Tuesday, August 24, 2010

The Price Of Inter's Success

There’s no doubt that the 2009/10 season was a triumphant one for FC Internazionale, better known as Inter, as they became the first Italian team to complete the treble by winning the scudetto, the Coppa Italia and the Champions League in a single year. In fact, Inter have been the dominant force in Italian football ever since the Calciopoli scandal in 2006, winning five league titles in a row, the first time this has been done since Juventus achieved the feat in the 30s.

This recent success must taste all the sweeter to Inter fans, as it follows a lengthy period of failure and disappointment. After winning the league in 1989, the nerazzurri endured 17 long years without taking the Serie A title, which was made even worse by their arch-rivals Milan sweeping all before them, but now the boot is well and truly on the other foot.

The victory over Bayern Munich in Madrid to secure the Champions League trophy represented the high point of Massimo Moratti’s reign as Inter’s president. Moratti is the fourth son of Angelo Moratti, who had been Inter’s owner and president during the club’s golden age from 1955 to 1968, when the team twice won the European Cup under the legendary Helenio Herrera. The current president took over the club in 1995, determined to restore Inter to its former heights, and he has spent a fortune attempting to fulfill that ambition.

"Mourinho and Moratti - the happy couple"

Using money earned from the family’s stake in Saras, an oil refiner, Moratti has repeatedly funded lavish spending sprees, twice breaking the world transfer record when buying Ronaldo from Barcelona and Christian Vieri from Lazio, but also splashing out on the likes of Roberto Baggio, Hernan Crespo and Juan Sebastian Veron.

Even so, Moratti has an impatient, not to say ruthless, side and he has gone through 14 managers in 15 years in his quest for honours, sacking many big names like the popular Luigi Simoni, Marcello Lippi, Hector Cuper and Roberto Mancini. When il Mancio was given the boot, Moratti explained that this was for the benefit of the club, “I intervened because I thought it was necessary … in the interests of Inter.”

In the past, Moratti has been criticised by many Inter fans, but he can hardly be accused of not putting his money where his mouth is, as he has spent around a billion Euros on delivering the dream. The president’s support has been an absolutely essential part of the club’s success, for the reality is that Inter do not make profits. Instead, they lose money. In fact, they lose a lot of money.

The last available accounts are for the year ending 30 June 2009 and these report an enormous loss of €154 million (£132 million). Just a blip? Not a bit of it – the previous year’s loss was very nearly as bad at €148 million and the 2007 loss was even worse at €208 million. That gives a cumulative loss of €509 million in just three years – over half a billion!

In fact, the profit and loss account has been a tale of woe throughout Moratti’s presidency. Even the reported loss of “only” €31 million in 2006 was boosted by the sale of Inter’s brand to a subsidiary, so it was really a €181 million loss after intra-group transactions had been eliminated. There were suggestions that some of the accounting entries at that time, including inflated transfer fees to secure fictitious capital gains, were a little too creative, leading to talk of a financial investigation.

There has been much discussion in the English media about gigantic losses at Chelsea, Manchester City and Barcelona, but the scale of Inter’s losses is breathtaking. According to the respected Il Sole 24 Ore (the Italian equivalent of the Financial Times), Inter’s combined losses during Moratti’s era amount to €1.15 billion with about €730 million of this being covered by the president.

"The immovable object"

What is particularly worrying is that Inter has produced such large losses during these highly successful years, but maybe the cause and effect are the other way round? In other words, all this silverware would not have arrived without all this expenditure. Moratti himself seems to have no doubts, advising the club’s Annual General Meeting, “The considerable loss is justified to keep our team at the top level worldwide.”

To put this into context, Tuttosport (admittedly a newspaper based in Turin) compared the relative achievements of Inter and Juventus last season. From a financial perspective, Inter’s €154 million loss was €161 million worse than the €7 million profit that Juventus made. On the pitch, Inter finished ten points ahead of Juventus, so that works out at €16 million a point. Obviously, it’s not quite as simple as that, but you can understand their, er, point.

In fairness to Inter, if last year’s accounts had been extended by one month to the end of July, the reported loss would have been €56 million lower, as the highly profitable sales of Zlatan Ibrahimovic and Maxwell to Barcelona would have been included. Having said that, the loss would have still been a thumping great €98 million, which is nothing to write home about.

"OK, he is a bit special"

Clearly, money alone can’t buy you success (or love) and we should give Inter a lot of credit for their sporting achievements. The self-proclaimed “special one”, Jose Mourinho, built a formidable unit, largely based on the uncompromising defence of Lucio and Walter Samuel, but also finding space for talents like the mercurial Wesley Sneijder and the goal scorer par excellence, Diego Milito. Although Mourinho is not everyone’s cup of tea (“I don’t like Italian football and it doesn’t like me”), he is a winning coach and he duly delivered a winning team, before moving on to Real Madrid. Finally Moratti had allowed his coaches a few seasons to build a squad and the positive results were there for all to see.

You may justifiably be wondering how one of Europe’s major clubs, with such a rich football tradition and such a large fan base, could possibly be struggling financially. The reasons start with their revenue.

On the face of it, Inter’s revenue is not too bad at €197 million (£167 million), which places them 9th in the Deloitte Money League, ahead of their neighbours Milan for the first time, and also represents €24 million (14%) growth over the previous year. However, problems begin to emerge when we take a closer look. Although Inter’s income is in line with the other top Italian clubs, it a long way short of their natural competitors abroad. For example, Manchester United earn £111 million more with £278 million, while the Spanish giants, Real Madrid and Barcelona, generate well over £300 million, which is around twice as much revenue as Inter. This makes it difficult to compete, especially when that difference in turnover is every year.

