Many people, including me, have been highly sceptical of the United business model. It appears however that through a combination of luck (the TV boom) and judgement (the commercial strategy), the management have managed to deleverage the balance sheet and keep the club (reasonably) competitive on the pitch. With the net debt down to under £300m, FFP coming in and continued strong commercial growth, we are now facing a radically improving financial position.

None of this make the Glazers good owners for Manchester United. It will take many years before the club makes enough in profits to compensate for the huge costs incurred. If it wasn't for Fergie's miracle work United could have followed Liverpool or even Leeds down the slippery financial slope. However, in light of the rapidly improving finances, the terms of the debate on ownership will inevitably change. The costs will have been incurred (I estimate total costs from the Glazer structure will top £1bn by 2016) but they will start to become an unpleasant historical footnote

As the eight year LBO experiment comes to an end and the financial risk to United ebbs away, the club and its supporters surely need to re-connect. On issues like away allocations, ticket prices and engagement with supporters’ groups the club needs climb out of it bunker. For fans, the financial experiment is thankfully coming to an end, but much remains to be done; on supporter ownership and having a voice in our club and in making sure the cash flows into the football club itself and not the pockets of owners who still show no evidence of caring one jot for supporters.

LUHG

MCFC's financial results - waiting for BT to ride to the rescue

noreply@blogger.com (andersred) — Tue, 18 Dec 2012 08:54:00 GMT

City's 2011/12 annual report and accounts contains the usual mix of giddy blueness (apparently more people choose to be City than United when playing EA Sports FIFA 2012 - wow), photos of blue Santas and lashings and lashings of red ink.

For a club like Manchester City of course, losses don't really matter whilst the owners are prepared to carry on writing cheques. In the last four financial years, the club has made pre-tax losses of £510.9m, all of which have been funded (through equity) by Abu Dhabi United Group Investment & Development Limited.

What is interesting in the City figures is how the club is getting on with meeting the new UEFA Financial Fair Play ("FFP") regulations and how this will change the way the club is run. The first FFP hurdle is the 2013-14 "monitoring period" which looks at profits/losses (on UEFA's definition) in the prior two seasons (2011/12 and 2012/13). Over these years, losses should not exceed €45m (c. £36.5m at today's exchange rate).

So how are City doing?

A quick glance at the profit and loss account suggests a long way to go, with a pre-tax loss of £97.9m. This is however a massive improvement on the £197.5m loss in 2010/11 (albeit this included £35m of "exceptional" costs).

Revenue - massive

The huge reduction in losses is driven by a 59% increase in income at the club. In the table below I have changed the way the club present Commercial income to bring it into line with most other clubs by including hospitality income in "Matchday".

The increase in Matchday was driven by higher average attendances (league gates averaged 47,031 vs 45,885 in 2010/11), one extra cup game and higher cup attendances from being in the Champions League.

The growth in TV income reflects the impact of the club's short lived Champions League campaign which added £18m in extra UEFA TV money.

The eye-catching growth comes of course from Commercial revenue and in particular "partnerships". Commercial income rose 102% to £109.4m in 2011/12 with 89% of this coming from the club's commercial partners. To put these numbers into context, United's total Commercial income in 2011/12 was only £8m higher than City's and (whilst definitions vary slightly) it looks to me that City's non-kit partner revenue was higher than United's.

I will leave it to readers to decide for themselves whether City would have managed to get to almost £100m of partnership revenues if they hadn't been owned by a member of the Abu Dhabi royal family. Perhaps Etihad, TCA Abu Dhabi, aabar and Etisalat would have all signed up as City's sponsors if Thaksin Shinawatra or even Franny Lee was the owner..... Such debates are pretty superfluous, other clubs have established the benchmark for commercial income at £100m or more per annum and a legally well advised MCFC will no doubt meet that benchmark as long as the club is owned by ADUG.

Costs - some signs of control

Whilst City's income rose 60% last season, cost control was actually quite good. Total staff expenses rose 16% to an English record £202m (by comparison Arsenal spent £143m and United £162m) but there were obviously significant bonus payments for winning the league meaning underlying growth in the wage bill was probably no more than 5-7%.

The key profit measure of EBITDA (essentially cash profits/losses before investment) was greatly improved with the loss before player sales down to £14.5m (a negative margin of 5.9%). This profit performance is still a long way off that of the major clubs with sustainable models (see chart below), but for the first time since the ADUG takeover, City are only making a small operating loss before investment spending.

Below the EBITDA line comes the cost of transfer spending - the amortisation charge. Whilst net cash transfer spending in the season fell to £95.2m from £143.4m, the amortisation charge only fell 1% to £83.0m. Amortisation lags transfer spending and only reflects purchases not sales. To make a major dent in the amortisation charge (which is included in the FFP calculation), the club will have to rely far more on home grown talent than currently is the case. It is a key characteristic of the FFP rules that spending on youth development is not included in the profit/loss calculation whilst transfer spending is. Across in M16, United's amortisation charge has never exceed £41m in any season as the club has had a constant stream of players coming through the youth system.

The FFP "breakeven" calculation

Although UEFA are not going to publish individual clubs' FFP figures it is quite easy to calculate a decent estimate. The items included in the calculation are set out in Annex 10 of the regulations. There are two main items which are not readily identifiable from most clubs' accounts; the total spending on dis-allowable items such as youth development and community programmes, and wages and salaries relating to contracts signed before the regulations were published in June 2010.

Although not in City's accounts, the club have briefed journalists that there are £15m of dis-allowable expenses relating to youth development so I have used this figure.

I have shown calculations both including and excluding the sale of intellectual property rights to ADUG for £12.8m. There is no detail on this transaction, but it looks like a one-off.

The bottom line is that City reported an FFP loss of £79-92m last season. At first glance this looks like a pretty poor result vs. the target of £36.5m over two seasons, but some journalists are reporting that around £80m relates to player contracts signed before June 2010. This looks very high to me given the number of contract renewals that have taken place (the major players still on pre-June 2010 contracts are Tevez, Kolo Toure, Lescott and Barry), and I wonder whether journos have misunderstood and that the £80m is a projection over both last season and this one. In any event there will be a substantial amount that UEFA will ignore in making their calculations.

The key point however is that breaches of FFP in the first monitoring period are very, very unlikely to result in severe punishment, especially if losses are reducing (they are) and the club can show strong evidence that it is moving towards compliance, and here they have BT to thank.....

BT - the football club owner's best friend

The recent domestic PL rights auction transforms the outlook for clubs like City who are struggling to comply with FFP. The entry of BT into the market caused the value of domestic rights in the next three year cycle to rise by 70% (compared to a 3% rise in the previous three years period). BT's Ian Livingston is taking a huge gamble that he can break BSkyB's vice like grip on the UK sports pay TV market. He is betting £246m per annum that BT will succeed where Setenta, ITV Digital and (arguably) ESPN have failed.

Livingstone: Visionary or sucker?

The exact impact on clubs' finances from the new three year cycle will depend on the eventual uplift achieved from international rights. Assuming a 50% uplift, the amount going to the league champions will rise from c. £60m to c. £100m (see Sporting Intelligence's excellent article for a full analysis). The uplift for a relegated club will be around £25m.

Closing City's FFP gap

Manchester City are very lucky that Ian Livingstone decided to barge into the market when he did. The £40-50m extra will alone more than halve the club's FFP deficit when the new cycle starts in 2013-14.

Even before this new bonanza, however, the FFP gap will close somewhat. The club's share of the CL "market pool" will rise significantly this season because they are English Champions, adding c. £7-8m. City will also benefit modestly from the general 20% uplift in the amount clubs receive from the Champions League. The Nike kit deal signed in May 2012 will add another £9-10m per annum vs. the current Umbro deal. There will no doubt be further second tier sponsors announced in the coming months as well.

As described above, the amortisation charge lags behind transfer spending, but with net cash transfer spending year to date down to £39m, the total charge should begin to fall from this year onwards (down by about £10m on my estimates).

Taking these items together and assuming a top two finish, this season will see £30m+ improvement and by next season the gap will have closed by £70m+. Further trimming of the squad, especially high wage/non-playing players looks very likely. The club no doubt expects to begin to reap rewards from its youth development spending, whether through reduced transfer spending or increased player sales income. Also further out, there is potential for the developments around the stadium and the new Etihad campus to yield profits too.

Finally, if City can start to work out the Champions League, there is a further £25m+ to be earned from getting into the late knock-out stages.

A calmer future?

City will no doubt miss the first break-even result test, despite the exclusion of pre-2010 contracts. Crucially however, there is decent visibility on a very substantial improvement in the club's FFP position over this season and even more next season as the PL TV bonanza rolls in.

The club has been very, very lucky that TV income is continuing to rise so fast. There is no possibility that City would have been able to reconcile £200m of staff costs with the FFP rules without the enormous rise in TV money coming in the next 18 months.

City still have much to do however. The "buy success" model needs to be replaced with a proper youth set-up that delivers high quality players. In the current first team squad, Micah Richards is the only player to have come through the ranks. Net transfer spending will have to fall and stay lower to keep the amortisation charge at a reasonable level. An £80m charge and a £200m wage bill are not compatible with a club generating £33m in matchday income (although the ticket price policy is to be applauded). Manchester City need to "bank" every penny of extra revenue they receive in the next two to three years.

For competing clubs, it doesn't look as if FFP is going to lead to major cutbacks at City, BT have seen to that. For those clubs who don't have sugar daddies, the outlook is still good. City can live with FFP, but they are going to be have to calm down to do so, and that has to be good for everyone else.....

LUHG

Manchester United's shares in issue: a quick guide

noreply@blogger.com (andersred) — Tue, 21 Aug 2012 11:02:00 GMT

The news that George and Robert Soros own 3,114,588 shares in Manchester United has led to some confusion about the number of shares the club has and hence the relative size of this stake. This is a quick guide.

Pre-IPO

Before the IPO on 9th August, the club's share structure was reorganised to create two classes of shares, "A" Shares and "B" Shares.

Red Football LLC, the Glazers' Delaware company owned 100% of each class of share.

The IPO - two elements

The IPO was an offer of a total of 16,666,667 "A" Shares at $14 per share. No "B" Shares were offered.

This total offer had two separate elements, the issue of 8,333,334 new "A" Shares by the company and the sale of 8,333,333 existing "A" Shares by the Glazers. The first element had the effect of increasing the total number of "A" Shares from the 31,352,366 before the offer to 39,685,700 afterwards. The number of "B" Shares remained unchanged.

The Glazers therefore ended up owning 58% of the "A" Shares and 100% of the "B" Shares, so 90% of all the shares in issue. Third party investors own 42% of the "A" Shares and none of the "B" Shares, so 10% of all the shares in issue.

Votes or lack of them

Each "B" Share has 10 votes, and each "A" Share has 1 vote. Because of this structure the 10% of total shares owned by third parties only command 1.3% of the company's votes. In aggregate all the "A" Shares representing 24% of the company, only command 3.1% of the votes.

The Soros position

The Soros family bought 3,114,588 "A" Shares in the IPO. That is a pretty significant 18.7% of the shares sold in the IPO, but only 7.85% of the total number of "A" Shares and 1.9% of the whole company. Being "A" Shares this stake only has 0.24% of the votes.

At a price of $14 per share, the Soros family paid $43.6m for this stake. At yesterday's closing price of $13.06, the stake is now worth c. $40.7m.

LUHG

The MUFC IPO - why the club won't benefit for over two years...

noreply@blogger.com (andersred) — Fri, 10 Aug 2012 17:29:00 GMT

So the Manchester United IPO has finally happened. Having failed in Hong Kong and Singapore, the Glazers and their increasingly desperate bankers ditched their own ludicrous $16-20 per share price range and the shares have limped on to the NYSE at a still very, very aggressive price of $14 per share.

