Monday, March 23, 2015

Aston Villa - Lost In The Supermarket

For a club of Aston Villa’s rich history, the past few years have been profoundly depressing, as they have spent most of that time at the wrong end of the Premier League table, desperately trying to avoid relegation. Their managerial merry-go-round has failed to improve matters, merely bringing their own version of doom (Alex McLeish) and gloom (Paul Lambert).

This has been matched by a dismal performance off the pitch with the club bleeding money through some hefty losses, financed by the American owner Randy Lerner pumping vast sums of money into Aston Villa – with no tangible success. Little wonder that this toxic combination has caused Lerner to put the club up for sale.

However, the mood has been a bit better at Villa Park since the enthusiastic Tim Sherwood was appointed manager last month. There are also some signs that there might be light at the end of the tunnel from a financial perspective, as Villa reported record revenue of £117 million in 2013/14, which helped them reduce their loss before tax by a hefty £48 million from £52 million to just £4 million. We shouldn’t go overboard here, as Villa still lost money, but it’s a step in the right direction.

The smaller loss was largely driven by the new Premier League television deal, which was worth an additional £28 million to Villa, but there was some useful revenue growth in commercial income £3 million and player loans £4 million. Expenses were also cut, notably player trading costs by £10 million (amortisation £4 million and impairment £6 million), wages by £3 million and  exceptional items (staff termination and onerous contract costs) by £2 million.

The improvement was neatly summarised by chief financial officer, Robin Russell: “By controlling costs we have been able to take advantage of the new Premier League broadcasting deal to bring the club closer to self-sufficiency.”

Russell added, “We are very pleased to be able to report improved results after a period of heavy financial losses.” You can say that again. Since Lerner bought Villa in July 2006, the club has accumulated losses before tax of £222 million – nearly a quarter of a billion pounds. In the five years between 2009 and 2013 alone the club lost £207 million, averaging £41 million a year. That’s an awful lot of money to finish 15th or 16th.

The best result in this period was a loss of “only” £18 million before tax in the 2011/12 season, but this was boosted by £20 million of exceptional items and £27 million profits from player sales, so the underlying figures were just as terrible as the other years.

The £20 million exceptional item refers to the once-off waiver of interest on £107 million of loans provided by Lerner. Although the club had been booking around £6 million of interest payable to the owner under the terms of the loan agreement, he never actually took a cash payment.

On the other side of the coin, Villa also booked £26 million of exceptional costs between 2011 and 2013, including £12 million in 2012 alone. These could justifiably be described as the costs of mis-management, as these include termination payments made to sacked coaching staff and the accounting cost of reducing the value of poor player purchases. There’s a price to pay for constantly bringing in new managers, who will want to recruit their own players, while getting rid of the deadwood accumulated by the previous regime. As Orange Juice one sang, you have to “rip it up and start again.”

The 2011/12 season was also enhanced by a record-breaking £27 million profit on player sales, largely due to the big money moves of Stewart Downing to Liverpool for £20 million and Ashley Young to Manchester United for £17 million. In fact, this activity had been fairly lucrative for Villa, earning them £79 million in the five years up to 2012. However, in the last two seasons the well has run dry with the club earning less than £2 million from player sales. The club argued that this was due to “the squad being rebuilt”, but a less charitable interpretation might be that there were few players worth buying.

Only four of the 15 Premier League clubs that have so far published their 2013/14 accounts have reported a loss, which places Villa’s improvement into context. The only clubs to have reported higher deficits than Villa are Manchester City (£23 million), Sunderland (£17 million) and Cardiff City (£12 million), who all have their own specific issues.

So, 11 clubs have made money (so far), largely off the back of the new Premier League TV deal. In fact, five clubs have made profits of more than £10 million: Manchester United £41 million, Everton £28 million, Chelsea £19 million, WBA £13 million and West Ham £10 million.

Revenue rose 39% (£33.2 million) from £83.7 million to £116.9 million in 2013/14, mainly coming from broadcasting, which was up 59% (£26.9 million) from £45.8 million to £72.7 million. Fees for player loans rose by £3.7 million from £2.0 million to a noteworthy £5.7 million, while commercial income was also up 12% (£2.8 million) from £22.9 million to £25.7 million. Gate receipts were virtually unchanged at around £13 million.

Villa’s revenue has also grown by 39% since 2009, which is another way of saying that there was zero revenue growth between 2009 and 2013. Revenue had risen from £84 million in 2009 to £92 million in 2011, but there was a reduction in revenue in 2012, largely thanks to worse performance on the pitch (dropping from 9th to 16th place in the Premier League and early exits from the cup competitions).

It should be noted that Villa changed the way they split their revenue among the various streams in 2013, so they restated the 2012 comparative, but not prior years. This means that the apparent reduction in match day income and consequent increase in commercial income since 2011 are misleading.

In 2012/13, the last season where we have accounts for all clubs, Villa’s revenue of £84 million was the 10th highest in the Premier League. Their £33 million growth to £117 million in 2013/14 has been matched by most other clubs, though they have overtaken West Ham.

There are two ways of looking at this. On the one hand, Villa will struggle to compete at the highest level, as there is a financial chasm between them and the top six clubs: Manchester United £433 million, Manchester City £347 million, Chelsea £320 million, Arsenal £299 million, Liverpool £256 million and Tottenham £181 million. United generate almost four times as much money as Villa – their revenue is an incredible £316 million more (for one season). On the other hand, Villa in turn earn more than clubs like Southampton, Swansea City and Stoke City, so really should be performing better than them.

In fact, Villa are the 22nd highest club in the Deloitte Money League, just ahead of famous clubs like Marseille, Roma and Benfica. Great stuff, but the problem is that every other Premier League club is also in the top 40 with 14 of them in the top 30, hence the club’s struggles in England’s top flight.

Note that the Deloitte Money League excludes revenue from player loans, so they have reduced Villa’s revenue of £117 million by £6 million to £111 million in their classification.

Villa’s reliance on TV money has become clearer than ever in 2013/14 with broadcasting accounting for 65% of total revenue (excluding player loans), up from 56% the previous season. In this way, commercial income has fallen from 28% to 23% and match day from 16% to 12%.

