Friday, December 5, 2014

From humble beginings

A review of the Deloitte (my old stomping ground) report on the finances of the football industry provides some interesting thought provokers.
The underlying data is based primarily on the 2012/13 season.
Leeds’ predicament
The Championship play-off decider at Wembley has been labelled the most financially critical game in soccer globally.   The desire to get into the Premiership has resulted in so many of the Championship clubs mismanaging their finances to such an extent that the combined debt of all Championship clubs exceeds their revenue by a factor of two.   The combined revenue of Championship clubs stood at £435million with debts of over £1 billion.
The step into the Premiership brings among other things a far more lucrative media rights pay-out.  In the year under review, TV payouts in the Premiership varied according to the profile of the club, with a high at £61 million to Man United and a low of £40 million to QPR.  Contrast this lower figure with average total revenues per club in the Championship of £19 million and you can begin to see the importance of staying in the top flight.
In pursuit of this goal, Championship clubs have substantially ignored financial discipline and only in season 2013/14 did they collectively agree to introduce some form of governance in the form of their equivalent of the European Fair Play Rules.
Poor old AVB
Much has been spoken about the brevity with which some clubs hire and fire managers.  Spurs are probably the prime example of a club which places limited store in longer term thinking and who do everything with this weeks’ results in mind.  Anyone who works for an American company will recognise this type of policy.
Football clubs are not football clubs any more.  They are financial institutions that have a large part of their revenue streams influenced by football results.   In the days of Lowry’s matchstick men, the football club was there to bring identity and pride to the local community; it now exists to deliver dividends and capital appreciation to shareholders.  Managers are no longer judged on attributes like loyalty, ethics, integrity and commitment (in addition to results) – think Shankly, Nicholson, Catterick – they are judged on results alone, because results generate revenues.
Clubs with benign or soft ownership structures have an easy “financial pitch” on which to play – meeting the expectations of Roman Abramovic or Sheikh Mansour from Abu Dhabi is a lot easier than meeting the expectations of the institutional investors who assess investments based on rates of return.   The principal recipients of “soft” financing (also generally interest free) in the Premiership were Chelsea, Newcastle, Aston Villa and QPR who benefitted from 90% of the soft financing which itself totalled £1.6 billion. 
Total debt for all Premiership clubs totalled £2.5 billion, and only two clubs had net assets – Swansea City and Norwich City, notably two provincial, “family” clubs who must be viewed as temporary or inconsistent members of the Premiership.
Show me the money
The total revenue for all Premiership clubs was £2.5 billion – an average of £126 million with six clubs above the average and fourteen below it.  Man United again weigh in on top with revenues of £353 million with the lowest being Wigan at £58 million.
Wages are the principal cost with the combined wages to revenue ratio standing at 71%.  Strangely QPR had the highest ratio in the Premiership at 129%, partly explainable by a low revenue base.   Contrast the 71% with the comparative figure in the Championship of 106% and you see further evidence of how messed up the Championship is.
Five clubs made pre-tax losses in excess of £50ml –the principal loss-making entities were Liverpool,  Chelsea and Man City (not necessarily in that order).   Total losses in the Premiership amounted to £316ml.
Qualification for the Champions League is lucrative but possibly not as much as may be thought.  The four clubs which participated in 2012/13 received Champions League payouts which averaged out at £29 million, although to get a true measure of value one must add to this the additional revenues for home Champions League fixtures. 
In the Indian Restaurant in Accrington
Brusselsblue passing himself off as a potential purchaser of Stanley wasn’t by any means inconceivable. Half of the Premiership clubs had foreign owners at the end of 2012/13.
While each deal had different valuation bases attaching thereto, bringing them all back to multiples of turnover allows us to crudely determine what the club might cost.  In the Premiership, Chelsea were sold in 2003 for a multiple of 1.2; Man United in 2005 for 4.7; Newcastle in 2007 for 2.4 and Man City in 2008 for 2.6.   Again the branded franchise and value of Man United comes through.
In the lower divisions (where there is going to be no “goodwill” or “Premiership” factor) it is more likely that the multiple will be lower, or alternatively for debt-ridden clubs that the purchase price will be £1 plus an assumption of the club’s debt.   However for the sake of conjecture let’s put that aside and work off a multiple of 1.2.
Total revenues in English football amounted to £3.2 billion - £2.5 billion in the Premiership; $435 million in the Championship and £200 million for Divisions 1 & 2.  Spreading tis £200 million across the 48 clubs in these divisions equally would give individual turnover of £4.1 million but more accurately the allocation should be weighted towards the teams in Division 1.  Refining the Accrington Stanley turnover along these lines would give turnover of say, £2 million and hence a valuation of £2.4 million. 
Using venture capital provided by Investec of 75%, Brusselsblue needs only find £600,000 himself – a drop in the ocean to a European bureaucrat who has been tucking away schillings at the expense of the Irish taxpayers for years.
Any hey presto, a Belgian owner for Stanley and a pension income stream for the Stillorgan corner-boy – funded out of replica shirt sales to “the Irish guys”. 
Internationally the Germans have it right
The Germans have an uncanny habit of winning the World and European Championships.  Based on technically superiority we might think.   Yes, this is undoubtedly a contributory factor but what it probably overlooked is that the Bundesliga is arguably one of the best administered and financially sound leagues in Europe.
Its’ revenue surprisingly surpasses La Liga and it is second only to the Premiership with turnover of €2 billion (Premiership €2.9 billion).   Along with the Premiership it makes an operating profit - €264 million; Premiership €90 ml – operating profit being defined as results before losses on player purchases transfers.  The latter item turns the Premiership operating profit of €90 million into a total loss of €380 million.
Wage control is prudently managed in the Bundesliga and with a wage to revenue ratio of 51%.  Unlike the Premiership, broadcast revenue is not the largest single source of revenue.  
Another feature of most Bundesliga clubs is that they are fan-owned via the” Verein” system which dictates that each must apply the “50 plus 1” ownership structure i.e. no majority shareholder.   If applied correctly, the fans retain control.   While this may limit investment, it certainly ensures that the League effectively is run by persons more interested in football than in financial return.
Interestingly the prime example of where this system has been manipulated is Hoffenheim, who assisted by an injection of more than €250 million from an ex-player, achieved promotion from non-league to the senior leagues and then the Bundesliga in 2008, where they finished runner-up.   This meteoric rise was accompanied by a popularity in Germany similar to that afforded to Chelsea and Manchester City in the UK, i.e. nil outside their own fan base.
Aside from this example, the Bundesliga appears to maintain as many of the facets of a football league as opposed to a share price index, than any other league in Europe.  Hard to prove or dis-prove but could this explain in any way why the German national team continues to throve while England, drawing from the Premiership (where reverse principles appear to apply) have deteriorated rapidly in recent years.  Interesting thought.