The whole saga has been a grubby and unedifying spectacle in our club's history that does very, very little indeed to improve the club's finances. The whole exercise has only been undertaken to help the Glazer family with their cash flow problems.

From the latest SEC filing we have confirmation that at the lower issue price, the club will receive net proceeds (after underwriters' discounts and commissions) of c. $110.3m (around £70.7m).

The club will use all this $110.3m to repay $101.7m face value (£63.6m) of the 2017 US$ notes at a price of 108.375% of nominal value.

These US$ notes pay 8.375% interest so the annual saving before tax will be:

£63.6m x 8.375% = £5.3m per year

Because interest is tax deductible, this reduction in interest paid will increase taxable profits. As a consequence of the IPO, United will pay US Federal Income Taxes at a rate of 35%. The net interest saving after tax will therefore be:

£5.3m x (1 - 0.35) = £3.46m per year

This net saving is the equivalent of the matchday income from one game at Old Trafford. It is just over 1% of the club's annual revenue and around 3-4% of EBITDA.

Before any United fans begin celebrating this tiny saving, there is a further sting in the tail.

The prospectus informs us that the club, and not the family, will bear the expenses of the IPO. From page 151 we can see that these expenses total $12.3m (c. £7.9m).

With so little debt repaid and United bearing the £7.9m of expenses, it will take until the end of 2014 for the club to even break-even from the IPO, let alone benefit financially.

And the Glazer family? They receive their $110m straight away.

That's "Glazernomics" folks.....!

LUHG

An apology to Sir Alex and a restatement of the fundamental issues

noreply@blogger.com (andersred) — Fri, 03 Aug 2012 09:21:00 GMT

Sir Alex Ferguson

Readers will no doubt have seen Sir Alex Ferguson's statement that he will not benefit financially from the IPO. As one of the people suggesting he was likely to participate in the $288m "2012 Equity Incentive Reward Plan" the club are putting in place, I'd like to apologise to Sir Alex for the suggestion that personal gain was a motivation in his support for the owners. I think it was a valid question to ask in the light of his comments about "real fans" last week, but I was wrong about my assertions. I have frequently stressed on this blog the miracles Sir Alex has achieved at United and was proud to promote the SAF25 fans' book last year. I'm extremely glad he is not caught up in the murky finances of our club.

The real issue

The key issue with the IPO is not however the share options that will be granted, but the continuing financial costs to the club of the Glazers' ownership. I thought it might be helpful to set out the costs and savings that stem from the financial structure that has been in place since 2005. There have been a few comments on this blog questioning the financial costs of ownership so I wanted to set them out again in full with full sources.

The costs divide into several categories. Firstly "cash costs" of £402m, money paid out of the club's coffers. The most important element of this is interest (£295m). Second are the limited repayments of debt since 2005, these comprise £37m of the original bank debt and £93m of repurchased bonds. Please note I have not included the repayment of the PIKs as the club did not pay for this. Adding these together we get costs of £531m, around two thirds of United's total wage bill over the last seven years to put the figure in context.

For information I have also set out various costs paid by the taking on of additional debt rather than paid out of cash flow. I have not added this £79m to the £531m as there would be an element of double counting (I include repayments in the cash costs so can't include debt additions too).

There are two key savings from the financial structure totalling £180m, firstly the dividends which the plc used to pay and secondly corporation tax saved because interest payments are tax deductible.

I have assumed dividends would have increased 8% per year from 2006-2012. This compares to 7.6% per year growth in the seven years up to the takeover and is faster than the 7% growth in EBITDA seen since the last full year of the plc (2003/4).

Corporation tax is as set out in the Manchester United Limited accounts (but not paid because of deductible interest higher up the corporate structure).

The net cost: £531m - £180m = £351m is a vast number. It is the gross transfer spend of the club in the ten years from 2001/2 to 2010/11. It could alternatively have funded a 60% ticket price cut in every year since the takeover. It could have been used to build out Old Trafford to be a 100,000 seat stadium. It was used for none of these things. It is the cost in cold hard cash of the Glazers' ownership.

Crucially, this figure ignores the fact that even after all this waste of money, the club still has £437m of debt on the balance sheet and that this will still be around £360m after the IPO.

The IPO

The IPO is a huge wasted opportunity to stop this enormous outflow of money from Manchester United. The SEC F-1 prospectus confirms that the IPO will only reduce the club's debt by around £78m, saving (after tax) only around £5m per year. Longer term, the IPO will cost the club more each year in higher US taxes (the corporate tax rate is 35% vs. 24% in the UK).

The real beneficiaries of the IPO will be the Glazer family who will receive around $150m from their sale of 8,333,333 shares and the unnamed senior executives (but not Sir Alex) who will be entitled to 16,000,000 shares under the "2012 Equity Incentive Reward Plan". All these people will make money and the club will be left with the vast bulk of its debts.

The IPO gives no opportunity for supporters to take a meaningful stake in their club. The shares on offer represent 10% of the club but with under 2% of the votes.

It has been mentioned by some people that the club is constrained by the bond terms as to the amount of debt it can repay. It is true that until 2013, the club can only repay 35% of the bonds. That figure is £182m compared to the £78m the IPO will repay. It is in any event only five months until this restriction falls away. If this IPO was about paying down debt, the vast majority of the $300m (£193m) proceeds could be applied to debt repayment today, with the balance being applied in January.

Agendas

People have queried my "agenda". My agenda remains the same. I want Manchester United run for the glory of Manchester United, not to make money for owners who do not care about it. I want the money United makes to be ploughed back into the club, invested in players, stadium and cheaper tickets, not wasted on financing costs. I want debts taken on only to expand the facilities of the club. This is not a pipe dream. It is how almost every European football club is managed, for the glory of the club. It is how the other financial titans; Barca, Real and Bayern are run.

As part of the IPO roadshow, the senior management team at United (Woodward, Arnold and Bolingbroke) have done a video presentation. For the next few days you can view it here:

http://www.retailroadshow.com/custom/mu/muroadshow.asp

In the video presentation they confirm that the club's transfer budget in the future will usually be a net £20-25m, the average spend over the last fifteen years. That is a choice being made by the Glazers, more concerned with maximising profits. A debt free United run like a normal football club could afford to compete with biggest clubs in Europe, we aren't even trying.

LUHG

The Red Issue Forum letter to Sir Alex Ferguson

noreply@blogger.com (andersred) — Mon, 30 Jul 2012 21:22:00 GMT

This letter was written by long standing United fans who post on the Red Issue Main Forum, I didn't have any part in writing it but would be happy to sign it.

I post it here in the hope that it receives a wider audience, especially today of all days when the Glazers again show their true colours with an IPO that enriches themselves and leaves the club in debt.

Dear Sir Alex,

As lifelong Manchester United fans, we are disappointed and concerned by quotes attributed to you in a recent interview. Many of us are the same fans who protested to denounce Cubic Expression back in 2005. These are the same fans who had previously offered you their unwavering support during your private dispute over Rock of Gibraltar's breeding rights, despite Cubic Expression raising some very pertinent questions. In the spirit of fairness, we would like to invite you to clarify these comments by responding to a brief summary of our concerns:

1. You suggested that ‘the majority of real fans will look at it [Glazer ownership] and see that it’s not affecting the team’. Can you clarify what constitutes a real fan?

2. With thousands of fans leaving the club in protest over the Glazer regime, do you consider these time-served reds to be less than real fans?

3. Have you personally met with any of the dissenters to determine how deep their commitment and affection for United may be?

4. What are your thoughts on an atmosphere which gets markedly worse each season as more and more local, traditional fans are marginalised and alienated from the club?

5. You are also quoted in the interview as claiming ‘I’m absolutely comfortable with the Glazers situation. They’ve been great’. You are clearly aware of the opposition from the United fan base - does that not make you uncomfortable in any way?

6. What, in your view, would constitute poor owners?

7. You have repeatedly claimed to have been backed financially whenever you have requested transfer funds. Is this your only consideration when determining what represents great ownership?

8. You continued the interview by saying that, ‘the salaries, agent fees – is just getting ridiculous now’. Whilst we agree in tone, it does represent a sea change in attitude from pre Glazer transfers. Agent fees in both the Ferdinand and Rooney transfers were criticised at the time for being excessive, so why does the club now refuse to meet market conditions for the top players?

9. Do you believe Jorge Mendes’s £2.6m cut of the Bébé transfer, a full 35% of the total fee paid, represented good value?

10. With more than £250k leaving the club each day to service the Glazer debt, totalling over £500m since the takeover, is it so reprehensible for us to question your constant references to ‘value’?

Given your personal background and previous support for fan involvement we hope you take the trouble to respond to our deep concerns about both the club’s situation and the wording of the interview quoted.

Signed
Concerned Manchester United Fans

Why have the Glazers changed their strategy on the debt? A theory....

noreply@blogger.com (andersred) — Thu, 12 Jul 2012 11:10:00 GMT

The big news in United's "preliminary prospectus" (the Form F-1 SEC filing) was 1) that the proceeds from the IPO will be used to repay some of the club's enormous debt and 2) that no dividends will be paid "in the foreseeable future".

The big question that stems from this, is "why?". Why after seven years of running a highly leveraged balance sheet and only two and a half years after the bond issue have the Glazers executed a huge u-turn? Why suddenly decide to reduce the club's debt?

I believe it is highly unlikely that the change is due to a sudden realisation that cash wasted on interest should be available for investment, although that may be a positive knock-on effect, but because of the financial pressures the family is under.

What follows is only my theory (and apologies if you don't like speculative articles like this), but one that I think is near the truth....

The amazing disappearing PIKs

Followers of the United financial story will know that out of the blue in November 2010, the Glazer family found £249.1m (around $400m) which they injected into the club as equity and used to repay the infamous "payment in kind securities" (PIKs). These short-term debt instruments had festered on the balance sheet of Red Football Joint Venture Limited for more than four years and had accrued £111m of rolled up interest on top of the original £138m loan.

In August 2010, the PIKs had become even more expensive as the Red Football companies breached a key debt covenant (section 8.2 of this document). The covenant stipulated that total debt in the group (from Red Football Shareholder Limited downwards) should not be more than 5x EBITDA (essentially cash profits before transfers). If debt exceeded this limit (set when the PIKs were issued in 2006), the PIK interest rate would rise from 14.25% pa to 16.25% pa. With debts in August 2010 totalling £773m and EBITDA of £102m the rate duely rose, making the PIKs even more toxic and in need of repayment.

The bond issue of February 2010 had created a "carve out" which allowed the Glazers to take £95m of the club's cash out and it was widely assumed (and mentioned in the bond prospectus as a possibility) that this money would be used to pay off a chunk of the PIKs. But the Glazers didn't use the carve out to repay them in November 2010. The exact source of funds is unknown.

What I do know, from impeccable sources, is that the money was borrowed by the Glazer family. They didn't have £249m in cash, few people do (and the other bits of the family empire are leveraged up already). The money was borrowed by one of their US companies from a single US financial firm.

Throughout the summer of 2010, the family and their advisers were hawking the deal around the market. Amusingly an old college friend working for a private "intelligence company" was retained by an American debt investor (I won't embarrass him by naming the investor) to look at the deal and initially asked me for help. The invitation to meet the potential investor was quickly dropped after they did some due diligence on who I was.

So that's what we know. Since November 2010, the club has been carrying the bond debt, and the Glazers have been stuck with what you might call "PIK2", expensive personal debt secured on their equity in United, presumably costing less than the eye watering 16.25% of the PIKs, but more than the senior bond debt's c. 8.7%.

Could there be another total debt covenant attached to "PIK2"?