So Villa’s Premier League television money increased by 62% (£28 million) from £45 million to £73 million in 2013/14. The distribution in the Premier League is the most equitable in Europe with much of the money distributed evenly between the 20 clubs. That is the case for 50% of the domestic deal and 100% of the overseas deals.

However, 50% of the domestic deal depends on other factors: (a) merit payments – 25% depends on where a club finishes in the league with each place worth around £1.2 million; (b) facility fees – 25% is based on how many times a club is broadcast live. This has really hurt Villa’s revenue over the last few seasons, as they have dropped down the table.

As an example, if Villa had finished 6th in 2013/14, as they did between 2007/08 and 2009/10, they would have received around £90 million, i.e. £17 more than their £73 million. In fact, if Villa had maintained their run of 6th place finishes in the four seasons since 2009/10, they would have pocketed an additional £42 million. This highlights the tricky balance between sustainable spending and investing for success. Spending money is obviously not a guarantee, but a safety first approach can leave money on the table.

Of course, there will be even more money available when the next three-year Premier League cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimate is that a club that finishes 14th in the distribution table (as Villa did in 2013/14) would receive around £110 million a season, which would represent an additional £37 million.

The danger for Villa is that they would miss out on this bonanza in the worst case scenario of relegation to the Championship. New chief executive Tom Fox has stated that “relegation should not be in the lexicon of Aston Villa”, but at this stage of the season this eventuality cannot be ruled out.

Even though Villa would be protected to some extent by the parachute payment of £24 million that would be added to the £1.9 million given to all Championship clubs from the Football League’s own TV deal, they would still have to contend with a £46 million cut in TV money. That’s a lot to absorb, even if players have relegation clauses in their contracts. Furthermore, Villa would have to quickly bounce back, as the disparity will become absolutely colossal once the new 2016/17 TV deal kicks in, e.g. around £72 million, even with an increase in the parachute payment.

Gate receipts fell very slightly by 1% (£0.2 million) from £13.0 million to £12.8 million in 2013/14. This is around mid-table in the Premier League, but importantly is significantly lower than the elite clubs, e.g. both Manchester United and Arsenal earn over £100 million from match day income (or eight times as much as Villa). A small part of this will be due to the different ways clubs interpret match day income, but there is undoubtedly an enormous difference.

Villa’s average league attendance of 36,081 was the 9th highest in the Premier League, which is an impressive achievement considering their problems on the pitch, but it is only 84% of the 43,000 capacity at Villa Park. Only two other clubs in the Premier League had a percentage sold lower than 90%: Sunderland 84% and Cardiff City 83%.

Villa’s attendance actually increased in the last two seasons, having steadily declined from the 40,000 peak in 2007/08, though it has once again fallen this season to around 33,000 (as of 20 March 2015). That represents an 18% fall and 7,000 fewer fans (or customers, to put it into financial terms). This has clearly hit the club’s finances, as has the limited progress in cup competitions, e.g. in 2009/10 Villa reached the Carling Cup final and the FA Cup semi-final, which had a beneficial impact on match day revenue.

Commercial revenue rose by an encouraging 12% (£2.8 million) from £22.9 million to £25.7 million, comprising £9.4 million sponsorship and £16.3 commercial income. This is almost exactly the same as Newcastle United’s £25.6 million, but (stop me if you’ve heard this one before) is significantly lower than the top six clubs. For example, Manchester United’s commercial revenue is up to £189 million, more than seven times as much as Villa, followed by Manchester City £166 million, Chelsea £109 million, Liverpool £104 million, Arsenal £77 million and Tottenham £45 million.

The disparity is most evident when comparing the shirt sponsorship deals. Villa have a two-year deal with Dafabet, an Asian online betting website, worth £5 million a year that runs until the end of this season. This looks very low compared to the major clubs, who continue to increase their deals, e.g. Manchester United and Chelsea have both announced huge new deals recently, United for £47 million with Chevrolet and Chelsea for a reported £38-40 million with Yokohama Rubber.

It’s a similar story with Villa’s kit supplier, Macron, who have a four-year deal worth £15 million (£3.75 million a year), running until the end of the 2015/16 season. Not bad, but it pales into significance next to match Manchester United’s “largest kit manufacture sponsorship deal in sport” with Adidas, which is worth £750 million over 10 years or an average of £75 million a year from the 2015/16 season.

In fairness, most clubs outside of the absolute elite have struggled to secure such massive deals and Villa would have to enjoy a sustained run of success to substantially improve their commercial deals.

They are placing a lot of hope in Tom Fox, who was previously the chief commercial officer at Arsenal. Although he has arrived with a solid reputation on the back of signing two substantial sponsorship deals with Emirates and Nike, some fans of the North London club were disappointed in his lack of progress in securing secondary sponsors. He will have to go some to significantly grow Villa’s commercial income, though there has been talk of selling naming rights to the famous Holte End stand.

Villa cut their wage bill by 4% (£2.5 million) from £71.9 million to £69.3 million in 2013/14, reducing the wages to turnover ratio from 86% to 59%. In fact, wages have fallen by 17% (£14 million) from the peak of £83.4 million in 2011. Since then Villa have “rationalised the playing squad” and exercised “tight control of players’ wages”, so that the wage bill has been held at around £70 million, despite £25 million of revenue growth in the same period. To be fair, the wages to turnover ratio was an unsustainable 91% in 2011.

In 2012/13 Villa’s wage bill was the 8th highest in the Premier League, only behind the usual suspects plus the basket case known as QPR. However, they are one of the few clubs not to substantially increase their wages in line with the new Premier League TV deal, so in 2013/14 they have been overtaken by Sunderland and largely caught up by the likes of Everton, WBA, West Ham and Swansea City. Of course, the “big boys” are nearly out of sight: Manchester United £215 million, Manchester City £205 million, Chelsea £193 million, Arsenal £166 million and Liverpool £144 million.

It is instructive to compare Villa’s wages with Tottenham, a club with similar aspirations. Back in 2008, both clubs had a wage bill around £50 million before Villa initially surged ahead in the next two seasons. However, Villa’s relative austerity since then has resulted in Tottenham’s wages being £24 million higher in 2012/13 and I suspect the gap will be even higher when Spurs publish their 2013/14 accounts.

