The Swiss Ramble

Leeds United - Marching On Together?

2012-05-18T08:57:00.003+02:00

So another season passes with Leeds United failing in their attempt to return to the top flight. Having narrowly missed out on the play-off places the previous season, hopes were high that this could be their year, but the Whites went backwards, ending up in the bottom half of the Championship. Poor results resulted in the January dismissal of manager Simon Grayson, who had guided the team out of League One two years ago, to be replaced by the experienced Neil Warnock.

However, there was little improvement, though Warnock’s cause was not helped by the timing of his arrival – one day after the transfer window closed. That said, given the limited investment in the squad in the last few years, it is doubtful whether Warnock would have been able to spend much in any case.

In fairness to Grayson, it must have been difficult for him to make significant progress, as the club has got into the habit of selling its best players. Before a ball was even kicked, goalkeeper Kasper Schmeichel was sold to promotion rivals Leicester City, and then tricky Ivorian winger Max Gradel, Leeds’ player of the year, joined French club Saint-Étienne in August.

"Howson - Jonny, come home"

The fans’ unhappiness was compounded in January when club captain (and local boy made good) Jonny Howson was transferred to Norwich City. Leeds argued that this was good business, as he was in the last year of his contract, but this was not the first time that the club had allowed itself to get into such a situation. In much the same way, other decent players, such as Jermaine Beckford (to Everton) and Bradley Johnson (also to Norwich) had exited stage left.

This lack of ambition is infuriating to most supporters, especially as it is in marked contrast to a ticket pricing strategy that is Premier League in all but name. Even new captain, Robert Snodgrass, was moved to break ranks after Howson’s unpopular transfer, “How can you say you’re aiming for promotion and then sell your captain?”

It’s not so long ago that Leeds United were a force at the very highest levels, reaching the Champions League semi-finals in 2001, before being eliminated by Valencia. This was in the middle of a purple patch when they finished in the top five of the Premier League every season between 1998 and 2002. Leeds were actually the last club to win the old First Division before the creation of the Premier League in 1992.

Going back further, Don Revie’s Leeds side had been even more potent, never finishing out of the top four between 1965 and 1974, winning two league titles in the process in 1969 and 1974, before the FA chose him as England manager. Known far and wide as “dirty Leeds”, this team could also play a bit, as seen when Jimmy Armfield steered the team to the 1975 European Cup Final, where they were defeated by Bayern Munich (in hugely controversial circumstances).

"Peter Ridsdale - riddle me this"

In short, Leeds United were a genuine big club for many years, though they spectacularly imploded after chairman Peter Ridsdale’s catastrophic attempt to “live the dream” resulted in a financial nightmare. Before the likes of Chelsea and Manchester City brought in their billionaire benefactors, Leeds reported the largest ever loss by an English football club of £49.5 million in 2003 (after a £34 million loss the previous year).

Ridsdale’s decision to “go for it” could be described as courageous, though reckless and irresponsible would seem more appropriate. When he jumped ship in 2003, Leeds were around £100 million in debt, after a grand acquisition strategy using innovative finance models, i.e. other people’s money, to fund player purchases. These included high interest sale-and-leaseback arrangements, which allowed Leeds to spread the cost of buying a player over the length of his contract, and a £60 million loan, a record for English football at the time, which was essentially secured on supporters’ loyalty, i.e. future gate receipts.

A consortium of local businessmen, led by insolvency specialist Gerald Krasner, took over Leeds, but the damage was done. When results on the pitch did not improve, the club could not sustain the massive wage bill, leading to a fire sale of players and many other important assets, including the stadium and the Thorp Arch training ground. The financial turmoil ultimately resulted in two relegations with Leeds dropping to the third tier of English football for the first time in 2007.

"Ken Bates - meet the new boss..."

Before that fateful day, Ken Bates had appeared on the scene with the former Chelsea owner looking for “one last challenge.” Even after all the sales, Krasner’s motley crew was still struggling to make ends meet, so a 50% stake was sold to the old bruiser for a reported £10 million in 2005. Or rather to a company called the Forward Sports Fund (FSF).

Despite extensive cost-cutting measures, two years later the club entered administration in May 2007 via a Company Voluntary Arrangement (CVA) with debts of around £35 million, incurring a 10-point deduction from the Football League, which officially relegated Leeds to League One.

The CVA was challenged by HMRC following an initial offer to settle debts at just one penny for every pound owed, but eventually went through (at an undisclosed higher payment) after it was approved by the required majority of 75% of the voting creditors.

Crucially, one of the major creditors, Astor Investment Holdings (an offshore company registered in the British Virgin Islands), said that they were willing to write-off their £17.6 million loan, but only if FSF remained in charge with Bates as chairman. This seemed extraordinarily generous, not only because other bidders offered more money, but it meant that they were supporting a man who had effectively lost them their cash.

"Ross McCormack - just can't get enough"

That does not make much sense – unless Bates was in some way connected to these companies. Indeed, he initially stated that the two shares in FSF were owned by him and his financial advisor, Patrick Murrin, but later corrected this “error” when he revealed that were in fact 10,000 shares in FSF – with undisclosed owners.

Although the club admitted that there had once been a link between Astor and FSF, they said that this had been severed in 2006 before the club went into administration, an explanation that was accepted by the administrators. This may seem a trivial issue, but it is important, as if there had been a link, then Astor would not have been able to vote on the CVA as an “unconnected” creditor and it would not have been passed.

Whatever the circumstances behind the exit from administration, the result was clear: FSF had retained control of an asset, which was now profitable after the slashing of the wage bill, while clearing almost all of the debts. Of course, this phoenix-like rise from the ashes was perfectly legal, albeit perhaps not the most moral course of action, as it left many bills largely unpaid, including many from small businesses and £7.7 million owed to the taxman.

Leeds United did not get away entirely scot-free, as the Football League imposed a further15-point deduction, due to the club not following its rules on clubs entering administration, which meant that they missed out on automatic promotion from League One and ended up losing to Doncaster Rovers in the play-off final.

"Luciano Becchio - don't cry for me, Argentina"

The ownership issue was still far from transparent. Indeed, the report from the House of Common select committee on football governance specifically singled out Leeds for criticism with MP Damien Collins stating, “The principle is that it should never be allowed to happen again that football clubs are bought by offshore trusts of which we have no idea who the owners are.”

Under pressure from the Premier League, who require its clubs to publish the names of all shareholders with stakes of 10% or more, the Football League tightened its rules, following which Leeds “clarified” its ownership: Leeds United Football Club Limited was owned by Leeds City Holdings Limited, which was majority owned by FSF, which was owned by three discretionary trust funds, which were in turn owned by Chateau Fiduciare, a Swiss-based trustee.

Far from clearing up the situation, this statement only added to the confusion, bringing to mind Sir Walter Scott’s famous quote, “Oh, what a tangled web we weave, when first we practice to deceive.”

Never mind, because in May 2011 Leeds issued another statement, following the “scaremongering arising out of the football governance inquiry”, which addressed the ownership issue: “The chairman, Ken Bates, has completed the purchase of FSF Limited for an undisclosed sum. FSF Limited is now owned by Outro Limited, which is wholly owned by Ken Bates.”

"Andy Lonergan - hold it now, hit it"

This was not enough for that man Collins, “Very important questions remain unanswered about the real identity of the previous owners of Leeds United, and the nature of the sale of the club to Ken Bates.” The most obvious question is why FSF would sell at a time when the riches of the Premier League appeared to be within reach, having supported the club through the dog days in League One?

Also, why wouldn’t they hold a beauty contest for other potential bidders to secure the maximum return on their investment? The price that Bates paid was (surprise, surprise) undisclosed, but it is unlikely to be that high, given that the man himself informed the High Court in 2009 that he had little cash with most of his wealth tied up in assets. It is true that there are not too many people rich (or foolish) enough to invest in a football club, but they do exist, e.g. the Liebherr family at Southampton and Vichai Raksriaksorn at Leicester City.

Whatever FSF’s thinking was, Bates is still holding the reins at Leeds. His time as chairman has been colourful to say the least, featuring bans for the BBC and Guardian, when irked by their reports on his activities, and insults aplenty for those fans of the club who have the temerity to disagree with his approach, describing them as “morons” and “dissidents”. That is by no means the end of his seemingly customer hostile strategy, as evidenced by the stratospheric ticket prices.

"Michael Brown - tough love"

Even when he made a valid point about adopting a long-term strategy, it was done in a crass manner, “In an age of instant gratification, Leeds United is having a long, drawn-out affair with plenty of foreplay and slow arousal.”

In fairness to Bates, other owners have gone down the path of splashing the cash with little success to show for it, so his prudent policy is not all bad. As he said, “All football clubs are now realising that you have to get your balance sheet and your profit and losses right first and then play football, otherwise as you're seeing every week you won't be able to play football.”

Indeed, he has managed to steadfastly improve the finances at Leeds, while reversing the club’s slide down the divisions, which is an achievement. However, it should be remembered that this financial recovery was originally due to the tactical administration, which cleared the club’s debts and enabled it to start afresh.

So how do the club’s finances look these days? Not too bad at all.

In 2011 the club made a profit after tax of £3.5 million, which was the highest since the £4.5 million reported in 2008 for the first 14 months after coming out of administration. Even though £2.6 million was due to the club recognising a deferred tax asset arising from previous losses, this still left a solid £0.9 million profit before tax.

Despite a £5.2 million (19%) rise in revenue from £27.4 million to £32.7 million following promotion to the Championship, the profit before tax fell by £1.2 million, as the wage bill grew £2.8 million (20%) and profit on player sales fell by £3.9 million.

Note that these figures relate to the football club (Leeds United Football Club Limited), but there’s not much difference in the holding company (Leeds City Holdings Limited), which reported revenue of £34.5 million and profit before tax of £0.3 million in 2011. In essence, revenue is slightly higher, but profits are lower (by £0.6 million in each of the last two seasons).

In addition to the football club, the holding company owns Yorkshire Radio Limited, Leeds United Media Limited and Leeds United Centenary Pavilion Limited. The latter two companies were only created last year “to allow separate… investment into these particular areas of our business in the future.”

Since coming out of administration, Leeds have been profitable for four consecutive years, a rare feat in the ultra-competitive world of modern football. The combined profits before tax are £7.5 million (2008 £4.6 million, 2009 £0.015 million, 2010 £2.1 million and 2011 £0.9 million), while profits after tax are worth £10.1 million.

In fact, just three out of 24 clubs in the Championship managed to make money in 2011 with Leeds’ £0.9 million only surpassed by Watford £9.6 million and Scunthorpe United £1.5 million. Nine clubs lost more than £10 million, including QPR £25.4 million, Hull City £20.5 million, Middlesbrough £18.7 million and Leicester City £15.2 million.

This is partly a result of low TV money in England’s second tier, but also due to many clubs over-spending in order to reach the promised land of the Premier League. Leeds are very much an exception to this rule. In fact, they are the only club in the Championship to have made profits in both of the last two seasons.

However, the impact of player sales on these results should not be ignored. Excluding the £11.5 million profit made from this activity between 2008 and 2010, the club would have registered losses in each of those three years. As well as normal player sales, the first year after administration benefited from compensation paid by Chelsea for two academy players, Tom Taiwo and Michael Woods. In 2010, the sale of Fabien Delph to Aston Villa transformed a £1.7 million loss into a £2.1 million profit.

The good news is that last season’s profit was entirely due to normal business, as there was no once-off profit on player sales. That was the first year since administration that Leeds made an operating profit (£0.9 million), which represented a £2.6 million turnaround from the previous year’s operating loss of £1.7 million. Next year will be business as usual, as the figures will benefit from the sales of Howson, Gradel and Schmeichel amongst others.

In many ways, it is not that surprising that Leeds are profitable, as their revenue is exceptionally high for a Championship club. At £32.7 million, it is not only the largest in the division, but it is £5-6 million more than the next three clubs in the revenue league (Burnley, Middlesbrough and Hull City), all of whom were boosted by £7.4 million of parachute payments following relegation from the Premier League.

Excluding that factor, it is clear that Leeds United’s revenue is the highest by some distance with the closest contender being Norwich City, whose £23 million is almost £10 million lower. Incidentally, the other clubs promoted to the top tier in 2011 have even lower turnover: QPR £16.2 million and Swansea City £11.7 million. One conclusion is that Leeds are punching well below their weight.

Revenue has risen over 40% since 2008 from £23.2 million to £32.7 million. Much of that is due to the better TV deals in the Championship compared to League One, but the majority comes from gate receipts and merchandising. Put another way, the club is very reliant on the loyalty of its supporter base for its high turnover.

Last season the fans contributed at least £19 million (gate receipts £12.7 million plus merchandising £6.1 million), which represents around 60% of the club’s total revenue of £33 million. If other activities such as catering were broken out of Other Commercial revenue, the proportion would be even higher.

Of course, the high gate receipts represent something of a double-edged sword, as it its partly due to the very high prices that Chairman Ken charges his fans. Not only are they the highest in the Championship, but, according to a survey conducted by the award-winning Leeds fanzine, The Square Ball, only four clubs in the Premier League have higher priced entry-level season tickets (Arsenal, Chelsea, Liverpool and Tottenham Hotspur).

However, this attempt to squeeze the orange until the pips speak could be counter-productive, as average attendances have fallen by 4,000 (15%) to 23,300 this season, when overall Championship crowds rose 2%. This is still the fourth best in the division, only beaten by one promoted club (Southampton), West Ham and Derby County, but it’s a measure of how much Bates has tested the supporters’ patience.

The previous season Leeds had the highest crowds in the Championship with 27,300 (more than eight Premier League clubs), while they averaged nearly 25,000 in League One. As an indication of the potential at Leeds, average crowds were just under 40,000 at their height in the Premier League.

The decline in attendances this season will cause something like a £2 million hole in the 2011/12 accounts. That will reduce the reported revenue, but the actual cash available to the club is also going to be impacted by an agreement made post balance sheet, whereby the club sold season tickets for both the 2012/13 and 2013/14 season for £5 million in order to finance further development of Elland Road.

Leeds’ total commercial income of £14.5 million is also impressive. To place that into context, it is only just below the money generated from this revenue stream by Aston Villa £16.7 million and Newcastle United £15.8 million, while it is actually higher than many Premier League clubs, including the likes of Everton £11.7 million and Fulham £14.1 million.

However, while merchandising revenue has grown 77% (£2.6 million) in the last three years to £6.1 million, other commercial income has actually fallen 8% (£0.7 million) to £8.4 million in the same period. Leeds recently extended their shirt sponsorship deal with Enterprise Insurance for two years until the end of the 2013/14 season, while the club signed a lengthy six-year kit deal with Macron in 2010. Financial details of both deals were undisclosed.

The influence of television on a football club’s finances is undeniable and Leeds United are no exception. Relegation from the Premier League in 2003/04 led to an immediate £9.4 million decrease with TV revenue falling from £16.9 million to £7.5 million, even though the fall was cushioned by annual parachute payments of £6.6 million for the next two seasons. When these stopped in 2006/07, the club’s finances were dramatically affected with TV money crashing to £1.2 million, which was exacerbated by the relegation into League One giving TV income of just £0.7 million.

The rise in 2010 to £ 1.6 million was partly due to higher payments from the Football League (central distributions £0.64 million, solidarity payments £0.1 million), but also owed a lot to a splendid FA Cup run, featuring four ties against Premier League opposition (Liverpool, Tottenham and Manchester United).

Promotion saw a big increase in TV money, as the Football League distribution to Championship clubs is worth £2.5 million (increased from £1 million in 2010/11) with a £2.2 million solidarity payment from the Premier League (up from £1.3 million). In addition, each club was given an additional £0.5 million as their share of the parachute payments for Newcastle and WBA, because they went straight back up to the top tier.

"Elland Road - I could build you a tower"

Although there is never a good time for a football club to be relegated, it is fair to say that Leeds’ timing was particularly unfortunate, as they missed out on the significant growth in TV deals, e.g. the three teams relegated from the Premier League last season received an average of £40 million compared to Leeds’ £17 million in 2004. Similarly, while their relegation was eased by £13 million of parachute payments, teams now will receive £48 million (£16 million in each of the first two years, and £8 million in years three and four).

The other cloud on the horizon is the new Football League Sky TV three-year deal that kicks off in the 2012/13 season, which will be £69 million lower than the current contract at £195 million, a reduction of 26% or £23 million a season. This reflected what Football League chairman Greg Clarke called, “a challenging climate in which to negotiate television rights.” Whatever the reason, it will mean a reduction in the payments distributed to Leeds.

This is another reason why it is a little puzzling that Leeds do not push harder for promotion to the significantly more lucrative top tier, as that would conservatively be worth around £90 million. That doesn’t come in one fell swoop, but it’s still a magnificent prize. Even if a promoted team comes straight back down, it would receive £40 million TV income plus £48 million parachute payments over the next four years. Leeds would also benefit from much higher gate receipts and better commercial deals.

Furthermore, if Leeds were to finish higher in the Premier League, they would receive even more TV money with every season survived adding another £40+ million to the coffers. This explains why many clubs push themselves to the absolute limit to secure promotion, though it’s a dangerous game, as only three clubs go up every year.

One concern is that a promoted club might eat into that higher revenue by increasing wages and other costs, but the net effect is still likely to be positive. If we look at the three teams that were promoted to the Premier League in 2009/10, we can see that Newcastle United, WBA and Blackpool all dramatically improved their operating profitability, even though wages increased.

Leeds’ wage bill has long been a bone of contention among the fans, as it is very low compared to the club’s turnover. Despite a 20% (£2.8 million) increase from £13.7 million to £16.5 million in 2010/11, the wages to turnover ratio is only 51%, which is not only the lowest in the Championship, but is also lower than all but two clubs in the Premier League (Blackpool 48% and Manchester United 46% - though United benefit from enormous revenue of £331 million). Since exiting administration in 2007, wages have grown by just £3.8 million, while revenue has increased by £9.4 million.