Stories about a potential IPO (in Asia) first started to circulate in mid 2011 as the first anniversary of the PIK repayment approached. As we now know, nothing came of the attempts to list in either Hong Kong or Singapore, but the Glazers kept going. Despite terrible market conditions, a moribund IPO market, weak results due to the Champions League etc, they have persisted.

The explanation for this burning desire to IPO the club must be to do with their personal circumstaces, and yet they are not seeking to cash out but to repay debt. I believe that it is highly likely that the PIK2 debt has "total debt to EBITDA" covenants attached to it of a similar sort to those in the original PIKs. Such covenants would be very common for quasi-equity financing of this sort. Breaching these covenants could be very costly for the Glazer family and the existence of such would go a long way in explaining their apparent change of heart on the debt. Under such a scenario there would be a very strong incentive to try to reduce the debt across the Red Football group of companies, and the easiest method is an IPO.

The change of strategy actually dates back to Q4 2010 and PIK repayment

It is worth noting that although the prospectus sets the new strategy down in black and white for the first time, the Glazers have been pursuing deleveraging for a while, using bond buy backs, and that this new approach began as soon as the PIKs were repaid.

The club first bought back bonds in the final quarter of 2010 (when £24m were repurchased) and has now spent a total of £92.3m. No less than two-thirds of the cash the club had at the time of the bond issue (all that Ronaldo and Aon windfall) has been used on bond buy backs. The peculiarity of holding almost £150m of cash when issuing £520m of bonds and then, just a few months later, using that cash to buy back those bonds is striking.

Something has definitely changed...

So since the repayment of the PIKs and their replacement with "PIK2" we have seen a completely new financial strategy. The best part of £100m has been whipped to buy bonds and now we have an IPO being launched into terrible markets to reduce the debt further. None of this proves they are under pressure from debt covenants in PIK2, but it all fits with the theory.

Even fellow "lineal descendants" can fall out

The other chat coming out of the US about the Glazers is that Darcie, Edward and Kevin don't like having wealth tied up in this pesky soccer club that Joel, Avram and Bryan are so fixated with. If the six of them are personally on the hook for $400m of "PIK2" and covenants are in danger of being breached, you can sort of see their point.

Theories and facts

Apologies again for such a speculative post. My theory may ring true to you or may sound like laughable rubbish. It would be lovely to think the Glazers have had a damascene conversion to prudent financial management and eschewed the crippling debts of the last seven years, but you'll forgive me for seeking a baser motive.

Perhaps there are multiple reasons for the change in tack, including fears that becoming uncompetitive on the pitch will hurt the club's value, as well as the sort of direct pressure on the family I have described above, and perhaps the reasons are less important than the fact the burden on the club is being reduced. That won't stop this blog trying to identify the "whys" not just the "whats" of the whole sorry saga.

LUHG

The Manchester United IPO some initial observations

noreply@blogger.com (andersred) — Thu, 05 Jul 2012 14:42:00 GMT

There’s been a lot written about Manchester United’s proposed listing on the New York Stock Exchange (“NYSE”) since it was announced on Tuesday night by the filing of an SEC Form F-1 (the document is available here), this post is designed as a brief summary of my thoughts on the subject.

This is a massive change in strategy by the Glazers and a positive one financially

Since the takeover, the club have insisted that the debt loaded onto United is not in any way a problem. As recently as last March, David Gill was reiterating this to the House of Commons Culture Media and Sport Select Committee.

Suddenly, the attitude to debt has changed. The SEC filing clearly states:

“We intend to use all of our net proceeds from this offering to reduce our indebtedness”

The Glazers do not need to take this approach, they could float United and retain the proceeds themselves. The fact they have chosen not to do so is very telling and has the potential to transform the financial position of the club. As I have mentioned again and again on this blog, over £500m has been spent on interest, debt repayments, fees and derivative costs since 2005. In the first nine months of the 2011/12 financial year alone the club spent £71m on interest and bond buybacks. The elimination or significant reduction of these costs is huge news.

The other key aspect of this debt reduction is that the prospectus makes it clear that there is no intention to pay dividends in the forseeable future. Interest payments will not simply be replaced with dividend payments.

The 2010 bond issue was supposed to lock in long-term (seven year) funding, and yet only two years later, that entire costly structure is being ripped up. A major change of heart has taken place.

The family can still cash in some shares under the "over allotment" mechanism

Although the prospectus says all the net proceeds will be used to reduce debt, the family can still sell some of their shares (as opposed to the new shares in the main offer) under the "over allotment" option. This is a feature of many IPOs, whereby the owners make additional shares available for sale if demand is higher than expected. Over allotment is not normally for more than 10-15% of the shares being offered.

At this early stage we are missing some very key details

The SEC filing is a “preliminary prospectus”. It contains no details on the number of shares being issued or the price of these shares. It is subject to revision.

The success or failure of the offer will have a lot to do with the valuation the offer puts on United. In the past, the Glazers have appeared to have placed a higher value on the club than most analysts or potential buyers. The FT recently reported that Morgan Stanley had left the IPO syndicate (of underwriters) because of disagreement over the valuation.

It is not too late for this offer to collapse spectacularly if the Glazers attempt to sell shares on too high a valuation or if financial markets weaken further. This is not a “done deal”.

The share offer will be significantly greater than $100m

The much quoted “$100m” issue is a red herring. There is a requirement in a preliminary prospectus to estimate the cost of registration fees and as these are dependent on the size of the share offer, a “placeholding” assumption has to be made. That is where the $100m figure comes from. It is not a guide to the size of the eventual offer. There is little or no point raising $100m (£64m). The exact amount raised will depend on the valuation placed on the company and the state of the markets in the next few weeks but I would expect at least $300m.

This is not a change of ownership

Sadly for those of us who want supporters to have a meaningful stake in Manchester United, this IPO is of virtually no use at all. The “A shares” on offer will only have very limited voting rights. Even if the Glazers sold 90% of the club in the IPO (which they won’t), the “B shares” the family will hold would still have a majority of the votes as each B share has 10x the votes of an A share.

Non-Glazer shareholders will therefore have virtually no influence over the club.

This remains a very short-sighted and depressing approach to governance. The experience from Spain and Germany shows that supporter participation in ownership is a huge plus for football clubs. United’s unwillingness to engage with supporters as anything other than potential customers remains an enormous problem that can probably only be solved by intervention by government.

They’ve chosen New York rather than London because they want to maintain control

The principal advantage to the Glazers from listing in New York rather than London is that the A/B dual share structure is acceptable in the US and not in the UK. Well known companies such as Google, Ford, Facebook and (infamously) News Corporation all have dual voting structures. It would be very hard to float a company with such diminished voting rights for outside shareholders in London.

The downside of US listing is the higher tax that the club will have to pay. United has been UK tax registered for all of its existence but will now be subject to US Federal Income tax on profits at the high rate of 35% (the UK rate is 28%). The fact that the Glazers are happy for the club to pay a higher tax rate tells us a lot about the importance of the A/B share structure to them.

Is this all about a post Fergie world?

Why is this all happening now? We can only speculate, but it seems to me that the Glazers are preparing for a Manchester United without Sir Alex Ferguson. As we know, the club has achieved great success on the pitch on a pretty low transfer spending since 2005. Would another “big name” manager come on board with this limited budget, especially as City, Chelsea, Real Madrid and Barcelona continue to flex their financial muscles?

What happens next?

The underwriting banks and the company will now undertake a road show for potential investors. United have ninety days from the date of the preliminary prospectus to file their “final prospectus”, which includes the price and number of shares being offered. The IPO can still be cancelled at any time prior to this….

Watch this space.

LUHG

Manchester United Q3 2012 results: getting hard to square the circle

noreply@blogger.com (andersred) — Fri, 18 May 2012 09:53:00 GMT

Since United had its bond issue in early 2010, the club has reported increased year-on-year revenues every single quarter. This revenue growth has more than offset rampant wage inflation. Meanwhile of course the club has clocked up Champions League finals and Championships. This season the performance on and off the pitch has stalled somewhat. The numbers for the next quarter (which runs from April to June) will be worse again.

For the Glazers, the clever trick of football success on a limited budget with high and seemingly ever increasing profits may well coming to an end. Will they spend at the expense of those profits? If they don't, will the success and hence the profits still be achievable?

It's getting harder to square the circle.

Revenue and EBITDA - both down a little
The poor performances in Europe and the domestic cups can be seen in these quarterly figures. Matchday income fell 13% compared to last year as the club played seven home games compared to last season's nine. Of the seven played, two were in the Europa League in front of smaller gates paying lower prices.

Media income fell 19% compared to 2010/11 despite the higher share of the UEFA CL "market pool" this year. The explanation is simply the exit from the Champions League. The impact will be far more severe in the current quarter of course when there will be no CL media income at all compared to the previous year's run to the final.

Commercial income was again the star, with the new contracts signed since last year; DHL, Epson etc and a step up in Nike income and income recognition boosting revenue by 15% compared to 2010/11.

In total, revenue fell 5.8% year-on-year in the quarter and revenue growth for the nine month period was 6.1% (down from 11.9% in the first half of the year). United may be a commercial powerhouse, but old fashioned football success and failure can still have a major impact.

Staff costs only rose 1% compared to last year, reflecting lower bonuses (presumably linked to qualification for the CL knock-out stages). The wage bill for the year to date is still 10% higher than last season, although the fourth quarter will not see any of last season's bonuses.

The major fall in operating expenses (down 16.3%) is largely due to the lack of domestic home cup games. The club accounts for the gate sharing for such games as an expense and this season there were no such games.

With revenue down 5.8% and costs only down 4.7%, EBITDA fell 8.4% and for the first nine months of the year was only up 3.3%. There will be a larger fall in Q4.

These falls shouldn't be overplayed, with United still making cash profits before transfers of £85m in the first nine months of the season. That is more than any other English club has made over any twelve month period. The worry for the Glazers, is that the profits are stagnating this year at a time when investment is needed to keep up with City and others, and none of that is good if you hope to float your club on a stock exchange.

Below EBITDA - not much of note
The club made a small £2m profit on player sales during the quarter (Gibson and Ravel Morrison). The amortisation charge (how transfers are "charged" in accounts) was basically unchanged at £9.7m for the three months. To put this in context, the c. £40m annual amortisation charge compares to a figure of £83.8m at free spending City in the last reported season (2010/11).

There was a £4.3m "exceptional" charge during the quarter which the club says related to "professional advisory fees" and the need to top up the Football League pension fund. I suspect the "fees" element accounts for the great majority of this £4.3m and relates to advice on the mooted IPO.

The interest charge is spread evenly over each quarter even though bond interest is paid twice a year in February and August. The club recorded a "gain" of £6.5m as the pound rose against the US dollar, reducing the sterling value of the club's dollar denominated bonds.

Taking all these charges and credits into account, pre-tax profit for the quarter was £2.8m, down from £7.4m last year.

Cash - a lot less money than there used to be
As I always say in these pieces, I do not consider the profit and loss account described above to be particularly informative when looking at football clubs below the EBITDA figure. The cash flow statement is often more informative. Cash flow includes real spending on transfers which are after all cash transactions (the amortisation charge is a significant simplification by contrast). For United, lumpy bond interest payments and bond buybacks are also a fact of life that constrain what the club can spend.

Despite their advantages, cash figures come with a warning however. Football is a seasonal business with season ticket revenue collected in the summer, boosting cash balances. The end of the season also see large TV payments from the Premier League and UEFA. Furthermore, prepayments on sponsorship contracts can lead to large positive and negative swings in cash and at United there are large interest payments in the first and third quarters of each financial year. It should be remembered that United are the only football club to publish quarterly figures (a requirement of the bond issue), all other club accounts are struck at the seasonal high point for cash in the summer.