The reasons for the shortfall are evident, as there are striking flaws in Inter’s business model. Among the top ten clubs listed in the Money league, Inter has the lowest commercial revenue of £45 million and the second lowest match day revenue of just £24 million. These are obvious financial weaknesses that the club needs to address.

At this stage, eagle-eyed observers will have noted that the revenue figures in my analysis are different from those quoted by the club. In order to be consistent with other clubs, I have used the Deloitte definition, so have excluded the following: (a) gate receipts given to visiting clubs €3.6 million; (b) TV income given to visiting clubs €17.8 million; (c) profit from player sales €11.6 million; (d) increase in asset values €3.1 million. Adding the total adjustments of €36.1 million to the Money League revenue of €196.5 million gives the €232.6 million revenue reported by Inter.

OK, that’s enough technical talk, let’s look at how Inter make their money.

Like all the big Italian clubs, the majority of the club’s revenue (59%) comes from television with €116 million, which is €8 million more than 2008. Inter’s broadcasting deal with Mediaset, extended until the end of 2009/10, earned them around €100 million gross before payments to visiting teams, which represents a significant uplift on the previous agreement with Sky Italia.

However, the growth of the Champions League has also been a key driver in the increased TV revenue with the central distributions in 2008/09 being worth €28 million. After Inter’s Champions League victory, the 2009/10 distribution will be significantly higher, as UEFA has confirmed the payment as €49 million (€7m for participation, €22 million for winning it and €20 million from the market pool).

Great stuff, but there are clouds on the horizon, starting with a price war between Rupert Murdoch’s Sky Italia and Silvio Berlusconi’s Mediaset that may ultimately impact the fees paid for the Serie A TV rights. That outcome is by no means certain, but what is definitely happening is a move to collective selling of TV rights from 2010/11.

Currently, teams like Inter sell their TV rights on an individual basis, so intuitively we would expect their television revenue to reduce due to the more equal distribution of revenue amongst all clubs. However, early projections indicate only a small decrease for Inter (€1 million) for a couple of reasons. First, the total money guaranteed by exclusive media rights partner Infront Sports will be approximately 20% higher than before at over €1 billion a year. Second, the complicated distribution formula favours the big clubs: 40% equal share; 30% based on past results (5% last season, 15% last 5 years, 10% since 1946); and 30% based on catchment area/number of fans.

"We are the champions!"

Of course, the new arrangement will mean that mid-ranking clubs earn more TV money and it will also restrict the growth potential for the larger clubs, unless those responsible for Liga Calcio can greatly increase the fees received for overseas rights, which currently lag way behind the Premier League (in particular) and La Liga. That may seem ridiculous at this time, but sport business expert Simon Chadwick believes that, “leagues on the continent will inevitably catch up with the Premier League.” We shall see – there’s certainly room for growth.

The same thing could also be said about Inter’s commercial revenue. Even after a substantial €16 million (43%) rise in 2009 to €53 million, it is still on the low side for a club of Inter’s stature. As a comparison, the opponents they defeated in the Champions League final, Bayern Munich, earned €159 million from this revenue stream last year. On the one hand, Inter have benefited from very long-term relationships with commercial partners, but on the other hand, this may have prevented them from taking up more lucrative opportunities elsewhere. Pirelli have been Inter’s shirt sponsor since 1995 and are also a minority shareholder in the club, which may help explain why they only pay €9.3 million a year. Similarly, kit supplier Nike have been partners since 1998 and pay €18.1 million a year for the privilege.

"You can put your shirt on us"

These deals do not seem particularly good, considering that we are talking about the winners of the Champions League. As an example, Liverpool, who have not even qualified for the Champions League, recently signed a shirt sponsorship deal with Standard Chartered at €24 million a year. The same Nike that gives Inter just €18 million somehow pays €30 million to Barcelona as kit supplier. And it’s not just foreign clubs that negotiate better deals, as Milan’s sponsorship deal with Emirates is also higher at €12 million a season. Even Juventus’ deal with BetClic is only a little lower at €8 million, even though they will only display their wares in the Europa League this season - and that's just for the home shirt.

More optimistically, the next accounts should show an improvement with La Gazzetta dello Sport estimating that the Champions League win should result in an additional €6 million from sponsors, presumably due to success-based clauses in the contracts, and €8 million from merchandise sales. Nevertheless, it is clear that the commercial department needs to pull its collective finger out. Despite pre-season tours to China and the US, the club has not really managed to develop a global brand that resonates in overseas markets.

Even though marketing revenue could be higher, Inter’s real Achilles’ Heel is match day revenue, which is embarrassingly low at €28 million. In fairness, this is a common problem for all Italian clubs with Milan earning €33 million and Juventus only €17 million. However, this is considerably less than other major European clubs. Despite attracting average attendances of 55,000, Inter’s revenue per home match was only €1.1 million, compared to the top six Money League clubs who all generated at least €2.6 million. That’s a massive difference to make up.

"Breaking new ground?"

This is why Inter have been exploring plans for moving to a new stadium, possibly bringing to an end the famous ground sharing arrangement with Milan. San Siro is a wonderful old ground, but it is owned by the local council, which is very “detrimental” to Inter’s revenues, according to managing director Ernesto Paolillo. Not only does the club have to pay rent and maintenance of around €13 million a year, but it misses out on many opportunities through not owning the stadium.

