Tuesday, September 1, 2015

Sheffield Wednesday - Working With Fire And Steel



Sheffield Wednesday are one of those clubs with a fine history that these days find themselves playing in the Championship. Wednesday spent most of the 80s and 90s in the top flight of English football, but have not been in the Premier League since 2000 and won the last of their First Division titles back in 1930.

Indeed, in recent times they actually spent two seasons in League One, England’s third tier, before promotion back to the Championship in 2012. Since then, they have not really threatened the promotion or play-off places, but there is now cause for a degree of optimism in the steel city following the arrival of new Thai owner Dejphon Chansiri.

His family owns the world’s largest producer of canned tuna, while Dejphon himself has a thriving property and construction company in Thailand. He acquired Wednesday for £37.5 million in January and has targeted promotion to the Promised Land of the Premier League within two years. He has already claimed to have cleared the club’s debts and given new head coach Carlos Carvalhal substantial backing in the transfer market.

"My name is Lucas"

Chansiri bought the club from Milan Mandaric, who had effectively saved Wednesday from going into administration when he bought the club for a nominal £1 in December 2010, but importantly negotiated terms to wipe out the club’s significant debts. In particular, he persuaded the Co-operative Bank to settle their £23 million debt for a £7 million payment.

Wednesday had faced a series of winding-up petitions from HMRC between July and November 2010 for unpaid VAT and payroll taxes, which were only withdrawn following Mandaric’s intervention.

Wednesday’s problems on the pitch went hand in hand with their financial difficulties, as Mandaric explained: “The decline of this great club can be traced back over the past decade. Both on and off the field mismanagement has seen a true footballing institution teeter on the edge of the financial abyss.”

"Tommy, can you hear me?"

Given these issues, Mandaric adopted a somewhat more cautious approach to spending: “I will not gamble with the long-term future of Sheffield Wednesday, this club has already flirted with financial oblivion far too closely in recent seasons.”

However, as the auditors noted in the annual accounts, the club continued to rely on the financial support of its parent company, which was “not legally binding and dependent on the intentions of the owner.” This lead to them noting a “material uncertainty which may cast significant doubt about the company’s ability to continue as a going concern.”

Strong stuff, but many clubs in the Championship rely on the goodwill of their owners and Wednesday are no exception. The hope would be that Chansiri continues to provide the club with the financial support required at this level.


Although Wednesday’s financial position is not ideal, in truth it’s not too bad for a Championship club, even though they reported a £5.6 million loss in 2013/14, the last season for which figures are available.

That said, the loss did increase from £3.7 million the previous season, as revenue dropped £1.1 million (7%) to £13.9 million, mainly due to a reduction in match receipts and commercial match day income; while the wage bill rose £0.6 million (5%) to £12.5 million, following an increase in player salaries and management costs. There were £0.1 million reductions in both depreciation and other expenses, but interest payable shot up by £0.3 million to £0.5 million.

Mandaric justified the loss when referring to “the difficulty of operating our club in the Championship whilst trying to remain competitive.” In fairness, Wednesday’s loss is quite small compared to most other clubs in this division, placing them a creditable 8th in the profit league.


As Mandaric observed, “we’re losing money, but not as much as some clubs”. That’s evident when you consider the stratospheric losses posted by the likes of Blackburn Rovers £42 million, Nottingham Forest £23 million, Leicester City £21 million, Middlesbrough £20 million and Leeds United £20 million.

In fact, the only clubs to make money in the Championship were Blackpool (with their highly dubious model), Wigan Athletic and Yeovil Town – and they have all since been relegated. In 2013/14 losses were reported by 21 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.


Wednesday have consistently reported smallish losses over the past few years. The last time that they made an accounting profit was in 2011, which was boosted by a £21.4 million (non-cash) credit after the former owner agreed to waive all amounts owed. Excluding this exceptional item, the club would have made a £5.6 million loss instead of a £15.8 million profit.

After that adjustment, Wednesday would have made an aggregate loss of £27.8 million in the last six seasons, averaging a £4.6 million deficit each year. Mandaric acknowledged that “losses of this amount will need to be reduced in the future and ultimately I would hope the club can be self-supporting.”


Other once-off items to hit Wednesday’s books include £1.4 million in 2012 due to bonus costs relating to promotion back to the Championship and the change in football management during the season. There was another £0.25 million paid the same season to the Co-operative Bank for a promotion-related clause in their debt settlement.

Profit on player sales can also improve the bottom line, but this has not really been the case at Wednesday. The last time they made any meaningful money from transfers was back in 2008 £3.3 million, mainly due to the sale of Chris Brunt to WBA and Glenn Whelan to Stoke City, and 2007, thanks to Madjid Bougherra’s move to Charlton Athletic.


Since then they have made just £2.2 million in six seasons, including only £0.3 million in 2013/14. Although few Championship clubs make big profits on player sales with only two earning more than £5 million in 2013/14 (Wigan Athletic and Bournemouth), Wednesday’s was still among the lowest.

Player trading is by no means the only issue at Wednesday, as the underlying business is loss making. The club has made operating losses in each of the last six years, though there has been some recovery in the Championship to £3-4 million.


Unsurprisingly the operating losses peaked at £7 million in League One in line with lower revenue, as described by the club: “The cost base, in common with other football clubs, is relatively fixed in the short-term, hence unfavourable movements in revenue, including those arising from below budget on pitch performance, can lead to significant variation in profits.”