You can see the volatility in United's quarterly cash flow in the chart below which shows how cash builds up in the fourth quarter and runs down through the rest of the year:

Manchester United is not like other football clubs of course, because it has £420m of outstanding bonds. Since the bonds were issued in February 2010, the club has periodically gone into the market and repurchased them (usually paying more than the issue price). These buybacks make financial sense (the bonds cost c. 8.5% whilst cash at the bank barely yields 1.5%) but risk depriving the club of cash needed for investment. It is a choice made by the Glazers and their management team.

There were no buybacks in the third quarter of the 2011/12 financial year, but since 2010, the club has spent over £92m on them. You can see their impact on the "gross" debt which has fallen by the amount bought back (plus currency fluctuations) and on the cash balance below:

Since June 2011, the club has spent £71m on buybacks and interest payments which together with the other seasonal cash outflows described above has pushed the club's cash reserves down to a low of £25.6m at the 31st March.

As described above, there will be the usual rebound in the club's cash position in the current quarter, although the precise amount is very hard to estimate. Judging from previous years and taking into account the lower profits caused by the CL exit, I estimate the cash position will improve to c. £75m by the end of June.

Will they spend?
The big question supporters want answering is not about buybacks or EBITDA, it's about spending to keep the club competitive after a season when the squad was found wanting at home, but especially in Europe. I can't give an answer to whether the club will spend, only the Glazers can, but the very issue raises big questions over their strategy for running the club.

Since the takeover, Fergie's genius has allowed United to consistently win trophies (with a couple of rebuilding dips on the way) whilst keeping the club's wage spending to turnover ratio very low (45.7% so far in 2011/12 for example) and whilst spending very little on transfers (average net spend of £16m per season). This combination of controlled wages and low transfer spending is vital for two reasons. Firstly it theoretically boosts the value of the club (if you look at valuation based on EBITDA). Secondly, it frees up profits to service the enormous debts taken on to buy the club. Since the takeover, 18% of revenue has gone on interest. This has been "affordable" because the club hasn't ever really had to "pay up" in either wages or transfers.

Since 2005 the challenge of achieving this financial balancing act has been aided by a number of factors. In the years immediately after the takeover, the 40%+ ticket price rises were crucial. The Ronaldo windfall in 2009 and, to be fair, the rapid growth in Commercial income in the last two years have also been significant pluses. Now however, the trick is becoming more difficult to pull off.

Bond buybacks and interest have eroded the club's previously huge cash balance. There has been spending (£47m last summer) but not on crucial areas of the pitch (United haven't bought a central midfielder since Ronaldo departed). Major transfers cost money twice over, both driving up wages and demanding immediate cash. Wage inflation and transfer inflation across football remain endemic and the advent of FFP appears not to be having any impact on this.

If United are to strengthen, money will be needed and that means no more bond buybacks. It probably means lower profitability, in at least the short-term, with negative implications for the valuation achievable at any IPO. The alternative may well be under investment and the club going further backwards relative to its main competitors.

The Glazers know their structure hampers the club. There was heavy briefing of journalists in the run up to the aborted IPO process last year, suggesting debt would be paid down from the IPO proceeds to make United more "competitive". If the IPO can't be delivered however, the club is stuck with its debt and the owners will have to accept lower profits or further relative decline. Can they square this circle?

LUHG

The scale of Fenway's challenge at Liverpool becomes clear

noreply@blogger.com (andersred) — Fri, 04 May 2012 10:43:00 GMT

Normal health warning: if you don't think a United supporter can impartially analyse Liverpool Football Club's finances don't read on.

Liverpool are a club in transition on and off the pitch. The financial results published overnight show just how great is the challenge facing Fenway Sports Group ("FSG"). We can now see that the American owners spent £261m acquiring and refinancing Liverpool. Of this figure only £30m has actually flowed into the club, the rest was spent on the purchase itself.

I think Liverpool will turn the corner financially, the commercial opportunity is still there and there is clearly the scope to occupy a far larger/more profitable ground. The challenge is getting far more sporting success out of a very expensive squad of players, and that isn't really down to money at all....

FSG's ownership structure

The primary operating company of Liverpool Football Club is "The Liverpool Football Club and Athletic Grounds Limited" which the the main entity I will focus on. Since 15th October 2010, 100% of this operating company has been owned by a new vehicle "UKSV Holdings Company Limited". UKSV is in turn owned by NESV I LLC, a US company also (and commonly) known as "Fenway Sports Group". The accounts of UKSV only run from 1st October when it was established to 31st July 2011. The accounts of the operating business, which I'll refer to as "Liverpool" or "the club" for ease, run for the year to 31st July 2011 (i.e. last season).

Ian Ayre's spin

Before the club's accounts were available at Companies House, Managing Director Ian Ayre gave a lengthy interview to the club's website and to the Liverpool Echo. Without making the accounts available, Ayre threw around various numbers and in particular blamed the £50m pre-tax loss on a write-off of work on the abandoned stadium plans. Whilst the write-off had a big impact, he was being pretty disingenuous by not mentioning a pretty exceptional profit (£43.3m) on the sales of Fernando Torres and Javier Mascherano. This profit largely offset the stadium write-off (£49.2m) and that meant that the underlying results were very poor.

Ayre is not alone in spinning his club's financial figures before they come out (hello Chelsea) or not being straight with his supporters (hello United and many, many others), but it is still pretty poor. The club is in transition and there is surely no need for such spin.

Revenues and costs

Football clubs are simple businesses. There are three revenue streams (matchday receipts, media income and commercial deals) and two main operating costs (wages and the costs of operating the club day to day). The difference between these numbers is "EBITDA" (earnings before interest, tax, depreciation and amortisation), effectively cash profits before any investment or the servicing of debts. After EBITDA come depreciation of the stadium, training ground etc, "amortisation" which is how transfers are accounted for, then interest and (rarely in football) corporation tax.

Liverpool's results for 2010/11 show what happens when costs run ahead of revenues; profits collapse. This is of course the curse of football finance. Success brings income so clubs invest in player wages in the pursuit of this success. Fail to do well on the pitch and the costs are still there but not the income.

Liverpool's revenue was effectively flat last season (down 0.5%). Matchday income fell 4.6% despite the same number of home games, reflecting a small fall in average attendances (40,224 vs. 41,940) more than offsetting ticket prices rises and must imply a fall of in corporate hospitality too. Media income was down 18% as the club failed to qualify for the Champions League (losing £25m of income). This was partly offset by £5m of Europa League income and the £7m increase in PL TV money from overseas rights. Commercial revenue was the star area with the Standard Chartered deal driving it up £15m or 25%. The Warrior kit deal will not impact the accounts until 2012/13.

Although revenues were down a fraction, there was significant cost growth as the club spent heavily in an attempt to break back into the top 4. Pre-exceptional staff costs rose a very punchy 12.7% year-on-year. This wage growth is more down to contract increases than transfers in my opinion. Although the club signed Cole, Poulsen, Konchesky, Meireles etc, Mascherano, Riera and Benayoun all departed and the January flurry of transfers will not have impacted the full year numbers significantly.

Total operating costs (pre-exceptionals) rose 9.3%, driving EBITDA before players sales down by 63% to only £9.8m, a margin of 5.3%. The graph below shows how the club's EBITDA has fallen very sharply since 2009 revenue despite growing slightly. Liverpool are overspending.

The issue of rampant wage inflation is not of course unique to Liverpool. The graph below shows that Arsenal, Everton, United and City all saw wages rise faster than turnover last season. The problem for Liverpool is however more acute than at other clubs, fundamentally because Liverpool are operating a squad with a Champions League cost base without Champions League income.

Liverpool's wage bill is quite competitive in Premier League terms, fourth behind City, Chelsea and United but the dreaded wages/turnover ratio is rising sharply (up to 70% from 62%). That puts Liverpool much closer to Chelsea (76%) than Arsenal or Everton (55% and 56% respectively).

Amortisation and depreciation

Amortisation is the method by which transfer spending is recognised in the profit and loss account. It reflects the level of transfer spending a club does, spread out over the life of player contracts. Importantly it forms part of the UEFA's FFP calculation. At Liverpool the amortisation charge has been quite high, reflecting steady transfer spending under Benitez and Hodgson. The charge fell from £40m to £36m in 2010/11.

Depreciation (on Anfield and Melwood) was up slightly at £2.9m (vs. £2.1m).

Exceptionals, player sales and interest

Exceptional costs totaled £58.99m in 2010/11. Of this, £49.2m was a write-off of capitalised costs relating to the abandoned stadium project. It is important to stress that this is not a cash cost in 2010/11, the money had already been spent in previous years. Most of the balance of the exceptional charges relate to getting rid of Roy Hodgson. The club spent £8.4m changing managers last season compared to £7.8m getting rid of Benitez the year before.

The interest charge fell very sharply from £17.6m to £2.9m as the burden of Hicks and Gillett's debts was lifted. It is worth noting that cash interest paid actually rose slightly.

Although not treated as an "exceptional", the club recorded a huge profit on player sales in 2010/11. Such profits are calculated as the difference between the price at which a player is sold and his "book value". Torres was acquired for around £20m and probably had a book value of around £10m when he was sold to Chelsea. That means the club recorded a profit on his sale of around £40m. Add in Mascherano and the "profit on player sales" was £43.3m.

Pre-tax loss

Bringing all these numbers together, Liverpool reported a pre-tax loss of £49.3m compared to £20m the previous year. The exceptional charges are unlikely to re-occur, but neither is the enormous profit on Torres. Estimating a "normal" profit on player sales is very difficult (the figure was £23m in 2010, £4m in 2009), but £10m looks a reasonable estimate for a club with Liverpool's strong youth set-up. Stripping out the exceptional costs and using £10m for a "normal" profit on player sales implies an "underlying" pre-tax loss of c. £23m. The collapse in EBITDA means Liverpool are structurally loss making at these level of income and wages. To change that of course, the club need cheaper players or more revenue.

Cash(flow) is king

Accounting items like non-cash exceptionals, amortisation and player sale profits can often make the profit and loss account of football clubs misleading. It is always important to focus on cash flow as shown in this table:

The collapse in EBITDA (here including cash exceptionals), led to a very sharp fall in operating cash flow at Liverpool. Unlike in the P&L, the transfer spending here reflects actual cash spent and received and with the Carroll spending paid up front but the Torres receipts staggered, there was punchy £40m of cash spending in 2010/11. Deduct interest and the club saw a £42.5m outflow before financing.

It goes without saying that Liverpool need to generate more EBITDA and hence cash flow to be able to compete in the transfer market in the future or will need subsidising by FSG.

Debt and financing

Of the £42.5m cash outflow shown above, £26m came from an injection from new parent company UKSV and the balance from running down the club's cash balance (which fell from £19m to £2.5m).

The £30m "debt" on the Liverpool balance sheet owed to UKSV/FSG is really equity by another name (it attracts no interest). At 31st July there was a real bank loan of £37.7m (the "stadium finance" part of a larger £92m facility with RBS and Wachovia/Wells Fargo) secured on the club's assets.

On 30th September 2011, the club entered into a new £120m facility with RBS, Bank of America and Barclays for £120m. The facility runs for three years. £45m is the stadium project facility and £75m for "general corporate purposes". Whilst with year end debt of only £37.7m there might appear to be plenty of spare capacity, football clubs' cash positions are highly seasonal and the club will definitely need this facility during the course of the season. We do not know the interest rate on this debt (the old facility was LIBOR +450bps).

Prospects and thoughts

Fenway have a very big challenge keeping Liverpool competitive in the next few years. The Warrior kit deal next season will add c. £13m (7%) to revenue, but there was no Champions League football in the current season and there won't be any next season. Wage inflation across football remains endemic despite the imminent arrival of FFP. The playing squad needs investment and a new ground is desperately needed.