The proposed ground would only be ready by 2014, holding 60,000 spectators, but importantly it would include 150 VIP boxes and 5,000 corporate seats, which could significantly enhance match day revenue. As a comparison, Arsenal make 35% of their match day revenue from just 9,000 premium seats at the Emirates. A new stadium would require a huge initial outlay (estimated at around €400 million) and is not necessarily a magic bullet, given that it would be difficult to raise ticket prices in an economic recession, but it could have a dramatically beneficial impact on Inter’s revenue. You only have to look at how Arsenal’s revenue overtook Inter’s in 2007 – the first year that the Emirates became operational – to appreciate the size of the prize.

If the club owned the stadium, it would also keep the receipts from non-sporting events like rock concerts in the summer (the likes of U2, Springsteen and the Rolling Stones have played San Siro), while it could also coin it from restaurants, parking, club shop, museum, etc. Finally, money would surely be on the table for naming rights (the Pirelli stadium, anyone?), which is more acceptable to fans when we’re talking about a new development, rather than renaming an existing ground.

All in all, the revenue is not great, but it’s not too bad. Inter’s real problem lies in the costs of €358 million (expenses €308 million plus player amortisation €50 million), which are far too high for their turnover of €197 million. They’re in the same range as Barcelona’s 2008/09 costs of €362 million, the only difference being that Barcelona’s revenue was much higher at €364 million. Basically, the impressive 2009 revenue growth of €24 million has been wiped out (and then some) by cost growth of €38 million, which is entirely down to staff costs: salaries €25 million and player amortisation €15 million.

The total wage bill stands at a jaw-dropping €205 million, which produces a wages to turnover ratio of 104%, way beyond any common sense let alone financial prudence. There has been a significant increase in wages over the last two years, rising from €162 million in 2007. In the accounts the club explains last year’s growth as being due to new players and an increase in bonus payments. The first part is accurate, as the players’ headcount increased by 6, but the second part is nonsense, as the bonus payments actually fell from €28 million to €25 million. Whatever. The fact is that Inter’s payroll is much higher than other Italian clubs: Milan paid €177 million, while the Juventus wage bill was only €130 million. Inter even paid more out in salaries than those well-known big spenders Real Madrid (€187 million), for heaven’s sake.

"Zlat's the way I like it"

However, that was then, this is now. The four highest-earning individuals at Inter in 2008/09 (Mourinho, Ibrahimovic, Adriano and Patrick Vieira) have all left the club as a sign of things to come, leaving only Samuel Eto’o in the latest list of the top 50 highest paid footballers. After the latest financial losses were announced, Moratti said that the staff costs would be cut. In particular, he spoke of a fundamental change in the structure of new salary contracts with a significantly lower guaranteed element plus higher variable payments linked to success on the pitch.

There was also a steep increase last year in player amortisation from €35 million to €50 million. That’s a lot, though it’s still on the low side compared to clubs known for being big spenders in the transfer market: Real Madrid €64 million, Chelsea €59 million and Barcelona €54 million (though this is up to €71 million in the 2009/10 accounts). Remember that amortisation is the annual cost of writing-down a player’s purchase price. For example, Christian Chivu was signed for €16 million on a five-year contract, but his transfer is only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, i.e. €3.2 million a year (€16 million divided by five years). Thus, the total cost of player purchases is not immediately reflected in the expenses, but increased transfer spend will ultimately result in higher amortisation.

Inter’s relatively low amortisation therefore suggests that their spending in the transfer market has slowed down and that is indeed the case. In fact, Inter have net receipts in the last two years of €45 million. This is very different to the majority of the Moratti era, in which Inter wrote the large cheques. In the 15 years since Moratti took the helm, Inter have spent €821 million on buying new players, though they have recouped over half of that, leaving a net spend of €371 million. While acknowledging that transfer fees are sometimes open to question (e.g. the fee quoted for the Ibrahimovic transfer in Inter’s accounts is different to that quoted on Barcelona’s website), there can be no argument that Inter have consistently splashed the cash.

Until now, that is, when they are giving the impression of being a selling club. They made a €12 million profit on player sales in 2008/09, largely from transferring Robert Acquafresca to Genoa and Pele (not that one) to Porto, but since then they have really done some business. After hearing that Bayern Munich had slapped a €70 million price tag on Franck Ribery, Moratti risked ridicule by saying that in that case Ibrahimovic was worth €90 million, but he was more or less vindicated when he sold the tall striker to Barcelona for €46 million plus Eto’o (estimated value €20 million) and the loan of Alex Hleb. This summer, Moratti has already realised €27 million by selling the talented, but temperamental, Mario Balotelli to Manchester City and there is talk that he may yet raise a similar sum from the sale of Brazilian full back Maicon.

In any case, player purchases are one of the reasons for Inter’s high debt levels. Actually, that statement is open to debate. In the red corner, we find our old friend, “Spain’s foremost football finance expert”, Jose Maria Gay de Liebana from the University of Barcelona, who included Inter in a list of football clubs with high debt, quoting a figure of €432 million. He certainly convinced the UEFA president Michel Platini, who also described Inter as a club steeped in debt. In the blue (and black) corner, Inter’s managing director Ernesto Paolillo has responded that Platini’s claims are excessive and mistaken: “Inter are not in debt with the banks.”

So who’s right? Actually, they’re both wrong. The Professor’s figure is for total liabilities, thus including amounts owed to trade creditors and employees, and is clearly over-stated. However, Paolillo’s claim is also palpably incorrect, as the accounts include €48 million owed to banks – not an enormous sum, but clearly more than zero.

