Monday, January 26, 2015

Brighton and Hove Albion - Love At The Pier

In many ways Brighton’s 2013/14 season was similar to their previous campaign, as they once again reached the Championship play-offs, only to fall at the semi-final stage this time to Derby County, leading to the resignation of Head Coach Oscar Garcia. In spite of this blow, the club’s finances still improved with their losses falling by nearly a third from £15.3 million to £10.6 million.

Chief executive Paul Barber described this as “a significant improvement”, which seems a little strange, given that Brighton still reported a loss of nearly £11 million, but he’s sort of right, given the crazy finances in England’s second-tier as clubs strive to reach the highly lucrative Premier League. Furthermore, revenue rose 3% (£0.6 million) to £24 million, which is a record for the Albion, though the debt owed to chairman Tony Bloom also increased by £28 million to £131 million.

The £4.7 million reduction in losses from £15.3 million to £10.6 million is largely due to a substantial cut in operating costs of £3.8 million (including the overall wage bill being trimmed by £0.8 million). Player trading also improved with profit on player sales £2.2 million higher, while player amortisation fell £0.6 million. Depreciation was £2.4 million higher, as a charge for stadium depreciation (£2.1 million) was made for the first time (the cost will be written-off on a straight-line basis over 50 years).

Revenue grew by £0.6 million, largely due to a £0.9 million increase in ticket sales, offset by a £0.3 million decrease in money from player loans. Commercial income was flat, as a £0.7 million increase in sponsorship and advertising was largely offset by an apparent £0.5 million fall in catering revenue – though this is due to a change in the way this revenue is reported (net instead of gross, as in the previous year).

Brighton’s strategy is more clearly seen by the club’s alternative presentation of the profit and loss account, which highlights the steep reduction in administrative and operational costs, down 27% from £16.7 million to £12.1 million. This was explained by Barber thus, “I’m obsessive about reducing our operational costs, cutting waste, getting better supplier deals, and making the club more efficient because it's the only way that we can maintain a competitive playing budget without breaking FFP regulations.”

Of course, the reduction in operational costs is also partly driven by the changed accounting treatment for the catering business, but the trend is clear, as football costs (excluding player amortisation and depreciation) increased by nearly £1 million from £19.9 million to £20.7 million. In fact, Brighton’s managers have benefited from a significant increase in this football budget of around 60% since 2012, as it has grown from £13.1 million to £20.7 million.

Brighton have consistently reported losses in recent years. The last time that they made a profit was back in 2007/08 – and that was less than £1 million and only because of a £3.6 million exceptional credit, due to a change in the accounting for the Falmer stadium expenses incurred to date. Since then, the club has made cumulative losses of £51 million.

Essentially, their losses have increased as the stakes have got higher, i.e. targeting promotion to England’s top flight, where the financial rewards are enormous. As Tony Bloom put it, “most Championship clubs are currently loss-making as a means of supporting their own ambitions.”

Although only a few clubs have published their accounts for 2013/14, this point is backed-up by reviewing the 2012/13 accounts in the Championship, which reveal that only four clubs made money that season, while the vast majority incurred losses. Everything is relative and Brighton’s £15.3 million loss was “only” the 9th highest that season with four clubs reporting losses more than twice as high as the Seagulls: Bolton Wanderers £51 million, Blackburn Rovers £37 million, Leicester City £34 million and Wolves £33 million.

Brighton’s revenue has grown by almost 500% since 2009, surging from £4.1 million to £24 million, largely due to what can de described as the "Amex effect", though the promotion from League One to the Championship in 2011 has obviously also helped. In 2012 revenue jumped from £7.5 million to £22.2 million with gate receipts increasing from £2.3 million to £8.3 million following the move from Withdean to the Amex Stadium in Falmer.

In addition, commercial income more than doubled that year from £3.1 million to £7.6 million. The club could negotiate better deals with sponsors in the higher division (up from £0.8 million to £3.9 million), increase retail sales, e.g. from the stadium megastore (up from £0.5 million to £2.0 million) and make more from catering, i.e. pies and the famous Harveys beer (up from £35k to £1.3 million).