Revenue fell by £1 million (7%) from £14.9 million to £13.9 million, largely due to decreases in match receipts of £0.7 million (11%) to £5.5 million and commercial income of £0.6 million (13%) to £3.9 million, slightly offset by a £0.2 million (5%) increase in broadcasting revenue to £4.5 million.


As you would expect, revenue was lower in League One, declining by £4.5 million to £9.4 million in 2011. As the club put it, “A mixture of relegation, supporter dissatisfaction and the general economic downturn saw falls in revenue across all areas of the business.”

The other side of that coin is that revenue has increased since promotion, but only by £2.9 million. The growth is entirely due to the better TV distribution deal in the Championship, which has increased broadcasting revenue by £3.3 million. In contrast, commercial revenue has only increased by £0.1 million, while match receipts are actually down £0.5 million.


Following the reduction in 2013/14, Wednesday’s revenue of £13.9 million was only the 15th highest in the Championship, a long way behind the top three clubs: QPR £39 million, Reading £38 million and Wigan Athletic £37 million. In fact, six clubs earned more than £30 million that year. Of course, to a large extent, this simply demonstrates the importance of parachute payments for those clubs relegated from the Premier League.


If these were to be excluded, Wednesday would move up to a more healthy 10th place in the Championship revenue league, but even so their £14 million would still be a long way behind Leicester City £31 million, Leeds United £25 million, Brighton £24 million and Derby County £20 million. Given these numbers, Wednesday’s mid-table performance could be regarded as essentially par for the course.


Much of Wednesday’s revenue performance is driven by match day receipts, which account for 40% of their total revenue, followed by broadcasting 32% and commercial 28%.

In fact, only four Championship clubs have a greater reliance on match day receipts than Wednesday: Charlton Athletic 50%, Nottingham Forest 44%, Brighton and Hove Albion 43% and Millwall 41%.


Arguably Wednesday’s match day revenue is even higher, as their accounts also include £1.8 million of commercial match day income, but I have classified this within commercial revenue, as this is consistent with the £3.9 million listed in the club’s turnover figures for total commercial activities.

Either way, the importance of match day revenue to Wednesday is clear, so the £0.7 million (11%) reduction from £6.2 million to £5.5 million in 2013/14 is concerning, especially as this was as high as £6.5 million before relegation to League One in 2010. Revenue here is partly influenced by progress in cup competitions, which helped keep the figure high in 2010, but the 2014 fall was essentially due to a 12% decrease in the average attendance from 24,078 to 21,274.


Even so, Wednesday’s match day revenue of £5.5 million was the 9th highest in the Championship. To put this into perspective only three clubs generate more than £7 million (Brighton £10.4 million, Leeds United £8.6 million and Nottingham Forest £7.2 million).

Even more impressively, Wednesday’s average attendance of 21,274 was the 6th highest in the Championship in 2013/14 and climbed to 21,993 last season. Although this is a little disappointing, considering the 24,078 average achieved in the first season back in the Championship, there is little doubting the potential here.


As a recent example, you only have to look at the 38,000 crowd that watched the final home game in the League One promotion season. This nearly filled the 40,000 capacity at Hillsborough, one of the largest grounds in the country.

Wednesday had kept “Early Bird” season ticket prices static for many seasons, but have introduced a new match day pricing structure for the 2015/16 season, which features a number of steep hikes in some prices.


Whether this is the right move, especially given that South Yorkshire is the fifth most impoverished area of the country, is obviously debatable, but the objective is to help fund a promotion drive by maximizing revenues streams. This move is understandable to an extent, but the fans are only likely to be placated if promotion is delivered.

Chansiri justified the price increase as follows: “In the bigger picture, if we are to achieve our ultimate aim of promotion, we must embark on this journey together. I will lead that journey as your chairman, but I need as much help as possible along the way. Budgets must be achieved, we must work within the constraints of Financial Fair Play, and we do not have the benefit of parachute payments, unlike a significant number of our peers in the Championship, each of whom are aiming for the same destination. As our costs increase, so too must our revenues across the business.”


In 2013/14 Wednesday’s broadcasting revenue was £4.5 million, which was in line with the majority of Championship clubs, who receive the same annual sum for TV, regardless of where they finish in the league. This amounts to just £4 million of central distributions: £1.7 million from the Football League pool and a £2.3 million solidarity payment from the Premier League. Other television money is dependent on whether a team reaches the play-offs; cup runs and the number of times a club is broadcast live.

However, the major impact of parachute payments is once again highlighted in this revenue stream, greatly influencing the top eight earners, though it should be noted that clubs receiving parachute payments do not also receive solidarity payments.

Looking at the Premier League television distributions, the massive financial disparity between England’s top two leagues becomes evident with Premier League clubs receiving between £65 million and £99 million, 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.


If Wednesday were to somehow gain promotion, the financial prize for returning to the Premier League would be immense. Even if a team finishes last in their first season and go straight back down, their TV revenue would increase by £61 million (£65 million less £4 million) and they would also receive a further £65-75 million in parachute payments, giving additional funds of around £130 million.

It could be even more, depending on where the club finishes in the league (with each place worth an additional £1.2 million) and how many times they are televised live (where each club is paid facility fees, with a contractual minimum of 10 games). All this is before the recent blockbuster Premier League deal that starts in 2016/17, which I estimate will be worth at least another £30 million a season. The size of the prize helps explain the behaviour of many Championship clubs, which are spending more than ever this season.