If all that wasn't bad enough, the competition for CL places is far fiercer than it was in the good old days of "the big 4". A £100m+ wage bill used to guarantee qualification for the CL, now it barely guarantees qualification for the Europa.

The great unknown in all this is the willingness of FSG to invest their own money in Liverpool FC. So far £30m has flowed in on top of the cost of acquiring the club. The expansion of the banking facility very much suggests that the business will be debt not equity financed in the next year or two and that is a worry.

Despite all this gloom, I think Liverpool will negotiate these financial risks, for two reasons. Firstly as shown by the Standard Chartered and Warrior deals, the club is a big brand still on the global stage. It is commercial success that has allowed United to compete despite its debt burden and remains a key advantage for Liverpool too. Secondly, there is significant scope to expand matchday income if a new stadium can be developed. Liverpool L4 is not London N5, but Arsenal's move to the Emirates gives a flavour of what can be done. Liverpool's matchday income is only 37% of United's. FSG need to close some of that gap.

The other thing Liverpool need is for Financial Fair Play to be rigorously enforced. This is the great unknown of course, but FSG have clearly made a bet that it will stick.

Taken together, the Liverpool "project" is a steep, steep challenge.

LUHG

The issues the football authorities won't address

noreply@blogger.com (andersred) — Fri, 09 Mar 2012 16:08:00 GMT

So finally, we now get to see "football's response" to the government's call for the game to reform itself.

What a damp squib.

You can see the "response" here, page after page of moving blazers around committees and no action. It's a depressing document more concerned with preserving the status quo than looking at the real issues; debt and financial mismanagement, ownership, ticket prices etc.

Debt, the cancer that kills clubs and costs fans gets one mention. Actually it doesn't, the word "debt" appears as in "debt of thanks". Thanks for nothing.

Crucially, the authorities have chosen to ignore government suggestions on supporter involvement and leveraged buyouts.

Why is there no response to this (from the Government response to the select committee)?

30. The Government notes the evidence before the Committee on the use of leveraged buyouts to purchase football clubs and the strong view of the Committee on the appropriateness of this vehicle. The Government expects that the issue of financial sustainability should be addressed as part of the recommendations on the new licensing model.

and why is there nothing at all in the document on supporter involvement in clubs as suggested by the government here (my emphasis)?

38. The Government supports the Committee’s recommendation about effective consultation with fans. The Government believes that every club should have a dedicated and mandatory supporter liaison officer. Furthermore, that every club should officially recognise the relevant supporters groups or trusts and keep an open dialogue with them. They should hold official and regular annual general meetings at which these groups are invited to take part and at which appropriate financial and other information can be shared and consulted upon.

39. The Government believes that these conditions should be an explicit condition of the football licensing model recommended by the Committee and so compliance should be a requirement of the club competing within the English game.

40. Furthermore, the Government urges the football authorities to consider ways to actively encourage and incentivise methods of including supporter representatives on the Boards of clubs. We see the value in the views of many supporters that such representatives should have a full role within the club Board. At the same time, we acknowledge that this may not be the right solution for all clubs or all supporters. Where there are ways of achieving this role in an advisory capacity that do not attract fiduciary responsibilities that could create conflicts of interest, then we urge the football authorities to also consider this route. Whatever the way that representation is achieved, we believe that there is every reason to think that clubs are stronger because they have supporters at the heart of the club, not weaker.

41. One option that we have considered is to specify within the new club licensing system a trigger point that would require clubs to make a seat available to one or more supporters’ representatives on the Board. Such a trigger point could be the next time the club changes hands; the point at which the officially recognised supporters organisations reach a certain size; or by a majority vote of eligible supporters. There will be other options as well.

The whole document smacks of complacency and an unwillingness to change.

Hugh Robertson should scrawl "not good enough, try again" on it in big red letters and send it back to Wembley and Gloucester Place.

LUHG

Manchester United Q2 2011/12 results - the amazing, expanding wage bill

noreply@blogger.com (andersred) — Tue, 21 Feb 2012 22:32:00 GMT

The second quarter of Red Football's financial year (September to December) is the least exciting. The transfer window is firmly shut, the season ticket selling season is over, it's the dull group stage of the Champions League. Nothing is won before Christmas and from a financial point of view, not much happens...

That is largely the case with these figures for the three months to 31st December 2011 (and therefore the first half of 2011/12 too). Having said that, there are some surprises.

Revenue

The trends seen in the first quarter figures were present again in Q2. Matchday income was up 3.8% compared to last year despite exactly the same number of home games. The club put through an average price increase of 2.5% this season and the additional revenue has come from better corporate hospitality sales, a real credit to the Old Trafford corporate sales team at what is obviously a very difficult time economically.

Media income rose an impressive 9.8%, but this increase is somewhat deceptive. United benefit this season from a higher share of the English "market pool" than in 2010/11 because of winning the league last season. Furthermore, the club recognises some of the Champions League media income evenly over the number of games played in the competition. With United being knocked out at the group stages, there is a paradoxically higher amount of revenue recognised in the first six months than last season (when income was spread over ten games across the whole season, not six in the first six months).

In the second half of the season, there will be no Champions League income of course and the meagre pickings from the Europa League (a maximum of about €5m if the final is reached) will depend of course on progress in that competition.

Commercial income continues to grow very fast (up 13.4% during the quarter vs last year and up 17.7% over the six months). Much of this growth comes from the c. £10m per annum DHL training kit deal. The club has also recently signed new deals with Bulgarian and Bangladeshi telecom operators. This strategy of finding a local telecom partner in a myriad of markets will eventually reach a natural end of course, but I must confess to having been too cautious on United's commercial growth. The "brand" has stretched far further than most observers (including this one) felt was possible.

In total, revenue growth of 12% in the first six months of the year is very impressive, even if the impact of the early Champions League exit is yet to be felt.

Costs - terrifying

It's a good thing that United's top-line is growing so well, because so is the cost base, and particularly the wage bill. After the 12.2% year-on-year growth in staff costs in Q1, they rose 17.2% in Q2. This increase is before any end of season bonuses obviously, so can only be put down to significantly more expensive deals for key players. When you consider that Garry Neville, VDS, O'Shea, Brown, Obertan and Scholes (his return is not included in these figures) all left the club in the summer with younger (and you would imagine cheaper) players coming in, the wage inflation is even more extraordinary.

Historically, there has been a very, very strong correlation (r squared of 0.98) between media income and wages at United. What has happened this season is effectively a breakdown in that relationship.There is no big new TV deal to drive player salaries up. Endemic wage inflation is THE financial problem in football, it is what Financial Fair Play is designed to deal with. These figures show it remains a huge issue in 2011/12.

Non-staff cash costs rose an equally punchy 14% in Q2 vs. last year. Some of this must be the club's swanky new corporate offices in Stratton Street in central London. Unlike at the old Pall Mall office, the club has the confidence in Stratton Street to have their name listed in reception.

EBITDA and below

With revenue up 8.7% and costs up 16.3% during Q2 vs 2010/11, EBITDA was virtually static (up 0.4%) and the margin was down from 48% to 44.4%. For the first half as a whole, EBITDA was up 7.7%. United remain very profitable, but the negative "jaws" between cost and revenue growth (costs are rising faster than income) is a worry in any business.

Below EBITDA, depreciation and player amortisation were virtually static. The club made its usual small profit on player sales and there was a totally unexplained £2m exceptional charge.

Interest and various marks to market

The interest charge in the profit and loss account was down 11% compared to Q2 last year. This reflects the increasing number of bonds the company has bought in during the last two years. It should be noted that actual bond cash interest payments are made twice a year in February and August.

Under International Accounting Standards, Red Football must recognise the initial discount on bonds over their life, any premium paid when buying bonds, any "mark to market" increase or fall in the sterling value of the US$ bonds and must also mark any swaps to market too. I don't consider any of these (largely non-cash) charges to be material to the health of the business.

Cash and debt

The second quarter is not a big one for seasonal cash flow (pre-payments of season tickets and sponsorships unwind over the quarter). Operating cash flow was slightly negative (-£2.7m) as these working capital positions unwound. As stated above the main bond interest payments fall outside this quarter and there was little transfer cash flow outside the window.The club bought another £5.2m of bonds during the quarter to take the total to £92.8m (almost 20% of the bonds issued in 2010).

The press have focused on the c. £100m fall in the club's cash balance, but £86m of this fall took place in Q1. In Q2 the cash outflow was only £14m.

The cash outflow and bond buybacks left gross debt at £439m and cash at £50.9m. Net debt has therefore risen slightly from £368m at the end of September to £388m at the end of December.

Thoughts

Credit has to go to the club for once again boosting revenues in a tough economic climate. United (along with Real, Barcelona and Bayern) is one of the commercial giants of modern football. Much though it pains me to say it, the Glazers have overseen extraordinary commercial growth (this year Commercial income will be more than 2.5x the level the plc achieved in their best year). The second half will see weaker media income as the CL exit bites, a timely reminder that on-pitch success is never guaranteed.

Despite United's excellent revenue growth, the dynamics of football finance remain awful (hello Rangers, hello Pompey). Any business which sees core cost growth of 16% year-on-year is going to struggle to meaningfully grow profits. Profit growth is not crucial for a football club, but it is for the owners who are no doubt still eyeing an IPO and want to tell a story of rising profits, not just revenue growth. I remain confident that FFP will eventually calm player wage inflation but such restraint is not visible in these figures.

Finally, for all the booming income and soaring wages, there can be no doubt whatsoever that the £116m Ronaldo/Aon windfall received on 30th June 2009 has gone to deal with the debts laden on the club. In the thirty months from that date 31st December 2011, the club spent the following on debt service and investment.

In almost all football clubs, surplus cash is reinvested. At Manchester United it is still far more likely to be spent dealing with debts that the club should never have had.

LUHG

Income up, costs down - Chelsea getting in shape for FFP

noreply@blogger.com (andersred) — Wed, 08 Feb 2012 13:42:00 GMT

Chelsea have a rather irritating habit of issuing an anodyne press release trumpeting their financial results (this year on 31st January), several days before the real accounts become available at Companies House (today). Normally, the detailed figures hide a whole host of nasties not in the release. This year however, the accounts show real progress in the club's aim to meet UEFA's new Financial Fair Play rules.

Rising income and falling costs - the holy grail of football finance

Football clubs find it incredibly hard not to pass increases in revenue straight on to players, managers and agents in the form of higher staff costs. It is the achilles heal of the financial side of the sport. These results from Chelsea show revenue rising by 8% and pre-exceptional costs falling by 5%, including a 2.6% fall in wages. That is a remarkable achievement. To put it into context, in the last five years there has only been one other occasion when the wage bill at any of the old "big 4", City or Spurs has fallen year-on-year.

Readers who think "oh cutting the wage bill is easy, CFC let loads of old, expensive players go", should remember that United did the same last summer when VDS, Neville, O'Shea, Brown, Hargreaves and Scholes (temporarily) all left, yet we can see from MUFC's Q1 results that wage costs are still up on last year (by 12.2%). The trick is not just offloading players, it is preventing endemic wage inflation amongst the remaining squad, especially when TV money is increasing as it was in 2010/11.

The only cautionary point to make about Chelsea's wage control in these figures is that Fernando Torres and David Luiz will only be in these numbers for six months. On an annualised basis they would add c. £4m to these salary figures (although there have been offsetting cost reductions from the sales of Alex, Anelka etc).

Revenue

Chelsea's revenue (excluding the digital JV) rose £16.5m or 8% in 2010/11. Chelsea unhelpfully do not give the usual "matchday/media/commercial" split other clubs provide. We know from UEFA figures that CFC received £10.3m in CL TV income in 2010/11 vs. 2009/10. We also know from Premier League figures that CFC's receipts from the league rose £4.9m.