This is all well and good, and revenue has gone up a further £1.8 million in the last two seasons, but a significant step-up in Brighton’s revenue would surely require promotion.

Following last season’s growth, the club’s revenue mix is largely unchanged: 43% comes from gate receipts, 34% from commercial income and 23% from broadcasting. This is a fairly typical mix for Championship clubs, as opposed to the Premier League where TV is by far the largest source of income.

In 2012/13 Brighton’s revenue of £23.4 million was the 6th highest in the Championship, only behind Bolton Wanderers £35.1 million, Wolves £32.1 million, Leeds United £29.3 million, Blackburn Rovers £26.9 million and Birmingham City £24.2 million.

Interestingly, many of the clubs that have already published their 2013/14 accounts have reported a reduction in revenue (including Birmingham City, Watford, Ipswich Town and Millwall), which casts an even more favourable light on Brighton’s achievement in managing to increase revenue last season.

Of course, these revenue figures are distorted by the parachute payments made to those clubs relegated from the Premier League, e.g. in 2012/13 the first year of relegation was worth £15.6 million. If we were to exclude this “disparity” (as Barber describes it), then Brighton’s revenue would have been the second highest in the Championship, only behind Leeds United.

The impact of parachute payments can be clearly seen when looking at the Media revenue in the Championship in 2012/13. Those clubs without parachute payments basically all received the same amount (around £4 million) split between the Football League central distribution and a solidarity payment from the Premier League. This actually fell in 2012/13, as the new deal with BSkyB was worth less, because no other companies were interested in the TV rights.

Brighton’s central distributions (£4.9 million in 2013/14) have been boosted in the last two seasons due to the appearances in the Championship play-offs, but this still pales into insignificance compared to what they would have received if they had succeeded in reaching the Premier League. As Jim Bowen used to say on “Bullseye” to the losing contestants, “come and have a look at what you could have won.”

For example, Cardiff City, who finished last in the Premier League, trousered the princely sum of £62 million – or £57 million more than Brighton, even though there were effectively only six places between the two clubs in the English hierarchy.

The higher PL TV deal will also increase the parachute payments, so clubs relegated at the end of the 2014/15 season will receive the grand total of £65 million: year 1 - £25 million; year 2 - £20 million; year 3 - £10 million; year 4 - £10 million. There are some arguments in favour of these payments, namely that it encourages clubs promoted to the Premier League to invest to compete, safe in the knowledge that if the worst happens and they do end up relegated at the end of the season, then there is a safety net. However, they do undoubtedly create a significant revenue advantage compared to clubs like Brighton.

Brighton’s gate receipts rose 9.5% (£0.9 million) from £9.5 million to £10.4 million in 2013/14, driven by an increase in average attendance from 26,236 to 27,283. In the previous season Brighton’s match day revenue of £9.5 million was only surpassed in the Championship by Leeds United £9.7 million, so it is possible that they will be the highest once all the accounts are published for the 2013/14 season. In any case, last year they were far ahead of the nearest clubs (Nottingham Forest £7.1 million and Cardiff City £6.2 million), though Brighton do have a transport levy paid to rail and bus companies.

Brighton’s attendances have been the highest in the Championship for the past two seasons. In 2013/14 their average attendance was more than 2,000 higher than Leeds.

Since the move from Withdean, basically a council-owned athletics stadium, to the Amex, attendances have been steadily rising. In the last season at the “theatre of trees” in 2010/11, the average attendance was 7,352, but has increased every season since then, as the new stadium finally met the local demand for tickets. Capacity has been increased twice since the original move: in July 2012 it grew from 22,500 to 27,444 after the Upper tier of the East Stand was extended; and in March 2013 there was a further increase to 30,500 after all four corners were completed.