The most accurate definition of net debt is probably the one provided by UEFA, which includes amounts owed to and from other football clubs, and this would mean total net debt for Inter of €129 million. Not great, but far from terrible.

"It's been a good year for Diego's"

In Inter’s case, paying transfer fees in stages is a significant part of their business model: they owe an incredible €99 million to other clubs, up from €62 million the year before. The largest debt is €28 million to Genoa for Milito, but other clubs waiting patiently to be paid appreciable sums include Porto €17 million, Roma €15 million, Portsmouth €9 million, Cagliari €8 million, Ternana €7 million and Cittadella €5 million.

In fairness, this transfer activity has produced €158 million of intangible assets (player values) on the books, but their market worth is much higher - €335 million per Transfermarkt.

Also, much of Inter’s “debt” is internal with €113 million owed to Group subsidiaries, which means that it’s money effectively owed to Moratti.

Having said that, we probably should not gloss over Inter’s payables of €432 million, which account for 23% of the total liabilities in Serie A. The only other club with a similar level of liabilities in Italy is Milan €364 million (19%), while the next highest is Lazio €129 million (7%). However, Inter’s figure is still a lot less than Barcelona €552 million and, especially, Real Madrid €683 million.

"Payback time"

But how is it possible for Inter to have relatively low levels of debt, given their horrendous losses?

Step forward, Signor Moratti. As Paolillo explained, “Inter, like many Italian teams, has had negative balances, but has always covered itself with capital made available by the club’s owners.” That is why the president has been such an important figure in Inter’s success. Without his generosity, there’s no way Inter would have been able to recruit the calibre of players good enough to win the Champions League. For example, Moratti injected €70 million of capital into FC Internazionale Milano S.p.A. after the last results to cover the losses, which was on top of €50 million paid in at various stages of the year. That brings the total capital paid out of Moratti’s pockets in his time as president to around three-quarters of a billion Euros. Wow.

However, this approach will not work in the future, as Inter are faced with the new challenge of UEFA’s Financial Fair Play Regulations, which will ultimately exclude from European competitions those clubs that fail to live within their means, i.e. make a profit. These will be implemented in the 2013/14 season, though the monitoring period will cover the preceding two reporting periods, 2011/12 and 2012/13, so clubs like Inter are under pressure to rapidly eradicate their losses.

"Your debt should be this small"

Wealthy owners will be allowed to absorb aggregate losses of €45 million over three years for the first two monitoring periods, so long as they are willing to cover the club’s losses by making equity contributions. The maximum permitted loss then falls to €30 million from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount). However, it is clear that Inter have a long way to go to get close to this “acceptable deviation”, let alone break-even.

Paolillo admitted that Platini’s criticisms of Inter might be valid concerning the club’s “self-sufficiency”, and UEFA’s president was quick to point out: “It's mainly the owners that asked us to do something - Roman Abramovich, Silvio Berlusconi and Massimo Moratti. They do not want to fork out from their pockets any more.” Indeed, Moratti has promised, “The company's philosophy for the next two years is to have a healthy balance sheet, so we will do what is necessary to achieve this.” Paolillo confirmed Inter’s willingness to tackle the losses, “'We will be ready to meet all the standards set by UEFA and we are working on various fronts. That means cutting costs and increasing revenues.”

"Money's too tight to mention"

This heralds a new period of austerity at Inter, as the club turns over a new leaf. Paolillo has warned Inter fans that “the old times are over, as football is close to collapse.” Marcel Vulpis, the professor of sport marketing at Milan’s Bocconi University, observed, “Moratti spent hundreds of millions for ten years before his team managed to win its first title. Now the era of Moratti the big spender is over.”

Actually, UEFA’s financial initiative may be quite timely for Moratti, as his company, Saras, appears to be facing a fair few challenges of its own at the moment, having made a loss of €55 million in 2009. This meant that it did not pay a dividend, which has been Moratti family’s largest source of income (over €280 million in the previous three years). Saras also had to issue a €250 million bond in order to raise funds.

That’s the problem when a club relies on a benefactor, even one who has been so munificent over such a long period. Such a model falters if the owner gets into financial difficulties, but can also suffer if there are legal issues, illness, loss of interest, etc. In a dynasty like the Morattis, it is also legitimate to ask whether his children will share his love for Inter and want to follow in his footsteps. Fortunately for Inter fans, both his sons, Angelo Mario and Giovanni (known as Gigio), seem to share his passion for the football club.

"Super Mario - up, up and away"

That’s future music, but can the club realistically achieve the stated aim of a balanced budget in two years? The accounts talk of improvement in the figures in 2009/10, largely due to the player sales, which have the double whammy of raising cash (€56 million last summer) and taking players off the wage bill. There will also definitely be an increase in the revenue from the Champions League win: guaranteed €21 million more from UEFA’s central payments, plus an estimated €14 million from commercial deals. I have seen some estimates of net losses between €70-90 million next year, which I think is a realistic objective.

For 2010/11, Inter will still be benefiting from the Champions League, as this accounting year will include the receipts from the UEFA Super Cup (€4 million) and the FIFA Club World Cup (€8 million), but they would need to repeat their victory in Madrid to maintain their TV revenue. You would also hope that there would be an indirect benefit, as winning sporting teams hold major appeal for sponsors. Finally, transfers will also boost the books with Balotelli’s sale plus the €10 million compensation paid by Real Madrid to secure Mourinho’s services being added to the pot. However, it is questionable whether Inter fans will accept a financial strategy that involves the club selling un campione every summer. This is not really a sustainable model for a top club.