This is the football club’s total wage bill, comprising £14.9 million salaries and £1.6 million social security. It is higher in the holding company, but only by £0.5 million, at £17.0 million. Directors’ emoluments are also up, rising from £174k to £299k, presumably largely for Shaun Harvey, the chief executive, as Bates “did not receive any benefits.”

According to the club website, “First team squad and management costs were £11.6 million, increasing from £7.7 million in the previous period.” They do not explain why the increase in these costs is higher than the overall growth in the wage bill, but it is probably due to bonus payments (including additional payments for loan players) made in 2009/10 for promotion. After Grayson was fired, Bates claimed that he had allowed his manager to go over his wage budget of £9.5 million in 2011/12 by 23% at £11.7 million, but that will only be confirmed by next year’s accounts.

While Bates has defended his record here (“At 30 players we have one of the largest squads in the Championship”), the figures do not lie and clearly show that Leeds’ wage bill is strictly mid-table in the Championship, coming in at the 12th highest in 2010/11. Leeds’ £16.5 million was around half the £30 million that QPR paid, though part of that will include promotion bonuses.

Although many Championship clubs have over-stretched themselves with nearly half reporting unsustainable wages to turnover ratios over 100%, they do not enjoy Leeds’ revenue advantages. All other things being equal, the Whites could safely increase their spending on player wages without going crazy.

If they targeted the 60% ratio adopted by Football League clubs in Leagues One and Two, that would mean an increase of £3.1 million to £19.6 million; if they opted for UEFA’s recommended upper limit of 70%, that would mean an increase of £6.4 million to £22.9 million. Either of those options would provide a budget good enough to mount a meaningful promotion challenge, more than the two other clubs that went up in 2010/11: Norwich City £18.4 million and Swansea City £17.4 million.

However, another factor needs to be considered at Leeds, namely the high amounts spent on Other Costs. Excluding salaries and amortisation, these stand at £13 million, which is very high for a club outside the Premier League. If we compare that with other Championship clubs with high revenue (not benefiting from parachute payments), we can see that Leeds have the highest Other Costs, e.g. twice as much as Norwich and Reading, with the highest proportion of total costs, though, in fairness, it does not look too high as a proportion of revenue,

Unfortunately, the club does not provide much detail for these costs, but one of the significant items is the rent paid for the stadium and training ground, after their sale and leaseback, which is around £2 million (increasing by 3% every year), a major financial burden. Nothing was identified for legal fees in 2011, but these have also been on the high sides in recent years: between 2008 and 2010 a total of £1.5 million was paid to a company controlled by RM Taylor, a director of the holding company.

Where Leeds have not spent big is in the transfer market, at least since the Ridsdale era. His unwise spending culminated in £69 million in the two years up to 2002, followed by a massive fire sale that produced £101 million of net proceeds in the next three years. Since then, the club has continued to make money from player trading with net proceeds of £15 million: £4 million in the four years up to 2009 and £11 million in the last three years.

Although Simon Grayson spent very little, having to mainly make do with free transfers and loans (an incredible 33 in his 37 months reign), he put a brave face on this, “Money isn’t the answer. It’s a help. It’s good management and scouting.”

It is undoubtedly true that money is no guarantee of success, as can be seen over the last three years with the likes of Leicester City and Nottingham Forest under-performing despite being among the highest spenders. Nevertheless, only four clubs have spent less than Leeds in this period – though admittedly one of those is Reading, who have just secured promotion to the Premier League.

It will be interesting to see if Bates continues his tight hold on the purse strings after the arrival of Warnock, who argued, “We’ll have to invest. The chairman knows what I’m looking at and what I think. The job requires major surgery in all departments.”

Net debt (in the holding company) is just £0.5 million, comprising a loan from Outro Limited (Bates’ company) of £975k, which has since been repaid, £149k of finance leases less £600k of cash. This is very respectable, though not as good as the previous year when the club held nearly £4 million of cash. Of course, the low debt levels are perhaps not that surprising after writing-off so much as a result of the administration.

However they got there, this is a better position than the vast majority of other clubs, as can be seen by the concerns of the Football League chairman, Greg Clarke, “Debt's the biggest problem. If I had to list the 10 things about football that keep me awake at night, it would be debt one to 10. The level of debt is absolutely unsustainable. We are heading for the precipice and we will get there quicker than people think.”

That said, Leeds do have other important potential liabilities: (a) if they are promoted to the Premier League before the 2017/18 season, they have to pay £4.75 million to the liquidator; (b) £875k may be payable on transfer fees depending on player appearances and/or Premier League promotion. Note: Leeds owe £133k transfer fees, but have transfer debtors of £988k.

"Adam Clayton - losing his edge?"

In addition, a total of £3.2 million has been raised via preference shares, which is a hybrid form of financing somewhere between equity and debt. These are worth £4 million when redeemed, guaranteeing a profit of £0.8 million for persons unknown. There is no fixed date for repayment, but they may be redeemed if the club is sold, liquidated or the majority shareholder (that would be Bates via Outro) decides to buy the shares.

Finally, there are the future receipts owed via the pledging of season ticket money (portion unspecified) to part fund the development of the Elland Road East Stand.

The football club’s balance sheet looks fairly strong with net assets of £10.6 million (up from £7.1 million), especially considering that the value of players in the books is only £1.5 million, compared to a real world valuation of £12.2 million (“based on the average opinions of seven members of senior football management”). Working capital is negative, but has been improving (from £5.7 million in 2009 to £1.2 million in 2011) and includes £8.1 million of prepayments of tickets and sponsorship revenue.

It also includes £4.6 million owed to other group companies (up from £0.4 million the previous year), which means that money from the football club is flowing to other companies, as opposed to being invested in the squad. The holding company notes that £2.1 million has gone to Yorkshire Radio.

The cash flow statement shows that Leeds generates money at an operating level (£9.1 million since administration), which is boosted by £5.4 million cash from player sales, but £16.6 million has been spent on capital projects, such as new executive boxes and lounges. This is consistent with Bates’ claim that “approximately £20 million” has been spent on “the clapped out, decaying stadium that I inherited”, but it gives the lie to his assertion that “all the money we have received has gone back into the squad.”

Clearly, improving stadium facilities is no bad thing, but it may be a case of putting the cart before the horse, if the club is prioritising property development before promotion. Bates has recently stated in his programme notes that the rebuilding, refurbishment and improvements of Elland Road are nearing completion, which would theoretically increase the money available to bolster the team, though, as we have seen, millions are still being invested into the East Stand.

This focus on property development should come as no surprise, as Bates once said, “In my view a football club is a property business that hosts a football match 25 days a year and is shut for the other 340 days.” While it does make sense “to increase the income generating potential of the club on non-match days”, this strategy has not always proved successful, as Bates himself should appreciate after Chelsea Village was on the brink of financial collapse before Roman Abramovich flew to the rescue.

"Tom Lees - searching for the young soul rebels"

Leaving aside reservations over whether the proposed hotel, superstore, retail arcade and casino are mere vanity projects that will not generate much revenue, the burning question is why the club should invest millions in properties that it does not own?

Stop me if you’ve heard this one before, but it is not clear who owns the stadium beyond Teak Commercial Limited, an offshore company registered in the British Virgin Islands in January 2005 (coincidentally the same month that Bates became Leeds United chairman). The uncertainty about ownership has already contributed to the local council rejecting an application from Leeds for a development loan, though this decision was also partly due to the failure of England’s 2018 World Cup bid.

Either way, what might be of interest to a potential investor is that the club has the opportunity to purchase Elland Road for £14.85 million, which was valued at £54.72 million according to the accounts, while Bates has confirmed that they could also buy back the training ground for £5 million.

Furthermore, Leeds should be a beneficiary of the new Financial Fair Play (FFP) framework, which was approved by the Championship clubs in February. This will see the introduction of a breakeven model, requiring clubs to stay within pre-defined limits on losses (falling from £4 million in 2011/12 to £2 million in 2015/16) and shareholder equity investment (falling from £8 million in 2011/12 to £3 million in 2015/16).

If clubs are promoted to the Premier League with losses above these limits, any excess will be taxed with any proceeds distributed among the clubs that comply with the FFP regulations, while offending clubs that fail to achieve promotion will be punished with a transfer embargo. However, no sanctions will be implemented during the first two seasons in order to give clubs a sensible period of transition, so it will be a while before this helps Leeds.

On the other hand, Leeds voted against the introduction of the Elite Player Performance Plan (EPPP), as this is likely to hurt their ability to sell young stars to top clubs for large sums. This has resulted in the club “reviewing our Academy structure to ensure we are best placed to benefit from its provisions.”

"Warnock points the way forward"

In conclusion, Leeds United are the proverbial sleeping giant, a club with a fine history and bags of potential, but it can only be realised with promotion to the Premier League. Love him or loathe him, Neil Warnock has a proven track record in getting teams promoted, but he will need financial backing to do the same with Leeds.

To date, Ken Bates has not provided his managers with an adequate budget, his attitude encapsulated by his comment after dismissing Simon Grayson, “We are building a club first and a team second and we are making progress when so many people are having financial difficulties.” Fair enough, but it could also be a false economy to not spend more and miss out on the riches available in the top flight.

More encouragingly, Bates suggested that this might be about to change, “We want to be in the Premier League and we will support Neil in the quest to get us there.” Leeds fans might be forgiven for taking this with a pinch of salt, but there is little doubt that the club could afford to be more aggressive with its spending on the pitch – without entering dangerous territory. Or will it be another chapter of broken dreams?

Liverpool - Keep The Car Running

2012-05-04T03:17:00.002+02:00

This has been a strange season for Liverpool. On the one hand, they have won their first trophy since 2006 by beating Cardiff City to secure the Carling Cup, which guarantees them European football next season, and have the chance of more silverware, having reached the FA Cup final. On the other hand, their form in the Premier League has been disappointing to say the least and they currently lie in eighth place, which is far below the expectations of their fans.

It is therefore difficult to work out whether the club is moving in the right direction, though there is little doubt that their new owners would have expected more from the Reds. Before the season commenced, John W Henry spoke about their objectives, “It’s too early for us to talk about winning the league. Our main goal is to qualify for the Champions League. If we don’t, it would be a major disappointment.”

That’s a pretty clear statement of intent, which was re-iterated by managing director Tom Werner, who described the Carling Cup success as “a big day for us”, but immediately emphasised that “our goal is still to reach the Champions League.” In other words, winning a domestic cup is fine, but success is defined by “finishing in the top four.” Of course, the focus on the league should be nothing new to Liverpool fans, as this was a mantra of the legendary Bill Shankly, “The league is a marathon not a sprint. It is where you find out if you are entitled to believe in how good you are.”

"John W Henry & Tom Werner - Magic Moments"

It was not meant to be this way. The returning Kenny Dalglish had worked wonders last season, bringing back the feel good factor and more importantly delivering results on the pitch. Hopes were high that Liverpool’s combination of old managerial skills and new money would produce a return to former glories, but the project is still very much a work in progress.

Dalglish has done himself few favours with some combative media interviews, though an irascible Scottish manager has not exactly hurt Manchester United. More importantly, Liverpool’s season has been de-railed by injuries to key players, such as Steven Gerrard, Daniel Agger and (crucially) the previously unheralded Lucas Leiva, plus the absence through disciplinary reasons of Luis Suarez. Even so, the Reds would have been higher in the table if they could have finished the numerous chances they created, thus converting draws into wins and avoiding so many one-goal defeats.

Of course, most teams could make the same excuses, but it is compounded in Liverpool’s case by the large amount of money they have spent on bringing in new players, which should have addressed some of the obvious weaknesses in the squad, such as finding someone able to consistently put the ball in the net. The policy of buying British has not exactly been a glittering success to date, exacerbated by the high fees spent on the likes of Andy Carroll, Stewart Downing, Jordan Henderson and Charlie Adam.

"Stevie wonders"

Although the side has under-performed, at least the owners’ willingness to back the manager in the transfer market should be applauded (“a significant commitment”, according to managing director Ian Ayre), especially as this is in stark contrast to the parsimonious approach adopted by their reviled predecessors, Tom Hicks and George Gillett. There seems to be an element here of proving to the fans that the new boss is not like the old boss, as Henry observed, “There was a fear we wouldn’t spend.” More positively, Billy Hogan, managing director of Fenway Sports Marketing, outlined the group’s philosophy, “You’re seeing the desire to win and the desire to compete in the transfer market.”

It’s worth pausing to reflect on how different this is from the unpopular former owners, who saddled Liverpool with a mountain of debt when they bought the club in March 2007, then took them to the brink of administration. The desperate situation was crisply summarised by UEFA’s William Gaillard: “The club has been rescued, thank God, but it was a close call. They suddenly found themselves being owned by two failed banks that had been taken over by governments.”

Liverpool’s debt had reached shocking levels under the previous unwanted regime. Although 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 around £400 million. The good news is that this debt was largely eliminated after the change in ownership, though there is still £65m net debt, comprising £38 million bank loans and £30 million owed to UKSV Holdings less £3 million cash.

This is enormously significant to the club’s finances, as the prohibitively expensive annual interest payments of £18 million (£40 million including the holding company) have been drastically reduced to just £3 million, which Ayre said meant that Liverpool are “in a much stronger position to utilise our revenues more effectively on the team.”

However difficult this season is proving, there is no doubt that it is preferable to the depths of despair suffered under the previous “gang of four”: Hicks and Gillett, a couple of charmless chancers; Christian Purslow, a smug, superficial excuse of a chief executive, who delivered little beyond infamously nominating himself as “the Fernando Torres of finance”; and poor Roy Hodgson, an experienced manager who was the archetypal square peg in a round hole (though apparently good enough to lead his country).

The arrival of Fenway Sports Group (FSG) has dramatically improved the club’s finances, as noted by Dalglish, “Off the pitch, especially, the club is a lot stronger than it was… see how much money we are getting through sponsorship and kit deals.” This comment was widely ridiculed, but he does have a point: the use of the money may be open to question, but at least it’s now available.

Some may wish that the owners would provide even more financing, but this is infinitely better than recent years when top class players were sold and replaced by inferior “talents” – Christian Poulsen and Joe Cole for Xabi Alonso and Javier Mascherano, anyone?

On the face of it, this improvement has not yet been reflected in the figures, as Liverpool announced a £49.3 million loss before tax for 2010/11, £29 million worse than the previous year, though much of this was due to clearing up the mess left by the “cowboys” with the club booking enormous exceptional expenses of £59m, mainly £49.6 million relating to the aborted stadium plans and £8.4 million termination payments to Hodgson (and his backroom staff) plus Purslow.

This is fairly typical of new management coming in and cleaning house. As Ayre said, “It is a big loss and a big write-off, but it means that it’s gone forever now and we can move forward without that around our neck.”

Excluding exceptional expenses, Liverpool would actually have made a profit of around £10 million, but the worrying thing is that this was only after hefty profits on player sales of £43 million, largely Fernando Torres to Chelsea and Javier Mascherano to Barcelona. If both once-off items are excluded, the underlying loss is around £34 million, similar to the previous year.

Although EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) is positive at £10 million, it has declined for the second year in succession and is on the low side, e.g. Manchester United’s is £111 million. After taking into consideration depreciation and player amortisation (an important part of any football club’s business), Liverpool’s operating loss excluding exceptionals was £31 million.

In fact, Liverpool have consistently been making losses with only one profit reported in the football club in the last six years (2008, boosted by large player sales). Losses were even higher at the holding company level, after including all interest payable, amounting to a shocking £178 million in the four years before Hicks and Gillette exited stage left (2007 £33 million, 2008 £41 million, 2009 £55 million and 2010 £49 million).

The Reds also have to pull their socks up if we consider that many other teams are improving their financial performance. In 2009/10 only four clubs in the Premier League made a profit, but this doubled to eight in 2010/11 with many maintaining solid finances while performing well on the pitch, e.g. Manchester United, Arsenal, Tottenham and Newcastle United. On the other hand, there are still clubs registering large losses in their pursuit of honours, notably Manchester City £197 million and Chelsea £67 million.

Where Liverpool have done well is to hold their revenue at about the same level following the £21 million reduction due to the failure to qualify for the Champions League. They compensated this with a £7 million increase in the Premier League distribution, thanks to the improved central deal, and a striking £15 million increase in commercial income.

Uniquely among leading English clubs, the highest proportion of Liverpool’s revenue comes from their commercial arm with 42%. In fact, this has been the main driver of the club’s revenue growth, contributing £40 million (63%) of the £64 million rise in the last five years.

Even so, the operating loss widened following a £15 million increase in the wage bill, which grew 13% from £114 million to £129 million (excluding termination payments), meaning that the important wages to turnover ratio increased from 62% to 70%. This is much worse than Manchester United 46%, Arsenal 55% and Spurs 56%, but considerably better than Manchester City 114%.

Player amortisation, the annual cost writing-off transfer fees, fell to £36 million, though it is likely to rise after last summer’s acquisitions, although will again be far behind Manchester City’s £84 million.

All in all, Liverpool should really be doing better with the resources at their disposal, both in terms of their revenue and wage bill.

Even with the slight decrease in revenue to £184 million, their revenue is still comfortably the fourth highest in England, £20 million ahead of Tottenham, £30 million more than Manchester City and around twice as much as Aston Villa, Newcastle and Everton. On the other hand, they remain handicapped compare to the top three revenue generators, more than £40 million less than Arsenal and Chelsea (both around £225 million) and an incredible £150 million behind traditional rivals Manchester United (£331 million). That’s a significant competitive disadvantage.