As we have seen, parachute payments make a significant difference to a club’s revenue and therefore its spending power in the Championship. Up to now, these have been worth £65 million over four years: year 1 £25 million, year 2 £20 million and £10 million in each of years 3 and 4.

However, the Premier League has recently announced changes to this structure, whereby from 2016/17 clubs will only receive parachute payments for three seasons after relegation, although the amounts will be higher (my estimate is £75 million, based on the advised percentages of the equal share paid to Premier League clubs: year 1 55%, year 2 45% and year 3 20%).

Revenue from commercial activities decreased by £0.6 million (13%) to £3.9 million in 2013/14, comprising commercial match day income £1.8 million (hit by the fall in attendances), retail and merchandising £1.5 million, catering £0.3 million and internet & other £0.2 million.


For a club with Wednesday’s history, their commercial revenue is fairly low and only the 13th highest in the Championship – though it should be noted that it is impacted by the outsourcing of the catering division in 2012.

One of Chansiri’s stated objectives is to raise the club’s commercial profile in the Far Ease, notably Thailand and Singapore. To that end, his family will act as principal shirt sponsor in 2015/16 to “illustrate to the whole of the football world our total support for this club.” It will be interesting to see how much this deal is worth, given that Leicester City’s Thai owner organized a lucrative marketing agreement with Trestellar Limited that boosted their commercial revenue to £18.6 million.

"Loovens - Building on Fire"

In 2014/15 Wednesday’s shirts were emblazoned with the Azerbaijani “Land of Fire” logo, as worn by Atletico Madrid and Lens, which had been secured by Hafiz Mammadov, who at one stage had looked like he would take ownership of the club from Mandaric. The value of this arrangement was not disclosed, beyond the fact that it was “financially significant” and a “six-figure deal”. This replaced the 2013/14 deal with WANdisco, a global software development company.

Retail sales are also expected to improve after a three-year kit deal commencing in 2014/15 was signed with Sondico, part of the Sports Direct family of brands.


The wage bill rose by 5% (£0.6 million) from £11.9 million to £12.5 million, increasing/worsening the wages to turnover ratio from 80% to 90%, though part of the growth was due to the club’s decision to change the manager (Dave Jones) in December 2013.

This means that wages have risen by £4.2 million (51%) since promotion, which is considerably more than the £2.9 million (27%) revenue growth in the same period. Nevertheless, Wednesday’s wage bill is still one of the smallest in the Championship with only six clubs below them – though one (Watford) was promoted the following season.


It was significantly lower than the likes of Leicester City, Reading, Blackburn Rovers and Wigan Athletic, whose wages were all above £30 million. QPR were even higher at £75 million, but that was simply ridiculous in the second tier.

Wednesday’s wages to turnover ratio of 90% is not great, but it is only the 14th highest in the Championship. Given the relatively low revenue, many clubs in the second tier have a dreadful wages to turnover ratio with 10 of them being more than 100%, including QPR 195%, Bournemouth 172%, Nottingham Forest 165% and Millwall 132%.


Arguably, Wednesday’s lack of spending on wages contributed to their troubles, as their wages to turnover ratios before relegation were all on the low side, even though they steadily increased their wage bill to £9.6 million in 2010. This again highlights the challenges outside the top flight.


Player amortisation has been steadily rising since promotion, but is still only £1.0 million, again one of the lowest in the Championship. To put this into perspective, the highest player amortisation was at QPR £16.6 million, Blackburn Rovers £7.2 million, Wigan Athletic £6.8 million and Nottingham Forest £5.7 million.


As a reminder, 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 via player amortisation – even if the entire fee is paid upfront. As an example, Marco Matias was bought for a reported £3 million on a four-year deal, so the annual amortisation in the accounts for him would be £750,000.

In the same way, the lack of spending in the transfer market is reflected in the balance sheet, with the value of player (intangible) assets only £1.3 million in 2014.


Given their financial difficulties, it is no surprise that Wednesday have spent very little on player recruitment: just £2.6 million gross spend in the eight seasons up until 2014/15, offset by £6.4 million of sales, giving net sales of £3.8 million. Mandaric “tried to support the manager wherever possible”, but it’s been a whole new ball game since Chansiri arrived.

On the day he was announced as the new owner, he preached prudence: “I believe that there needs to be some investments into the club, but just throwing money at it is not a guarantee of success. We need to do it in a smart and sustainable manner. Some clubs throw a whole lot of money at it in the transfer market, but are not successful.”


However, he has bankrolled some major purchases with more than £9 million spent to date this summer on 15 players, including the likes of Marco Matias, Lucas Joao, Fernando Forestieri, Rhoys Wiggins and Lewis McGugan. In the past few days, there have been rumours of big money bids for a new striker, with Ross McCormack, Jordan Rhodes, Matej Vydra and Gary Hooper all being mentioned, so the spending might not have stopped there.

This is a big change for Wednesday, whose £0.3 million net sales over the last two completed seasons (2013/14 and 2014/15) was one of the lowest in the Championship. Although this comparison has to be treated with some caution, as the figures are distorted by clubs that were in the Premier League the previous season, either because of high spend when they were in the top flight or large sales following their relegation, it is evident that Wednesday have been comfortably outspent by their rivals, so have effectively been competing with one hand tied behind their back.