"Will he be laughing in a few months?"

Inter’s challenge is made all the more difficult by the underlying problems in Italian football. Regarded as the place to be in the 80s, Serie A has been experiencing a crisis of confidence in the last few years, being confronted by crumbling infrastructure, falling attendances, outbreaks of hooliganism and isolated incidents of racial abuse. It’s almost as if there has been an inferiority complex against the Premier League and La Liga, which is understandable off the pitch, but somewhat puzzling on the field of play, given that Italy has produced three Champions League winners in the last eight years, one more than both the other leagues.

Whatever the future holds, one thing is clear: Inter can no longer afford to win at all costs. Rafa Benitez, the new head coach, faces a tough battle to repeat last season’s spectacular success, given the club’s financial constraints. Jose Mourinho was always going to be a daunting act to follow, but Benitez may have to do it on a shoestring budget.

Tuesday, August 17, 2010

Good Old Sussex By The Sea

Many years ago a young boy stood on the terraces at his local club scarcely believing their remarkable rise from the old Third Division to the First Division, which was then the top tier of English football (yes, football did exist before the Premier League and Sky Sports). He watched them overcome an all-conquering Liverpool side, beat the reigning European Cup champions, Nottingham Forest, and, most memorably of all, come within a kick of beating the mighty Manchester United in the 1983 FA Cup Final (“and Smith must score”). The club was Brighton and Hove Albion; the young boy was me.

These were indeed the best of times, glory days when attendances averaged over 25,000, as fans turned out in great numbers to watch legends like Peter Ward (“he shot, he scored”), Brian Horton, Steve Foster and even Mark Lawrenson (before he became a world-weary TV pundit) in those classic blue and white striped shirts.

Since those heady days, life has not been so kind to the Seagulls, as they have endured a rollercoaster ride, but the direction has mainly been downwards. They once again find themselves in League One, but after many years of re-branding, this is now the third level of English football. The decline reached its nadir in 1997 when they avoided relegation out of the Football League to the Conference by the skin of their teeth, as a 1-1 draw at Hereford United condemned their opponents to the dreaded drop.

"And Smith must score - you know the rest"

It was an incredible, dramatic escape, but the club’s on-field struggles were nothing compared to their problems off the pitch, as they paid a heavy price for the unsustainable spending under former Chairman Mike Bamber, whose attempts to “live the dream” had given the club the most successful period in its history, but also laid the foundations for major financial difficulties. The club’s increasing deficit gave rise to a series of winding-up orders from the Inland Revenue in 1992 and 1993.

In order to pay off the club’s debts, the Board made the hugely unpopular decision to sell the Goldstone Ground, which had been the club’s home since 1902, to property developers who built a frankly hideous retail park, including such gems as a Toys 'R' Us store and a Burger King drive-thru (“they paved paradise/and put up a parking lot”). Although a few might have seen this as a desperate move to avoid bankruptcy, the vast majority of fans considered it a blatant act of asset-stripping by the reviled chairman, Bill Archer, and his partner-in-crime, chief executive David Bellotti.

Archer was the majority shareholder, securing control of the club for the princely sum of £56 via an off-the-shelf company, and the suspicion was that he was simply lining his own pockets with no regard for the fans, especially after it was revealed that the club’s Articles of Association had been amended to allow directors to benefit from any sales proceeds if the club were to be wound up. Indeed, there had been no consultation with supporters, no discussion with the local council and, tellingly, no alternative ground was lined up.

The fans were convinced they had been sold down the river. Not just those following the Albion, but fans from many other clubs recognised this injustice, thinking “there but for the grace of God, goes our team.” This solidarity culminated in the extraordinary Fans United day when supporters from all over Europe came to the Goldstone to join together in an unprecedented protest against the board.

Whatever the directors’ motives were, the result was that Brighton no longer had a ground to call their own and they have been without a permanent home ever since – for 13 long years (unlucky for some).

A mooted ground share with Portsmouth never happened, leading to a similar arrangement being agreed with Gillingham in Kent. Although this county is described as the “garden of England”, it held few attractions for Albion followers, who had to endure a 140-mile round-trip to attend their “home” games. This awful period of exile lasted two long years before the club made its weary way back to Brighton in 1999.

Three years after Euro 96, football was finally coming home, but the destination was Withdean, an old athletics stadium on the northern outskirts of the city (and just ten minutes from where I used to live). Although it was a relief to be back in Brighton, the facilities were far from ideal. Largely open to the elements, the “theatre of trees” is arguably the worst stadium in the whole of the Football League with totally inadequate facilities. It was planned as temporary accommodation, but the club’s tenancy has lasted a lot longer than intended and they are still there, very much the unwanted guests. As former Brighton chairman, Dick Knight, admitted, “We don’t want to be there any more than they want us there.”

"Withdean - a good stadium for athletics"

Hence the search for a new stadium, which eventually alighted on Falmer, but it has been a long, painful process ever since the original planning applications were submitted a decade ago back in 2000. Despite the overwhelming majority of the local community being in favour of the development, there has been strong opposition, mainly by Lewes District Council, due to its proximity to an “area of outstanding natural beauty”. Nevertheless, after much debate and numerous inquiries, the Deputy Prime Minister John Prescott granted the club planning permission in October 2005. When he visited Withdean to support his hometown club, Hull City, the Albion faithful serenaded him in their own style, “He’s fat, he’s round, he’s given us a ground.”