Nevertheless, Liverpool are in a more than respectable ninth place in Deloitte’s European Money League, which is not to be sneezed at, especially as they are the only club in the top ten that did not compete in the Champions League in 2010/11. More gloomily, the Spanish giants continue to surge ahead with Real Madrid and Barcelona earning £433 million and £407 million respectively. That £200-250 million shortfall could either be considered an insurmountable obstacle or something to target, especially the commercial revenue, which is around double Liverpool’s.

It’s a similar story with the wage bill of £129 million, which is the fourth highest in the Premier League, a little higher than Arsenal (£124 million), but a fair way ahead of the next club Tottenham (£91 million) and perhaps more pertinently over twice as much as Newcastle (£54 million). However, it is a lot lower than Manchester United (£153 million), Chelsea (£168 million) and new kids on the block Manchester City (£174 million).

That said, Liverpool have been faced with escalating financial challenges over the last few years, both externally and internally.

On the external side, there has been a clear increase in competition, as the “Big Four” has expanded into the “Sky Six” with the addition of Manchester City and Tottenham, who have both managed to break the glass ceiling of Champions League qualification. City have been backed by Sheikh Mansour’s billions, while Spurs have benefited from the astute business guidance of Daniel Levy.

This can be seen by looking at the revenue trend of those clubs, which shows that Liverpool is the only one to have negative revenue growth since 2009. In the same period, the two Manchester clubs and Tottenham have all grown their revenue by more than £50 million. Arsenal’s revenue was also flat, but they are now £43 million ahead of Liverpool, having been £7 million behind in 2005 (a £50 million turnaround).

Furthermore, some of those clubs have spent big in their pursuit of success, notably Manchester City and Chelsea. As Henry said when asked what surprised him most about football, “The sums of money that are spent on buying and selling players is remarkable.”

Everyone bangs on about Liverpool’s activity in the transfer market since FSG’s arrival, but the splurge since January 2011 has really only been an attempt to compensate for the lack of spending in previous years. This is a difficult problem to quickly address when you only have two transfer windows a year, a new phenomenon for the owners that has been difficult to adapt to, as Werner admitted, “We’re used to American sports, where there’s a draft and trades and some free agency. This is a whole different way of thinking about players.”

In any case, the net spend is still relatively low, as much of the expenditure has been recouped via player sales, especially to Chelsea who paid £50 million for Fernando Torres and £12 million for Raul Meireles. Over the last four years, Liverpool’s net spend of £22 million is much of a muchness with Manchester United and Tottenham, but a long way below the two clubs funded by wealthy benefactors, Manchester City (around £400 million) and Chelsea (over £150 million).

However, much of the damage at Liverpool is self-inflicted, as the fall-out from the Hicks and Gillett era proved very costly to the club’s finances, adding up to around £300 million, which would have bought a lot of good players or even gone a long way towards a new stadium.

This has been the toughest problem facing FSG, as they inherited a club in disarray. The situation was in some ways reminiscent of the old joke whereby a tourist asks for directions and an Irishman replies, “If I were you, I wouldn't start from here.”

Specific areas that have hurt Liverpool include: (a) hefty interest payments; (b) money lost through not qualifying for the Champions League; (c) shortfall from lower Premier League finishes; (d) compensation paid to sacked managers and executives; (e) stadium expenses written-off.

(a) In 2006, the year before Hicks and Gillett bought the club, Liverpool’s net interest payable was less than £2 million, but this rose significantly in subsequent years, peaking at £45 million in 2010 in the holding company. The total interest needlessly incurred to pay the speculators from across the pond thus amounted to a depressing £124 million.

(b) Liverpool’s failure to qualify for the Champions League last season and missing out on Europe completely this season are down to many factors, but arguably the most important was the lack of investment by the previous board, which did not provide Rafa Benitez with the means to build upon his team’s Premier League runners-up spot in 2008/09.

Whatever the reasons, the Reds have missed out on significant sums. Their adventures in last season’s Europa League only generated £5 million, which was significantly lower than the money received by England’s four Champions League representatives: Manchester United £44 million, Chelsea £37 million, Tottenham £26 million and Arsenal £25 million (average £33 million).

Liverpool will obviously receive nothing this season from Europe, compared to an average of £31 million for the English sides – lower than last year, as most did not progress as far. A similar sum will go begging after missing out on qualification for next season’s Champions League, giving a total of £86 million in lost revenue.

(c) Although finishing lower in the Premier League will have hurt Liverpool’s pride, it has not damaged the bank balance too much, thanks to the equitable nature of the distribution of central funds. Half of the domestic money and all of the overseas rights are split evenly among the 20 clubs, meaning that Liverpool have only really been hit by lower merit payments with each place in the league worth around £0.8 million. The other variable is facility fees, based on how often a club is shown live on television, but Liverpool’s box office appeal has ensured that this remains high.

So, Liverpool’s positions of seventh in 2009/10, sixth in 2010/11 and eighth (currently) in 2011/12 only have a minor financial effect, which we can calculate as £7 million (compared to finishing in the top four).

(d) Liverpool have paid out £20 million in compensation to sacked employees in the last three years: 2009 £4.3 million to Rick Parry, the former chief executive, and coaching staff at the Academy; 2010 £7.8 million to Benitez and his backroom staff: 2011 £8.4m to Hodgson’s team plus Purslow.

(e) The £50 million write-off for the Stanley Park scheme this year should come as no surprise, as the 2009/10 accounts had warned, “It is highly likely there will be a significant write-off of the new stadium project costs in the financial year ending 31 July 2011.” These are costs that had previously been capitalised on the balance sheet, but are now booked to the profit and loss account. Added to £10 million of similar impairment costs in 2007, that makes an incredible £60 million squandered on useless stadium designs.

"My name is Lucas"

Some of the assumptions used in this analysis may be debatable, but there is no dispute that Liverpool have thrown away a vast amount of money – more than a quarter of a billion pounds per my calculations. As the late, great Ian Dury said, “What a waste.”

Enough of past sins, let’s look at the major challenges facing Liverpool:

1. New/redeveloped Stadium

Ayre has admitted that the lack of a solution to the stadium issue has set the club back several years, “If we had started building a stadium in 2007, we would be in it by now.”

Although Anfield is a wonderfully atmospheric old ground, its relatively low capacity of just over 45,000 means that Liverpool’s match day revenue of £41 million, while more than most teams, is £68 million below Manchester United’s £109 million and less than half of Arsenal’s £93 million. Liverpool only earn around £1.5 million from each home match, which is significantly less than United (£3.7 million) and Arsenal (£3.3 million), despite significant price increases in each of the last two seasons and having the fifth highest Premier League attendance.

FSG continue to review possibilities with recent reports suggesting that the preferred option is a return to 2003 plans for a 60,000-seat stadium in Stanley Park, which were long ago given planning permission by the local council. However, the feeling persists that they would rather redevelop Anfield in the same way that they refurbished Fenway Park, the iconic home of the Boston Red Sox, as Henry confirmed, “Anfield would certainly be our first choice. But realities may dictate otherwise. So many obstacles.”

This is partly for sentimental reasons, but also for hard commercial motives, which Henry explained, “If a new stadium is constructed with 60,000 seats, you’ve spent an incredible sum of money to add just 15,000 seats. If the cost is £300 million, that doesn’t make any sense at all. Liverpool isn’t London, you can’t charge £1 million for a long-term club seat. And concession revenues per seat aren’t that much different at Emirates from Anfield.”

He added that this is why the club is seeking a naming rights partner. While Werner has categorically stated that they “have no intention of exploring naming rights for Anfield”, there would be no hesitation in following Arsenal’s Emirates model for a new stadium. Ayre again: “The new stadium in the park comes down to economics. How do we pay it back? It needs a big naming partner.”

This is easier said than done, as many clubs have discovered, but it could be a compelling prospect for sponsors, so a £150 million multi-year agreement is feasible. This would finance half of the stadium costs, leaving £150 million to be covered by additional debt, as it is unlikely to be funded by the FSG partners. Again, this could follow the Arsenal path of low interest bonds. Even in the current tough economic climate, this is where FSG’s connections should help.

"Move like Agger"

Henry stated that “from a financial perspective… a ground share (with Everton) would be helpful”, but he accepted that the lack of support from both sets of supporters means that this is effectively a dead issue.

Notwithstanding all the difficulties, the absence of a clear stadium strategy after 18 months in charge must be disappointing to Liverpool fans. Most worryingly, an email from Ayre that Tom Hicks produced in court evidence implies that Henry’s purchase agreement included “no actual guarantee of a stadium”, which is bizarre, as this was described as the only non-negotiable element by Martin Broughton, the man brought into Liverpool as chairman to sell the club. Given the broken promises in the past, it is better that the new owners take their time and get it right, but it’s not as if they have too many options.

2. Champions League qualification

Although Ayre has said that the club’s business model does not “fall apart when we don’t have a year playing European football”, it’s still a lot of money to leave on the table, e.g. in 2009/10, the last year Liverpool qualified for the Champions League, they earned £29 million.

This year, of course, they will get nothing from Europe, compared to at least £46 million that Chelsea will receive for reaching the Champions League final, which only emphasises the potential size of the prize. Additional gate receipts and higher payments from success clauses in commercial deals also contribute to what Ayre calls a “significant revenue uplift”.

Gate receipts are important, as Liverpool’s last two seasons both included income from seven additional matches, which was worth around £10 million. This will not be the case in 2011/12 with no European competition, though domestic cup runs will partially offset the shortfall. However, the Europa League will contribute again next season (albeit probably lower attendances at reduced prices).

It is also imperative that Liverpool reclaim their traditional place among Europe’s elite (remember that they have won this prestigious competition no fewer than five times) in order to help attract world-class players to Anfield.

3. Revenue growth

FSG will be looking at revenue growth in terms of both short-term gains and longer-term possibilities.

More immediately, the focus is on commercial income, which rose an impressive 25% last season to £77 million. This is already the seventh highest in Europe, though it is a fair way behind Manchester United £103 million and only around half the amount earned by Bayern Munich, Real Madrid and Barcelona. As Ayre said, “We’ve made great progress but… we still have a long way to go particularly internationally.”

Most of the growth came from the four-year shirt sponsorship deal with Standard Chartered, which is worth around £20 million a year, so £12.5 million higher than the previous deal with Carlsberg. This is in line with Manchester United’s Aon deal and Manchester City’s reported Etihad agreement, but Barcelona’s £25 million contract with the Qatar Foundation has raised the bar.

Future growth is assured by the £25 million kit deal with Warrior Sports, which is not included in the latest results. Starting from the 2012/13 season, this is more than twice the amount received from Adidas, who currently pay £12 million a year, and is about the same level as Manchester United, Real Madrid and Barcelona. This makes sense, as these are the leading clubs in terms of replica shirt sales worldwide.

Interestingly, unlike the Adidas arrangement, Liverpool will be allowed to open their own retail outlets, which some have speculated might mean doubling the value of the deal to £300 million over six years, as Ayre noted, “That area of business currently represents 50% of everything we generate.” Of course, that is revenue, which is not the same as profit, and it is a policy that Manchester United abandoned in the 1990s when they joined forces with Nike, so it might not be the El Dorado many assume.

In addition, the club will surely look to emulate United’s success in attracting secondary sponsors, which will be helped by FSG’s ability to package the Liverpool brand with their other sports holdings to provide an attractive opportunity to advertisers, as they did with Warrior. As Ayre put it, “The more quality and high-level partners we can attract, the more we’ll have to invest.”

There are numerous possibilities to “leverage the club’s global following to deliver revenue growth”, which was emphasised by Werner, “We consider Liverpool to have untapped potential globally.” In particular, they have focused on Asia with plans to open two new offices there, supported by a pre-season tour that attracted huge crowds – a key element in securing the Standard Chartered sponsorship. They will build on this success by again touring the Far East plus the US, including a match at Fenway Park against Roma.

"Suarez - I fought the law"

One unexpected threat to this campaign emerged earlier this season when Standard Chartered expressed their unhappiness with the bad publicity around the Suarez affair, but a bigger danger would be a continued lack of sporting success. As Ayre said, “performance on the pitch definitely affects business.”

In the longer-term, FSG will be pushing to further “monetise” Liverpool’s global appeal, especially in the television space. They were attracted by the explosive growth in overseas TV rights for the Premier League, backed up by top matches attracting huge global audiences.

This is particularly relevant to Liverpool, as FSG have substantial expertise in this sphere, owning 80% of New England Sports Network, a profitable regional cable television network, while Werner is an experienced television producer. This may have been behind Ayre’s unpopular suggestion that leading clubs should receive a larger slice of the money from overseas TV rights, because the average fan in Kuala Lumpur “isn’t subscribing… to watch Bolton.”

New technology will open up a plethora of possibilities for digital rights, which to date have been treated as little more than an afterthought to the main TV deal, but the emergence of fast, broadband networks might just be the catalyst for clubs to interact directly with fans, when revenue could potentially explode. If so, you can expect Liverpool to be at the forefront of any such developments.

"Jordan: the comeback"

4. UEFA’s Financial Fair Play regulations

Another motive for the club to increase revenue is the advent of UEFA’s Financial Fair Play (FFP) rules that aim to make clubs live within their means, rather than operate with big losses bank-rolled by wealthy benefactors.

The first monitoring period is 2013/14, but this will take into account losses made in the two preceding years, namely 2011/12 and 2012/13. In other words, the 2010/11 accounts are not considered, but those from the current season will be, so a rapid improvement is required.

However, they don’t need to be absolutely perfect, as owners will be allowed to absorb aggregate losses of €45 million (around £38 million), initially over two years and then over three years, as long as they cover the deficit by making equity contributions.

Not only is Henry supportive of these regulations, but he said “we wouldn’t have moved forward on Liverpool except for the passage of FFP.” However, he is concerned that others will find ways around the rules, “The question remains as to how serious UEFA is regarding this. It appears that there are a couple of large English clubs that are sending a strong message that they aren’t taking them seriously.” He specifically queried the transparency of Manchester City’s massive Etihad deal, given the owners’ close relationship with the sponsors. Werner supported the party line, hoping that UEFA’s process “would have some teeth.”

One point to note is that the cost of a new stadium would be excluded from UEFA’s break-even calculation, so that should not be a factor in any investment decision.

5. Cut costs

Given the revenue pressures arising from the lack of Champions League, Liverpool will have to cut their cloth accordingly, which means reducing the wage bill. After purchasing the club, Henry complained about “a huge multi-year payroll for a squad that had little depth.”

Action was taken last summer with many bit part players leaving either through sales (including Meireles, Paul Konchesky, Milan Jovanovic, David N’Gog, Sotirios Kyrgiakos, Emiliano Insua and Philipp Degen) or loans (notably Joe Cole and Alberto Aquilani), even if this meant cut-price deals or subsidising loans. Obviously, there have been a fair few arrivals too, so the net impact is unknown, but is likely to be positive in the next accounts.

The danger of this approach is that other clubs continue to grow their wage bill, which traditionally has a high correlation with success on the pitch. That said, Tottenham have outperformed Liverpool recently with a far lower payroll.

"Would you Adam and Eve it?"

While FSG were initially attracted to Liverpool by parallels with the Red Sox, another great club that had fallen on hard times and needed a stadium solution, there were also sound business reasons behind the investment, even though Henry has stated, “I don’t think you go into sport to make a profit.” In particular, if they succeed in driving revenue growth, they will be able to keep all the money they make (apart from some of the TV rights), unlike baseball where their income is taxed by the MLB and shared among other clubs.

Despite the obvious synergies, both clubs have suffered recently in the sporting arena, Liverpool enduring their worst run of results in the league for over 50 years, while the Red Sox spectacularly collapsed to miss out on qualification for the post-season play-offs. This has raised concerns that FSG are being spread too thin, though their template leans heavily on the managers of the franchise, mainly Ayre, Dalglish and (until recently) Damien Comolli, the Director of Football.

In fact, FSG’s mantra has long been one of self-sufficiency for Liverpool. This will be a challenge, as their cash flow has been consistently negative before financing – except when investment in the squad and stadium is restricted like in 2010. The problem is that this is exactly what Liverpool need, hence the dash for cash with new sponsorship deals.

A key element of FSG’s strategy is a focus on youth, as outlined by Henry, “We have been successful through spending and through securing and developing young players.” Werner added, “We certainly feel we can do a better job bringing in more players that are home grown.”

Dalglish has been more than willing to follow this policy, acknowledging the improvements, “You look at the academy and see how much better it is.” Many graduates have been given first team action this season (Jay Spearing, Martin Kelly, John Flanagan and Raheem Sterling), which is testament to the changes implemented by Benitez, as is the high number of Liverpool youngsters involved in England squads.

When FSG first appeared on the scene, much was made of their belief in the application of statistical analysis made famous by Moneyball, Michael Lewis’ bestseller about the innovative methods adopted by Billy Beane at the Oakland Athletics baseball club. However, it was never quite that simple, as Henry acknowledged, “Everyone is fixated on Moneyball or sabermetrics, but football is too dynamic to focus on that. Ultimately you have to rely on your scouting.”

"Carroll - big deal"

It has always been the case that they have used their financial muscle to complement value purchases by also spending big on players that they needed. In fact, the Red Sox have been among the highest spenders in major league baseball. That said, some of the prices paid for Liverpool’s purchases have looked ridiculous, especially considering the good use that Newcastle have made with the money Liverpool paid them for Carroll. Ultimately, that was one of the reasons for Comolli being given his P45. As Werner wryly explained, “We’ve had a strategy that we agreed on. There was some disconnect on the implementation of that.”

The investment in the academy and scouting is all very worthy, but in the meantime the first team has been under-performing, so it is legitimate to ask whether FSG’s strategy is the right one for Liverpool. After all, when Henry bought the club, he confessed to knowing “virtually nothing about Liverpool Football Club nor EPL.” A year later, he said, “We have so much to learn about all aspects of the sport and we are still learning.”