Using these PL and UEFA figures, Deloitte's estimated segmental split for last season and adjusting for one fewer home game in 2010/11 vs. 2009/10 and we can get quite a good estimate for the club's segmental revenue performance for 2010/11:

The table above shows quite an encouraging growth in commercial income, especially in difficult economic conditions, although at c. £60m pa, CFC's commercial revenue is far behind that of MUFC (£103m) or Real Madrid (£127m).

Decent revenue growth and tight cost control meant that Chelsea made positive EBITDA (before profit on player sales and exceptionals) for only the second time since Abramovich bought the club (the other occasion was a £1m profit in 2007/08). The c. £4m EBITDA in 2010/11 is not huge (Arsenal made £47m from non-property activities) but being able to cover cash costs (pre-transfers) from earned income is a key first step in achieving financial sustainability, . The contrast with City's £71m EBITDA loss is stark.

Below EBITDA - messy

Unfortunately neither the profit and loss account nor UEFA's FFP "breakeven" calculation finishes at the EBITDA line.

On the plus side, Chelsea made a profit on player sales of £18.4m, boosting EBITDA to £22.4m. After that, things get worse quite fast.

Chelsea are still hampered by a very significant amortisation charge (the way transfers spending is recognised across the life of a player's contract). This charge has fallen in recent years, something that is key for meeting FFP, reflecting a reining back of the very aggressive transfer spending of the early Abramovich years. The charge rose in 2010/11 however, and this rise only includes six months of amortisation from the c. £75m spent on Torres and Luiz in the January 2011 transfer window (see chart below):

At around £40-45m, the amortisation charge nowhere close to being covered by EBITDA. Once depreciation is added too, the club made on operating (EBIT) loss of £26m (inc player sales), a loss but a great improvement on last year's £71m.

Exceptionals (again)

In the last four years, CFC have reported "exceptional" costs relating to firing their manager on no less than three occasions. Nothing very exceptional there.... In 2010/11 there were £41.9m of exceptional charges. These split as follows:

Termination of Ancellotti + back room staff contracts/compensation to Porto for AVB: £28m

Impairment of player registrations: £7.4m

Payments to HMRC for unpaid NI on "image rights": £6.4m

Now these costs are individually "one-off" in nature, but Chelsea's managerial merry go round has cost the club no less than £64m in compensation to various parties over the last four years. That is equivalent to 25% of the club's matchday revenue over that period, a staggering waste.

Adding the exceptional charge, a small interest bill and the share of profit from the media JV takes the £26m EBIT loss to a pre-tax loss of £67.4m. Ignore the exceptionals and the loss would be £25.6m. This compares to £70.4m in 2009/10. There is definite progress being made.

Cash flow and Roman's support

With £34.3m of the £41.9m of exceptional charges being real cash payments (the impairment is a non-cash charge), Chelsea's operating cash flow was weak in 2010/11, with an cash outflow before investment of £5.5m, but this is still an improvement on 2009/10, reflecting the far better underlying EBITDA performance and strong working capital inflows.

In 2009/10, Chelsea had negative net cash transfer spend. That all changed of course in January 2011 with the (panic?) purchases of Torres and Luiz. These accounts show £112m of "intangible asset" additions on the balance sheet and a gross cash spend of £85m. As I have explained before on this blog, cash flows from transfers are very volatile but the pattern is clear. Chelsea are spending again (at least for now).

Even adding in £24m from player sales, the accounts show net cash spending on transfers of £60.6m. Add in capex and there is a £72m cash outflow before financing. This hole is filled as it is every year by loans from Abramovich's parent company Fordstam Limited. In the past, such loans are converted to equity after a while and no doubt the same will happen again.

Some FFP maths

So how close are Chelsea to meeting the FFP rules? On the assumption that UEFA ignores exceptional items (and I believe it is reasonable to make that assumption, especially in the early years of the new rules), the club has made good progress.

I have assumed that within Chelsea's cost base is c. £8m of spending on youth development and c. £1m of spending on community development. These items are effectively "deductible" under FFP.

The table above shows that based on these assumptions about spending on youth and community activities, Chelsea have closed their "break-even" deficit quite substantially over the last three seasons. Revenue is up and costs are down. This calculation is before any player wages based on pre-June 2010 contracts are excluded under the Annex XI exemption, which will reduce the loss further.

Most big clubs should be able to generate profits on player sales (academy products have zero "book cost"). Assuming Chelsea can match the £18.4m profit achieved in 2010/11, the core deficit is only around £8m. That is well within the the €45m (c. £38m) allowable loss over the first two years of the new rules.

As discussed above, the main risk to this happy position is a big rise in the amortisation charge (i.e. a further splurge of transfer spending). Five years ago the amortisation charge was £70m. A return to that level would blow a big hole in the FFP calculation.

The other, ever present, risk if of course that the club will abandon it's cost control in an attempt to stay competitive on the pitch. I have written before how "six into four doesn't go" when it comes to Champions League places. Chelsea can only meet FFP with the sort of squad cost they have now by being in the Champions League. The stakes are high.

Concluding thoughts

Ignoring the exceptional charges (and Chelsea will pray UEFA do just that), these are impressive figures. To continue to meet FFP and to ween the club off Abramovich's cash, Chelsea will need to repeat the trick of holding down wages whilst achieving top four finishes. That is no easy task when every other club's wage bill is rising and when the squad needs a significant overhaul.

The other long-term option of course is boosting matchday income from the current c. £65m pa to an Emirates Stadium like £90-100m. Maybe Nine Elms/Olympia/Earls Court etc is the answer.

LUHG

Why England's richest club doesn't have any money...

noreply@blogger.com (andersred) — Thu, 19 Jan 2012 15:49:00 GMT

I wrote this article for the latest edition of the famous fanzine United We Stand and it is reproduced here with the very kind permission of the editor, Andy Mitten.

If you don't buy it at the match I'd heartily recommend United fans subscribe to UWS here (ten editions for only £28).

Whenever things go wrong on the pitch or when injury ravages the team, I get asked whether United “have got any money” to buy new players. The last few weeks have definitely been one of those times and regardless of the footballing wisdom of January signings, the question is being asked with great urgency. Can United afford to strengthen?

I believe there are actually two answers and both are important. The first is purely factual, how much cash does United have in the bank, and the second is more subtle, what is the cash earmarked for and what are the real restrictions on transfer spending?

When it comes to cash in the bank, United has been very, very rich since 2009 (when the club received the £80m for Ronaldo from Real Madrid and Aon paid £35.9m of their four year sponsorship up front). At the end of June 2009, the club had a cash balance of £150m, a year later it was up to £164m and at the end of June 2011 was still £151m. To put that number into context, it is more than twice the club’s £67m net transfer spend in the six seasons from 2005/6 to 2010/11.

Since last summer the cash balance has fallen very sharply, by September 2011 the figure was down to £65m. A big chunk of this fall (£47m) is down to the signings of Jones, De Gea and Young (less the cash received from the sales to our Wearside retirement home). The club also spent £5m on corporate box upgrades and £8m on more land purchases around Old Trafford.

The remaining £26m fall in club’s cash pile is where “Glazernomics” kicks in. The club generated around £22m in profits during those three months, but the interest bill was £21m (interest is paid twice a year in August and February). On top of the interest paid, the Glazers decided to spend £23m buying back bonds in the market. This is not the first time the club’s money has been used in this way; since the bonds were issued in 2010 £88m has been spent repurchasing them from investors (see graph below).

These bond purchases go to the heart of how the Glazers run Manchester United and how horribly different it is from other “normal” clubs. At almost every other football club, any profits are reinvested. Real Madrid made a handsome pre-tax profit of €50m in 2010/11 and spent every penny of it on transfers. That is not the way United is managed. Over the last two years the club chose to spend that £88m on buying back bonds rather than on strengthening the squad. Just to be clear, there was no obligation to buy these bonds, it was a judgement made by the Glazers and their management team.

The financial return on these bond buybacks is pretty good, with cash in the bank earning 1.5% being used to buy bonds that cost the club 8.7% in interest. But good financial sense is not always good sporting sense if money is diverted from the football club. Which brings us to the subject of wages.

When Sneijder turned down United’s offer last summer (and again when Nasri chose City over us), the sticking point was wages. Now no football club should be held hostage by greedy players, but there is something distinctly odd about a club like Manchester United being unable to “compete” for the best talent. So what is the reason we can’t compete? As with transfer spending (or the lack of it), it is a conscious choice by the owners.

United is run not only to make a profit, that is just commonsense, but is run to maximise value for its owners. That means maximising profits and thus operating on a far lower budget than a club of United’s scale can actually afford. In 2010/11, United made so much money that the club could have paid three new players the same wages as Rooney (around £140k a week) and still make EBITDA (cash profits) of £89m. But making £89m instead of the £111m reported by club would inevitably reduce the price that could be achieved in a listing on the Singapore Stock Exchange, or the value of any future sale to a Sheikh or Oligarch. So the Glazers chose to restrict the wage bill to a level they were happy with and thus chose to make Sneijder unaffordable.

Older reds will no doubt point out that this dance with financial devil began when Edwards floated the club back in 1991, and there is much truth in that. The difference however is in the scale of impact on Manchester United. Across all the plc years, the total dividends paid were only £59m. The total cost in interest, fees and debt repayment in the six and a half years of the Glazers is £480m.

So it doesn’t really matter if we have about £60m in the bank (we do). It’s that unfortunately for us the club is run to make money for a distant family from Florida and they’ll do what they want....

LUHG

Explaining the confusing world of Everton's cash transfer spend

noreply@blogger.com (andersred) — Tue, 17 Jan 2012 14:39:00 GMT

Warning

This is slightly dweeby analysis of Everton's transfer spending that attempts to explain why the figures quoted by EFC Chief Executive Robert Elstone and published in the club accounts do tie in with reality. Hopefully it casts some light on the complex cash flows involved in many transfers, but it may be a bit dull!

Andy

The problem
After Everton announced the purchase of Darron Gibson last week I tweeted:

"Little known fact. Everton have been net spenders on transfers every year since Rooney left (cash figs from accounts)."

Along with this graph:

This was met by some understandable scepticism from Evertonians pointing out that in 2010/11 "we didn't sign anyone". Then by happy coincidence, Everton Chief Executive Robert Elstone published an extraordinary blog on the club's official website entitled "Where The Money Goes", which said exactly the same thing I had said.

The dichotomy between the honest opinion of Everton fans that the club has been more about selling than buying and the numbers in the club's cash flow statements in the accounts showing net spend over each of the last six years needs explaining.

The problem arises with the phasing of payments for players and receipts from their sale and from the fact that the only information we have are headline figures for deals, what you might call "the Sky Sports News number", and two numbers in a club's cash flow statement, one for purchases and one for sales.

The details Elstone gave on transfers

This is what Robert Elstone has to say about Everton's transfer activity since 2006/07 (emphasis as in original):

"[2006/07] We spent £4m net on new players (money we paid out on signing including Kroldrup, Davies, Johnson and Lescott less money banked on the likes of Rooney, Bent, Kilbane and Davies).

[2007/08] A net spend of £15m (further money we paid out for Kroldrup, Johnson and Lescott and new spending on the likes of Howard, Jagielka, Yakubu, Baines and Pienaar, less the money banked for Davies, Kroldrup, Beattie, McFadden and Naysmith).

[2008/09] We spent £6m net on players(payments for Yakubu, Baines, Howard, Kroldrup, Lescott and Fellaini, less monies in for McFadden, Kroldrup, Beattie and Johnson).

[2009/10] We spent £3m net on players (payments out on Yakubu, Fellaini, Bilyaletdinov, Distin and Heitinga, less monies in for Johnson, Rooney and Lescott).