Except the overweight imbecile hadn’t, as his department had messed up the Decision Letter, referring to the site being in the “built up area” of Brighton and Hove, while part of the development is in Lewes. Amazingly, this minor technicality allowed the NIMBYs in Lewes District Council to mount a legal challenge, which further delayed the process. However, all good things come to those who wait and the definitive approval was given by Hazel Blears, the new Secretary of State, in July 2007.

Throughout this unhappy period, the passionate Brighton fans contributed a considerable amount to the movement, especially the “Falmer for All” campaign led by Paul Samrah. As well as inundating the politicians with petitions and letters, this featured many innovative ideas such as a hit record and the formation of The Seagulls Party to contest seats in local elections.

"Dreams do come true"

However, once bitten, twice shy and chief executive Martin Perry greeted the approval with caution, “This is fantastic news for the club, but it isn’t green for go just yet. We’ve already had one false dawn.” And sure enough, the legislation relating to the design and operation of stadia had changed during the drawn-out approval process, so the club had to submit a revised planning application for the stadium only, which was approved by Brighton & Hove City Council in February 2009. At long last, building could start and the new stadium should be ready for the start of the 2011/12 season.

So, all systems go? All things Brighton beautiful? Not quite. The credit crunch hit and banks were unwilling to lend the money required to fund the costs of the stadium, which had risen to a staggering £93 million, or at least would only grant a loan at exorbitant rates.

Step forward, Tony Bloom, a successful poker player known as “The Lizard”, who had already provided the club with substantial loans. He promised to fund the majority of the construction costs, injecting a cool £80 million into the club. Dick Knight welcomed his cash, “This is the natural progression for the football club. Tony's investment will mean no need for external funding.” Martin Perry was even more effusive, not to mention blunt, “We would not have the stadium without him.”

It’s only natural that fans’ expectations have grown with the arrival of Bloom and his millions, but it’s worth looking at the club’s financials to see whether these are realistic.

The club’s reliance on its directors’ support is very clear when looking at its debt, which is now up to £17 million (from £11 million in 2008). Hardly any of this has come from bank loans with almost all of the funding being provided by the directors, namely Tony Bloom. The club’s latest accounts (up to 30 June 2009) actually report a net debt of only £10,000, but this excludes the £16.9 million owed to group undertakings, which is clearly an inter-company loan, so should be considered part of the club’s overall debt.

Any road, the important point is that this loan is very generous, being unsecured and interest free. This is crucial for the club, as commercial interest rates on a loan of this magnitude would have been prohibitively expensive. The fact that the loan is unsecured is also critical, as this means that Bloom has no guarantee of repayment, because there is no security on the money. The £80 million he has pledged is repayable in 2023, but again there is nothing mysterious about this, as a convertible loan requires a returnable date. If the money is not available, Bloom could convert the loan into shares, as have many owners at other clubs, or the loan could simply be refinanced.

"A Blooming miracle"

So Bloom’s shareholding in the club has increased to slightly more than 75%, but his stake would grow to 90% if he were to convert the loans repayable in 2023 into shares. He has also assumed the role of chairman, replacing Dick Knight, who still holds 6.42% of the equity. Knight’s role in supporting the Albion should not be under-played. He is the man who bought out the despised Archer and his cronies, steadily guiding the club forward in his 11 years as chairman. Bloom for one recognised his efforts, “Nobody should be in any doubt that he saved the club from almost certain extinction at a time when no one else was willing to come forward.”

But Bloom’s investment does not necessarily mean that big money will be available to spend on improving the squad, as most of the funds are earmarked for the new stadium. Fans may have to take a reality check here, especially if they listen to comments made by manager Gus Poyet, who has said that he is not going to pressurise the chairman for a bigger budget. He has also warned transfer targets to be reasonable in their wage demands.

And you can see why when you look at the club’s profits – or I should say losses, for the stark reality is that Brighton do not make money. In fact, the club’s losses have actually been increasing over the last few years. OK, the club reported a profit of £877,000 in 2008, but that was only due to an exceptional item of £3.6 million, which represented a net expense reversal for the Falmer development costs, which had previously been impaired. The planning approval and work commencing on site has allowed the club to now include these costs as an asset on the balance sheet.

However, fundamentally each season is a struggle for the club to keep its head above water and avoid administration, as can be seen by the latest loss of £4.6 million in 2009. The losses have been lower in the past few years, especially 2006, but this was heavily influenced by profits made from selling players. The weaknesses in the club’s business model have been noted by the auditors, who mentioned in the accounts that the club’s ability to continue as a going concern depended on the “continued support of the directors in providing adequate loan facilities.” This explains the financial prudence demonstrated by the former chairman, who acquired the unwelcome nickname of Dick “Tight” - but even with all this caution the club still makes large losses.

In fairness, it is difficult for the club with its relatively low turnover of just over £4 million. To place this into context, Manchester United’s revenue the same year was £279 million. OK, that’s maybe not a fair comparison, but even a club like Portsmouth with relatively low attendances earned £60 million, which demonstrates the impact of TV revenue in the Premier League.

"The good old days"

Brighton will always face financial challenges with such low revenue, even though it is boosted by £347,000 of other operating income, which includes a £165,000 youth development grant and £114,000 made from loan players.