Some fans are crying out for stronger leadership, which often translates into additional investment, both in the playing squad and the stadium. Conversely, FSG might argue that they could have expected a better return on the money they have put in (even though the acquisition was concluded at a “fire sale” price of £300 million). Ayre is firmly supportive, “Money is not an issue. If we need somebody, I think our owners have shown the level of commitment you would expect from a good ownership group.” Mind you, he said that before the late season slump.

"The Kuyt Runner"

It was always a big ask to secure Champions League qualification in the first full season under new ownership, but there’s little doubt that Liverpool’s results have been below par. Although by no means disastrous, it has been a disappointing season, leading to Dalglish’s position being questioned.

Henry has shown that he is not afraid of pulling the trigger, especially when the long-serving Red Sox manager Terry Francona was effectively fired last summer. The removal of Comolli confirmed that FSG could be just as ruthless at Liverpool, with Werner observing, “when it’s time to act, we need to act”, but Henry recognises that the rebuilding process at Anfield will take time, “it could take years to get the club back to where it needs to be.”

Even though the team might be lagging behind expectations, there has been some improvement under FSG, which was recognised by stalwart Jamie Carragher, “people need to remember the club was on its knees.” Years of mismanagement has cost Liverpool hundreds of millions, but Ayre for one is now positive, “The key message is that the new ownership has created stability, a long-term opportunity for Liverpool and some good foundation work that hopefully we’ll all build on.”

"Hope in the Ayre"

Nevertheless, the fans will want to see more progress where it counts, as Ayre acknowledged, “The finances are all well and good – if you don’t have any finances, it makes it more difficult to be successful – but success on the pitch is the biggest factor.”

There may well be changes on the playing side (and even in the manager’s seat) this summer, but to date FSG have backed their man, taking a patient, level-headed view of the club’s prospects, as seen by Werner’s pre-season objective, “We just want to move forward – we want to be better this year than last year and just keep going on the right track.” In other words, keep calm and carry on.

The Truth About Debt At Barcelona And Real Madrid

2012-04-30T09:04:00.003+02:00

Despite their failure to reach next month’s Champions League final, Barcelona and Real Madrid are by common consent the best two club sides in world football. Featuring superstars such as Lionel Messi and Cristiano Ronaldo, their talented players entertain and delight us in equal measure, as they dominate La Liga season after season.

However, admiration of their exploits is tempered by the financial advantages that they enjoy compared to other less fortunate clubs. Not only do they generate far more revenue than anybody else (around €100 million higher than the nearest challenger, Manchester United), but one of the main reasons for this substantial competitive advantage is an unbalanced domestic TV deal that awards the two Spanish giants almost half of the money available.

Their reputation off the pitch also suffered a hit recently in the media when it was “revealed” that these great teams were built on a mountain of debt (€590 million at Real Madrid and €578 million at Barcelona), raising questions as to whether this was, to coin a phrase, “financial fair play.”

Quite why this came as a surprise to some analysts is a little perplexing, given that the clubs’ accounts have been available to the public for many months. Whatever.

"Pep Guardiola - Goodbye cruel world"

The fundamental issue is whether this debt is too high, as many commentators suggest, with the implication that these grand old clubs might even be in some financial difficulty.

That might seem like an easy question to answer, but, as is so often the case in the murky world of accounting, it’s not quite so simple. To give a comprehensive response, we have to do three things:

1. Importantly, understand what this debt figure actually represents, as there are numerous definitions, all of which can be equally valid in different circumstances.

2. Look at the overall strength (or weakness) of each club’s balance sheet, i.e. also at assets, not just liabilities.

3. Explore how well the debts are covered by items such as income and cash flow.

To avoid looking at Madrid and Barcelona in isolation, we should also compare their debt position with that at other leading clubs. For the purpose of this exercise, I have opted to look at two English teams, Manchester United and Arsenal, as they are useful comparatives, who are viewed as being at different ends of the spectrum. The former are known for the large amount of debt they have been carrying since the Glazers bought the club via a leveraged buy-out, while the latter are often portrayed as the poster boy of sustainable football clubs.

"Jose Mourinho - I couldn't bear to be special"

1. What is debt?

For people without a financial background, the different definitions of debt can be a bit confusing, as acknowledged by UEFA’s snappily titled Club Licensing Benchmark report, which stated, “In practice, the term ‘football club debts’ has been used in many different ways with a great deal of flexibility, references ranging from the very broad, totalling all liabilities that a club has, to the narrow definition of debt financing either including or excluding interest-free owner loans.”

At the narrowest extreme, we have just bank debt: at the broadest extreme, we can use total liabilities, which covers all financial obligations, including tax liabilities, trade creditors, provisions for future losses, accrued expenses and even deferred income. Often, when the media refer to debt, they actually mean total liabilities.

This includes what might be described as operational debt, such as: (a) trade creditors (payables) for amounts outstanding on bills for products or services received, e.g. rent, electricity; (b) money owed to staff, e.g. wages earned by staff paid at the end of the month, bonus payments; (c) other accrued expenses (accruals), which are the same as payables except no invoice has yet been received; (d) provisions, which are an estimate of probable future losses, e.g. legal claims; (e) and, most bizarrely, deferred income for payments received for services not yet provided, e.g. season ticket revenue for matches to be played in the future.

That last one highlights one danger of using liabilities as a definition for debt, as season ticket money received in advance is clearly not a bad thing, as UEFA explain: “It is recorded as a liability, as accountants consider the cash received as not yet being fully earned until the matches take place. This is a liability, but not a debt that will have to be paid back.”

So, much of Madrid’s €590 million and Barcelona’s €578 million debt includes liability for what might be termed normal operations. If we apply the same definition to Manchester United, they have debt (total liabilities) of just under €1 billion (£824 million converted at a rate of 1.20). Even Arsenal’s debt on the same basis is €524 million, which the journalists would no doubt describe as “eye-watering” if they were talking about others and not their template for a well-run club. To use an old adage, you have to make sure that you are comparing apples with apples.

Of course, if you wanted to make a club’s debt look as bad as possible, then you would absolutely use the total liabilities definition. However, it is very conservative to say the least. Indeed, in response to their critics, Madrid and Barcelona might feel like misquoting Mark Twain: “The reports of my debt have been greatly exaggerated.”

The net debt reported in an English club’s financial statement will be in line with IFRS (International Financial Reporting Standards) and essentially covers purely financial obligations, such as overdrafts, bank loans, bonds, shareholder loans and finance leases less cash. On this basis, the gross debt of Madrid and Barcelona at €146 million and €150 million respectively is not only considerably smaller than the figure highlighted in the press, but is also much lower than Arsenal €310 million and Manchester United €551 million.

The difference is not quite so large for net debt, as both United and Arsenal have substantial cash balances, but the Spanish clubs are still lower: Madrid €48 million and Barcelona €89 million. Arsenal are much of a muchness with €117 million, while United are the outlier with a hefty €370 million.

In their Financial Fair Play (FFP) guidelines, UEFA introduce a third definition of debt which lies somewhere between the narrow calculation employed in annual accounts and the widest possible measure of total liabilities: “A club’s net player transfers balance (i.e. net of accounts receivable from players’ transfers and accounts payable from players’ transfers) and net borrowings (i.e. bank overdrafts and loans, owner and/or related party loans and finance leases less cash and cash equivalents).”

They go on to explicitly state, “Net debt does not include trade or other payables.” However, it does include the net balance owed on player transfers, which is a reasonable approach to take, as this can be an important element in the business model adopted by some football clubs, e.g. this amounts to €76 million at Madrid (actually down from €111 million the previous year and an astonishing €211 million in 2009), though it is only €12 million at Arsenal, which probably comes as no surprise to those fans that have been exhorting the club to spend some money.

This has clearly been an important factor in allowing Madrid to finance big money acquisitions. Although all clubs make stage payments for transfers, very few do so to the same extent as Madrid (and indeed Barcelona).

Of course, this does not make the practice inherently wrong. Indeed, UEFA commented, “It is worth noting that the size of transfer payables reported in financial statements can be influenced by the timing of the financial year-ends relative to the timing of transfers, and that transfer payables are, in most cases, not overdue but in line with the payment schedule agreed between the respective clubs.”

Under this UEFA definition, it is remarkable how similar the net debt is between Madrid, Barcelona and Arsenal, with all three clubs reporting a balance in a narrow range of €124-131 million. The exception to the rule is United with, deep breath, €442 million.

2. Strength of the balance sheet

To state the blindingly obvious, liabilities are only one side of the story (or balance sheet). To get a full picture of a football club’s health, we also have to look at its assets. This is where the English clubs start to look better, as they tend to have higher assets, especially as they usually own their own stadiums.

United’s net assets (assets less liabilities) are a mighty €973 million, though €618 million of this is due to inter-company receivables from the parent undertaking, while Arsenal have a highly respectable €322 million. Madrid are far from shabby with net assets of €251 million, but Barcelona fall down on this measure with net liabilities (also described as negative equity) of €69 million. In other words, their reported liabilities are larger than their reported assets. Barcelona are far from alone in this, as UEFA’s benchmarking report noted that 36% of clubs reported negative equity in 2010, but it is still nothing to be proud of.

If this ratio is refined to only cover current assets and liabilities (payable within 12 months), then it is even worse for the Spanish clubs, as they both have net current liabilities: Madrid €141 million and Barcelona €226 million.

Once again, the accounting values are a little misleading when looking at the balance sheet, because of the way that certain assets are treated in the accounts. As UEFA say, “Some of the principal assets of a club, such as a loyal supporter base, reputation/brand, membership/access rights to lucrative competitions, and home-grown players, are not included within balance sheet assets since they are extremely difficult to value, despite them unquestionably having a value. These unvalued assets tend to be greater for larger clubs.”

"The Glazers - Money (that's what I want)"

This is highlighted when a football club is sold. Invariably, the purchaser pays a higher price than the fair value in the accounts and the difference is booked as an asset called goodwill. In this way, Manchester United’s balance sheet includes £421 million of goodwill.

This can also be seen very clearly with player valuations. In the accounting world, when a player is bought, football clubs do not expense the cost immediately, but instead book it onto the balance sheet as an intangible asset and write it off evenly over the length of the contract. Following the Bosman ruling, the assumption is that the player will have no value after his contract expires, since he could then leave on a “free”.

However, the value in the real world is almost always higher. As Javier Faus, Barcelona’s Vice President of Finance once explained, his club has over €250 million of assets that are not reflected in the balance sheet. This is particularly the case for the Catalans, as their team is full of players developed in-house by the legendary La Masia, and these effectively have zero value in the accounts. I don’t know exactly how much the likes of Messi, Xavi and Iniesta would be worth if sold, but I do know that it’s more than zero.

The respected Transfermarkt website does actually list values for each major team’s squad, so we can get an idea of how much stronger each club’s balance sheet would look if you applied real values instead of accounting values. As expected, this is most striking in the case of Barcelona, where the real value is estimated as €591 million, so €470 million higher than the books, leading to adjusted net assets of €401 million.

Of course, it would kind of defeat the object if a club were to realise that value by selling all its players, but a few judicious sales can make a big difference to the reported strength of a club’s balance sheet.

3. Debt coverage

As we said earlier, Real Madrid (€480 million) and Barcelona (€451 million) have the highest revenues in world football, covering around 80% of their debt, which is significantly higher than their English counterparts, Arsenal 57% and Manchester United 40%. In Arsenal’s case, this is obviously a function of much lower revenue (€307 million), even though I have included property income, as liabilities are not split by business segment.

However, as the old saying goes, “revenue is for vanity, profit is for sanity”, so a more useful ratio might be cash flow to debt, which provides an indication of a club’s ability to cover total debt with its annual cash flow from operations. There are many ways of defining cash flow, but I have used EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) for simplicity’s sake. Others might adjust for (irregular) profit on player sales, while you could also use free cash flow, (operating cash flow minus capital expenditure).

Contrary to popular belief, Real Madrid and Barcelona are relatively profitable: Madrid have made total profits of around €200 million in the last five years, including €47 million last season; while Barcelona’s loss was only €12 million. Adjusting for non-cash flow expenses like depreciation and amortisation plus interest produces very impressive EBITDA of €151 million for Madrid and pretty good €66 million for Barcelona. In the same way, Manchester United’s notable ability to generate cash results in excellent EBITDA of €138 million.

So, Madrid’s cash flow over debt ratio comes in at 26%, much better than the others: Manchester United 14%, Arsenal 13% and Barcelona 11%. Simply put, the higher the percentage, the better the club’s ability to pay its debt.

While it is clearly important to be able to ultimately pay off debt, a club’s ability to service its interest expenses is absolutely crucial. This can be explored with the interest coverage ratio (cash flow/interest payable), which tells a similar story to debt coverage, i.e. Madrid’s ratio of 11.7 is by far the best, though the others are not too bad: Barcelona 4.5, Arsenal 3.9 and Manchester United 2.5 (anything below 1.5 is a bit questionable).

What is striking here is just how much higher the interest payable is at United €56 million (£46 million) compared to the other clubs: Arsenal €18 million, Barcelona €15 million and Madrid €13 million. In fact, both “heavily indebted” Spanish clubs actually pay less interest than the two English clubs.

Let’s look at the debt in a bit more detail for the clubs we are reviewing, as this might throw up some other anomalies.

Real Madrid’s accounts use yet another definition for debt, which is essentially the same as UEFA’s definition (bank debt plus net transfer fees payable) plus selected creditors (essentially stadium debt). This gives a net debt of €170 million, a reduction of €75 million from the €245 million in 2010. That’s pretty impressive, especially when we consider that the net debt peaked at €327 million the year before.

That said, for many years before 2009 they had no bank debt at all. The loans are split evenly between Caja Madrid and Banco Santander and were mainly used to finance the major signings that summer. The interest rate is relatively low, but the loans do have to be repaid by 2015, though even here Madrid were given some leeway with lower payments in the first three years.

Stop me, if you’ve heard this before, but Barcelona also use a different definition for debt, providing their Annual General Meeting with a figure of €364 million, which is not fully explained, but the main distinguishing factor is that some debtors are deducted to arrive at the net balance.

This represents a 15% reduction from the €430 million reported the previous season, but is still higher than the preceding years. Indeed, Javier Faus, Barcelona’s Vice President of Finance, admitted, “We’ve reduced the debt, but we’re still in a delicate situation. The debt is still too high for us to be able to dictate our future. We can’t afford to owe so much money to the bank, and we need to generate more income.”

He emphasised the board’s concern when he added, “It’s not the debt that we want, and we have to reduce it further, to sustainable levels, with regard to the cash flow generated by the club. We’ll continue to work on it.” Ideally for Faus, the net debt would be “just over €200 million.”

Indeed, Barcelona were forced to take out syndicated loans of €155 million in 2010 from a group of banks led by La Caixa and Banco Santander, though club president Sandro Rosell has defended Barca’s debt level, arguing that it is eminently serviceable via its huge revenues, “The club is not bankrupt, because it generates income. The banks know that we have a business plan that will allow them to recover the money.”

Indeed, the willingness of Spanish banks to help Barcelona is a factor, as it is difficult to imagine a scenario where a local financial institution would be responsible for damaging the emblem of Catalonia, given that its customer base is largely made up of the club’s supporters – even with the struggles in the Spanish economy. This is evidenced by the banks ignoring Barcelona’s breach of commitments in terms of total liabilities made when securing the 2010 loan.

Manchester United have also succeeded in reducing their net debt, which was cut from £377 million to £308 million (£459 million gross debt less £151 million cash), after the club bought back £64 million of its bonds. This is down from a peak of £474 million in 2008.

Last year the club raised around £500 million of funds via a bond issue, so that they could repay the previous bank loans, in order to fix the club’s annual interest payments for a longer period (up to 2017), thus ensuring more financial stability. However, there was a price to be paid, which can be seen with a comparison to Arsenal’s bonds, as the debt has to be repaid quicker (7 years vs. 21 years) and the interest rate is higher (8.5% vs. 5.75%).

The really annoying thing for United fans is that this is still unproductive debt. While clubs like Chelsea and Manchester City have used their debt to fund the purchase of better players and Arsenal used theirs to build a new stadium, United’s debt was only used to enable the Glazers to buy the company.

At least the owners managed to find £249 million last November to pay off the prohibitively expensive Payment In Kind notes (PIKs), which carried a stratospheric interest rate of 14.25% (rising to 16.25%), though it is unclear how they funded this repayment. Including the PIKs, United’s gross debt was at one point as high as £773 million with annual interest payments of around £70 million. To paraphrase Winston Churchill, “never has so much been owed by so many to so few.”

"Emirates Stadium - good debt"

Included within the net debt as at 30 June 2011 are astounding cash balances of £151 million, though this was boosted by cashing the £80 million Ronaldo cheque and the £36 million upfront payment from the shirt sponsor. United’s board has argued that it likes to retain so much cash to provide “flexibility”, but this seems a strange decision when they have to pay 8.5% interest on the bonds, while cash balances are unlikely to attract more than 2% interest.

The latest financial engineering from the Glazers is the decision to float a minority stake of the club via an IPO (Initial Public Offering) on the Singapore Stock Exchange with whispers suggesting that the board is seeking to raise £600 million for a 30% stake. The IPO was postponed last year due to volatile market conditions, but is now reportedly back on the agenda.

If some of the proceeds were used to repay part of United’s debt, as the club has apparently briefed journalists, then they would benefit from lower interest payments, though this would not improve cash flow if they were then replaced by dividends to the new shareholders.

Arsenal have now eliminated the debt they built up as part of the property development in Highbury Square, reducing gross debt to £258 million as at end-May 2011. That comprises the long-term bonds that represent the “mortgage” on the Emirates Stadium (£231 million) and the debentures held by supporters (£27 million). Once cash balances of £160 million are deducted, net debt was down to only £98 million, which is a significant reduction from the £136 million last year and the £318 million peak in 2008.