More worryingly, the average attendance this season has so far declined to 25,351, largely due to the insipid displays under the guidance of Hyypia (though a new record crowd of 30,278 was set in the FA Cup 4th round tie against Arsenal). Although the former Leverkusen manager resigned in December, it would have been no surprise if the club’s hierarchy had decided at some stage to “bin the Finn”, given his influence on and off then pitch.

In the new world of Financial Fair Play, Tony Bloom has said that the club needed “to establish a sharper commercial focus”, which they have clearly done, despite the reported figures only showing a slight increase from £8.1 million to £8.2 million. Sponsorship and advertising was up 16% from £4.2 million to £4.9 million; retail was down 3% from £1.4 million to £1.3 million (as this is usually dependent on timing of new shirt releases); and catering down £0.5 million from £1.8 million to £1.3 million.

In 2012/13 Brighton were once again only behind Leeds in the Championship, whose commercial revenue, as befitting their fine history, was much higher than every other club at £14.7 million.

As already outlined, the reported fall in catering income is misleading. Following the outsourcing of this activity to Sodexco, Brighton now show only the net commission in revenue, whereas in the previous season all the gross revenue was reported in revenue with the expenses shown in costs. In fact, Barber has said that there was “a very good increase” in catering in 2013/14. It is likely to be among the highest in the division, though Delia Smith’s Norwich City reported £4.2 million catering income the same season (albeit before their relegation from the Premier League).

What has been impressive is the increase in sponsorship with the two major deals attracting new sponsors. American Express replaced Brighton and Hove as shirt sponsor from the 2012/13 season and they are also the naming rights partner for both the stadium and the training ground. From 2014/15 Nike replaced Errea (after 15 years) as the club’s kit supplier. The value of the deal has not been divulged, but Barber said that it “represents a significant increase on our existing commercial arrangement.”

Profit from player sales, which equals the transfer fee less the remaining amortised value of the player in the accounts, increased from £1.6 million to £3.8 million in 2013/14, thanks to the sales of Liam Bridcutt to Sunderland and Ashley Barnes to Burnley. As can be seen from the Championship 2012/13 accounts, this has traditionally not been a big money-spinner for Brighton, but this is likely to change.

The 2014/15 accounts will benefit from the major sales of Leonardo Ulloa (“who’s that man from Argentina?”) to Leicester City for £8 million and Will Buckley to Sunderland for £2.5 million (note that these are press estimates, as figures have not been officially announced by the club). There are also potentially additional transfer fees receivable of up to £4.3 million from their new clubs, if certain performance criteria are satisfied, e.g. number of appearances, relegation avoided.

In the future, Brighton will hope that the significant investment in their academy bears fruit, as it has done with their South Coast “neighbours” Southampton, by developing young players, either for the first team or to sell profitably to other clubs.

Brighton’s total wage bill was cut by 4% (£0.8 million) from £21.1 million to £20.3 million, lowering/improving the wages to turnover ratio from 90% to 85%. That said, given the significant reduction in administrative and operational expenses, it is likely that the players wage bill has actually increased. Since 2009, wages have more or less kept pace with the revenue growth: revenue has grown by £19.9 million, while wages have grown by £15.4 million.

In 2012/13 Brighton’s wages of £21.1 million were the 8th highest in the Championship. Two of the three promoted clubs that season had far higher wage bills (Cardiff City £32.8 million and Hull City £25.9 million), though in fairness Crystal Palace (gulp) managed to go up on lower wages (£18.8 million). It is worth noting that many of the clubs that have reported 2013/14 results to date have also cut their wage bills, e.g. Blackburn Rovers, Birmingham City, Ipswich Town and Watford.

The remuneration for the highest paid director, who is not named, but is surely Paul Barber, has increased from £480k to £652k, which is a lot of money, but almost certainly includes a large bonus for the chief executive’s success in cutting operational expenses and renegotiating many of the sponsorships.

The prudent approach is evidently the one that Brighton want to follow, especially in a FFP world, as noted by Bloom: “While we do want to play at the highest level, we cannot simply open our cheque book and start spending without care or attention.” This can be seen in the wages to turnover league table in the Championship in 2012/13. Brighton’s 90% is not great, but considerably better than most of the other clubs, e.g. Cardiff City 189%, Bristol City 170%, Hull City 153%.