However, the bread and butter revenue for any club in the lower leagues is its gate receipts, which are cripplingly low at Brighton - one of the many problems associated with playing at such an appalling stadium. This was acknowledged in the club’s accounts, “Clearly the poor facilities offered to spectators at Withdean remains the main factor in low attendances coupled with the continuation of the economic recession and relatively poor achievements on the pitch.” In fact, average attendances have actually been falling with the recent high of 6,802 in 2006 (when the team was in the Championship) down to 5,679 last season. The figures also highlight the importance of glamour ties in the FA Cup to such teams, as the 2005 revenue was boosted by £300,000 from the third round away tie with Spurs.

The sad thing is that all these years without a decent stadium have cost Brighton big time. In 2005 Dick Knight said that the club had lost out on at least £30 million, but it must be much more than that. He estimated that the club missed out on £3 million gate receipts every season, assuming crowds of 12,000, which implies lost revenue of £39 million (after 13 seasons without a permanent stadium). Add to that the £3 million spent on refurbishing Withdean, the £4 million or so spent on public inquiries and even a £350,000 tax bill for the capital gain made on selling the Goldstone and the total is close to £50 million – a huge sum for a club Brighton’s size. And that does not include any money lost from commercial opportunities afforded by a purpose-built football stadium (corporate hospitality, merchandising, programme sales, etc).

"Thumbs up for Dick Knight"

Things might have been better on the playing side too. As former manager Steve Coppell said, “The football has almost been a sideshow. If that money had been spent on the pitch, we wouldn’t have found ourselves in this position.” Many good managers have left the club because of the restrictions arising from a lack of a decent stadium: Micky Adams, Peter Taylor and Coppell himself. Not to mention the thousands of young fans who have never had the opportunity to watch the Albion.

To cut a long story short, the importance of the new stadium to the club cannot be emphasised enough. Against all odds, work is well and truly underway and the pictures from the Falmer site look terrific. Martin Perry said that “the delivery of the stadium remains an absolute priority”, while the accounts warned that “the operating loss clearly demonstrates the urgent need for the new stadium at Falmer with all the facilities, commercial and economic benefits and additional revenue streams it will generate.”

Having said that, dreams don’t come cheap and building Brighton’s new home is going to cost an eye-watering £93 million, comprising construction costs of £66 million with the rest going on associated legal, refurbishment and acquisition fees. On the plus side, the contract with the building contractors is fixed price to reduce the risk of over-runs, while the South East England Development Agency provided a £5 million grant towards the infrastructure cost.

"If we build it, they will come"

Falmer will be a state-of-the-art stadium with a 22,500 capacity, which will be three times the size of Withdean. Given the falling attendances, it is legitimate to question whether the new ground will be filled, but the obvious response is the one given by Dick Knight, “We are not building a new stadium for League Two.” That man Coppell agreed, “They’re capable of being in the top division. Once the crowd return, they’re going to be very good.”

And there is a lot of potential in Brighton to back up these seemingly outlandish claims. The city has a population over 250,000, while the club has a huge catchment area, being the only Football League club in the county of Sussex. The 30,000+ fans that the Albion took to the Millennium Stadium in Cardiff for the 2004 play-off final highlighted the possibilities.

This is evidenced by the demand for corporate packages at Falmer, which are selling like hot cakes. The head of sales put it very well, “The people of Brighton have had to put their love for their club on hold, but now they are coming back in droves.” Furthermore, naming rights for the new stadium have already been sold, though the club has not divulged how much the deal is worth. Falmer will henceforth be named the American Express Community Stadium, though the fans will inevitably call it “The Amex”, after the city’s largest private employer.

"Brighton rock Manchester City"

God knows the commercial revenue could do with a shot in the arm. Although it is reported in a lot of detail in the accounts, it is still only £1.5 million, but I suppose that’s not too bad if you consider that the club can only attract local sponsors in its present guise. The main shirt sponsors are IT First, who have confirmed their support until 2010/11, the final year at Withdean. Similarly, a local restaurant, Donatello, extended its agreement as secondary shirt sponsors for the same period. For ten years, the club was famously sponsored by the appropriately named Skint Records, the record label of Brighton fan Norman Cook, better known as the DJ Fatboy Slim. In addition, the club has benefited from direct sponsorship from “Friends of the Albion”, a supporting network of local businesses. Last, but not least, the supporters have also raised funds over the years, notably the “Alive & Kicking” campaign in 2004/05, which raised £262,000.

In much the same way, the television revenue is obviously on a different scale from the Premier League, coming in at less than £700,000. Compare that to the team finishing last in the “best league in the world” (© Richard Keys), which will pocket around £40 million from the central distribution. Yes, it is indeed a “different ball game”. Nevertheless, Brighton still face similar issues to those clubs, whose sole strategy is Premier League survival in order to avoid the steep drop in TV money.

"He's a dedicated follower of fashion"

The effect of relegation from the Championship can be clearly seen in 2007, when the Albion’s TV revenue fell by a dramatic 60% from £1.4 million to £0.6 million. This was the direct result of a far lower central distribution from the Football League, though there was a small increase of £106,000 in 2008, thanks to the introduction of a “solidarity payment package” funded by the Premiership.

Actually, the 2006 television revenue highlights the fine margins at this level, as it was inflated by three once-off payments: a £250,000 windfall from a competition sponsored by Coca Cola (which was used to buy striker Colin Kazim-Richards); a relegation parachute payment of £120,000; and proceeds from the ITV Digital liquidation of £88,000.

Given the small turnover of just over £4 million, it is shocking that the costs are nearly £9 million – more than twice as much. This includes relatively high administrative expenses of £4.2 million. The accounts don’t reveal the full details here, but in the past Dick Knight has bemoaned the fact that 50% of the gate receipts go in putting on a game, compared to the average of 10% for others.