Many fans ask whether it would be possible for Arsenal to pay off the outstanding debt early in order to reduce the interest charges, but chief executive Ivan Gazidis has implied that this is unlikely, arguing that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates and very affordable for the club.” In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

So, Real Madrid and Barcelona might not exactly be sitting pretty in terms of debt, but their situation is not quite as bad has been made out. However, it is true to say that debt is a major issue for many other Spanish clubs.

A recent study by Professor José Maria Gay de Liébana of the University of Barcelona revealed that total debt of La Liga clubs was €3.5 billion with half of them having negative equity (though it should be noted that the accounts from seven clubs were only from the 2009/10 season and two from as far back as 2008/09).

As Professor Gay said, “Everyone is concentrated on Madrid and Barca, who are the kings of the banquet, while the rest live a real uncertain future. Many clubs are living dangerously.”

While Madrid and Barcelona unsurprisingly top the list with debt (total liabilities) of €590 million and €578 million, seven other clubs have debt over €100 million, most notably Atletico Madrid €514 million, Valencia €382 million (even after selling stars like David Villa, David Silva and Juan Mata) and Villarreal €267 million. In contrast to the big two’s debt cover (by revenue) of around 80%, theirs is much lower, e.g. Atletico Madrid just 19%.

Spanish football’s struggles are highlighted by the fact that no fewer than six clubs in the top division are currently in bankruptcy protection: Racing Santander, Real Mallorca, Real Zaragoza and all three promoted clubs (Real Betis, Rayo Vallecano and Granada). Furthermore, the beginning of this season was delayed by a players’ strike over unpaid wages. The figures are frightening with 200 players owed a total of €50 million, up from €12 million owed to 100 players the previous year.

"Athletic Bilbao: good football, low debt - what's not to like?"

This is due to two factors: (a) Spanish football’s inability to govern itself properly; (b) the awful state of the economy.

Up until recently, the Spanish Football League (LFP was unable to impose any meaningful sanctions on financial miscreants, but a new law came into force in January 2012 that now authorises the authorities to relegate a club in administration – though whether they have the stomach for a confrontation with a club’s supporters is debatable.

In fairness to the LFP, they have also been impacted by the troubled economy, as Spain is entering recession with a record unemployment rate of 24% (a horrific 40% for young people) and Standard & Poor’s cutting the country’s credit rating. As LFP president José Luis Astiazaran noted, “We are not immune to the wider economy.” Professor Gay agreed, “Football is largely a reflection of what has been happening in our economy, with people spending way beyond their income, relying on fanciful growth forecasts and ending up with unsustainable debt and an asset pricing bubble.”

It could be argued that the dominant position of the two Spanish powerhouses is slowly killing Spanish football. This financial pre-eminence is boosted by the “every man for himself” approach taken with the individually negotiated TV deals. Madrid and Barcelona both trouser €140 million a season with the nearest club to them, Valencia, receiving about a third at €48 million. Thirteen of La Liga’s clubs receive between €13-18 million, including Athletic Bilbao with just €17 million. What price them holding on to all of the scintillating young talents that have enthralled us during their Europa League campaign?

Spain is unique among the leading European leagues in not having a collective TV deal, which explains why accusations of selfishness have been aimed at Madrid and Barcelona. The Sevilla president, José Maria del Nido, complained, “We cannot allow a situation where, because two clubs are very powerful, they bring about the demise of the Spanish league.”

That said, football is an amazingly resilient industry and it has not yet collapsed under the weight of debt in Spain, even though the issue is not a new one. In fact, La Liga debt has been about the same level of €3.5 billion for the last four years. Although it rose €50 million last season, the 2001 debt of €3.53 billion is actually lower than the €3.561 billion peak in 2008.

Nevertheless, there is no room for complacency, when a comparison is made with the other major European leagues. At €3.5 billion, Spanish liabilities are by far the highest, almost a billion Euros more than Serie A €2.7 billion (up €327 million in 2010/11) and the Premier League €2.6 billion (2009/10 figure). The debt levels in the financially disciplined leagues are unexpectedly much smaller: the Bundesliga €0.9 billion and Ligue 1 €0.7 billion.

In addition, the Spanish league also has the worst debt coverage (in terms of revenue) at 47% compared to the others: Serie A 63%, Premier League 95%, Ligue 1 140% and the Bundesliga 193%.

This sad state of affairs was underlined when it emerged that Spanish clubs owed the taxman €752 million, including €426 million from clubs in the top division. In fact, that came from just 14 of the 20 clubs, as the remaining six had no outstanding tax debt. According to the AS newspaper, that included Real Madrid, which seems a little strange, as both the club’s accounts and the study by Professor Gay do list tax liabilities.

Once again, Atletico Madrid have the dubious honour of leading the pack with the largest tax debt of €155 million, even after paying the €50 million from the sale of Sergio Aguero to Manchester City directly to the tax authorities. The next highest was Barcelona with €48 million.

This high level of tax debt is galling to many, particularly given the fragile Spanish economy, not to mention the fact that Spain has five clubs in the semi-finals of the Champions League and the Europa League – including the aforementioned Atletico Madrid.

As always, Uli Hoeness, the forthright president of Bayern Munich, got straight to the point, “This is unthinkable. We pay them hundreds of millions to get them out the shit and then the clubs don’t pay their debts.” In fairness, some clubs have negotiated payment plans with the authorities, such as Atletico Madrid (€15 million a year), Levante (5 years) and Mallorca (10 years).

On top of that, the Spanish government and the football league recently announced new rules that would pave the way for the clubs to repay the outstanding tax debts, as the threat of intervention from European Union anti-trust officials loomed large. The LFP said, “Economic control will be strict, as well as the sanctions regime.” These measures will include clubs being obliged to set aside 35% of TV rights revenue for tax payments from the 2014/15 season; clubs possibly being forced to sell players to raise cash; and clubs maybe even booted out of the league.

"Holidays in the sun"

Of course, Spain is hardly unique in having clubs facing severe tax issues, as fans of Rangers and Portsmouth would no doubt attest, but it is the magnitude of the debt in Spain that is concerning, especially given the relatively low revenue of some of the clubs involved.

Given the understandable focus on tax liabilities recently, it might also be a good idea for UEFA to include these in their definition of debt in order that clubs take this issue more seriously than they appear to have done in the past. It is actually a little strange that UEFA do not, as Article 50 of the FFP regulations specifically states that there should be no overdue payables to social/tax authorities (as well as employees) in the same way that Article 49 prohibits overdue payables towards football clubs. While the latter is included in their definition of net debt, the former is not.

In conclusion, while there are some very real debt problems in Spanish football, the situation is not quite so dramatic at Barcelona and Real Madrid as some would have people believe. It would obviously be better for their balance sheets if the debt was lower, but their ability to generate revenue is unsurpassed, admittedly partly due to the current unfair TV deal, but also their high gate receipts and awesome commercial strength. These operations continue to grow, as seen by Barcelona’s record-breaking shirt sponsorship deal with the Qatar Foundation and Real Madrid’s plans to build a $1 billion holiday resort in the United Arab Emirates.

"Put your shirt on it"

Of course, the two Spanish giants may still come under pressure from their creditors at some stage, especially if they embark on a summer spending spree following the disappointing Champions League semi-final exits. Nor should the impact of Spain’s faltering economy be trivialised, but the fact is that right here, right now, the important debt (bank loans, transfers and tax liabilities) is relatively low, at least for clubs of this size.

When reading reports on how much Barcelona and Real Madrid owe, it’s not quite a case of “don’t believe what you read”, but you do need to understand what any analysis is actually referring to, because, as we have seen, debt has many different definitions.

Caveat emptor – or something like that.

Champions League Revenue - The Final Countdown

2012-04-25T14:11:00.000+02:00

Chelsea’s remarkable triumph over Barcelona in last night’s Champions League semi-final was a surprise, but no more than their old fashioned, backs to the wall display deserved. They might not have played the prettiest football, but the result made it all worthwhile in the end, as they could book their tickets to Munich for a sumptuous final against either Real Madrid or Bayern Munich. You can’t put a price on nights like that.

Well, actually you can, as we are now in a position to estimate the impact on Chelsea’s Champions League revenue compared to last season. In fact, we can now work out the increases (or decreases) in revenue for all the English clubs in Europe with a reasonable degree of accuracy.

First, we need to understand how revenue is distributed among the clubs competing in the Champions League. UEFA negotiate various TV and sponsorship deals that contribute to a pot of around €1.1 billion to be distributed to teams competing in the Champions League and Europa League – after reserving around a fifth to cover their own costs and make “solidarity” payments to associations, leagues and clubs.

The pot made available for the clubs is divided into two parts: (a) prize money based on participation and results; (b) TV (market) pool.

Prize Money – Champions League

The above table lists the participation fees and prize money payable to the 32 teams that qualify for the Champions League group stages. Right off the bat, each team is awarded €3.9 million for participation plus another €550,000 per match played in the group phase, regardless of the result. Assuming that a club fulfills its six group fixtures (a fairly safe assumption), that’s worth €3.3 million. This means that each team is guaranteed €7.2 million for qualifying for the group stage, even if it loses every single game.

There is also a performance bonus of €800,000 for each victory in the group stage plus €400,000 for a draw. So if a team really puts its pedal to the metal and manages to win all six of their group matches, it will get €4.8 million. If a team qualifies for the first knock-out round (the last 16), they are awarded a further €3 million.

There are additional performance prizes for each further stage reached: quarter-final €3.3 million, semi-final €4.2 million, final €5.6 million and winners €9 million. So if you go all the way and win the damn thing, you would earn a total of €31.5 million (not counting the TV pool share), which is serious money in anybody’s language.

"UEFA's Michel Platini - Hammer Time"

Prize Money – Europe League

The principle is the same in the Europa League, though the sums involved are considerably smaller. Each of the 48 clubs involved in the group stages receives a participation bonus of €640,000 plus €60,000 for each match played in the group, giving a total of €1 million. In addition, there is €140,000 for each win and €70,000 for each draw in the group stage.

Turning to the knock-out stages, clubs competing in the round of 32 will receive €200,000 each, clubs in the last 16 €300,000, the quarter-finalists €400,000 and the semi-finalists €700,000. The Europa League winners will collect €3 million and the runners-up €2 million. The winning club could therefore receive a maximum of €6.4 million (around 20% of the Champions League).

TV Pool

In addition to these fixed sums, the clubs receive a share of the television money from the TV (market) pool, which is allocated according to a number of variables. First, the total amount available in the pool depends on the size/value of a country’s TV market, so the amount allocated to teams in England is more than that given to, say, Spain, as English television generates more revenue.

Clubs can also potentially do better if fewer representatives from their country reach the group stage, as the available money is divided between fewer clubs. This tends to benefit clubs from smaller countries, e.g. in 2010/11 Panathinaikos received €14.4 million from the TV pool, as Greece only had one qualifier, which was much more than the €9.7 million that Lyon received, as the French TV pool was divided between three clubs.

"Pep Guardiola - can't win them all"

OK, in the case of the English clubs in the Champions League, the allocation works as follows:

(a) Half depends on the position that the club finished in the previous season’s Premier League with the team finishing first receiving 40%, the team finishing second 30%, third 20% and fourth 10%.

(b) Half depends on the progress in the current season’s Champions League, which is based on the number of games played, starting from the group stages.

In other words, success has a direct impact on the amount of money received. Qualifying for the Champions League in fourth place is obviously beneficial, but that team would not receive as much as the teams finishing above it based on the above algorithm.

Of course, fourth place has other unhappy implications, as there is potential for an awkward qualifying match at an inconvenient stage of the club’s preparation (like Arsenal having to play Udinese this season). This season could actually be even worse, if Chelsea win the Champions League, as this would guarantee them qualification into next season’s competition. They would take the place of the team finishing fourth in the Premier League, which would then be bumped into the Europa League.

TV Pool – Allocation

Let’s see the result of these factors on the allocation of this season’s TV pool, taking Chelsea as the example, which seems only fair, as they have progressed furthest. We shall assume that the size of the English TV pool remains unchanged from last season at €84 million.

Chelsea finished second in the 2010/11 Premier League, so they receive 30% of the half allocated to this element, meaning 30% of €42 million, giving €12.6 million. Including the final, they will play a total of 13 games in this season’s Champions League, which works out to 39% of the total 33 games played by the four English clubs, generating another €16.5 million. They have benefited here from the early exits of the other English clubs with the two Manchester sides going out at the group stage and Arsenal being defeated by Milan in the last 16. In total, that gives Chelsea €29.1 million from the TV pool (€12.6 million plus €16.5 million).

This is €2.1 million more than the €27.0 million they received from the TV pool in the 2010/11 season. This might seem like a relatively small increment, given that the Blues only reached the quarter-finals last year, but this is due to the way the money is allocated. In particular, Chelsea won the 2009/10 Premier League, so they received 40% of the half of the TV pool based on the previous season’s Premier League finish, as opposed to 30% this season. In other words, they receive €4.2 million less this season for this element (€12.6 million minus €16.8 million), which offsets the additional €6.3 million (€16.5 million minus €10.2 million) from progress in the Champions League.

This factor is not very well understood among the football public, but it can have a significant impact on Champions League revenue. If we look at Arsenal, yes, they qualified for Europe’s flagship tournament this season, but their fourth place was only worth €4.2 million, which is a quarter of the €16.2 million that Manchester United received for their first place in the Premier League.

Similarly, progress in the actual tournament is very worthwhile, not just for the obvious higher prize money, but also the impact that it has on the TV pool allocation. For example, both United and City did not get out of their group this season, so received €7.6 million, while Arsenal got €2.6 million more (€10.2 million) for reaching the last 16.

Prize Money – Allocation

The allocation of the prize money is thankfully a bit simpler. This season, Chelsea will receive at least €26.5 million, which is made up of €7.2 million participation, €3.2 million from the group stage (3 wins at €800,000 plus 2 draws at €400,000), €3 million for the last 16, €3.3 million for the quarter-final, €4.2 for the semi-final and €5.6 million for the final (with the conservative assumption that their injury-ravaged team finish runners-up).

Total Money

So, Chelsea’s total revenue for the 2011/12 Champions League will be at least €55.6 million, comprising €26.5 million prize money and €29.1 million TV pool. That is €11.1 million higher than last season’s €44.5 million, when they exited the competition at the quarter-final stage.

Of course, if they actually win the final, they would receive €9 million prize money instead of the assumed €5.6 million, increasing their total money by €3.4 million (€9 million less €5.6 million) to €59.0 million, €14.5 million higher than last season.

In Sterling terms, Chelsea will receive £46.4 million (if they finish runners-up) or £49.2 million (if they win the final). That would be either £9.3 million or £12.1 million more than last season.

Exchange rates obviously play a part in the Sterling sum received by the club, but I have assumed a constant rate of €1.20 to the Pound for the sake of simplicity.

Other Clubs

Let’s look at how the other English clubs have fared in revenue terms compared to the previous season:

Manchester United – down £14.0 million. Although they received a minor uplift (€2 million) from being parachuted into the Europa League, this was nowhere near enough to compensate for the difference in the Champions League (did not get out of the group compared to reaching the final last season).
Manchester City – up £18.2 million. Qualified for the Champions League instead of the Europa League.
Arsenal – down £1.8 million. Virtually unchanged, as they were knocked-out in the last 16 both seasons. Only difference comes from the market pool.
Tottenham – down £22.2 million, as they only qualified for the Europa League, as opposed to the Champions League in 2010/11.
Stoke City – up £4.2 million. Reached the last 32 of the Europa League.
Birmingham City – up £3.7 million. Qualified for the Europa League, but did not get out of the group.
Fulham – up £3.7 million. Qualified for the Europa League, but did not get out of the group.
Liverpool – down £5.1 million. Did not qualify for Europe, but reached the last 16 of the Europa League the previous season.

My one caveat here is that the TV pool allocations for the Europa League have been estimated based on previous seasons, so will not be completely accurate.

"Sir Alex Ferguson - Mind over Money"

Other Factors

In addition to the TV money analysed above, clubs will also benefit from additional gate receipts from staging European matches. Chelsea will receive money from UEFA for the final, but this amount is unspecified.

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

However, this is difficult to quantify, as a former Barcelona vice-president admitted, “What is harder to put into figures is the impact it has on your brand. That is very difficult to discern. There is no doubt we got a massive boost from winning the competition. We were on television and on the front of all newspapers all around the world, but that increased exposure and interest doesn’t lead to an immediate increase in the value of your sponsorship deals.”

There is no doubt that competing in the Champions League makes a big difference financially, especially as the equitable nature of the distribution methodology for TV money in England means that there is not a huge difference between Premier League payments to the leading clubs.

In other words, whatever the size of the increases and decreases compared to last season, it should not be forgotten that all English clubs playing in the Champions League still have a considerable financial advantage over the rest of the Premier League, as can be seen by the above analysis of TV revenue.

Nevertheless, Chelsea and Manchester City will surely enjoy their additional funds from this season’s Champions league, while Manchester United and Tottenham will have to cope with reduced revenue. All part of the fun and games aboard UEFA’s Trans-Europe Express.

Queens Park Rangers - Hoop Dreams

2012-04-17T09:20:00.026+02:00

This has been a pretty good season for teams promoted from the Championship with Swansea City and Norwich City attracting many plaudits, so it is a little strange that Queens Park Rangers have not received much praise, especially as they actually won that division last year, playing some thrilling football en route to the title. In many ways, this is understandable, as they have been involved in a relegation battle for much of the season, but there’s more behind the lack of warmth than results on the pitch.