There is one myth that should be nailed, namely that Randy Lerner has not funded transfers since the profligate Martin O’Neill era. It’s true that there was a slowdown in the following two seasons, but Villa have a net spend of £49 million in the last three seasons, averaging £16 million a  year. This compares pretty favourably with the £84 million O’Neill spent in four seasons or £21 million a year. As the wonderfully named director General Charles Krulak explained: “The idea that Randy had not put money into the club and that Paul Lambert’s hands were tied is simply not true. It’s hogwash.”

Obviously this £49 million net spend is way below the expenditure in the same period by the leading clubs such as Manchester United £222 million, Manchester City £164 million and Chelsea £132 million, but it was still the 8th highest in the Premier League and fans are entitled to expect a bit more bang for their buck. In fairness, the figures are a little misleading, as only one player, Christian Benteke, arrived for a sum above £5 million, so the suspicion is that many ordinary purchases have been made. As the club’s accounts once put it: “The acquisition of players and their related payroll costs are deemed the core activity risk and… the directors are mindful of the pitfalls that are inherent in this area of the business.”

Villa’s net debt was slashed by £87.5 million from £189.5 million to £102.0 million, mainly due to Lerner converting £90 million of loan notes into share capital in December 2013, “reducing the club’s debt load and accelerating the process towards long-term stability and financial self-sufficiency.” Gross debt of £104 million mainly comprises owner debt of £86 million (£69 million owed to the parent undertaking and £17 million of loan notes), though the bank loan and overdraft is up from £13.6 million to £18 million.

Potential additional transfer fee payments (based on contractual conditions such as number of appearances and retention of Premier League status) decreased from £8.4 million to £4.2 million, though there are now also contingent liabilities of £2.75 million payable upon the change of ownership of the football club.

Although Randy Lerner did not inject any additional funds into Villa in 2013/14, he has been a most generous owner. On top of the initial £66 million paid to acquire the club in 2006, he has put in the best part of £300 million, split between £125.5 million of share capital, £114.5 million of loan notes and £46 million loans from the parent undertaking. In addition, he has cancelled repayment of £97.5 million of loans.

According to the club, Villa  should have no problems with Financial Fair Play: “In terms of regulations, players’ payroll for the year complies with the Premier League’s Short Term Cost Control Rules and forecast results for the three years ending 31 May 2016 currently meet the Premier League’s Profitability and Sustainability Rules.”

Villa will have to be aware of the restriction whereby clubs whose player wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years. This only applies to the income from TV money, so if Villa want to “go for it” and substantially increase their wages, they will have to grow revenue via new sponsorship deals, higher gate receipts or profits from player sales.

It is difficult to know what Villa can do to improve their situation. Initially under Lambert, they appeared to be following a youth policy, but that appears to have been largely abandoned. There are a couple of youngsters like Jack Grealish, Callum Robinson and Lewis Kinsella coming through, but Villa’s academy does not seem to be as successful as it has been in the past in producing talented youngsters.

"Big Ron"

Randy Lerner appears to have had enough, which is hardly surprising after he has spent so much for so little return on the pitch. Effectively, Villa are back to where they were when he acquired them. In May 2014, he put the club up for sale and you could feel the man’s pain: “I have come to know well that fates are fickle in the business of English football. And I feel that I have pushed mine well past the limit. I owe it to Villa to move on, and look for fresh, invigorated leadership, if in my heart I feel I can no longer do the job.”

He put the prospective sale on the back burner last summer, basically after no buyer could be found, but there are whispers that talks are ongoing with potential purchasers. Any deal would surely only take place in the summer after Villa’s fate is known, as relegation would severely impact the price.

The club has gambled on reducing the investment in the playing squad, especially with the tightly controlled wage bill, as it focuses on a sustainable future, which is an admirable strategy – so long as it does not backfire and result in the dreaded relegation. Tom Fox summed up the club’s (modest) ambition: “We’ve got by far the best house on the worst street in town. Our aim is to get to be the smallest house on the best street and try to build it up from there.” After many managerial debacles, Villa’s supporters will hope that Tim Sherwood is indeed the right man for the job.

Monday, March 16, 2015

Swansea City - A Design For Life

The past few years have been pretty successful for Swansea City. After becoming the first Welsh club to gain promotion to the Premier League in 2011, they have since firmly established themselves in England’s top tier, finishing 11th, 9th and 12th in the three seasons since then. During this period, they have also won the Capital One Cup, which qualified them for the Europa League, where they reached the knockout stage before being eliminated by Napoli.

In the process, they have continued to follow a prudent financial strategy As the club explained after promotion: “Our long term goals will cater for Swansea City remaining as a top flight club, but not in any way that puts the company’s financial stability at risk. This remains paramount in our management philosophy.”

This was evidenced by another robust set of figures in 2013/14 with Swansea reporting their third consecutive profit on the back of a £32 million increase in revenue to a record level of £99 million.

Profit before tax actually fell nearly £20 million from £20.8 million to £1.3 million in 2013/14, almost entirely due to no income being received for player sales, compared to £21 million the previous season. That was predominately from the sales of Joe Allen to Liverpool, Scott Sinclair to Manchester City and Danny Graham to Sunderland.

The revenue growth of £32 million was very largely driven by TV money, mostly due to the new three-year Premier League deal that commenced in the 2013/14 season plus some money from the Europa League exploits. There was also a useful increase of £2.4 million in commercial revenue. This was offset by increases on the cost side: wages £15 million, player trading £12 million (amortisation £7.6 million plus impairment £4.6 million) and other expenses £2 million. The club presented this as an increase in playing squad costs of £21.2 million plus an increase in other operational expenses of £8.5 million.

It was good to see the club once again make an operating profit of £1.3 million after last season’s £0.6 million loss. Also worth noting that the year-on-year reduction in profit after tax from £15.3 million to £1.7 million was only £13.5 million, due to a £5.6 million tax charge in the prior year.

Since promotion to the Premier League, Swansea have been consistently profitable, making a total of £40 million profits before tax in those three seasons. As we have already seen, the 2012/13 high profits were down to player sales, while the £21 million profit in 2011/12 was due to the club wanting to counteract the previous season’s £17 million loss. That had showed the price of success, as promotion triggered hefty bonus payments to the players and management staff plus additional transfer fees.