Nevertheless, Brighton’s gross debt has increased by £28 million from £103 million to £131 million, almost entirely comprising debt to Tony Bloom. The amount loaned is interest-free and repayable after more than one year. This figure would have been even higher if Bloom had not converted around £69 million of loans into equity over the years, including £18 million in May 2009, £40 million in September 2012 and £11 million in October 2013. That means that Bloom has pumped around a cool £200 million into the club.

This means that Brighton have one of the largest debts in the Championship, though still not as high as Bolton’s £164 million in 2012/13. Of course, this is essentially “in-house” debt with hardly anything owed externally. Most clubs also increased their debt last season, notably Blackburn Rovers who went up £25 million to £80 million.

Brighton are very reliant on the generosity of their chairman, as explained by Barber: “In addition to Tony's interest-free funding to build the American Express Community Stadium and American Express Elite Football Performance Centre, he continues to cover the club's on-going losses and is committed to funding future losses.”

Being so dependent on one individual can be a concern, but Bloom comes from a family of Brighton supporters: “My investment in the club starts – and ends – with being a fan. I am proud to be able to contribute to the community in which I was raised, and in which my family still lives. As a supporter (and chairman) my burning ambition remains to see the Albion return to play at the highest level.”

However, Brighton will not be able to buy success, as they will need to continue to comply with the Financial Fair Play regulations. Under the existing rules, clubs are only allowed a maximum annual loss of £8 million (assuming that any losses in excess of £3 million are covered by injecting equity). It should be noted that FFP losses are not the same as the published accounts, as clubs are permitted to exclude some costs, such as youth development, community schemes, promotion-related bonuses and depreciation on fixed assets. This means that Brighton will comply with FFP for the 2013/14 season.

If clubs do not meet the FFP targets, they will be subjected to sanctions such as transfer embargoes (as is the case with Leeds United, Nottingham Forest and Blackburn Rovers from 1 January 2015) or financial penalties if they are promoted to the Premier League.

"Charge of the Rohan"

The existing rules will continue to apply for the 2014/15 and 2015/16 seasons (though the maximum allowed loss is increased to £13 million from the second season), but will change from the 2016/17 season to be more aligned with the Premier League’s regulations, e.g. the losses will be calculated over a three-year period up to a maximum of £39 million. In addition, parachute payments will be cut from four to three years, which Bloom said “will help to address some of the current disparity”.

There’s no doubt that Brighton have come a long way, but the club is still far from breaking even, so continues to be reliant on Tony Bloom to a large extent. The move towards a self-sustaining model (with the associated pricing levels and restrained investment in the squad) has annoyed some supporters, but this is the new reality in the Championship. As Bloom explained, “If we are successful off the pitch, that can only help us on it.”

The chairman has invested heavily “to give us the best possible chance”, but he acknowledged that “there is no guarantee of success” and Brighton currently sit closer to the relegation places than the play-offs. Relegation to League One would hit the club hard, as that division’s financial fair play regulations restrict a club’s wage bill to a maximum of 60% of revenue. Given that all Brighton’s revenue streams would be significantly hit if they went down, the wage bill would have to be slashed with the consequent reduction in quality of players.

However, recent performances under new manager Chris Hughton have given cause for encouragement. It is difficult to argue with his assessment that Brighton “is a Premier League club in everything except the division it plays in”, but they still need to do it on the pitch – in one of the most competitive leagues in the world.

Monday, January 19, 2015

Stoke City - You Better You Bet

Year after year Stoke City make it clear that the club’s primary objective is to “maintain its Premier League status” and that was duly achieved in 2013/14, as they finished in a comfortable 9th position. This means that Stoke are now in their seventh consecutive season in the top league.

Once again, the support of the Coates family’s investment in Stoke City through their company bet365 was critically important, as they provided an additional loan of £15 million to fund further investment in the playing squad, increasing the club’s debt to their owners to £57 million.