For many years, QPR were well regarded by neutrals, not least in the 70s when a team featuring the mercurial talents of Stan Bowles, Gerry Francis and Dave Thomas finished runners-up in the old First Division, only losing out to Liverpool by a single point. However, a succession of deeply unsuitable owners has tarnished the club’s image over the years, even alienating sections of its own support.

This season alone, the club’s long-suffering fans have already seen yet another change in ownership, as Malaysian entrepreneur Tony Fernandes took control in August. This was not the end of the moves, as Neil Warnock, the manager who took QPR into the Premier League for the first time in 15 years, was dismissed in January to be replaced by Mark Hughes, a man who notoriously questioned Fulham’s lack of ambition when he left them after less than 12 months.

"Mark of success?"

Although Hughes is an easy man to dislike, he did manage to save Blackburn Rovers from relegation when they found themselves in a similar predicament to QPR, and three successive home wins against Liverpool, Arsenal and Swansea have given hope that he can repeat the trick at Loftus Road.

One advantage that he will have compared to previous QPR managers is an owner that seems willing to support him, not just financially, as seen by the relatively high spending in the January transfer window, but by providing the stability that has been missing at the club for the best part of a decade.

The previous owners had also been welcomed into the club when they arrived in November 2007, as they saved QPR from “certain administration.” The consortium included some seriously affluent individuals: Flavio Briatore, Renault’s Formula One team principal (worth £150 million); Bernie Ecclestone, the F1 supremo (worth around £2 billion); and Lakshmi Mittal, the steel magnate (Britain’s richest resident, worth north of £20 billion).

The initial purchase price of less than £20 million must have seemed like small change to them. Briatore paid £540,000 for 54% (later selling a 20% stake to Mittal for £200,000), while Ecclestone’s 15% holding cost £150,000. In addition, they covered £13 million of debt and pledged £5 million in convertible loans to fund player purchases.

"England is mine and it owes me a living"

Although some believed that the acquisition would deliver untold riches, this was far from the case, as Ecclestone was quick to clarify, “QPR isn’t a wealthy club. It’s a club that’s owned by some wealthy people. No-one is going to be lashing out loads of money.” Unlike Roman Abramovich at Chelsea and Sheikh Mansour at Manchester City, the owners did not pour big money into the club, though in fairness they did bankroll some hefty losses.

Their motivation for buying into QPR was never clear. In fact, Ecclestone admitted that he first thought that Briatore was offering him an opportunity to invest in a restaurant. Mittal is thought to have invested in order to please his son-in-law, Amit Bhatia, a keen football fan, who took the family’s seat on the board of directors.

However, the new owners slowly went from heroes to villains, with fans giving Briatore and Ecclestone the wonderful nickname, “Tango and Cash.” All was revealed to the world at large in the amazingly candid documentary, “The Four Year Plan”, which in particular painted Briatore as an irritable buffoon prone to interfering in team selection and tactics.

"Briatore and Ecclestone - it takes two to tango"

As one caretaker manager, Gareth Ainsworth, diplomatically explained, “He’s the chief investor and he loves taking an active part in how his investment is going.” That’s one way of putting it. Briatore’s desire to get involved resulted in the club going through no fewer than six managers (plus two caretakers), most of whom he described as “idiots” in the documentary.

The club’s reputation as a laughing stock was “enhanced” by a series of embarrassing episodes: Briatore threatening to sell the club if he did not receive the names of thousands of fans that heckled him at one game; the sight of supermodel Naomi Campbell sporting a QPR scarf, while appearing bored stupid in the directors’ box; and the club’s traditional badge being replaced by a tacky new version. At one stage, Briatore’s status as a “fit and proper person” to own a football club was brought into question following the F1 ban for his part in “crashgate”, when he was accused of instructing one of his drivers to seek advantage for the team by deliberately crashing.

Even last season’s promotion party was soured when QPR were found guilty of fielding a player, Alejandro Faurlin, who was owned by a third party, which was strictly forbidden after the Carlos Tevez affair at West Ham. Fortunately, the club was only fined, instead of suffering a points deduction, but it reflected badly on management, especially the controversial chairman, Gianni Paladini.

"Faurlin - Don't cry for me, Argentina"

Fans were equally dismayed at the lack of funds provided for transfers with Warnock complaining that he had only been given £1.25 million to strengthen the squad, but they were incandescent with rage at the massive rise in ticket prices that followed the elevation to the Premier League, which seemed like a real slap in the face to people that had stuck with the club through thick and thin.

This was just one of the decisions that led to Bhatia’s departure, though he was also unhappy at the removal of his friend Ishan Saksena as chairman. In addition, the rejection of his bid to buy out the partners must also have played a part in his reasoning. This was a blow to the club, as he had been one of the few to emerge from the documentary with any credit.

However, even though the broadcast was cringeworthy, it is important to note that they did actually deliver on the primary objective, namely promotion to the Premier League within four years. In fact, without the money that Briatore and Ecclestone put in, it is possible that the club might not be here at all. As Warnock said, “When they came in, the club was in a mess. We shouldn’t forget that altogether.”

"Anton Ferdinand - he's not heavy, he's my brother"

The truth is that QPR had been in financial difficulties ever since their relegation from the Premiership in 1996, which meant that they missed out on the boom years in the world’s most lucrative domestic league and were hit by the collapse of ITV Digital.

The club went into administration in 2001 under music mogul Chris Wright as it dropped into the third tier and were only saved by a £10 million loan from the mysterious ABC Corporation, a company registered in Panama, though this came at a price, as the interest rate was a whopping 11.76%. The annual charges of more than a million were crippling for a club whose 2003 turnover was around £7 million. It was also surprising that the loan was so high, as Wright was only paid £3.5 million in full settlement for his loans.

The injection of cash did help QPR secure promotion back up to the second tier, but the sting in the tail was that the lenders were also given the option to acquire the stadium (used as collateral to secure the loan) for £10 million if the club failed to repay the debt, even though it was valued at more than twice that amount.

"Paladini - suits you, sir"

Our old friend Gianni Paladini arrived in 2005, when he introduced Antonio Caliendo, like him a former football agent. Although Caliendo’s reputation was hardly unblemished, having been convicted of corruption in Italy, the club somehow managed to keep its head above water, albeit hit by numerous scandals, such as the memorable court case when seven men were acquitted in a court case after Paladini had alleged that he had been threatened at gunpoint before a match against Sheffield United.

Nevertheless, Paladini’s services were retained by Briatore, proving that he was supremely adept at the art of survival, if nothing else. The finances remained unstable, as seen by the auditors comments in the 2009 accounts, which noted, “the existence of material uncertainties regarding the group’s ability to continue as a going concern… unless sufficient funding (was) forthcoming.”

This was not the first example of the auditors expressing concern, as the accounts published for the 2004/05 financial year had been shown to be different from those approved at the annual general meeting.

These were symptoms of QPR’s underlying financial problems, amply demonstrated by the club’s growing debt, which rose from £14 million in 2006 to £56 million in 2011, including £22 million in the last 12 months alone. This was largely funded by various loans from shareholders, including £15.8 million from Sarita Capital Investments (believed to be a Briatore vehicle), £12.3 million from Sea Dream Ltd (a company owned by the Mittal family), £11.4 million from Ecclestone; and £10 million from Amulya Property Ltd (a company connected to Briatore and Bhatia).

The Amulya loan replaced the infamous ABC loan “at a more favourable rate of interest”, though it is worth noting that the interest rate was still on the high side at 8.5%, before being extended in 2010 at zero interest. It also still gave the lenders the option to acquire Loftus Road on the cheap in certain circumstances. More positively, the other shareholder loans were all made at zero interest with both Ecclestone and Mittal advancing a further £10 million apiece in 2011.

QPR had also used £4.9 million of their £5 million overdraft facility with Lloyds Bank, while £2.1 million of the debt was unexplained. As a technical aside, the analysis of net debt in Note 24 of the 2011 accounts does not equal the figures listed in the Creditors Notes (15 and 16), either in total or the split between debt due within one year and after one year.

Of course, this is all largely irrelevant, as Tony Fernandes and his partners have since bought a majority shareholding (66%) in the club. The Mittal family retained a 33% stake and Amit Bhatia was brought back as vice-chairman.

"Wright-Phillips - chip off the old block"

The purchase, reportedly costing £45 million in total, included the re-assignment of the loans made by Briatore and Ecclestone to Tune QPR Sdn Bhd, a company controlled by Fernandes, and the repayment of the bank overdraft. This was nowhere near the £100 million that the previous owners had been seeking, but largely covered the money that they had put in.

Bhatia confirmed that the gruesome twosome were no longer involved with QPR, “They have no ties with the club left. Balance sheet, debt, amounts owed – all of it.” That included ownership of the stadium. The takeover also resulted in Paladini’s eight-year association with the club ending three months later.

New chief executive Philip Beard announced, “The reality is that the club has no debt”, but he must have meant that it had no external debt, as the shareholder loans have simply been taken on by the new owners.

"Fernandes - come fly with me"

The arrival of Fernandes hopefully heralds a new dawn. The affable founder of Air Asia and principal of the Lotus Formula One team has a good business record and has already been much more communicative with the fans than his predecessors, making good use of his Twitter account. Although perceived as a nice guy, he is not afraid of taking tough decisions, hence his replacement of Warnock with a man he considered more likely to avoid the dreaded drop.

That said, QPR fans should not be expecting Fernandes to be a benefactor like Abramovich or Mansour, as he said, “I’m not someone who can whip out the cheque book like them. That’s Disneyland stuff. I’m not a sugar daddy. Maybe a sugar baby.” He continued, “This is not a black hole of Calcutta or a trophy asset. This has to be run as a business.” That might sound like pie in the sky, but he likened the situation in football to his other sporting experience, “I got into Formula One when the cost cutting came in. And you know, crazy budgets were slashed into much, real profits.”

The extent of his immediate ambition is to survive in the Premier League, which he deemed “realistic”. Bhatia added that they needed to achieve this aim “without throwing large amounts of money at it.”

This all sounds rather admirable, but Briatore said much the same thing after his arrival, “These deals will allow QPR to move towards our objective of ensuring that QPR is financially self-sufficient”, which was subsequently followed by three years of considerable losses.

This culminated in a deeply worrying £25.4 million loss in 2011 (in QPR Holdings Limited), which was £11.7 million (85%) higher than the previous year’s £13.7 million deficit, meaning that the club lost nearly £500,000 a week. It actually would have been £2 million worse without the reinstatement of a provision for a liability that was in place due to the sale of the club to a previous owner.

Unlike many clubs, the figures are not really impacted by profits on player sales, which were only £0.5 million last year. Indeed, the highest recorded in the last six years was only £2.1 million in 2008, largely as a result of the sale of Lee Cook to Fulham.

Clearly, these accounts are the last before the Fernandes takeover, so next year’s figures will be very different. In particular, promotion to the Premier League will mean significantly higher revenue (and expenses).

There’s certainly room for improvement, as it is ages since QPR achieved break-even. The losses really exploded in the Briatore/Ecclestone era with £58 million being racked up in the last three years alone. Even the relatively small 2008 loss of £6 million was artificially boosted by Caliendo waiving £4 million of his outstanding loans. Excluding this once-off factor, there would have been another double-digit loss in 2008 of £10 million. In fact, excluding all exceptional items, the total loss under the previous owners amounted to a colossal £70 million in four colourful years.

Of course, the vast majority of clubs in the Championship lose money with only three of the 24 contenders making money in 2010/11 (Watford, Scunthorpe United and Leeds United) and nine losing more than £10 million. This is partly a result of low TV money in England’s second tier, but also due to many clubs over-spending in order to reach the promised land of the Premier League.

QPR obviously managed to clear this hurdle, but their £25 million loss was by far the biggest in the Championship. As a comparison, Norwich City and Swansea City were also promoted, but made much smaller losses, £7 million and £11 million respectively.

The reason for QPR’s huge loss is blindingly obvious if we look at the factors behind their worsening deficit in the last five years, when the loss widened by £22 million from £3 million in 2006 to £25 million in 2011. In this period, revenue only grew by £7 million, but wages surged by £23 million. Other costs (£6 million) and player amortisation (£3 million) also increased, but the real damage was done by the booming wage bill.

Although QPR’s revenue grew 13% in 2011 from £14.4 million to £16.2 million, this was only mid-table in terms of the Championship. Leeds United were top of the tree with £33 million, due to very high gate receipts (thanks to Ken Bates’ ticketing policy) and a prosperous commercial operation. The next three clubs in the revenue league (Burnley, Middlesbrough and Hull City) all benefited from £15 million parachute payments after relegation from the Premier League.

Based purely on revenue levels, QPR did well to secure promotion, though Swansea’s achievement in doing the same on turnover of less than £12 million is even more remarkable.

One area where Briatore and Ecclestone should be applauded is the new commercial deals that they negotiated in 2009, which increased revenue by 60% from £9.2 million to £14.8 million. Even that pales into insignificance compared to the growth this season in the Premier League, when I estimate revenue will rise around 240% to £55 million, almost entirely due to the TV deal which should deliver at least £40 million on its own.

Unhelpfully, QPR stopped providing an analysis of their revenue after the 2008 annual report, so I have estimated the split since then using various assumptions. The accounts inform us that ticketing was 34% of total revenue in 2010 (42% in 2009), which would give £4.9 million match day revenue. Strangely, the same accounts also state that match day revenue is £2.5 million in the Business Review, but this seems very low. However, I have used the increment for this figure in the 2011 accounts of £0.4 million (£2.9 million less £2.5 million) as the basis for 2011 match day income of £5.3 million. This year assumes a 25% increase in the top flight.

The TV revenue is mainly per the distributions made to all clubs in the Championship, e.g. in 2010 this was £3.8 million, comprising central distribution of £2.5 million plus a £1.3 million solidarity payment from the Premier League. In 2011 this increase to £5.2 million, as the solidarity payment rose to £2.2 million and each club was given an additional £0.5 million as their share of the parachute payments for Newcastle and WBA, because they went straight back up to the top tier. The remaining TV money is for live broadcasts and progress in the cup competitions.

That just leaves commercial income as the balancing figure in years 2009 to 2011 with 2012 growth in the Premier League estimated at 25%, which does not seem unreasonable.

Of course, this season is all about the revenue from the Premier League’s TV deal. Many people refer to promotion being worth around £90 million, which is a little misleading, as it is not all received in one fell swoop, but it’s still a magnificent prize. Even if QPR do come straight back down, they would receive £40 million TV income plus £48 million parachute payments over the next four years (£16 million in each of the first two years, and £8 million in each of years three and four) plus additional gate receipts and commercial revenue.

Furthermore, if Rangers finish higher in the Premier League, they would receive even more TV money with every season survived adding another £40+ million to the coffers. Given the spectacular difference in revenue compared to the Championship, it is understandable why clubs like QPR push themselves to the absolute limit to secure promotion, though it’s a dangerous game, as only three clubs go up every year, leaving another 21 disappointed.

One concern is that the club might eat into that higher revenue by increasing wages and other costs, but the net effect is still likely to be positive. If we look at the three teams that were promoted to the Premier League in 2009/10, we can observe this phenomenon with Newcastle United, WBA and Blackpool, as all three clubs dramatically improved their operating profitability, even though wages increased.

Although £55 million revenue must seem like a huge sum to QPR, after averaging around £15 million for the last three years, it is still relatively low in the Premier League, e.g. only Blackpool and Wigan Athletic generated less revenue last season. For some perspective, QPR’s recent defeat to Manchester United was against a team whose £331 million revenue is six times as much as their own. As Sky used to say, “it’s a different ball game.”

Nevertheless, the allocation of TV money is reasonably equitable, ranging from £40 million to £60 million, with 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£17.9 million) shared out equally. Facility fees are allocated based on the number of matches shown live on TV (minimum of ten for each club), while the merit payment is worth £757,000 for each place.

Match day revenue of around £5 million is QPR’s real Achilles Heel. Clubs like Manchester United and Arsenal generate more revenue in just two games than QPR achieve in a whole season. This is partly down to Rangers’ low crowds with last season’s average attendance of 15,635 being only the 14th highest in the Championship.

This actually represented something of a recovery, as the previous season the average had only been 13,349. In fact, during the darkest days QPR’s crowds fell below 13,000. Although attendances have increased this season to over 17,000, this is still the smallest in the Premier League, even behind Wigan Athletic, whose crowds are notoriously low.

Part of the problem is the capacity at Loftus Road, which is only 18,360. This was one reason why QPR raised their prices so much following promotion, as the lovable Paladini explained, “QPR is a small ground, so we could not survive if we did not put prices up.” However, this did not make much sense, given the relatively small sums involved, especially as this increase understandably caused so much ill will among the supporters.

Season ticket prices were raised by around 40%, but the real increase was even higher, as there are four fewer matches in the Premier League, while match day prices doubled. This was the ghastly result of Briatore’s desire to create a “boutique stadium.” In fairness, most promoted teams do increase ticket prices, but this was excessive.

At least it presented Tony Fernandes with a PR open goal and he duly thumped the ball into the back of the net by quickly revising the pricing structure, so season ticket holders were given “significant” refunds; a cheaper match day pricing category was introduced; and under-eights were allowed in free of charge if accompanied by an adult.

Although Loftus Road can be an intimidating arena for visiting teams, it is far from ideal for a club with aspirations of competing at the top level. Given the current ground’s proximity to nearby housing, it would be too difficult to expand it, so a move to a new stadium has been mooted. Although it is not clear how this would be funded, Fernandes seems enthused by the idea and Philip Beard has emphasised its importance, “Football will be the bedrock of that stadium and a place where we can generate additional revenues from other activities so that the business plan for the club is sustainable.”

The club would like to stay close to where they are, as Fernandes explained, “It makes no sense to move out from where the fan base is.” Aided by the possibilities opened up by the BBC’s relocation to Salford and the massive Westfield shopping development, the club has reportedly identified three possible sites in the White City area.