[2010/11] We spent a further £7m net on players (money spent on Fellaini, Heitinga and Gueye, less cash in for Lescott and Pienaar)."

Modelling Everton's cash transfer spend

We can look at Elstone's long list of purchases and sales in more detail in the table below, along with the actual cash flows from the Everton report and accounts.

We can then apply some estimates of transfer prices, I have used figures from transfermarkt.co.uk except for Tim Howard for whom no figure was available on the site and I have estimated £3m, the sale of Simon Davies (est £2m) and for Rooney where the relevant stage payments for 2007 and 2010 are estimated from note 11 of MUFC's 2005 accounts.

Except in the case of the Rooney stage payments and the payments for Lescott, I have assumed that where cash is received or paid over multiple seasons all payments are equal (a modelling simplification I concede), so we can get to an estimated payment/receipt per season:

We can then apply the payment/receipt per annum estimated to the sequence of payments given by Elstone and compare the calculated figures to the actual cash flows in the report and accounts:

As can be seen from the table above, this model matches the actual numbers from the accounts pretty well, with an error of only £1-2m per annum.

Conclusion

I am not claiming the above model is perfect, but hopefully it shows why Everton's published numbers are correct. The issue of phased payments creates significant confusion when people examine football club accounts, something we will no doubt see with Chelsea and Liverpool's next few results in which the £50m paid for Torres will be spread over 5 years....

It's worth noting that for two years in 2003/4 and 2004/5, Manchester United, under pressure from the club's major Irish shareholders Magnier and McManus published detailed player by player analysis of all transfers. The example below from 2004/05 (apologies for the low quality) shows the complexity of the cash flows and conditional payments:

Only £1.4m of the £23m cash United received that year was from player sales in that season and only 58% of cash spent related to deals signed in that year.

I can see no logical reason why UEFA, FIFA or national associations shouldn't insist on this level of disclosure, prices paid are hardly commercially confidential, and then everyone could see how much their club does or does not spend and on whom.

LUHG

An open reply to steve_mcfc's questions to me on 13th January 2012

noreply@blogger.com (andersred) — Sat, 14 Jan 2012 13:34:00 GMT

This is an open reply to steve_mcfc, the Manchester City supporting Twitter sensation. I blocked Steve on Twitter months ago but in a rush of blood to the head I unblocked him yesterday.... Steve proceeded to tweet me around 30 times starting at 7.48pm yesterday. The Tweets were a combination of insults and questions and are reproduced in full below (in bold). You can check they are exactly as Steve tweeted on his timeline. I was out at the time.

Given that it is hard to reply to 30 tweets I thought I would give more detailed answer to each of Steve’s points on this blog. I apologise for not replying on Twitter but as Steve doesn't restrict his questions to 140 characters, I don't see why I should restrict my answers...

Before you blocked me, you said you were opposed to a cap on squad spending where the cap is the same for all clubs. How can you claim to be impartial when you refuse to support a cap that's fair and you will only support a cap that provides United with a huge long-term advantage? You're not impartial at all, are you?

I’m not impartial about which team (United) I want to win things and which teams (others, especially Liverpool, City) I don’t. That’s called “being a supporter”. I am impartial about wanting football organised in a fair and sensible way maintaining decent competition, preventing the exploitation of supporters and the endangering of clubs through excess debt and financial mismanagement.

I support FFP because I think excessive owner subsidy unbalances competition and injects unsustainable inflation into the system. The labour market in football has an almost vertical supply curve, that is to say the supply of footballers is almost completely price inelastic. Additional cash above a certain level just increases the price (wages) of footballers. The vast majority of clubs lose money because of the wages they are forced to pay. Controlling owner support through FFP should calm this systemic inflationary problem, helping the whole pyramid.

Why did you refuse to support a cap on spending where the cap is the same for all clubs, & you would only support either FFP as it currently stands, or a cap on spending where the cap is set to be a percentage of revenue?

Because a fixed cap would eliminate any incentive to grow and develop a club, surely a daft and unwelcome consequence? What is wrong with the “normal” equation of “play good, attractive football, attract higher gates and more sponsors, reinvest this money back in squad and create virtuous circle....”?

FFP doesn’t preclude massive investment in stadia, youth development, training facilities etc in any way. It just limits inflationary bursts of wage and transfer spending.

I would have preferred FFP to have specific debt restrictions in addition to its spending limits, debt is a cancer on the game. I would like to see any English licensing rules to include debt restrictions. See my submission to the CMS Select Committee, available here:

http://www.publications.parliament.uk/pa/cm201012/cmselect/cmcumeds/792/792vw13.htm

Do you still think that FFP will land City "back in the ditch", as you once charmingly said?

I hope City go back to the regular relegation/promotion comedy cycle of failure they have been on for most of my life yes! In other shocking news I hope Liverpool implode with King Kenny going mad, that Leeds never come back up and I have to tell you Steve, THE POPE IS CATHOLIC.

Before you blocked me, you said you were opposed to a cap on squad spending where the cap is the same for all clubs. How can you claim to be "impartial" when the reason you oppose that is because you want FFP to provide United with an unfair advantage?

I don’t support FFP because it helps United (under the current ownership all it would actually do is help the Glazers boost EBITDA and get a bigger price for any future IPO in any case).

I actually think there needs to be a financial rebalancing between the richest clubs like United and the less well off. I would advocate the reintroduction of league gate sharing and a redistribution of Champions League income across the PL to help this. I think the FFP exclusions on stadium development are great for aiding a rebalancing but bottom line, clubs like United should be “taxed” through gate sharing etc. If you don’t believe me, ask Dave Boyle, David Conn and Ian King (of TwoHundredPercent) with whom I’ve been discussing this for a while now.

Why did you assume that Etihad Airways would not grow at all over the 10-year period that the Etihad sponsorship deal of City covers? Etihad is a young airline that is looking to massively expand over the next decade, yet the figures you assumed for Etihad's growth over the next 10 years was 0%. Your assumption of 0% growth was dishonest wasn't it, Andy? Why would a young airline seeking to massively expand sign a £400m sponsorship contract and expect to grow by 0%?

If you are talking about my benchmarking of the Etihad deal to the company’s current financial in my blog post of 13^th July you have got the wrong end of the stick. I pointed out that the company’s current turnover was £2bn and that even at a 10% EBIT margin the deal would represent an unusually substantial proportion of profits. When did I say the company would never grow?

I think the deal is extraordinarily large compared to the size of the company and can find no equivalently large deal vs. company size out there (Bayern’s sponsor Deutsche Telekom for example have EBITDA of €3.9bn and pays Bayern €25m pa). Let me know if you can find another mismatch between deal size and company size...

No response to anything I've just said then? Does that mean you accept everything I've just said?

No, hence these replies!

As for verbal diarrhoea, I would say you being interviewed by the BBC talking about City's finances is the best example of verbal diarrhoea I've seen. Why on earth a supposedly unbiased broadcaster has a highly biased Utd fan on to slag off our finances I'm not entirely sure.

Why don’t you ask the BBC Steve.

You don’t like me or my views, but lots of other people take me seriously unfortunately.

One other thing. Do you not consider it extremely hypocritical to campaign against the Glazers because they limit United's spending while you also act as cheerleader for FFP, cos it will limit City's spending? Is that impartial?

The Glazers exploit United and its fans (like Hicks and Gillett exploited Liverpool and their supporters) through an LBO. My main gripe is not spending restrictions, it is enforced ticket price hikes to make the LBO numbers stack up. The House of Commons Select Committee for Culture Media and Sport was scathing of LBOs in football, it is not an unusual view that they add no value.

I am not a cheerleader for FFP, I support it but think that the financial structure of UEFA’s CL is a major problem and would like specific debt limits in the rules too. Again, see my DCMS submission for details (and note that the committee quoted my submission on several occasions).

No response to any of that then? Guilty as charged then.....

Sorry, it took me a while...

You actually blocked me because I accused you of being a liar, Andy. I see you're lying about that too now.

Did I Steve? I knew there had to be a good reason.

Sorry, my mistake, you blocked me because I accused you of being a biased liar. That's the one.

OK, if you say so Steve.

Come on Andy. I think I explained the issues I have with your claim of being impartial. You used to stick up for yourself, so why not now? For example, this is a yes/no answer: Do you still think FFP will land City "back in the ditch"? Yes/no - wouldn't take you very long to clear that up, would it?

I actually think City may get around FFP sufficiently to remain quite competitive. As a United fan I would of course like to see you back down in the ditch!

Stop pretending to be impartial. We all know you've only started covering clubs other than Utd so that you can help to convince people of the supposed need for FFP so that Utd get their massive unfair long-term advantage. Unless you can convince people why it's "fair" for United to spend around 65% more than their PL rivals year in year out when on-field success has been shown to be highly correlated with total spending on wages & transfer fees

Are you saying nobody who supports any club can comment on the finances of any other club or on football wide regulation? That would rather restrict debate!

As I said above, I think the big clubs like United need reining in financially through new rules. The fact that clubs without rich owners like Everton can’t possibly compete and that clubs with quite rich owners like Sunderland can spend £100m of their owner’s money and not get anywhere suggests fundamental flaws with the system. The answer to that is surely not a billionaire owner for every club?

I started covering other clubs because the whole subject interests me and I believe fans are exploited all too often (see my work on QPR’s ticket price hikes for example). The Football Supporters Federation were kind enough to nominate me in their blogger of the year award. I’ve helped out various supporters trusts behind the scenes too, not that you appear to care about ownership issues Steve.

In fact Steve, you are like a stuck record, fixated by FFP and its relative impact on City and United.

You've provided a great defence of your impartiality, Andy. Well done son.

Thanks Steve.

The financial cost of United's CL exit

noreply@blogger.com (andersred) — Thu, 08 Dec 2011 15:00:00 GMT

So it’s London 2 – Manchester nil (enjoy it while you can London, you aren’t going to win the thing).

The way modern football works, not only is being knocked out of the Champions League miserable enough, but the financial consequences aren’t great either, especially when you’re up to your eyes in debt.

Lots of people have asked me about the cost of United’s CL exit, so here’s a quick run through of the figures. The bottom line is that due to the way UEFA makes its payments, with a big element relating to the last season’s domestic rankings, United will not lose a huge amount of cash compared to last year.

What two wins, three draws and a defeat in one of the easiest of groups says about the club is another matter.....

Last season

I’ll make financial comparisons with last season when of course United were (well) beaten finalists. UEFA publish the TV cash distribution and its shows MUFC received €53,197,000 (c. £46m) in Champions League income.

This season

There are several elements to the CL TV payments:

1. Participation and “match bonus”

All clubs in the group stages receive a €3.9m “participation” payment and a €550,000 per game played “match bonus” (nonsensical since everyone is guaranteed six matches!). So every club gets €3.9m + (6 x €0.55m) = €7.2m.

Difference versus 2010/11: ZERO

2. Group performance bonus

For every win in the group stages, a club gets €800,000 and for every draw €400,000. The table below shows the number of each for the four English clubs this season:

Difference versus 2010/11: DOWN €1.2m

Bringing these elements together we can calculate how much the basic group stage payments are:

3. Last season's knockout round payments

Participation in each round means another payment of the following amounts:

Last season United earned €16.1m as losing finalists.

Difference versus 2010/11: DOWN €16.1m

4. The “market pool”

The market pool represents around 45% of the CL money UEFA distributes to clubs. Each country has its own pool amount (reflecting the relative size of the advertising markets). The English pool is c. €84m, around 25% of the total.

Each market pool is distributed based on two formulae, 50% by the relative domestic league position of the clubs from the relevant country and 50% by how far in the CL each club progress.