It should be noted in passing that the 2009/10 figures were adjusted the following season, because of a change in accounting policy in respect of the treatment of player acquisition costs, which improved profit by £0.6 million from £0.6 million to £1.2 million.

Although another Swansea profit is clearly impressive, it is actually one of the lowest reported so far in the Premier League for the 2013/14 season, as all clubs’ finances have been boosted by the new Premier League TV deal. To date, 11 of the 14 clubs that have published accounts have reported a profit, with Swansea’s £1.3 million being the second lowest. Five clubs have made profits of more than £10 million: Manchester United £41 million, Everton £28 million, Chelsea £19 million, WBA £13 million and West Ham £10 million.

Fans will probably remember that Swansea eclipsed all their rivals the previous season, when their £21 million profit before tax was the highest in the Premier League, with the nearest challengers (Newcastle United £10 million and Arsenal £7 million) a long way back.

Revenue rose 47% (£31.6 million) from £67.1 million to £98.7 million, mainly coming from broadcasting, which was up 57% (£29.4 million) from £51.3 million to £80.7 million. There was also promising growth in commercial income: although this only rose by £2.4 million from £5.8 million to £8.3 million, this represented a 42% increase. Player loans also contributed £0.5 million in 2013/14, but match day income was down 7% (£0.7 million) from £9.9 million to £9.2 million.

Obviously, the main reason for the massive revenue growth in the last three years is elevation to the top flight, which has resulted in revenue increasing by a thumping £87 million from £12 million to £99 million. As the club accounts noted, this “amply demonstrates the rewards of gaining promotion.” The 2011/12 accounts were also enhanced by the £5 million compensation payment that Liverpool made to acquire the services of Brendan Rodgers.

Despite this growth, Swansea still have one of the lowest revenues in the Premier League. In 2012/13, only four clubs reported lower revenue. Although Swansea will be higher in 2013/14, having already overtaken WBA, the fact remains that their revenue of around £100 million is overshadowed by the elite clubs. At the top of the pile, Manchester United’s revenue of £433 million is more than four times as much as Swansea, while significant sums are also generated by Manchester City £347 million, Chelsea £320 million, Arsenal £299 million and Liverpool £256 million.

Nevertheless, Swansea’s £99 million still places them 29th in the Deloitte Money League within striking distance of European thoroughbreds such as Hamburg £101 million, Benfica £105 million, Roma £107 million and Marseille £109 million. In fact, the wealth from the TV deal means that no fewer than 14 of the top 30 clubs by revenue are from the Premier League. What is striking is that no club in the top 30 has a higher reliance on TV money than Swansea, where a staggering 82% of their total revenue comes from broadcasting.

The combination of the new Premier League deal plus TV money from the Europa League has increased broadcasting’s share of Swansea’s total revenue from 76% to 82% in 2013/14, leaving match day and commercial to account for just 8% apiece. That’s an incredible statistic: less than one fifth of Swansea’s revenue comes from sources outside television.

Swansea’s share of the Premier League TV money increased by 56% (£26 million) from £48 million to £74 million in 2013/14. Given the importance of this money to Swansea, it is worth analysing how this is distributed. The money is split into three elements: the UK TV deal, overseas TV deals and central commercial income. Much of this is split evenly between the 20 Premier League clubs, namely 50% of the UK deal and 100% of both the overseas deals and the central commercial income. The remaining 50% of the UK deals is divided into merit payments (25%), which is distributed depending one where you finish in the league, and facility fees (25%), which depend on how many times a club is broadcast live.

In this way, Swansea were helped by their attractive style of football, as they were broadcast live 13 times, which was a lot more than, say, Cardiff City (8 times) and so was worth an additional £2.3 million (£10.9 million less £8.6 million). Each place in the league table is worth around £1.2 million, so Swansea’s 12th place merited £11.1 million, compared to West Ham receiving £9.9 million for coming 13th.

Of course, there will be even more money available when the next three-year cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimate is that a club that finishes 11th in the distribution table (as Swansea did in 2013/14) would receive around £113 million a season, which would represent an additional £39 million.

Swansea’s performance in reaching the last 32 of the Europa League generated €4 million, which is not a huge amount of cash, but even the competition winners Sevilla only received €14.6 million. The big money is in the Champions League, where the English clubs averaged revenue of €38 million in 2013/14.

Match day revenue fell 7% (£0.7 million) from £9.9 million to £9.2 million. The additional money from the Europa League was not enough to compensate for the reduction in revenue from the domestic cups. Swansea played no home ties in these competitions in 2013/14, whereas the previous season included three home matches in the run to Wembley for the Capital One Cup triumph against Bradford City.

Swansea’s match day income is significantly lower than many other Premier League clubs. At the other end of the spectrum, Manchester United and Arsenal earn over £100 million match day income or more than ten times as much as Swansea. Put another way, they earn more in three matches than Swansea do in an entire season.

Swansea’s surge through the leagues has been matched with a rise in average attendance, which at 20,407 is more than five times as much as the low point in 2001/02.

However, this is still the lowest attendance in the Premier League with the next lowest, Crystal Palace and Hull City, being around 4,000 more. The problem is that the Liberty Stadium is too small to satisfy demand with around 98% of the capacity being sold and a lengthy waiting list for season tickets.

Therefore, the club has started negotiations with the local council to buy the Liberty Stadium and is looking at plans to increase the capacity form 20,800 to 33,000. It currently shares the stadium with rugby union side the Ospreys on a 50-year lease. Planning permission has been granted (subject to a few technicalities) for a stadium expansion, but the club cautioned that “work will only start when our projected cash flows allow us to continue.”

Commercial income was up an encouraging 42% (£2.4 million) from £5.8 million to £8.3 million. However, this was still one of the lowest in the Premier League. To place this into context, the top four earners commercially are Manchester United £189 million, Manchester City £166 million, Chelsea £109 million and Liverpool £104 million. No wonder that Swansea chairman Huw Jenkins admitted recently that the club was “miles behind” rivals commercially. This is presumably why commercial headcount increased from 18 to 55 in 2013/14, as Swansea look to improve this revenue stream.