However, the obvious question is whether Rangers would be able to fill a new stadium. Fernandes’ “gut feel” is for a 40,000 to 45,000 capacity, even though that would be more than twice the current attendance. That’s a big ask, especially with so many other teams on the doorstep.

"Running up that Hill"

Some of the costs might be reduced with a ground share, especially as QPR have plenty of previous here. Not only did Fulham share Loftus Road for two seasons between 2002 and 2004 while Craven Cottage was being redeveloped, but Wasps rugby union club also played home matches there for a while.

QPR’s commercial income of £5-6 million is not too bad, comparing favourably with many established top flight clubs like Bolton Wanderers and Blackburn Rovers, though it is only half of the £12 million generated by neighbours Fulham. Indeed, the club has stated that it “believes that its Premier League status will help it to significantly increase its commercial revenue.”

The previous owners had already demonstrated commercial acumen by making once-off payments in 2008 to extricate themselves from “poor value” sponsorship agreements with Car Giant and Le Coq Sportif. These were replaced by a three-year deal with Gulf Air worth £2.3 million a season and a five-year kit supplier agreement with Lotto Italia worth £20 million, which was a record for the Championship, though the full value would only be attained with promotion to the Premier League.

Last summer a joint shirt sponsorship deal was signed with Malaysian Airlines for the home kit and Air Asia for the away kit and third jersey for the next two years. The value was not divulged beyond a “multi-million pound deal”, though the respected Sporting Intelligence website estimated £2.3 million a year in line with the previous sponsor, while the Malaysian press estimated that it could be as much as £3 million. Beard said that “attracting two major Asian companies to come on board shows the global appeal QPR has as a brand”, though his argument is weakened by the fact they are both part-owned by Fernandes.

In any case, the money is not too bad at all, though it is still a fair bit less than the £20 million earned by Liverpool from Standard Chartered, Manchester United from Aon and (reportedly) Manchester City from Etihad. If the £4 million a season for the kit supplier are accurate, that’s even more impressive, e.g. it would be higher than Aston Villa’s new deal with Macron, but again it is small beer compared to the £25 million deals for Liverpool with Warrior Sports and Manchester United with Nike.

Of course, the burning issue at QPR has been the wage bill, which has more than quadrupled in the last five years, rising from £6.3 million in 2006 to £29.7 million in 2011. This has resulted in a dreadful wages to turnover ratio of 183%, significantly higher than UEFA’s recommend upper limit of 70%. To place that into context, big spending Manchester City’s ratio is “only” 114%.

In fact, QPR’s ratio has been above 100% in each of the last four years, which they partly ascribe to the imposition of transfer windows, claiming that this means they have to recruit a larger squad. In addition, the figures have been inflated by numerous termination payments to former managers.

While the wage bill looks awful, a couple of points should be acknowledged: (a) the 2011 figures have been inflated by bonus payments for promotion; (b) this is far from unusual in the Championship, where nearly half the clubs have a wages to turnover ratio over 100%.

Nevertheless, QPR’s wage bill of £29.7 million was easily the highest in the Championship last season (having pro-rated Middlesbrough’s figures, as their last accounts covered 18 months). Only three clubs in that division had a wage bill over £20 million, while QPR’s payroll was £11-12 million higher than the other two promoted clubs. Put another way, it was almost twice as much as clubs like Leicester City, Nottingham Forest and Leeds United.

However, before we stray too much into “shock, horror” territory, it was still a lot lower than every Premier League club in 2010/11 with the exception of Blackpool. Clearly, the wage bill will have increased this season with the likes of Joey Barton, Djibril Cissé and Nedum Onuoha being recruited on £60-80,000 a week, but this is unfortunately the price of dining at the top table. As the 2001 accounts put it, “The Group operates in a highly competitive market for talent and the market rate for transfers and wages is, to a varying degree, dictated by competitors.”

The other expense impacted by investment in the squad is player amortisation, which has been on the rise, but only reached £3.2 million in 2011. For those unfamiliar with this concept, amortisation is simply the annual cost of writing-down a player’s purchase price, e.g. Shaun Wright-Phillips was signed for around £6 million on a 3-year contract, but his transfer will only be reflected in the profit and loss account via amortisation, booked evenly over the life of his contract, so £2 million a year (£6 million divided by 3 years).

In this way, amortisation will rise significantly in the next couple of seasons in line with the recent higher expenditure in the transfer market. That said, QPR will still have a long way to go to match Manchester City’s £84 million.

Over the years, QPR have hardly been big spenders. Indeed, they had net sales proceeds of £1.2 million in the five years up to 2007. Only £14.8 million was spent during the four years under Briatore, as the club largely relied on free transfers and loans. Even in the promotion season, Warnock’s net spend was just £1.5 million.

However, things have changed since Fernandes’ arrival with £20.6 million being splashed out in the last two transfer windows, including £11 million in January alone on Bobby Zamora, Cissé and Onuoha plus loans for Samba Diakité, Federico Macheda and Taye Taiwo.

As the Malaysian said, “We have made a significant investment in relation to bringing new players to QPR.” In fact, only four clubs have spent more in that period (Chelsea, Manchester City, Manchester United and Liverpool), though Fernandes was at pains to emphasise that they had only been spent as much as “half a Man City player.” To an extent, the expenditure is predictable, as explained by Beard, “We are new to the Premier League. To stay up, we have had to invest in the squad.”

QPR’s balance sheet is not very robust with net liabilities of £40 million, having enjoyed net assets up to 2006 (as high as £10 million in 2000), though player values are under-stated in the books at £8 million, when their worth in the real world is much higher. The Transfermarkt website estimates the current value to be £70 million, taking into consideration the recent influx.

This deficit explains the need for support from the club’s shareholders and creditors, which is further demonstrated by the cash flow statement. In the last four years, this shows net cash outflow from operating activities of £47 million, rising to £68 million after interest payments and investment in players and infrastructure. This deficit required £64 million of new financing, made up of £30 million additional share capital and £34 million new loans.

It is therefore crucial that Fernandes and Mittal continue to provide support. Some concern has been expressed over the fact that Fernandes is not a QPR fan (he supports West Ham), though he did actually grow up in the area. Mittal could be seen as a somewhat reluctant owner, but Beard’s understanding is that the shareholders are “100% committed to this club in the short, medium and long term.” Bhatia has also said that his family “remains passionate about QPR.”

In any case, Fernandes has explained that apart from the emotional pull of owning a football club, he was also attracted by good, old-fashioned business reasons, especially QPR’s strength as a marketing vehicle for his companies. “Many people do not realise the power of sport to market a brand,” he said. “You can spend £40 million on advertising and have nothing like the same effect. Around the world, everybody watches Premier League football.”

Fernandes even believes that QPR could be profitable one day: “Yes, without a doubt. Otherwise I wouldn’t have got involved.” That makes sense, as he is reportedly worth “only” £200 million, which is big money for the likes of you and me, but does not go very far in high-level football. This is why he is so committed to the idea of the club finally paying its own way. As he neatly summarised, “It can’t be about one benefactor. I might be hit by a bus.”

"Shaun Derry - All cats are grey"

In the long-term, there are ambitious plans to build a new training ground, which would help improve the youth system. Fernandes said, “I’m keen to create a good academy, so that there’s a constant supply of players. We’re in a fantastic part of London and we should be bringing kids through.”

More immediately, the objective is clear, “The main thing is to avoid relegation.” Even though the blow would be softened by parachute payments, there would still be a tremendous financial hit, especially as it is rumoured that some top earners do not have relegation clauses in their contracts. Older fans would need no reminding that the last time that happened it took 15 years for QPR to get back...

Maintaining Premier League status for a couple of seasons would also provide some badly needed stability at the club, which might just loosen Mittal’s purse strings. Even if not, it would make QPR a more attractive opportunity for other investors.

"That's Zamora"

QPR fans have endured enough drama to last a lifetime, but there is potential here, especially under the guidance of Fernandes, who achieved a spectacular turnaround with Air Asia. When he bought that company, it was “a kind of unpolished diamond” with just two planes and a lot of debt, but he transformed it into a success story with 100 aircraft and profits of $400 million.

Could he achieve something similar at QPR? History would suggest not, but Fernandes has already beaten the odds once in his career, so it’s not impossible that West London’s version of Hoop Dreams could become reality. Westway to the World? Time will tell.

Newcastle United - Life In A Northern Town

2012-03-20T09:03:00.023+01:00

What a difference a few months can make, especially at a football club. Newcastle United fans endured a turbulent pre-season, as they saw the heart and soul of their team leaving for pastures new with Kevin Nolan and Joey Barton making their way to London and José Enrique joining his former colleague Andy Carroll at Liverpool.

The departing players wasted little time in putting the boot into their former club, which might be expected, but this exodus did seem to undermine the authority of manager Alan Pardew, who had firmly stated that they would all stay. Pardew himself still had a lot to prove to the Geordie faithful, as his track record at former clubs had provided little support for his abundant self-confidence.

Above all, the rotund figure of Mike Ashley loomed large in the background with his almost unparalleled ability to alienate supporters with a series of embarrassing gaffes and his seeming unwillingness to hand Pardew much of the £35 million received for Carroll.

That was then, this is now. The Toon army has had much to celebrate in a season that has seen their team restore the pride in the shirt. Playing some thoughtful, attractive football, Newcastle currently lie sixth in the Premier League with a genuine chance of qualifying for Europe.

"Pardew - Fade to Grey"

Pardew’s appointment now appears remarkably astute, even though there is still much sympathy for his unfortunate predecessor, Chris Hughton, while there is an increasing belief that selling some of the club’s more experienced players has strengthened the harmony in the dressing room and actually helped to improve the team’s style.

In truth, Newcastle have been on the road to recovery ever since they secured promotion from the Championship two years ago, when they bounced back after just one season in the lower tier.

There is little doubt that Ashley played a major part in Newcastle’s relegation after 16 consecutive seasons in the top flight, even though the club enjoyed one of the highest budgets in the Premier League, as he was responsible for a series of frankly baffling managerial appointments, starting with the overly sentimental choice of Kevin Keegan, followed by Joe Kinnear, who had been out of the game for four years, and culminating in local hero, Alan Shearer, who won only once in eight games after leaping off the Match of the Day sofa.

However, he was also the man who bankrolled the largest wage bill in the Championship, despite the club’s revenue nearly halving. Although many players left during the summer of 2009, the club retained the vast proportion of its squad and strengthened it further in the January 2010 transfer window. So, although Newcastle’s demotion had largely been a mess caused by Ashley, at least he helped to clear it up, as his willingness to fund a Premier League wage bill in the Championship clearly gave the club the best chance of being promoted. Ashley is known as a man who likes a bet and in this case his gamble paid off.

"Coloccini - Songs from the big hair"

Since Ashley bought the club in June 2007, Newcastle supporters have become all too aware of the owner’s habit of shooting himself in the foot. Even his right-hand man Llambias admitted, “We were naïve and we made mistakes.” Ashley’s initial attempts to ingratiate himself with the fans by stuffing himself into a replica shirt came across as cringe-inducing, rather than endearing, while his recruitment of the “Cockney mafia”, including the taxi drivers’ friend Dennis Wise, angered people, not so much because of their origins, but the fact that they had virtually no experience of running a football club.

Other less than brilliant ideas included putting the club up for sale on its website, inviting bidders to send applications to an e-mail address (yes, really), and deciding to rename the splendid St. James’ Park the Sports Direct Arena, after Ashley’s own cheap and nasty retail chain.

All that said, a large slice of credit is due to Ashley for saving the club and putting its house in order, as he inherited a business drowning in debt, limited borrowing capacity and a bloated wage bill. The former ownership’s excesses, memorably epitomised by Douglas Hall and Freddy Shepherd being caught bad-mouthing the fans in a seedy Spanish bar, may have featured some exciting moments, but it also resulted in deeply worrying losses. That man Llambias again, “If Mike had not come in at that time, the club would have been in dire, dire trouble. It would have been another Portsmouth, maybe worse, because it is such a big club.”

"Cabaye - French connection"

Although things got worse before they got better, it could be argued that relegation was the slap in the face that Newcastle needed for them to get to grips with their myriad issues off the pitch. Not only did their stint in the Championship boost the club’s morale, as the team once again acquired the winning habit, but more importantly it forced the club to address its financial problems – and also lowered expectations to a more reasonable level.

Indeed, last season’s twelfth place in the Premier League, followed by this season’s improvement, represents the sort of steady progress that is just what a company doctor would have ordered. This is all the more impressive, as it has been achieved within a sensible budget, so that the club’s finances now look a great deal healthier. Years of hefty losses have been converted into a substantial profit, while the wage bill has been slashed and debt is under control. To paraphrase the Rolling Stones, Ashley saw a club’s balance sheet covered in red ink and painted it black.

The club clearly outlined its self-financing strategy when it published a mission statement that talked of no longer financing losses by increasing debt year after year. It referenced a “five-year plan to get Newcastle United on a sound financial footing”, which by and large they have succeeded in doing, though presumably relegation was not part of the original strategy.

"Tioté - sound Cheick"

This meant adopting a very different approach in the transfer market, making sensible signings of young, hungry players, as opposed to over-paid stars just going through the motions. As the statement put it, “the days of Newcastle United acquiring trophy signings who command huge salaries for past successes on the pitch are over”, which some may take as a veiled reference to Michael Owen. Instead, “the focus now is to bring in players who can develop and fulfil their potential at Newcastle.”

Moreover, this has to be managed within budget, as Llambias explained, “We have to recruit what we can afford.” This is a laudable objective, but will only succeed if the club has a good scouting network. Fortunately, under the auspices of chief scout Graham Carr, this seems to be the case, as they have made a number of shrewd purchases for relatively modest fees, doing particularly well in the French market, where their bargain signings include the dynamic central midfield partnership of Cheick Tioté and Yohan Cabaye. These players have arrived with a point to prove and appear to be hungrier than their high-earning predecessors.

Such a policy of doing business “on the cheap” does not necessarily mean a reduction in quality. The best example is probably Senegalese striker Demba Ba, who has scored an impressive 16 goals since he arrived on a free transfer in the summer. Not bad, especially considering that he cost £35 million less than Andy Carroll, the man he effectively replaced.

"When I was Krul"

This is part of a newfound realism at Newcastle, as Pardew colourfully explained, “Mike has made it quite clear this club needs to wipe its nose. We can’t invest above our income. We can’t compete with Manchester City.” Llambias went further, “We are punching above our weight at the moment, but now it’s a case of pushing forward. This season we targeted tenth or above. Next season it was going to be eighth - it still is.”

This is very different from the previous regime urging the “Geordie nation” forward, while they risked the club’s future. As the great Elvis Costello once said, “Clowntime is over.” For so long the poster boy of inept mismanagement, Newcastle United are now a great example of how you don’t have to break the bank to be successful.

So Newcastle have made great strides financially, but how has this happened and what does it mean exactly? Let’s take a look at the key questions arising from their journey.

1. How profitable is the club?

After many years of hefty losses, Newcastle reported an impressive £32.6 million profit before tax in 2010/11, compared to a loss of £17.1 million the previous season, which represents an improvement of nearly £50 million year-on-year. Within that figure, the operating loss was significantly reduced from £33.5 million to just £3.9 million, a huge turnaround.

This comprised a cash profit (or EBITDA – Earnings Before Interest, Taxation, Depreciation and Amortisation) of £16.2 million less £20.1 million of non-cash flow expenses (player amortisation £13.5 million, impairment of player values £3.7 million and depreciation £2.9 million).

Revenue grew by £36 million (69%), while costs only increased slightly by £1.2 million (2%), as the £6 million rise in the wage bill to £54 million was largely covered by a £5 million reduction in other expenses.

The bottom line was then boosted by a substantial profit on player sales of £37 million, £21 million higher than the previous season, mainly due to Carroll’s barely credible £35 million transfer to Liverpool.

To place this achievement into context, the last time that Newcastle made a profit was back in 2005 – and that was a very small one of £0.6 million. In the following five years, the club made combined losses of around £100 million: 2006 £12 million, 2007 £34 million, 2008 £20 million in 2008, 2009 £15 million and 2010 £17 million. In other words, Newcastle had been very obviously living beyond their means.

In fairness, last season’s loss in the Championship actually showed the first signs of improvement, as it was around the same level as the deficit in the Premier League, despite a massive (£34 million) drop in revenue, thanks to the determined actions the club took with their wage bill.

2. Are they self-financing yet?

Although the overall profit of £32.6 million is a notable performance, it is evident that this is largely due to the sale of Carroll. Excluding the £36.7 million profit on player sales, the club would have made a loss of £4.1 million. Newcastle’s reliance on player sales is nothing new, as they have made £86 million profits from this activity in the last four years, including £10.8 million in 2008 (mainly Kieron Dyer), £23.4 million in 2009 (James Milner, Shay Given, Charles N’Zogbia and Emre) and £15.4 million in 2010 (Sebastien Bassong, Obafemi Martins and Damien Duff).

However, the big difference in 2011 is that Newcastle very nearly broke-even without the benefit of player sales. Llambias was justly proud of this feat, “The club’s financial results for the year end-June 2011 are extremely strong. We can now count ourselves amongst very few clubs across the UK and Europe who are operating close to break-even.”

This is very different to previous years when profit on player sales was nowhere near enough to cover large operating losses. In the four years up to 2010, the annual “clean” loss (excluding player sales and exceptional items) was between £27 million to £35 million, which was a recipe for disaster.

By far the largest reason for these exceptional charges was the severance payments made to departing managers, including Graeme Souness, Glenn Roeder, Sam Allardyce and Keegan, which amounted to a staggering £14 million between 2006 and 2009. Not only did this hire-and-fire policy disrupt the club on the pitch, but it also damaged it financially.