For a long time the owners have been “committed to reducing the club’s reliance on bet365 and, over the medium term, to make it self-sufficient” and the latest financial figures make this seem a lot more likely than before.

In 2013/14 Stoke improved their bottom line by an impressive £35 million, converting a £31 million loss the previous season into a £4 million profit and reporting record revenue of £98 million, up 48% (£32 million) from £66 million.

The £35 million profit improvement was almost entirely due to the new Premier League television deal £31 million plus an £8 million reduction in player amortisation/impairment, partly offset by a £3 million increase in other expenses.

This was the first time that Stoke had made a profit since 2008/09, when they registered a small surplus of £0.5 million in their first season back in the top flight. In fact, in the eight seasons leading up to 2013/14 the club had made cumulative losses of £64 million. In fairness, nearly half of that (£31 million) came last year as Stoke invested heavily to ensure that they remained in the Premier League in order to benefit from the new TV deal.

Revenue increased £31.8 million (48%) from £66.5 million to £98.3 million in 2013/14, the major reason being broadcasting, up £30 million (65%) from £46.2 million to £76.2 million, driven by that new PL TV contract. Although the other revenue streams also increased, the growth was much smaller: commercial income up £1.6 million (12%) from £12.8 million to £14.4 million and gate receipts up £0.2 million (4%) from £7.5 million to £7.7 million.

This is nothing new. In fact, apart from TV money, the other revenue streams have essentially been flat since 2011: in that period commercial income has risen by only £0.8 million (6%) from £13.6 million to £14.4 million, while gate receipts have actually fallen £0.8 million (9%) from £8.5 million to £7.7 million.

To be fair, 2010/11 was arguably the most successful campaign in Stoke’s history, as they reached the FA Cup final for the first time and qualified for Europe as a result, because the eventual winners Manchester City went into the Champions League. In financial terms, that success boosted gate receipts and merchandising sales in that season. The following year was then inflated by £4.5 million generated from the Europa League run.

The increase in TV money means that Stoke’s turnover is now even more reliant on this revenue stream, increasing from 70% to 77%. Commercial income is down to 15%, while gate receipts only contributed 8% of total revenue in 2013/14.

Stoke’s achievement in staying in the Premier League for so long is really placed into context when you compare their revenue to other clubs. In 2012/13 Stoke’s revenue of £66.5 million was the 17th highest in the top tier, only above QPR, Reading and Wigan, i.e. the three clubs that were relegated that season.

Although Stoke’s revenue significantly increased in 2013/14, every other club will report similar growth, as they all benefit from higher distributions from the new Premier League TV deal. Furthermore, the leading clubs enjoy massively higher revenue, e.g. Manchester United’s £433 million is more than four times as much as Stoke’s £98 million.

Stoke’s share of the TV deal increased by an amazing 70% (£31 million) from £45 million to £76 million, not just because of the new deal, but also partly due to a higher merit payment, as they finished 9th compared to 13th the previous season.

It should be noted that the majority of the money is distributed equally among all Premier League clubs (50% of the domestic deal and 100% of the overseas deals), but there are different payments depending on where a club finishes in the league table (merit payment) and how many times the club is shown live on TV (facility fees).

Some critics have derided Stoke’s rather rudimental playing style, which (rightly or wrongly) might help explain why Sky broadcast them so infrequently. Each club is guaranteed a minimum facility fee based on 10 live games, but Stoke were only shown seven times in 2013/14.

Although gate receipts increased from £7.5 million to £7.7 million, this remains one of the lowest in the Premier League. At the other end of the spectrum, Manchester United and Arsenal both earn more than £100 million of match day revenue, which works out to around £3.5 million a match. In other words, they generate almost as much as Stoke’s annual gate receipts in just two matches.

Stoke have secured planning permission to expand the 27,700 capacity of the Britannia Stadium to around 30,000, but those plans are apparently on hold for the moment, as the club seemingly prefers to invest any available funds into their training facilities and youth academy.