Wednesday’s gross debt increased by £1.5 million to £12.7 million in 2014. Almost all of this (£11.3 million) was owed to Mandaric’s company (“The debt is not club debt, it’s my debt as far as I’m concerned”), but there was also a £1.4 million overdraft.


This is a significant improvement on the situation when Mandaric took control with the last accounts before his takeover in 2010 showing debt of £42.6 million, including £21.5 million owed to the bank. Following the Serb’s arrival, the club benefited from the £21.4 million waiver of the previous ownership’s loan and the settlement of the external debt. More recently £0.8 million of debt was converted into share capital in November 2014.

That said, the debt had been creeping up in the last four years before Chansiri’s appearance and the accounts also include £5.1 million of other loans in accruals that are not classified as net debt for some reason. To an extent, this is all irrelevant now, as it has been claimed that the club is debt free – to be confirmed when the 2014/15 accounts are published.

In addition, the club had contingent liabilities of £0.9 million, split between transfer fees of £505,000, dependent on future appearances, and loyalty bonuses of £392,000, if players are still with Wednesday on certain dates. On top of that, in the event of promotion to the Premier League before 31 May 2021, payments will become due to players, staff and loan note holders (£1.3 million) and the Co-operative Bank (£750,000).


Using Wednesday’s definition of debt, their £12.7 million was one of the lowest in the Championship, as many clubs have built up substantial debt (very largely owed to their owners) in their pursuit of promotion, especially Bolton Wanderers £195 million, QPR £185 million, Brighton £131 million, Ipswich Town £86 million, Blackburn Rovers £80 million and Middlesbrough £77 million.

Wednesday’s cash flow from operating activities has been negative since 2009, requiring funding from the owner to balance the books with £11.3 million put in by Mandaric in the last four years. Hardly any money has been spent on player recruitment (net) or capital expenditure, though £1.3 million of interest payments have been made in the last six years, including £0.5 million in 2014 alone.


The need for financial support was referenced by Mandaric when he introduced Chansiri: “His enthusiasm, his drive to win the games and, of course, financial backing will allow him to be a top chairman for this great club.” Apart from player purchases, there is a need to invest in infrastructure, such as the stadium, the pitch and the training facilities at Middlewood Road.

The 2013/14 accounts confirmed that Wednesday have complied with the new Football League rules in respect of Financial Fair Play (FFP), adding, “we remain confident that the club can continue to operate within the current FFP regulations.” The £0.8 million conversion of debt into equity in November 2014 implied that this was the amount that was required to be in line with the allowed FFP losses.

The current rules will continue to apply for the 2014/15 and 2015/16 seasons (though the maximum allowed loss is increased to £13 million from the second season), but will change from the 2016/17 season to be more aligned with the Premier League’s regulations, e.g. the losses will be calculated over a three-year period up to a maximum of £39 million. This more relaxed approach should help facilitate Chansiri’s spending plans.

"Long May you run"

FFP encourages clubs to invest in youth development, which is an area of focus for Wednesday, whose academy was granted Category Two status under the Elite Player Performance Plan (EPPP). However, there is a price to pay with a “considerable” increase in investment in the academy taking the costs above £1 million.

The concern with EPPP is that the changes in the contractual position of players under 16 might produce a situation where clubs such as Wednesday become feeder clubs, “ultimately subsidising the costs of youth development for those able to attract the best available talent without paying the true value to the club that worked so hard developing the player.”

"Under my thumb"

There is no doubt that supporters have been put through the wringer in the past few years, very nearly going all the way “from the Ritz to the rubble” as big Wednesday fans Arctic Monkeys once sang, but Chansiri’s money might just change that.

He certainly talks a good match: “I’m developing plans over the short, medium and long term to maximise the sporting potential of Sheffield Wednesday in a healthy and sustainable manner. We feel that if we make smart decisions and savvy investments that within a couple of seasons, it’s very possible to get to the Premier League.”

The owner’s dream is to celebrate Wednesday’s 150th anniversary back in the Premier League, which would mean returning to the top flight for 2017. That’s obviously very far from a done deal, but at least the Owls now have a fighting chance.

Tuesday, August 25, 2015

Blackburn Rovers - Burning Down The House



This year marks the 20th anniversary of Blackburn Rovers winning the Premier League, a magnificent feat that only five clubs have achieved. Things are very different these days, compared to that golden period when Alan Shearer and Chris Sutton were tearing defences apart, as Rovers now languish in the Championship following a disastrous takeover.

In November 2010 Rovers were acquired by Indian poultry giants Venky’s, who paid £23 million to end the club’s long association with the Jack Walker Trust. The new owners also took on around £20 million of debt, subsequently converting £10 million into share capital.

The sale of the club was done with the best of intentions, namely to take the club to the proverbial next level, as outlined by former chairman John Williams: “There is an opportunity to take the club forward, to consolidate our position in the league and look for year-on-year improvement. It is a cliché but standing still is going backwards, certainly that is the case in football and we must focus on the new challenges and opportunities ahead.”

Venky’s objective was to exploit football’s global popularity to boost their brand, thus driving their commercial ambitions forward, but the club has instead been a significant drain on their financial resources.

"Stay on these Rhodes"

There has been substantial managerial upheaval, starting with the new owners’ curious decision to sack Sam Allardyce almost immediately after their arrival and replace him with first-team coach Steve Kean. Big Sam may not be everyone’s cup of tea, but he had done a fine job at Blackburn and left the club in a comfortable 13th position in the Premier League.