It should also be noted that the £34.2 million loss in 2007 (the last financial year of the old board) would have been even higher without the benefit of £6.7 million of compensation received following Michael Owen’s injury at the 2006 World Cup. Otherwise, it would have been a shocking £41 million, including a £2 million loss on player sales.

3. How does the profit compare to other clubs?

If another statistic were needed to emphasise how well Newcastle are doing financially, try this for size: they made more money than any other club in the Premier League last season with their profit of £32.6 million. This was ahead of the cash machine known as Manchester United (£30 million), the low spending Blackpool (£21 million) and the widely admired Arsenal (£15 million).

Three clubs (Liverpool, Sunderland and Birmingham City) have still to publish their accounts for 2010/11, but there is no chance of them emulating Newcastle’s performance.

Although more clubs were profitable last season (eight of the 17 to report in 2010/11, as opposed to four out of 20 in 2009/10), Newcastle’s figures are particularly impressive if you consider that Aston Villa, a club with similar aspirations, made a gigantic loss of £54 million last season.

4. What difference has Ashley really made to the club’s profit?

Before we go overboard about the impact Ashley has made on the club’s business, it is worth making a comparison to the situation before he arrived. On first glance, this looks like an amazing transformation, as he has converted the 2007 loss of £34.2 million to a thumping great profit of £32.6 million, delivering an improvement of around £67 million.

Not bad at all, but this is mainly due to two factors: (a) profit on player sales is £39 million higher; (b) he has cut costs by £27 million after reducing operating expenses by £12 million, player amortisation (including impairment) by £9 million and interest payable by £6 million.

This is all highly laudable, but what he has not managed to do is to grow revenue. In fact, the 2011 revenue of £88.5 million is only £1.4 million (2%) higher than the £87.1 million generated in 2007, despite the higher Premier League TV deal. Both match day and commercial revenue have declined, the former partly due to 2007 being boosted by a good run in the UEFA Cup. In fairness, much of the fall in commercial income was due to outsourcing the club’s catering operations in 2009, which also lowered costs, but the underlying performance is still not that good – it was described as “relatively flat” last season.

5. But didn’t the revenue grow substantially last season?

It is true that revenue grew by almost 70% in 2010/11 from £52.4 million to £88.5 million, but this was almost entirely due to promotion to the Premier League, where TV revenue is significantly higher than the Championship (even with parachute payments). In other words, this only meant a return to much the same level of revenue as 2008/09, the last season in the top flight, when Newcastle earned £86.1 million.

Newcastle have become increasingly reliant on TV revenue, which has risen from 30% of total turnover in 2007 to 55% in 2011. This might sound like it’s on the high side, but most other clubs in the Premier League are even more dependant, e.g. Blackburn Rovers and Bolton Wanderers earn about three-quarters of their money from TV, while an astonishing 88% of Wigan Athletic’s revenue comes from this source.

6. So is Newcastle’s revenue good or bad?

On the one hand, Newcastle have little to complain about, as they enjoy the eighth highest revenue in England, around the same level as Aston Villa. In fact, their turnover of £88.5 million is actually the 25th largest in Europe, just ahead of clubs like Ajax and VfB Stuttgart.

On the other hand, they are still a long way behind the six leading English clubs. This season’s thrilling 3-0 victory against Manchester United is all the more impressive when you consider that the Reds earn almost four times as much with £331 million. Similarly, Arsenal (£227 million) and Chelsea (£226 million) have around £140 million more than Newcastle, while Tottenham (£164 million) and Manchester City (£153 million) generate nearly twice as much.

The fact that the traditional “Sky Four” are so far ahead in terms of revenue may not be too surprising, but it is concerning that there is such a big gap to Spurs and City, especially as they have been rapidly growing their revenue, while Newcastle have effectively been running to stand still. For example, in 2007 Newcastle’s revenue of £87 million was only £16 million less than Spurs, but they are now £75 million behind. The Geordies were actually £30 million ahead of City in 2007, compared to the current £65 million deficit.

For Newcastle to still be competitive at the upper levels of the Premier League with a much smaller budget is worth of admiration, but it will make it hard to repeat this feat on a consistent basis, unless they can somehow grow their revenue. As Pardew explained, “The problem is that where we are financially means it's hard to fulfil the expectations of fans who a few years ago watched European football here.” That said, their resources should be sufficient to keep them in the top ten.

7. What are the implications of finishing higher in the Premier League?

The distribution methodology for TV revenue in the Premier League is fairly equitable, so there would not be an enormous difference if Newcastle climbed up the table, though the additional money would still be worthwhile.

The lion’s share of the money is allocated equally to each club, which means 50% of the domestic rights (£13.8 million in 2010/11) and 100% of the overseas rights (£17.9 million). However, merit payments (25% of domestic rights) are worth £757,000 per place in the league table, so if Newcastle were to finish in their current sixth position, i.e. six places higher than last season, that would give them £4.8 million additional revenue.

Finally, facility fees (25% of domestic rights) depend on how many times each club is broadcast live, which has traditionally benefited Newcastle, as the “great entertainers” tag lives on, so they were shown 16 times last season, the seventh highest in the division. This helped them to receive more TV money than two of the clubs that finished above them (Sunderland and WBA), while they earned nearly £3 million more from facility fees than eighth placed Fulham (£8.7 million vs. £5.8 million).

Total television revenue of £48.5 million was £32.4 million higher than the £16.1 million received in the Championship, which largely comprised a £12 million parachute payment, £2.5 million central distribution and a £1 million solidarity payment. This huge disparity demonstrates how important it was for Newcastle to get back to the top flight, not least because they will be hoping that the next three-year Premier League deal will again rise, as it did in 2007/08 and 2010/11, while the forthcoming Football League deal is for less money than before.

8. What would happen if Newcastle qualified for the Champions League?

The real game changer for English clubs (at the top end) is the money available to those that regularly play in the lucrative Champions League. Last season the four English clubs in Europe’s flagship competition (Manchester United, Chelsea, Arsenal and Tottenham) received an average of £35 million, which makes a considerable difference to their budgets, but distorts the competitive balance for the likes of Newcastle. As Llambias said, “We would love to be in the Champions League, the extra £30 million would help us get where we would like to be.”

The Europa League would provide some extra cash, but it pales into insignificance compared to the riches available in the Champions League, as can be seen by Liverpool and Manchester City only earning £5 million apiece in return for reaching the last 16, though it would mean additional gate receipts.

9. How important is the Toon Army to Newcastle’s finances?

Newcastle's average attendance last season of 47,746 was the third best in England, only surpassed by Manchester United and Arsenal, and the 14th highest in Europe. The loyalty of the fan base was shown by the fact that their crowds were the fourth highest in England even when they played in the Championship. As the club’s mission statement said, “This support is greatly appreciated and is the envy of many clubs up and down the country. It would be impressive in any year, but during a recession when personal finances are still so stretched, it is even more so.”

However, the crowds have fallen from their peak, when they regularly averaged over 50,000. The decline first started in the relegation season and accelerated in the Championship, though they have improved since promotion.

10. What does this mean for match day revenue?

Although match day revenue increased from £20.9 million to £24.3 million following promotion, this has still fallen significantly from the peak of £35.3 million in 2005, partly due to the reduction in attendances, but also due to fewer home matches, e.g. in 2010/11 Newcastle staged only 20 games (19 Premier League and 1 Carling Cup), while there were 30 in 2004/05 (including 3 FA Cup, 2 Carling Cup and 6 UEFA Cup).

As a result of what the club described as “stadium utilisation of only 91%”, they have initiated a number of ticket initiatives in an attempt to fill the ground, such as freezing the price of season tickets for 10 years (if bought now); allowing payment in 12 monthly instalments for the first time; increasing the size of the family enclosure to 7,500 (the largest in the Premier League); introducing a new section for supporters aged between 18 and 21 to ease the transition to full adult pricing; and offering half-price season tickets in October.

In addition, the prices of corporate boxes have been held level, as this category has been weak in recent years, falling from £6.7 million to £2.8 million after relegation and only climbing back to £4.2 million following promotion.

In fairness, Newcastle’s match day revenue is still the seventh best in England, but it is a long way behind Manchester United £109 million, Arsenal £93 million, Chelsea £68 million, Tottenham £43 million and Liverpool £41 million.

11. Why is Ashley so keen on stadium naming rights?

Newcastle’s commercial revenue of £15.8 million may be the eighth highest in the Premier League, but it is still low for a club of Newcastle’s size and history. Any comparison with the likes of Manchester United £103 million and Liverpool £77 million may be somewhat spurious, but they should still be closer to Tottenham’s £37 million.

This important revenue stream only rose 2% after promotion, hence the dry comment in the annual report that “it remains a potential growth area.” There is certainly room to grow, but whether Newcastle can achieve their stated objective of expanding their brand internationally is more questionable. As Llambias pointed out, “Manchester United have 360 million fans, we have 3.5 million.”

Nevertheless, they have had some success here. In January Virgin Money took over the shirt sponsorship from Northern Rock until the end of the 2013/14 season. Although financial details were not divulged, it is very likely that this is worth more, as Northern Rock’s extended deal was worth only £2.5 million per annum (about half of the previous contract of £4.8 million), while some sections of the press announced that the Virgin agreement was worth up to £20 million in total, which would imply around £10 million a year. This seems on the high side, though Aston Villa have recently signed a new sponsor at £8 million. It has also been reported that Ashley has negotiated a “significant rise in revenue” for the two-year extension of the Puma kit deal until 2014.

In any case, these deals are still far below the leading shirt sponsorships with £20 million being earned by Liverpool from Standard Chartered, Manchester United from Aon and (reportedly) Manchester City from Etihad. A legitimate objective might be to emulate Tottenham’s £12.5 million (£10 million Auresma plus £2.5 million Investec). It’s a similar story with kit suppliers, as seen by the £25 million deals for Liverpool with Warrior Sports and Manchester United with Nike.

You might expect Newcastle to earn a great deal from the sale of replica shirts, but Llambias advised that the club’s retail turnover was only £5 million, producing a miniscule profit of £100-200,000.

Hence, the desire to sell stadium naming rights, as Llambias explained, “We know the naming rights is contentious, but that income is something we need. It is such a passionate thing, but it’s not about being disrespectful or taking away the tradition or the history of the club, it’s about trying to get another Yohan Cabaye out there on the pitch.”

That’s all well and good, but Ashley has gone about this in a strange fashion, temporarily renaming the stadium the Sports Direct Arena in a clumsy attempt to “showcase the opportunity to interested parties.” Apart from giving his company some free, albeit negative, publicity, there seems to be little logic behind this decision, as it does not bring in any additional revenue.

The only rationale that might conceivably make sense is that any future bidder might be looked upon more fondly after replacing the much maligned retail chain as sponsor. That said, the club’s hope of securing £8-10 million a year looks optimistic, as naming rights are far less effective with existing stadiums and other clubs like Chelsea have struggled to attract sponsors at this level.

12. How have they managed to cut costs?

The club has cut costs across the board, but has been particularly effective at reducing the wage bill by £17 million from £71 million in 2009 to £54 million in 2011. It did rise £6 million from last season’s £48 million, but this was to be expected following promotion from the Championship, especially as the headcount increased by 47 from 431 to 478 (20 in players and coaching staff, 24 in administration). Llambias said that the club had “worked hard to address an inherited wages to turnover ratio which was unsustainable.” This was 83% in 2009, rising to 91% in the Championship, but is now down to a comfortable 61%.

In fact, Newcastle’s wage bill of £54 million is only the 13th largest in the Premier League, so they have done much better than the figures would suggest this season, give the strong correlation between budget and playing success. This is in stark contrast to 2009, when Newcastle were relegated with the sixth highest wage bill, so massively under-performed.

Although new signings and contract extensions like those signed by Tioté, captain Fabricio Coloccini and goalkeeper Tim Krul will put pressure on the wage bill, it is also true that some high earners (Barton, Nolan and Enrique) have left since these accounts closed.

Interestingly, it has been revealed that the club has settled a dispute over image rights with HMRC, apparently for less than the amount set aside as a contingency.

Similar to wages, player amortisation, namely the annual expense of writing down the purchase price of new players, is £6 million lower than the last time the club were in the top flight at £14 million. It did increase by £2 million in 2011, but is nowhere near as much as big spenders like Manchester City £84 million and Chelsea £40 million. In fact, it’s about the same level as lowly Wigan Athletic.

13. Have Newcastle become a selling club?

Traditionally, the club has spent big on new players, but that has pretty much changed since Ashley’s arrival with three consecutive years of net sales proceeds, though this season has been a little different with net spend of £13.6 million.

However, they have clearly learned a few lessons from past mistakes, as they have by and large made some excellent purchases, as noted by Arsène Wenger before the recent match against Arsenal, “They have bought very well in a very efficient way.”

Nevertheless, nobody can accuse Newcastle of buying success. Indeed, only Arsenal have a lower net transfer spend over the last four seasons with Newcastle generating proceeds of £38 million. Put another way, they have balanced their books in this period and then had the unexpected bonus of the Carroll sale.

Llambias admitted, “We’re not saying we are not a selling club. The reality is when we get the price in, we have to sell our best players.” That might not be a message that the fans want to hear, but it is profoundly realistic.

14. Is the club’s debt manageable?

Net debt fell last season from £150 million to £130 million, comprising a £140 million loan from Mike Ashley less £10 million cash balances. Since Ashley arrived, the gross debt has significantly increased from £77 million in 2007, though he also had to clear the mortgage on the ground. Importantly, the club now has no external debt (it had a £36 million overdraft as recently as 2009), which not only provides more stability, but has also saved considerable sums in interest payments. These were £6.5 million in 2007, but would now be around £11 million a year following the rise in debt.

Although Newcastle’s annual report initially stated that Ashley’s loans would carry interest at LIBOR + 0.5%, since 2009 they have all been classified as non-interest bearing. The 2010 accounts said that £12.3 million was repayable in August 2010, £16.5 million after more than a year and the remainder on demand, but no repayments have actually been made to date – though it is likely Ashley will want the loans repaid at some stage.

The previous ownership had mortgaged Newcastle to the hilt, securing loans on virtually all the club’s assets (training ground) and future income streams (TV, sponsorship), and also left Ashley with deferred transfer payments of £36 million, some of which was owed on players who had left the club. Following the implementation of a new policy whereby transfers fees are paid up front, the club is now owed £5 million.

Even so, the balance sheet shows net liabilities of £36 million, though the players’ values in the accounts of £32 million is under-stated compared to the price they would receive in the real world (estimated at £120 million).

15. How important has Ashley been to Newcastle’s revival off the pitch?

Despite his occasional crass behaviour, there is no doubt that Mike Ashley has put his hand in his pocket to keep the club going, as its cash flow has been consistently negative before his financing. There is still much distrust of the owner, leading Llambias to emphasise in the results statement, “Once again, Mike has not taken any money out of the club.” In fact, he has invested £273 million in total, made up of £133 million to acquire Newcastle plus £140 million of loans.

Some might argue that this is partly his own fault, as he clearly failed to perform adequate due diligence on the books before buying the club. However, Newcastle’s improvement off the pitch can be seen by the fact that Ashley only had to advance a further £0.2 million last season.

16. Will Ashley sell the club?

"Ashley - Favourite Shirts"

Back in the dark days of the 2008/09 season Ashley twice tried to sell the club, but he no longer seems to be so keen to make an exit. Llambias said, “We’re not doing this to sell up”, though he admitted that they would consider offers “if somebody came along with the right price.”

He is certainly under no immediate financial pressure to sell, as his net worth rose £400 million last year to £1.6 billion, according to Forbes wealth magazine. That said, it is clear that the club is now a far more attractive prospect to potential investors, as it is more financially stable and challenging for European qualification.

17. Will Newcastle be affected by UEFA Financial Fair Play?

If the club qualifies for Europe, then it will have to live within its own means, though it will be allowed to make losses up to a certain level, so long as the deficit is covered by the owner, e.g. €45 million (£38 million) for the two years leading up to the first monitoring period in 2013/14.

Newcastle’s mission statement explicitly mentions that they are “working towards being able to operate within the boundaries of UEFA’s FFP.” This would be no problem if they repeat last season’s financial performance, especially as certain costs can be excluded for the FFP calculation such as depreciation on fixed assets and expenditure on youth development.

18. What does the future hold?

"Gutiérrez - Jonás Was"

The club is reportedly looking to make profits of £10 million a year, which could be possible if they can continue to control their wage bill. The opportunities for revenue growth are limited, given that the TV deal is centrally controlled, while ticket prices have been largely frozen. That only leaves more money from success on the pitch, such as finishing higher in the league or European qualification, or from commercial activities, such as new sponsorship deals.

There is a fear that the club will continue with their strategy of selling players, as Tioté, Cabaye and Krul all have their admirers. Indeed, Llambias confessed, “We’ll be losing one or two names this summer, but that’ll be regenerated back into the squad.”

As well as looking to maintain their “efficiency” in the transfer market, Newcastle will focus on their academy, which has recently produced promising talents like Sammy Ameobi and Shane Ferguson. The aim is to secure Category One status under the Premier League’s new Elite Player Performance Plan (EPPP), which would mean they could recruit youngsters from anywhere within the country rather than the current restriction of 90 minutes from the academy.

"Cissé - Papiss don't preach"

Backed by their large, passionate following, Newcastle United should really have a bright outlook. If they continue to improve on the pitch, that might result in a virtuous circle, as that should generate more money, leading to better players arriving, thus increasing the chances of success.

However, this is equally a club where recent history teaches us that virtually anything could happen, especially with Mike Ashley at the helm. Nevertheless, their financial improvement has been truly impressive, so it is perhaps time to cut the owner some slack. As Fatboy Slim once said, “You’ve come a long way, baby.”