As a sign of improvement, the shirt sponsorship with Chinese financial services firm Goldenway (with their GWGX brand adorning the shirt) doubled from £2 million to £4 million a season when it was extended by two years until the end of the 2015/16 season – “the largest agreement in the club’s proud 102-year history”. This increase will be reflected in the 2014/15 accounts. Similarly, the kit supply deal with adidas was also extended in 2014, but no financial details were divulged.

The wage bill shot up 32% (£15 million) from £48 million to £63 million, though the important wages to turnover ratio was still lowered from 72% to 64% due to the high revenue growth. Since promotion the wage bill has grown £46 million while revenue increased by £87 million, reducing the wages to turnover ratio from a horrific 149% (though to be fair the 2011 wage bill was inflated by bonus payments linked to promotion). Interestingly, the wages in Swansea’s first season back in the big time were amazingly low at £35 million – unsurprisingly the smallest wage bill in the Premier League that season.

Swansea’s wages, heavily based on performance-related contracts, are still among the lowest in the top tier, e.g. in 2012/13 only three clubs (Southampton, Reading and Wigan Athletic) had lower wages. Last season’s growth means that Swansea have already overtaken Norwich City and Stoke City and nearly caught up with West Ham and WBA, but they are still far away from the “big boys”, e.g. Manchester United and Manchester City both have wage bills north of £200 million.

It is only recently that Swansea’s directors started receiving payment for their efforts, but it is worth noting that the highest paid director (presumably Jenkins) earned £550,000 in 2013/14, including a £275,000 bonus for retention of Premier League status, which was significantly up from the previous year’s £250,000.

The promotion effect can also be seen in the club’s activities in the transfer market. In the eight seasons before promotion to the Premier League, there was basically zero net spend (and precious little gross spend), but since then net spend has “soared” to £12 million. This included £71 million of expenditure on player acquisitions, including the big money signings of Wilfried Bony, Federico Fernandez, Ki Sung-Yeung, Pablo, Kyle Naughton and Jefferson Montero.

Even with this increase, Swansea are hardly recklessly extravagant. The approach was summarised in the accounts thus: “we will continue year on year to improve our playing squad, but in a sensible and cost effective manner.” It should therefore be no surprise that Swansea are among the lowest spenders in the Premier League. In the four years following promotion only three clubs had a lower net spend than Swansea’s £12 million, while Manchester United shelled out £260 million in the same period.

Swansea have made their strategy very clear: “The secret is to balance spending to maintain and improve performance on the pitch so we remain in the Premier League, and spending on new projects considered important to the wellbeing of the club going forward.” It’s a tricky balance, but it has (so far) worked rather well for the club.

Investments in infrastructure include the completion of a £6 million youth academy training facility, which should help improve the academy status from Level Two to Level One, and a new training complex at Fairwood, which became operational in February 2014. This has cost around £12 million, including £6.9 million in 2013/14 alone. Both these developments should help reinforce Swansea’s status in the future.

Of course, a good academy will not only produce players for the first team, but graduates can also be sold for a healthy profit. A recent study by the CIES Football Observatory showed that over the past six seasons Swansea had made the 11th highest sales of academy graduates, most notably Joe Allen and Ben Davies. Incredibly, this put the Swans just above Bayern Munich and Manchester United.

The club appears to have put its debt issues firmly behind. Indeed, they have had net funds over the last three years. These have decreased by £3.0 million from £3.5 million to £0.5 million in 2013/14, but gross debt was actually cut by £4.1 million from £5.3 million to £1.2 million with cash balances falling by £7.1 million from £8.8 million to £1.7 million.

Gross debt largely comprised £1.0 million owed to group undertakings plus £0.2 million of hire purchase contracts. Importantly, bank debt (£5.5 million in 2012) has been virtually eliminated.

It should be noted that total creditors have been rising and increased £7.2 million in 2013/14 alone, mainly due to Other Creditors, which are up to £22.1 million, probably due to the infrastructure investment. In addition, Swansea have contingent liabilities of £3.1 million for potential future transfer payments, dependent on player appearances and club success, and a possible £2.2 million of additional signing-on fees.

The only other balance sheet point that seems a little strange is a significant increase in the amount of goods and services purchased from Jaxx Bay Limited, a company controlled by director Martin Morgan, from £25,000 to £1.7 million in 2013/14. If I had to speculate, I would guess that this is again due to the development work done at the new training facilities, but no details are provided in the accounts.

The recently announced new Premier League TV deal will further boost clubs’ profitability, so Swansea should have no problem meeting the Premier League’s new Financial Fair Play legislation. This also ensures that the majority of the increased money from the new TV deal remains within the club and does not simply go to higher player wages (and agents’ fees), as has invariably been the case with previous increases.

"Ash the bash"

Specifically, clubs whose player wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years. However this restriction only applies to the income from TV money, so any additional money from the higher gate receipts, new sponsorship deals or profits from player sales can still be spent on wages.

All this lovely TV money also explains the interest in Premier League clubs from overseas owners. Even Swansea, who have been much praised for achieving so much without foreign investment, have been tempted by an approach from American businessmen John Jay Moores and Charles Noell, the former owners of Major League baseball team the San Diego Padres, who were reportedly seeking to acquire a 30% stake.

Whether any such approach succeeds, it is unlikely to break the model whereby the Supporters’ Trust owns 21.3% of the club (and has a representative on the Board), which is unique in the Premier League. There has been some noise about the dividends paid to Swansea’s directors (£2.4 million in 2013 and £1.0 million in 2014), but most fans seem to think that this is fair reward for all their efforts in first saving and then running the club so well.

So another successful year for Swansea. Financially, for a club of this size, their performance is remarkable – and next year’s figures will be further boosted by the £25 million January sale of Bony to Manchester City.

Clearly, much of their growth is due to promotion to the Premier League, but other clubs have had similar opportunities and blown it, so Swansea’s achievements should not be under-estimated. The Board understands that more needs to be done, particularly with the stadium and commercial income, which will each bring their own challenges, but you wouldn’t bet against them succeeding, given their track record.

Monday, March 9, 2015

Liverpool - A Show Of Strength

It was so close. Although Liverpool supporters would naturally have been disappointed that Brendan Rodgers' team narrowly missed out on securing title winning glory in the 2013/14 season, objectively speaking their surge to second place in the Premier League represented great progress. Not only did they improve significantly from the previous season’s seventh, but they also qualified for the Champions League, a competition that has played an important part in the Reds’ famous history.