However, as with all other football clubs, by far the highest component of the costs are wages, which accounted for £4.8 million in 2009, an increase of £0.9 million over the previous year, which the club described as reflecting “increased investment in the playing budget.” You can say that again – a 22% increase in just 12 months. This has produced a quite horrific wages to turnover ratio of 115%. In fact, this important measure has been increasing (deteriorating) over the last five years, which is not surprising when the revenue has fallen by 25%, while the wage bill has grown by 34%.

Salary costs increased by £0.5 million in 2006 in a failed attempt to stay in the Championship, but were then cut £0.4 million in 2007 to reflect the lower budget following relegation. However, wages have shot back up since then, despite remaining in the same division, though the 2008 increase was largely due to resources needed to deliver the stadium project and the introduction of an in-house scouting system. To be fair, it’s not as if the players earn fortunes. My guess is that most first team players are on around £50,000 a year, though some will inevitably be on higher packages, while the fringe players would probably earn half of that.

"In Gus we trust"

Another important expense for major clubs is player amortisation, i.e. the annual cost of writing-down their value (which is taken to be the purchase price). This is a highly technical accounting procedure, which is not really worth discussing here, as it’s so immaterial for Brighton (only £177,000 in 2009). This is an indication that the club spends small sums on buying players, which is backed-up by the £300,000 purchase of Glenn Murray from Rochdale in 2008 being the largest transfer fee paid for over a quarter of a century. In the same year, long-serving midfielder Gary Hart celebrated ten years service, having been bought for just £1,000 plus a set of training kit. Nobody is whistling “Hey, big spender” here.

So, this is clearly not a club that has splashed the cash when it comes to buying players, but that has not prevented a large turnover, e.g. the latest accounts mention nine new players coming in (plus another seven after the end of the season). They have also made extensive use of the loan system with an incredible 13 players signed in this way. It has to be said that there has also been a bit of a merry-go-round at the managerial level with 12 managers in the last 12 years.

Brighton has made some money from player sales in the past, but not that much. In fact, the last substantial profit from player trading (£2.1 million) was reported back in 2006, when Adam Virgo was sold to Celtic for £1.5 million, Dan Harding to Leeds for £0.5 million and Leon Knight to Swansea for £125,000.

This is important, because of the way the club’s business model works, which was explained in the 2007 accounts thus, “losses can only be sustained through the sale of our greatest assets, namely our players, or through shareholder funding.” So if very little money is raised via player sales, that means that the only practical option left for Brighton is funding from the owners and this is confirmed when we look at the cash flow statement, which reveals that the club requires additional financing almost every year to break-even.

So it’s just as well that Brighton have found in Tony Bloom their own version of Roman Abramovich, albeit on a smaller scale. One concern is that it’s not entirely clear what is the source of his wealth. Obviously it’s unlikely that the money will have come from poker, no matter how good a player he might be, but it is known that he sold his stake in Premierbet, the company he founded, in 2005. Like so many other investors in football clubs, he is also involved in property development and “finance”.

But why would Bloom want to invest in Brighton, apart from football reasons? He would probably only get a return on his money if the club reaches the promised land of the Premier League, which is not impossible, but the odds are a lot longer than a professional gambler would appreciate. At the moment, the only “positive” financially is that he may well be able to write-off the loans to the loss-making football club against profits in other parts of his business organisation in order to reduce tax. Similarly, he might be able to utilise the £5 million deferred tax asset at some stage in the future, if the club starts making profits.

"The spade is in the ground"

There is always some concern with the benefactor model, which works just fine as long as the owner remains dedicated to the football club, but can be problematic if his circumstances change. Bloom himself admitted that he had to “make a bigger commitment than I would have envisaged”, because of the difficulties in securing credit.

The other worry is the sheer size of the debt, which is approaching twenty times the club’s annual turnover. Unless the loans are converted into shares, there has to be a possibility of repayment at some stage, though this would presumably only be likely if Bloom were to fall on hard times. Considering their experiences with Bill Archer, the fans would be justified in feeling nervous about a repeat performance. As one fan memorably put it, “we don’t want to have all our eggs in one bastard.”

On the face of it, Tony Bloom is cut from a different cloth and has hastened to assure fans that he is nothing like Archer. Indeed, there are strong family ties to Brighton and Hove Albion, as his uncle Ray is also a director, while his grandfather Harry was vice-chairman when the club reached the old first division in 1979. You could say that the Albion is in his blood and Bloom himself is a lifelong supporter.

"Glenn Murray - he's mint"

This is clearly not some fancy toy for the chairman, which he has reinforced by bringing in two of his long-time associates as directors: Adam Franks, the finance director for all his companies, and Marc Sugarman, an equity analyst for Citigroup. He will also have to continue to cover losses for a number of years before the club can stand on its own two feet, while building a solid legacy in the form of bricks and mortar (and steel and glass). Finally, if Bloom were simply looking to make money on his investment, there are many other better opportunities around.

These are exciting times for the Seagulls. The future would have been very grim without the new stadium, but this is the club that refused to die. Paraphrasing the title of one of Fatboy Slim’s albums, the club has come a long way, baby.

It’s been a long journey, but when the first match kicks-off in Falmer (sorry, The Amex), grown men will raise a glass (probably a pint of Harveys), maybe shed a tear and in a distant corner in Switzerland, passers-by will be startled, when, for no apparent reason, a man suddenly pauses to bellow, “Seagulls!!!” It’s going to be emotional.

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