Kean proved to be utterly ineffectual, only leading Blackburn to relegation in 2012, thus ending the club’s 11-year stay in the top flight. His resignation started a cycle of four managers in less than a year (plus a couple of caretaker stints). Neither Henning Berg, nor Michael Appleton lasted more than a couple of months, before Gary Bowyer steered the club away from a second successive relegation.

Bowyer has introduced a much-needed degree of stability, steadying the ship and guiding Rovers into the top half of the table. In fact, the club only missed out on the play-off places by two points in the 2013/4 season. This might not sound like much, but it was just what the doctor ordered after the previous turmoil.

Blackburn’s approach under the previous ownership was less ambitious, but it had proved successful over a number of years. Essentially, the strategy was to maintain the wage bill at a level that should have been too high for the club’s income, but to cover the shortfall with profitable player sales.

"Tonight, Matthew, I'm going to be..."

This was explained by John Williams thus: “It is a fact of life that we have had to make some sales to balance the books. Using capital receipts in this way (to fund the wage bill) may not be the perfect model, but it works for us.” He added, “Using player sales will become by necessity a well-practised art for us, because we do not want to weaken our team.” The alternative would have been to reduce wages to a level where “we would struggle to be competitive.”

Williams asserted that this “lean and mean” strategy represented “the simple economics of a club with a small fan base”, but Venky’s adopted a very different stance, as they brought in a number of players on big money, long-term contracts, such as Danny Murphy, Dickson Etuhu, Leon Best and Jordan Rhodes, while offering generous extensions to many senior professionals.

The unwise level of player investment was exacerbated by the recruitment seemingly being guided by a motley crew of football agents, including Jerome Anderson, who just happened to represent Steve Kean. At the same time, there was a cavalier disregard for the club’s supporters, as communications broke down, despite the presence of the bizarre figure of Shebby Singh, a Malaysian TV pundit, as global advisor.

In fairness to Venky’s, they do appear to have been very badly advised and were clearly surprised by the devastating impact of relegation from the Premier league. Indeed, they have since admitted, “We have learned some very valuable and costly lessons.”


It has certainly been an expensive education, as can be seen in the 2013/14 accounts, the most recent published by the club, which included a thumping great £42.1 million loss. This was even worse than the previous year’s £36.5 million loss, but was distorted by around £16 million of once-off charges, which the directors considered “to be important in our efforts to return the club to a sound financial footing.”

This was a reference to the Championship’s Financial Fair Play (FFP) regulations, which the club had failed to meet, resulting in a transfer embargo. Finance director Mike Cheston explained the thinking behind effectively bringing forward costs into 2013/14 accounts, “These costs are now, not in future years, so it gives us a much better chance of achieving FFP.”

Payments of £6.6 million were made to achieve player disposals, thus increasing the loss on player sales by £4.7 million, while an impairment charge of £3.3 million was booked to reduce player values and a £6.4 million provision for onerous (player) contracts was made.

The good news was that the underlying figures improved with revenue rising £3.5 million to £30.4 million, while expenses were £6 million lower.

The revenue growth was largely due to £4.2 million higher broadcasting income following an increase in parachute payments from the Premier League, though commercial income was up £0.6 million, due mainly to an increase in academy grant income received as a result of achieving Category 1 status. This was partially offset by a £1.2 million reduction in match day revenue due to a decrease in cup competition income.

The wage bill was cut by £2.1 million to £34.5 million, while player amortisation was down £2.5 million and other expenses were £1.2 million lower. On the other hand, interest payable was £0.7 million higher at £1.1 million.


Unsurprisingly Blackburn’s £42 million pre-tax loss was the highest in the Championship in 2013/14, around twice as much as the nearest contenders: Nottingham Forest £23 million, Leicester City £21 million, Middlesbrough £20 million and Leeds United £20 million. Even excluding the £16 million of exceptional items, Blackburn’s loss would still have been the worst in the division at £26 million.

To be fair, almost all clubs in the Championship lose money and are reliant on owners’ funding. In 2013/14 losses were reported by 21 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 only clubs to make money in the Championship were Blackpool (with their highly dubious model), Wigan Athletic and Yeovil Town – and they have all since been relegated.


Up until the Venky’s takeover Blackburn had operated a model that essentially broke-even with a series of small annual profits and losses. When the new owners took charge, their aim was “to build a successful and sustainable club”, but they have horribly failed to meet this objective, as the combined losses of the last four years add up to a colossal £93 million. The dramatic change from the previous regime has been highlighted in the Championship with the losses in the last two years alone amounting to a worrying £79 million.


Managing director Derek Shaw claimed that future losses would “be a lot less than they are now”, but this would require significant player sales, as can be seen in 2012 when £23 million profit on player sales helped produce a £4 million profit. This was the only profitable year under Venky’s, thanks to the sales of Phil Jones to Manchester United, Chris Samba to Anzi Makhachkala and Nikola Kalinic to Dnipro Dnipropetrovsk. Otherwise there would have been another significant loss of £19 million.

The old business model relied a lot on player sales with this activity contributing £42 million of profits in the four years up to 2010, notably £19 million in 2009, mainly due to the sale of Roque Santa Cruz to Manchester City. Without these sales, the £1 million profit in this period would have been a £41 million loss.