It was a similarly positive story off the pitch, as Liverpool reported their first profit in seven years after revenue surged by 24% to a record £256 million, despite receiving no benefit from European football. These figures were testament to the financial progress the club has made since it was purchased in October 2010 by Fenway Sports Group (FSG), the American investment company run by John W. Henry. The good news did not end there, as it came hot on the heels of UEFA clearing the club of any breaches of their Financial Fair Play (FFP) regulations.

This represented a significant turnaround in the club’s finances, as the massive losses of recent seasons were converted to a £0.9 million profit before tax (£0.4 million after tax). As chief executive Ian Ayre said, “The profit of just under a million pounds from a loss last time of almost £50 million is a huge swing for us.” He rightly pointed out that the key component of this £51 million improvement was “media revenue increase” of £37 million, driven by the new Premier League television deal, as 2013/14 was the first season of a three-year cycle.

In addition to the increase in TV money, the other revenue streams also grew steadily with commercial and match day income each up around £6 million. The loss from player sales was also slashed by £12 million to just under a million, while the player amortisation and impairment charges fell by £6 million, as last season’s figures included the impact of correcting previous errors in the transfer market. These improvements were partially offset by £17 million higher expenses, largely due to a £13 million increase in the wage bill.

It is worth noting that the net interest payable of £4.6 million has come down significantly since the bad old days of the Tom Hicks and George Gillett regime, when it peaked at £17.6 million in 2010. That said, it is one of the higher interest payable figures in the Premier League, albeit nowhere near as much as Manchester United £27 million and Arsenal £13 million.

The last time that Liverpool reported a profit was back in 2007/08 with £10 million. Since then, the club has registered substantial losses, amounting to £176 million over the five years leading up to 2013/14, including an average of £47 million for the last three seasons. In fairness, many of these losses have been due to FSG having to spend substantial sums on player recruitment in order to repair the damage caused by the previous owners’ lack of investment in the squad.

The other factor that has had a strong influence on Liverpool’s losses is the amount booked for so-called exceptional items, which adds up to nearly £100 million over the last eight years, mainly due to writing-off £61 million spent on unsuccessful stadium developments and £31 million paid-out as a result of changes in coaching staff (e.g. the departures of Roy Hodgson and Kenny Dalglish). In fact, Liverpool would have made a profit of £10 million in 2011 without such exceptionals. These have been steadily reducing and were down to just £1.4 million in 2013/14 for costs related to the new stadium development in Stanley Park.

Profits and losses have also been influenced by player trading. In the six seasons up to 2011 Liverpool made a total of £106 million profit on player sales, including £43 million in 2011 and £23 million in 2010 with profitable sales including Fernando Torres to Chelsea and Javier Mascherano to Barcelona. However, in the last three seasons the club has registered total losses of £15 million from this activity, including the sale of Andy Carroll to West Ham.

Basically, player sales have gone from boosting profits (or at least reducing losses) to being a drag on the financials. This will, of course, change in the 2014/15 figures, as this season will include the lucrative sale of Luis Suarez to Barcelona, reported in various media outlets as being between £65 million and £75 million.

The potential importance of this activity can be seen by looking at Chelsea, who would have made a £46 million loss last season instead of a £19 million profit without their £65 million profit from player sales. Also, it will not have escaped the attention of Liverpool’s board that Everton made £28 million profit from player sales.

So what, you might say, given that Liverpool still produced a profit. That’s true, but their £0.9 million profit is still at the lower end of the spectrum. To date 14 of the 20 clubs in the Premier League have published their 2013/14 accounts and 11 of those have reported profits – with Liverpool’s figure being the lowest. Five clubs have announced profits before tax of more than £10 million: Manchester United £41 million, Everton £28 million, Chelsea £19 million, WBA £13 million and West Ham £10 million.

In fact, the only clubs to have so far announced a loss are Manchester City £23 million, Cardiff City £13 million and Aston Villa £4 million, and all three of those clubs have their own particular issues.

Revenue grew by an impressive £50 million (24%) from £206 million to £256 million in 2013/14, largely driven by media revenue, which was up £37 million (58%) from £64 million to £101 million. There was also good growth from match day of £6 million (14%) from £45 million to £51 million and commercial income of £6 million (6%) from £98 million to £104 million.

Ayre noted, “Revenue has been consistently increasing from around £170 million in 2009 to over £250 million today”, which is largely true, though the growth is actually £78 million (44%) from £177 million in 2009. It’s also worth noting that the majority of this growth (£67 million) has come in the last two seasons, as revenue was relatively flat over the previous seasons, partly due to the disappearance of Champions League revenue, which offset commercial growth (including bringing catering revenue back in-house in 2010/11.

The absence of Champions League money has restricted the growth in broadcasting revenue since 2009 to “only” 35% (£26 million), largely due to the new Premier League TV deals, though also partly because of the inclusion of Liverpoolfc.TV Limited in the club’s figures. Commercial income has, in fact, been the main growth driver, increasing by 72% (£44 million) over the same period, while match day income has risen by a more modest 20% (£8 million).

So Liverpool remain in 5th place in the English revenue league with £256 million, as all other clubs have grown their revenue in 2013/14, thanks primarily to the new Premier League TV deal. As Warren Buffett once said, “A rising tide lifts all boats.” Liverpool are still a fair way behind their rivals for Champions League qualification with Manchester United’s revenue of £433 million being an amazing £177 million (or almost 70%) higher. Similarly, Liverpool are below Manchester City £347 million, Chelsea £320 million and Arsenal £299 million. That said, Liverpool are in turn much higher than Tottenham’s £181 million.

Liverpool’s challenge can be seen more clearly by comparing the 2013/14 revenue growth for the top six English clubs. Although their growth of £50 million is seriously impressive, it’s still lower than the growth reported by Manchester City £76 million, Manchester United £70 million, Chelsea £60 million and Arsenal £55 million. In other words, the gap was large and will get larger – unless Liverpool do something about it. This is why they are developing Anfield and are so focused on qualifying for the Champions League (which they did last season, but need to do consistently to narrow the financial gap).