4a. Market Pool - PL finish element

As Champions, United receive 40% of the Premier League finish element of the English market pool, Chelsea (2^nd in the league) receive 30%, City (3^rd) 20% and Arsenal (4^th) 10%.

This means that United receive c. €16.8m this season vs. the €12.5m they received last season (when Chelsea were the reigning champions).

Difference versus 2010/11: UP €4.3m

4b. Market Pool - progress in the CL element

The 50% of the market pool determined by the relative progress of the clubs cannot be calculated for certain until we know how far through the competition Chelsea and Arsenal progress. The split is determined on the number of games played (maximum of thirteen for finalists). The minimum the London clubs could play is eight (if they go out in the next round).

The difference for United and City between the best and worse case is not huge (around €2m).

Difference versus 2010/11: DOWN €4.4-6.8m

5. Total UEFA CL payments

Adding up the group stage payments, and the market pool, the most United can earn from the CL this year is around €36.5m, the least is €33.4m.

Total difference versus 2010/11: DOWN €17.4-19.8m (£15-17m)

Europa League cash

United and City will both get the dubious honour of being parachuted into the Europa League in the new year.

The UEFA distribution for this beaten up tournament is less than 20% of what is paid out for the Champions League. There is a market pool and payments for progressing through each of the five(!) rounds up to and including the final. Winning the competition could add around €10m (there is a market pool here too).

Gate receipts

There are potentially four home games in the Europa league vs. three in the Champions League, so the impact on gate receipts depends on a few factors, primarily how far through the EL United progress. The club’s website does not have ticket prices for the Europa League yet, and we do not yet know whether the club will enforce the ludicrous “automatic cup scheme” that compels Old Trafford season ticket holders to buy tickets for all cup games (with an opt out only for the League Cup). If United enforce the ACS, if prices are set close to those for the Champions League and if United get to the quarter finals or beyond, there will be no impact on revenue.

A nice club would waive the ACS obligation to buy Europa Cup tickets and would cut prices too (as Spurs have this season). Don’t hold your breath.....

Conclusion

Because of the big market pool boost from being champions last season, United will only lose a maximum of £17m in TV cash from the early exit. Some of this can even be recovered from the Europa league. The club don’t budget to progress beyond the last sixteen in any season, so recent success has been a financial bonus. To put this loss into context, it represents a maximum of 15% of last year's EBITDA.

The fact that a club who have reached three finals in four years can get eliminated from one of the easiest groups points to wider problems....

LUHG

Manchester United Q1 2011/12 results: The big red money machine slowed down by debt

noreply@blogger.com (andersred) — Tue, 15 Nov 2011 12:36:00 GMT

The first quarter of United's 2011/12 financial year saw a familiar story of a very profitable football club servicing some pretty expensive debt. Because the club is so profitable at the operating level (and full credit to the players, coaching staff and commercial team for making it so), the debt can be comfortably serviced. The threat of substantial dividends seems to have disappeared at the moment, but the sheer sums of money wasted by the Glazers' financial structure remains eye watering.

Revenue

Matchday

There were four home matches at Old Trafford during the quarter as there were in the prior year, with attendances virtually identical. Seasonal hospitality sold out for the first time in several years, adding £400,000 to income. The other c. £1.4m growth came from a bigger US tour (tour income is included in "matchday").

Media

The substantial growth here (up £3.2m) reflects a final payment from UEFA for last season's Champions League campaign which has been accounted for this financial year. United also receive a greater share of the Champions League English "market pool" this season. This is because we were Premier League champions last season rather than runners-up the year before.

Commercial

The £5.4m year-on-year growth in Commercial revenue comes from a variety of sources including the DHL training kit deal (worth around £2-2.5m per quarter), step-ups in existing deals (such as Aon) and the inclusion of partnerships signed post Q1 2010/11. On the bond holder conference call the club talked of "many" additional opportunities on the commercial side. United has by far the most successful commercial operation in English football, but still lags behind some major European clubs (especially Bayern Munich). The Stratton Street office in London now has over forty staff.

Costs

Staff costs

Despite the retirement of several senior players over the summer and the sale of Brown, O'Shea and Obertan, staff costs again increased sharply, by 12.2% vs. the previous year. The club said they "continue to face pressure" on wage costs. The club confirmed they had signed new deals with Valencia, Smalling, Park, Cleverley and Hernandez. Some of the cost pressure came from a further expansion of the London commercial team.

Despite the 12.2% rise in staff costs, the ratio of staff costs to income actually fell slightly vs. last year from 53.2% to 51.2%. By way of comparison, the figure at Arsenal in 2010/11 was 55.2% (football revenue only), at Barcelona was 58.3% and at Real Madrid was 45.0%.

Other operating costs

Other costs (ex-depreciation and amortisation) rose sharply up 13.3% year-on-year. Some of this is due to the expansion of the commercial operations and associated costs (the club revealed they pay for some elements of partner companies' advertising, such as the Turkish Airlines TV advert). The other main factor relates to the larger and more costly US pre-season tour.

EBITDA to EBIT

With revenues up 16.6% and costs up 12.6%, EBITDA (earnings before interest, tax, depreciation and amortisation) rose 29.6% to £19.3m for the quarter. This represents a 26.1% margin, which is good for Q1 (a seasonally weak quarter).

Depreciation grew slightly to £1.8m. The club achieved an accounting profit on selling Brown, O'Shea and Obertan of £5.6m. The amortisation charge (how transfer spending is recognised in the profit and loss account) was virtually unchanged at £10m. This all meant that EBIT rose substantially from £4.9m to £13.0m.

There was no goodwill amortisation charge now Red Football has moved from UK GAAP to International Accounting Standards.

Below EBIT

The P&L interest charge was £10.0m, lower than the prior year reflecting the interest saved by the club buying back bonds over the previous twelve months.

In addition to this interest charge there were £9.3m of non-cash accounting charges. These relate to changes in the value of United's debt caused by the pound depreciating vs. the US dollar (£6.3m), the premium paid on repurchased bonds (£1.9m), the ongoing bond issue discount and issue cost amortisation (£803,000) and a small mark to market movement in interest rate swap (£321,000). In the previous year these items were a positive £11.4m and are of no real importance to the club's financial position.

Cash flow, interest and debt

EBITDA of £19.3m and a £3.2m inflow from working capital (largely prepayments on commercial deals) meant the club saw a £22.5m operating cash inflow during the quarter, virtually identical to the prior year despite the strong profit growth.

There was an August coupon payment on the bonds (the other payment is in February each year) of £21m and the club actually paid £3.2m in corporation tax, a rarity caused by group losses in 2010/11 being insufficient to offset the entire tax charge.

The club spent a substantial £13.8m on capital expenditure, including £8.2m on property near Old Trafford with the balance being spent on box refurbishment in the ground.

Unlike Q1 2010/11, there was substantial transfer spending in Q1 2011/12. The club spent a net £47.1m buying De Gea, Young and Jones (netting off receipts for the players sold).

The combination of heavy capex and transfer spending meant there was £62.6m outflow before financing. The club bought back a further £23.1m of bonds, meaning the total cash outflow for the quarter of £85.7m.

The club's cash balance fell sharply from £150.6m at the end of June to £65m at the end of September. Gross debt (excluding bonds held in treasury) is down to £433.2m, meaning net debt is £368m, up slightly on the same date last year.

Thoughts

Another £21m of interest and £23m of bond buybacks takes the total cost of the Glazers' financial model to an eye watering £578m. There have been some savings along the way (corporation tax savings of around £100m), but the net cost is clear.

There are very few football clubs that could support a burden like that, after all Hicks and Gillett's Kop Holdings Limited collapsed after a couple of years with a lower interest bill than United's. Thankfully, Manchester United can cope with its current level of interest. The club's resilience is down to good management, good luck and good fortune. It is largely of course a product of Sir Alex Ferguson's extraordinary record.

Despite the fact that the club's £100m+ of annual EBITDA can support the £40m+ of interest paid each year and still leave funds for investment, the mooted IPO in Singapore (currently on hold of course) tells its own story.

United's debt is expensive at an effective rate of c. 8.5% at a time of very low interest rates. The club's wage structure cannot apparently be stretched to afford a Wesley Sneijder type purchase, and net cash transfer spending since the Glazers took over is only £114.6m or £21.8m per year.

The House of Commons Select Committee report on Football Governance was highly critical of leveraged buyouts in football and the Department of Culture, Media and Sport response acknowledged this. The crushing cost of the Glazers' LBO are clear every time Red Football reports results. Just because United can "afford" to waste millions, it doesn't mean it's right or sensible.

If the club does do an IPO to reduce debt it appears that message has even made it to Florida.....

LUHG

The real problem with Liverpool's media income

noreply@blogger.com (andersred) — Wed, 12 Oct 2011 10:06:00 GMT

There are few things as unedifying in any aspect of life as hearing the rich demand more at the expense of the less well off, and football is no different.

Ian Ayre, Liverpool FC's Managing Director has suggested that the current (equitable) distribution of the Premier League's overseas rights income should be looked at. Ayre believes that "big" clubs (which apparently includes clubs that finish 7th and 6th respectively in the last two seasons) should get a bigger share.

Ayre is particularly worried about "competing" with Barcelona and Real Madrid and told the Guardian:

"If Real Madrid or Barcelona or other big European clubs have the opportunity to truly realise their international media value potential, where does that leave Liverpool and Manchester United? We'll just share ours because we'll all be nice to each other? The whole phenomenon of the Premier League could be threatened. If they just get bigger and bigger and they generate more and more, then all the players will start drifting that way and will the Premier League bubble burst because we are sticking to this equal-sharing model? It's a real debate that has to happen."

So how bad is the competitive gap between Liverpool and the Spanish giants?

Well at face value, the gap is big and growing. The chart below shows Liverpool and Barcelona's media income for the last five seasons (numbers for 2010/11 are derived from the PL, UEFA, FCB's account and an estimate of LFC's domestic cup income). I have converted Barcelona's income from Euros into Sterling at the average exchange rate for each season.

Having been £20m in 2006/07, the gap has expanded enormously to £75m last season. So what's going on?

Much is made of La Liga's highly inequitable TV rights deal which allows Barcelona and Real Madrid to negotiate to sell their rights individually, creaming off the majority of the total paid between the two clubs. This has indeed been a factor as the chart below showing income from the domestic league rights demonstrates:

The chart appears to show Barcelona's league income running far ahead of Liverpool's in recent years, but it masks the key impact not of the way rights are sold, but of currency. In 2006/07, one € was worth on average 67.6p, by 2010/11 the pound had devalued substantially and one € was worth 85.7p. Once this currency impact is accounted for, a different picture emerges:

The chart above, rebases domestic league media income to 100 in 2006/7 and shows Barcelona's figures in both £ and €. From this chart it is clear that in local currency, the value Liverpool receive for domestic competitions (PL, FA Cup and Carling Cup) has actually grown faster than the equivalent in Spain.

So currency plays one factor in explaining the divergence between the clubs, but there is another huge factor at play; performance on the pitch.

To get a sense of how the relative fortunes of the two clubs have diverged and how crucial this is to media income, consider the following chart showing UEFA TV distributions (all in €).

In 2006/07, Liverpool earned €9.5m (£6.4m) more from the Champions League than Barca. By 2010/11, the positions were radically reversed with Barcelona earning €44.9m (£39m) more from their winning CL campaign than Liverpool did from the Europa league. This season, Liverpool will earn precisely zero from Europe.

Rather than bleating on about how unfair the allocation to Bolton Wanderers is, Ayre needs to look at the performance of his own club. The gap in media income with Bolton over the last five years is already £159m, how much more does he want?

If Liverpool football club had made better use of the £340m in media income they have received since 2007, perhaps they would have been closer to Manchester United on the pitch. The gap last year between United and Barcelona? Not £75m but £20m.....

LUHG