However, this is no longer the case, as three of the four years under Venky’s have actually produced losses on player sales, which is a clear a sign of poor player trading and football management. In fact, Blackburn's £6.7 million loss in 2013/14 was the worst performance in the Championship that season.

There are signs that this is changing, as the 2014/15 accounts will include the sale of Tom Cairney to Fulham, while 2015/16 will be boosted by the big money sale of Rudy Gestede to Aston Villa. To be honest, there are not too many Blackburn players who would attract large fees to close the deficit, which is why there has been a lot of speculation that leading scorer Jordan Rhodes might have to be sacrificed.


Player trading is not the only issue at Blackburn, as operating profitability has been on a declining trend, falling from a peak of a £7 million operating profit in 2008 to a £24 million operating loss in 2013, though there was a recovery of sorts in 2014 to an operating loss of £17 million (excluding exceptional items). The club would require a fairly extensive restructuring in order to return to operating profits in the Championship.

Revenue rose 13% (£3.5 million) from £26.9 million to £30.4 million in 2013/14, but this still represented a 44% (£23.8 million) drop compared to the last season in the Premier League in 2011/12. The largest reduction was broadcasting £19.0 million (46%) to £22.1 million, though this was cushioned by a parachute payment of £19.3 million.


However, the other revenue streams have also suffered from relegation with commercial income falling by £2.5 million (32%) to £5.2 million and match day down £2.3 million (43%) to £3.1 million. In fact, both of these are considerably lower than their recent highs in 2006/07, when match day was as high as £9.0 million, while commercial income was £10.5 million, though this included a £3 million donation from the Jack Walker Trust.

A few years ago Blackburn identified relegation from the Premier League as “the biggest risk to the business” and the substantial revenue reduction since that unhappy event has demonstrated why that was the case. In fact, it will get worse, as the parachute payments will fall to £10 million in 2014/15 and 2015/16 before stopping altogether the following season.


Following this increase, Blackburn’s revenue of £30.4 million was the 6th highest in the Championship in the 2013/14 season, though still a fair way behind the top three clubs: QPR £39 million, Reading £38 million and Wigan Athletic £37 million. In fact, six clubs earned more than £30 million that year.

Money often talks in football, so it is no surprise that two of the four clubs with the highest revenue were promoted in that season: QPR and Leicester City. The exception to the rule was ironically Blackburn’s local rivals Burnley, who demonstrated what is possible by securing promotion with only the 11th largest revenue of £20 million, around £10 million less than Rovers.


Of course, those total revenue figures are heavily influenced by the parachute payments received when clubs are relegated from the Premier League. If these were to be excluded, a slightly different picture emerges with Leicester City on top of the pile with £31 million, followed by Leeds United £25 million, Brighton £24 million and Derby County £20 million. Blackburn’s £13 million (£30 million less parachute payments £19 million plus solidarity payments £2 million) would then drop them down to 13th highest revenue.


The influence of parachute payments is clear in Blackburn’s revenue mix with broadcasting contributing an incredible 73% of total revenue. Commercial is worth only 17%, while match day is just 10%.


This reliance on TV money is one of the highest in the Championship, only surpassed by Wigan Athletic (an astonishing) 87% and Bolton Wanderers 74%. It should be noted that all three clubs are from the economically distressed north-west of England.

In 2013/14 Blackburn’s broadcasting revenue rose from £17.9 million to £22.1 million, including parachute payments, which increased from £15.6 million to £19.3 million with the introduction of the new 3-year Premier League TV deal. In the Championship most clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to just £4 million of central distributions: £1.7 million from the Football League pool and a £2.3 million solidarity payment from the Premier League.


However, the clear importance of parachute payments is once again highlighted in this revenue stream, greatly influencing the top eight earners, though it should be noted that clubs receiving parachute payments do not also receive solidarity payments. Other TV money is dependent on whether a team reaches the play-offs, cup runs and the number of times a club is broadcast live.

Looking at the Premier League television distributions, the massive financial disparity between England’s top two leagues becomes evident with Premier League clubs receiving between £62 million and £98 million in 2013/14, 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.


Obviously there is never a good time to be relegated, but Blackburn’s timing was particularly bad, given that the Premier League distributions continue to increase. As an example, Blackburn’s 19th place in 2011/12 was worth £40 million, but the club who finished in the same position in 2014/15 (QPR) received £65 million – and that’s before the recent blockbuster deal commences in 2016, which I estimate will be worth at least another £30 million a season.

The other point worth noting is that Blackburn’s fall down the Premier League also cost them a lot of money. Even though much of the cash is distributed equally, there is a merit payment based on where a club finishes in the league, so Blackburn’s 7th place in 2007/08 was worth £10.2 million, while the 19th place in 2011/12 only delivered £1.5 million.


As we have seen, parachute payments make a significant difference to a club’s revenue and therefore its spending power in the Championship. Up to now, these have been worth £65 million over four years: year 1 £25 million, year 2 £20 million and £10 million in each of years 3 and 4.

However, the Premier League has recently announced changes to this structure, whereby from 2016/17 clubs will only receive parachute payments for three seasons after relegation, although the amounts will be higher (my estimate is £75 million, based on the advised percentages of the equal share paid to Premier League clubs: year 1 55%, year 2 45% and year 3 20%).


The potential upside following promotion would thus be even higher – especially if a club could survive in the top flight for more than one season. The size of the prize explains why so many Championship clubs push the boat out in an attempt to reach the highly lucrative Premier League. This may seem like a distant dream at the moment to Rovers’ long-suffering fans, but they have been within striking distance of the play-offs in the last couple of seasons.