The increase in Premier League TV money has resulted in English clubs moving up the Deloitte Money League with Liverpool rising three places from 12th to 9th place, ahead of Juventus, Borussia Dortmund and AC Milan, despite not competing in European competitions. The magnitude of Liverpool’s task in their Champions League group this season is emphasised by the disparity with Real Madrid, whose revenue of £460 million is around £200 million more than Liverpool’s £256 million.

Despite the new Premier League TV deal, commercial income remains the most important revenue stream at Liverpool, contributing 41% of total revenue, though it is now only just ahead of broadcasting 39%. With the addition of Champions League revenue in 2014/15, broadcasting is likely to become the highest revenue stream. Match day income is down to 20%, which should be addressed with the planned stadium expansion.

Broadcasting revenue increased by £37 million (58%) to £101 million, very largely driven by the new Premier League TV deal, though this was partly offset by no Europa League revenue in 2013/14. In fact, even though they finished 2nd in the Premier League, Liverpool actually received the largest central distribution with £97.5 million, up £43 million (or 78%), as they were shown live more often than champions Manchester City, which resulted in higher facility fees (25% of the domestic deal).

The only other variable element in the Premier League distribution is the merit payment (also 25% of the domestic deal), which depends on where you finish in the league. All other elements are equally distributed among the 20 Premier League clubs: the remaining 50% of the domestic deal, 100% of the overseas deals and central commercial revenue.

Of course, this is just the first year of the current Premier League TV deal and there will be even more money available when the next three-year cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimates are that a club finishing near the top of the table will receive around £150 million a season, which would represent an additional £50 million. If anybody had any doubts as to why so many overseas owners have been investing in English football, it’s staring you in the face right here.

Liverpool’s broadcasting revenue for 2014/15 will be boosted by their participation in the Champions League (and Europa League). Given the equitable nature of the Premier League TV deal, the real differentiator for the leading English clubs is in fact the Champions League. In 2013/14 Liverpool earned most from the Premier League, but their total broadcasting income of £101 million was surpassed by Chelsea £140 million, Manchester United £136 million, Manchester City £133 million and Arsenal £123 million.

In that season, the English clubs earned an average of €38 million, ranging from Manchester United’s €45 million to Arsenal’s €27 million. In the past Liverpool have earned similar sums from Europe’s premier competition, averaging around €29 million between 2007 and 2010.

The importance of qualifying for the Champions League has been further emphasised with the new deal from the 2015/16 season that will further increase the prize money. UEFA recently advised the European Club Association that clubs could expect a 30% increase in revenue, but the uplift is likely to be even higher for English clubs, as BT’s exclusive acquisition of UK rights is double the current arrangement.

Although Liverpool’s failure to qualify from their Champions League group will reduce the amount of money they receive, this blow will be partly mitigated by some revenue from dropping down into the Europa League (like 2009/10), but also the way that the TV (market) pool is allocated. A club’s share of the UK market pool is dependent on both how far they progress (compared to other English clubs) and their finishing place in the previous season’s Premier League. In this way, Liverpool will benefit from finishing 2nd in last season’s Premier League, which will give them 30% of half of the market pool.

Commercial revenue rose £6 million (6%) from £98 million to £104 million, mainly due to additional sponsorship and merchandising sales. New sponsor deals were announced with Subway, Dunkin’ Donuts, Vauxhall and Garuda, which is an example of Liverpool’s strategy of “leveraging the club’s global following to deliver revenue growth.”

Only seven clubs generated more commercial income than Liverpool, which is an excellent performance, given the lack of Champions League qualification in recent seasons and demonstrates the strength of Liverpool’s “brand”. That said, other leading clubs do earn prodigious amounts of money from commercial activity. In particular, Bayern Munich have managed to increase commercial income from £203 million to £233 million, more than double Liverpool. PSG’s numbers are inflated by their €200 million deal with the Qatar Tourist Authority.

To reinforce this point, in England Manchester United have increased commercial income by 171% (£119 million) to £189 million in the last five years, which is far superior to Liverpool’s 72% (£44 million) over the same period – and that’s before United receive the full benefit of their massive new Chevrolet and Adidas deals. In fact, the gap between Liverpool and United has grown from £10 million in 2009 to £85 million in 2014. Similarly, Manchester City is now up to £166 million, driven by their Etihad sponsorship. Liverpool are still way above Arsenal, though the Gunners’ PUMA deal only starts from the 2014/15 season.

Liverpool’s shirt sponsorship of £20 million, signed in July 2010, is one of the highest in England, though has been overtaken by Manchester United’s £47 million Chevrolet deal and Arsenal’s £30 million Emirates deal. Recently, Chelsea announced a new deal with Yokohama Rubber for a reported £38-40 million. Therefore, Liverpool will be looking for a significant improvement when their current deal expires at the end of the 2015/16 season with figures of at least £30 million being discussed.

Last month Liverpool announced a “record” New Balance kit deal, switching from Warrior to their current supplier’s parent company. No figures were divulged, but I suspect that the basic deal is worth the same amount as the six-year deal signed with Warrior in 2012, namely £25 million a season, with the increase coming from the other part of the deal, i.e. earnings from merchandising sales, due to New Balance’s better distribution network. Whatever the exact details, it will have to go some to match Manchester United’s “largest kit manufacture sponsorship deal in sport” with Adidas, which is worth £750 million over 10 years or an average of £75 million a year from the 2015/16 season.

Match day income grew by £6 million (14%) from £45 million to £51 million, mainly due to additional pre-season matches, ticketing and hospitality revenue, though this was partially offset by not having any European matches. The pre-season tour attracted huge crowds including 95,000 in Melbourne and 82,000 in Jakarta. Great stuff, but Liverpool’s match day income is still miles behind Manchester United and Arsenal, who both generate over £100 million – or more than twice as much.

In order to address this difference, FSG plan to expand Anfield in much the same way they successfully redeveloped the Fenway Park Stadium for one of their other clubs, US baseball team the Boston Red Sox. The plan is to expand the Main Stand capacity by 8,300 seats taking the overall Anfield capacity to around 54,000, which should be complete for the 2016/17 season. Potentially, there would also be a further increase of 4,800 seats in the Anfield Road stand at a later date.