Of course, any promoted team would also have to spend more to improve their playing squad, but the net impact on the club’s finances is undoubtedly positive, as can be seen by the clubs that were promoted in 2012/13 (Cardiff City, Hull City and Crystal Palace). On average, their expenses increased by £38 million, particularly the wage bills, but their operating profits substantially improved by £32 million, due to the huge revenue growth of £70 million.


Match day revenue fell £1.2 million (29%) from £4.3 million to £3.1 million in 2013/14, though the club stated that underlying revenue was actually up, if ticket income from cup competitions were excluded, as the previous season’s figures include money from reaching the quarter-final of the FA Cup, which featured a memorable 1-0 win at Arsenal.

This reduction meant that Blackburn’s match day income was one of the smallest in the Championship with only four clubs having lower revenue here: Barnsley, Blackpool, Doncaster Rovers and Yeovil Town. That said, few clubs generate significant match day revenue in the Championship with only three reporting more than £7 million (Brighton £10.4 million, Leeds United £8.6 million and Nottingham Forest £7.2 million).


Blackburn’s low revenue is partly due to their admirable policy of low ticket prices: “we try to make football at Ewood Park as affordable as possible and we remain in the best-value category in terms of season tickets and match day pricing.” This was confirmed by a BBC survey of Championship prices that placed Rovers 4th lowest for cheapest season tickets and 2nd lowest for most expensive season tickets.

The club reduced ticket prices by 25-30% in the 2007/08 season to increase crowds as part of a “Taking Back Ewood” campaign and cut prices again in 2009/10 (albeit after a 6% increase in the intervening season). Since then, they have implemented a Premier League Pledge season ticket, which would mean a 75% discount if the club were promoted, and have frequently frozen ticket prices.


Despite all these initiatives, attendances remain on the low side with the 2013/14 average of 14,959 being only 16th highest in the Championship, a long way behind clubs like Brighton (27,283), Leeds United (25,088), Derby County (24,933) and Leicester City (24,916).

Of more concern is the huge fall in attendances following relegation. Crowds have dropped by around a third from 22,551 in the Premier League to less than 15,000. This means that Ewood Park (capacity 31,367) is less than half full. There had been talk of developing the Riverside Stand to raise capacity to 40,000, but there is little chance of that happening any time soon.


Commercial revenue increased by 13% (£0.6 million) from £4.6 million to £5.2 million, which is the 6th highest in the Championship. This may be a long way behind Leicester City £18.6 million (boosted by a major marketing deal with Trestellar Limited) and Leeds United £12.2 million, but it is not too bad. As Derek Shaw explained: “All Championship clubs face commercial challenges, further compounded in our case by the close proximity of a number of big city clubs with rich traditions.”

Rovers have signed a new, multi-year shirt sponsorship deal with the online gaming company Dafabet for the 2015/16 season that is reportedly worth seven figures plus bonuses. This followed a couple of one-year agreements: Zebra Claims (2014/15) and Regulatory Finance Solution (2013/14).

They also signed a three-year kit supplier deal with Nike that started in the 2013/14 season, moving from a long-standing arrangement with Umbro. The club has stated that this has already “helped substantially increase retail income.”


The wage bill was reduced by 6% (£2.1 million) from £36.6 million to £34.5 million, improving the wages to turnover ratio from an unsustainable 136% to 114%. This should have come as no surprise, following Derek Shaw’s comments the previous year: “We are doing our utmost to turn the corner and support the manager and his team, so that they can challenge for promotion and at the same time cut the wage bill. That’s the big number.”

Despite relegation clauses in most contracts that helped lower the wage bill by £13.4 million in 2012/13 from £50.0 million to £36.6 million, Blackburn have struggled to get some high earners off the payroll. Shaw again: “We came down with a Premier League squad that was very well paid and it’s just been too much money to lose – we’ve been unable to move enough people out.”


This was very different from the stance adopted immediately after relegation: “With Venky’s stated commitment to a return to the Premier League as soon as possible, every effort was made to keep the team together and add further to the squad.” Now it’s more about “putting our house in order”, which is hardly surprising when you consider that the number of senior football players and management has increased from 76 in 2010 to 92 in 2014.

Clearly, the business model is still far from ideal if revenue is not sufficient to cover the wage bill, let alone any other expenses, but this has always been an issue for Rovers with former chairman John Williams describing the wage bill as “something of an Achilles heel for us.”


The harsh reality is that almost every club in the Championship has a dreadful wages to turnover ratio with 10 of them being more than 100%. Even so, Blackburn’s 114% is the 8th highest in the division, though significantly better than clubs like QPR 195%, Bournemouth 172%, Nottingham Forest 165% and Millwall 132%.

The £34 million wage bill was actually the 4th highest in the league, only behind QPR £75 million (ridiculous in the second tier), Leicester City £36 million and Reading £35 million. This means that Blackburn have been under-performing compared to their financial resources. Following the 2013/14 pay-offs and the number of first-team squad players that have left this summer, the expectation is that the wage bill would have further fallen in 2014/15.


Player amortisation decreased £2.5 million from £9.7 million to £7.2 million in 2013/14 as a result of several player departures, but this had initially increased after relegation due to Venky’s outlay on player purchases.

To better explain this point, it should be noted that 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 – even if the entire fee is paid upfront. As an example, Jordan Rhodes was bought for £8 million on a five-year deal, so the annual amortisation in the accounts for him is £1.6 million.

In the same way, the slowdown in big money buys from other clubs, allied with the 2013/14 impairment, has impacted the balance sheet, with the value of player (intangible) assets decreasing from £20.4 million in 2013 to £7.5 million in 2014.


The 2012/13 season seems to represent a last hurrah in terms of the transfer market with £13.5 million being splashed on player purchases, as the owners “sanctioned significant spending” and “looked to build a squad capable of bouncing back at the first time of asking”. In the six seasons up to that point, Blackburn averaged gross spend of £8.4 million, but this has been slashed to an average of just £1.4 million in the last two (completed) seasons.

Equally striking is the lack of big money sales with an average of £13.8 million up until 2013 falling to £0.9 million in the last two seasons. As we have seen, player sales were a key part of Rovers’ strategy with John Williams admitting, “The leap to becoming a net spender remains beyond our capabilities without new investment.”


In the last two seasons Rovers’ net spend of £1.0 million puts them firmly in mid-table in the Championship. Although this comparison has to be treated with some caution, as the figures are distorted by clubs that were in the Premier League the previous season, either because of high spend when they were in the top flight or large sales following their relegation, it is evident that Blackburn have been comfortably outspent by many of their league rivals.

This summer the club seems to have returned to a selling policy by bringing in more than £10 million for the sales of Rudy Gestede and Tom Cairney plus sell-of fees for Josh King and Steven Nzonzi. However, it’s a tricky balance, as Derek Shaw acknowledged, “Our owners don’t want to sell our assets, our owners want us to get promoted, so we won’t be putting many players up for sale.”


Gross debt shot up again by £25.2 million from £54.9 million to £80.1 million, which is around four times as much as the £20 million level when the Venky’s took over. This is largely owed to Venky’s in the form of an interest-free loan of £58.6 million (with no fixed repayment date).

The remaining debt includes an £11.9 million overdraft facility with the State Bank of India (at 2.65% over 6 month GBP LIBOR) that was due to expire in November 2014, but was expected to be renewed. Finally, there were £9.5 million of other loans, secured on Premier League parachute payments: £5 million at 9% was repaid in August 2014, while £4.5 million at an equally exorbitant 9.5% was due to be repaid in August 2015.

On the one hand, the Venky’s are to be applauded for providing so much funding in an attempt to win promotion, but a model that “remains reliant on its ability to maintain existing and obtain additional funding” is not great. Indeed, when the debt was £20 million, John Williams said that “it cannot be allowed to increase further” – and that was in the Premier League.


In addition, the club had net transfer fees payable of £7.7 million and contingent liabilities of £6.5 million, depending on player appearances and team performance.

Of course, many clubs in the Championship have built up substantial debt, but Blackburn’s £80 million is only surpassed by four other clubs: Bolton Wanderers £195 million, QPR £185 million, Brighton £131 million and Ipswich Town £86 million.


The cash flow statement makes clear the reliance on Venky’s funding. In 2013/14 Blackburn had negative cash flow of £14 million from operating activities and then spent a net £10 million on players (including costs of disposal) and £1 million on interest payments, leading to a £25 million shortfall before financing. This was covered by Venky’s increasing their debt by £22.5 million and the club taking on £4.5 million of additional loans

The owners have confirmed that they are willing to provide additional funding “for the next 12 months and thereafter the foreseeable future even in the case of the bank facility not being renewed”, which is just as well.

Their commitment was re-affirmed by Derek Shaw: “There is no talk of them getting out; they know mistakes have been made, they don't dwell on it and they are looking forward. They have an unbelievably big business in India and the Far East, they have backed this football club and continue to do so.”

"Best not to think about it"

The other major challenge for Blackburn is Financial Fair Play, especially as they broke the rules by posting a loss in excess of the maximum allowed in 2013/14, along with QPR, Leeds United and Nottingham Forest. This resulted in a transfer embargo, whereby the club is prevented from paying fees for permanent and loan signings.

Even though FFP losses are not the same as the published accounts, as clubs are permitted to exclude some allowable costs, it is clear that Rovers were well above the allowable loss, hence the move to raising funds from player sales to help reduce losses. This is the only way that they are likely to get the transfer embargo lifted any time soon, as losses need to be within the permitted deviation (£6 million in 2014/15, rising to £13 million in 2015/16).

FFP encourages clubs to invest in youth development, which is an area of focus for Blackburn, whose academy was granted the Category 1 status under the Elite Player Performance Plan in July 2013. This is a feather in their cap, as very few clubs outside the Premier League have been awarded this important status.

"God put a smile on your face"

There is no doubt that this has been a torrid time for Blackburn Rovers, but there might just be a little light at the end of the tunnel. Manager Gary Bowyer got it about right, when he said, “We’ve stabilised it from where it was, but that doesn’t mean that it’s in the place we want it to be. Now we need to kick on and go again.” Whether Bowyer is actually the right man to take the club forward is debatable and there has already been some speculation about the manager’s future after an indifferent start to this season.

Given their track record, it would be no great surprise if Rovers found another way of shooting themselves in the foot, but if they needed any additional focus, then the realisation that this is the last season when they will benefit from parachute payments should surely provide this. Once these have finished, who knows what might happen to this fine old club?
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