It is estimated that this would increase revenue by £25 million: £20 million from the extra seats and (an ambitious) £5 million for naming rights for the stand (though importantly the club would keep the famous Anfield name for the stadium as a whole). The additional seat income is largely driven by 4,500 corporate seats, which Ayre says is vital for the plan’s viability: “Corporate hospitality revenues are essential. This means we will pay the debt back quickly… while increasing revenues into the playing squad.”

"Sterling service"

Including the cost of acquiring the land, this project will cost well over £100 million, but it is likely to be funded by an interest-free loan from the owners, thus eliminating the need to make steep interest payments, as Arsenal are still doing for their Emirates Stadium.

This all sounds very promising, as relatively low match day income has long been Liverpool’s Achilles’ heel, but every silver lining has a cloud and there has been much concern among supporters’ groups about ticket prices. Season tickets have risen by around 10% over the last few years, which is more than other leading clubs. Liverpool chairman Tom Werner is clearly aware of the fans’ discontent: “We are committed to working towards a tiered solution at Anfield, so there are affordable tickets as well as tickets that are higher priced.” We shall see. Certainly the new TV deal should give clubs the opportunity to address ticket prices.

Wages increased by £13 million (10%) from £131 million to £144 million, largely due to higher bonus payments “as a result of the impact of the 2nd place Premier League finish.” Interestingly, Ian Ayre has spoken of making player contracts more performance-related, which seems very sensible. Despite this wages growth, the wages to turnover ratio was cut from 63% to a very respectable 56%, the lowest for five years.

The highest paid director, presumably Ayre, earned £1.032 million, which is almost exactly the same amount as he was paid the previous season.

Note: these wage figures have been adjusted from the staff costs in the club’s accounts to exclude once-off exceptional items (for pay-offs to departing coaching staff), as most clubs show these separately.

Liverpool’s £144 million is the 5th highest wage bill in England, exactly in line with revenue, behind Manchester United £215 million, Manchester City £205 million, Chelsea £193 million and Arsenal £166 million. United’s wage bill is almost 50% (£71 million) more than Liverpool.

The different investment policies of the last two sets of owners can be clearly seen by looking at the net transfer spend: in the three years leading up to 2010/11 the club had net sales proceeds of £8 million, but there has been net spend of £135 million in the four years since then, even after a number of big money sales including Torres and Suarez. It was imperative that Fenway splashed the cash after Hicks and Gillett kept their hands in their pockets and they have done so. This season alone, they have bought Lallana, Markovic, Lovren, Balotelli, Moreno, Can, Origi and Lambert with the proceeds of the Suarez sale.

That said, Liverpool have still been outspent by other clubs in that four-year period, especially by Manchester United £260 million, but also Manchester City £212 million and Chelsea £196 million. They have however spent more than Arsenal, even though the Gunners bought Mesut Ozil and Alexis Sanchez, and Tottenham, whose figures are impacted by the sale of Gareth Bale to Real Madrid.

Net debt has increased by £12 million from £114 million to £126 million. As there are only modest cash balances of less than £500,000, gross debt is £127 million, made up of interest-free loans of £69 million from the owners (unchanged from last year) and bank loans of £58 million (up £10 million). Note that the reported net debt excludes £20 million owed to the subsidiary Liverpoolfc.TV Limited.

Although debt has been steadily increasing since 2011, it is still nowhere near the shocking levels reported under the previous hated regime. While there was “only” £123 million net debt in the football club, the full picture was revealed in the holding company where borrowings had grown to nearly £400 million. Fortunately, this debt was largely eliminated following the change in ownership.

In addition to this debt, Liverpool have contingent liabilities of £12.8 million, which represent fees that may be payable depending on contractual clauses such as number of appearances, Champions League qualification, etc. Similarly, Liverpool will potentially receive £3.3 million from other clubs. Debt will surely increase for the stadium development, though this should be provided by the owners.

Since FSG bought the club, they have actually had lower cash flow available from operating activities: £81 million in four years, compared to £123 million in the previous four years. Despite this, they have spent more on players (£152 million vs. £110 million), though less on capital expenditure (£16 million vs. £52 million). This has been funded by higher bank loans, making use of a revolving credit facility.

There has actually been relatively little funding from FSG, though they did of course write-off the previous debt and injected £47 million into the club in 2012, which was used to fully repay the outstanding stadium loan. All these external loans have meant relatively high interest payments: net £29 million over the last eight years.

Liverpool have managed to avoid any FFP issues, even though their cumulative pre-tax loss of £89 million for the last three seasons is clearly higher than UEFA’s €45 million limit (assuming the owners cover the deficit by making equity contributions). This is because UEFA permits some “good” costs to be excluded from its break-even calculation, such as stadium development, youth and community development and goodwill amortisation.

However, the clause that has probably most helped Liverpool is the possibility to exclude the wages for players signed before June 2010 (when the FFP rules were introduced). Theoretically, this would only be allowed if Liverpool’s losses had reduced from 2011/12 to 2012/13, which was not the case, but as the 2011/12 accounts only covered 10 months, the argument must have been that it would have been higher on an annualised basis.

Despite the potential problems for Liverpool, John W. Henry has actually been one of FFP’s staunchest advocates: “Financial Fair Play is a much bigger solution to the problems Liverpool and other clubs are trying to compete against.”

"Little Red Corvette"

Going forward, Liverpool should not experience any more FFP issues, as their revenue will continue to grow. The 2014/15  accounts will be further improved by Champions League money plus the Suarez transfer (and the accounts state that the net effect of player sales will be a £52 million profit), while the figures in 2016/17 will be enhanced by the Anfield expansion and the blockbuster new Premier League TV deal, especially as Premier League rules prevent much of this money being used on player wages.

If Liverpool can also improve their record in the transfer market by successfully investing in young players, that will not only help the squad, but potentially lead to the club once again making money on player sales.

Returning to profit after so many years is only one step in the club’s journey, but, as those sons of Liverpool, Echo and the Bunnymen, once said, “A show of strength is all you want.” Although there is still much to do, it is difficult to argue with Ian Ayre, who said, “With a hugely supportive ownership we have brought financial stability back to this football club and we now have the right structure, platform and ambition to continue growing on and off the pitch.”
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