This may also be due to attendances falling, as the average league attendance has dropped by over 1,000 in the last two years: 2011/12 27,216; 2012/13 26,922; and 2013/14 26,134.

Commercial income rose 12% (£1.6 million) to £14.4 million, largely due to sponsorship and advertising revenue increasing by 25% (£1.5 million) from £6.2 million to £7.7 million. The other streams were relatively flat: conferencing and hospitality £3.4 million, retail and merchandising £2.1 million and other operating income £1.3 million.

Again, Stoke’s commercial income of £14 million is dwarfed by the leading clubs, e.g. the two Manchester clubs significantly grew their commercial revenue again in 2013/14: United to £189 million and City to £166 million.

Stoke’s current shirt sponsorship with (you guessed it) bet365 is worth £3 million a season. This 3-year deal was signed in 2012, replacing the long-standing agreement with Britannia, who became Stoke’s official banking and community partner while also retaining naming rights for the stadium. Of course, this deal is a long way behind the “big boys”: United – Chevrolet £47 million, Arsenal – Emirates £30 million, City – Etihad Airways £20 million, Liverpool – Standard Chartered £20 million.

From the 2014/15 season Stoke’s kit deal is with Warrior, the US manufacturer most closely associated with Liverpool, who have succeeded Adidas.

The wage bill appears to be virtually unchanged, rising just 0.4% from £60.3 million to £60.6 million, though it is possible that the previous season’s figure includes the £2.85 million paid to Tony Pulis and his coaching team following their departure (the club only said that it was included in “operating expenses”).

Either way, Stoke’s wages to turnover ratio has improved from 91% to 62%, thanks to the significant revenue growth. This is the lowest since the 56% reported in 2008/09, the first season back in the Premier League.

Stoke have generally performed to expectations based on their wage bill. For example in 2012/13 they had the 12th highest wage bill and finished 13th. Once all the 2013/14 accounts are published, it is likely that they will be seen to have outperformed last season by finishing 9th, given that there is normally a very close correlation between wages and success on the pitch. For example, the top four wage bills in 2013/14 were Manchester United £215 million, Manchester City £205 million, Chelsea £193 million and Arsenal £166 million.

Although it is clearly a major challenge for Stoke to compete on wages, Chairman Peter Coates is very aware of its importance, being quoted in one set of accounts thus: “The football club's main risks and uncertainties centre around the ability to train, acquire and develop players to sufficient standard to retain and improve its position in the Premier League.” In simple terms, that is only possible by paying players a decent salary to attract them to the Brittania.

Since Stoke’s return to the Premier League they have invested heavily in player recruitment. In just five years between 2008/09 and 2012/13 they had a net spend of £88 million, as they built a competitive squad, splashing out on the likes of Peter Crouch, Kenwyne Jones, Wilson Palacios and Cameron Jerome.

However, they have not been so expansive in the last two seasons, making a number of free transfer signings (Phil Bardsley, Steve Sidwell, Mame Biram Diouf, Stephen Ireland and Marc Muniesa), resulting in a net transfer spend of just £5 million. This is lower than all but three Premier League clubs: Burnley, Southampton and Tottenham – and the last two clubs’ figures are a little misleading, as they are only so low due to hefty player sales, which have then funded numerous acquisitions.

The modified change in approach towards player signings is reflected in player amortisation (the annual cost of writing-down transfer fees), which rose significantly from £0.3 million in 2005 to peak at £22.2 million in 2013, before falling back to £16.3 million last season.

Although net debt only increased by £2 million from £36 million to £38 million, this was largely due to cash balances rising £13 million from £7 million to £20 million, and gross debt was actually up £15 million from £42 million to £57 million. The good news is that this is all owned to Stoke City Holdings Ltd, which is ultimately owned by bet365 (under the control of the Coates family). In other words, Stoke City have no external debt with banks, but an “in house” debt to their owners in the form of interest-free loans with no fixed repayment term.

The accounts highlight the importance of bet365’s ongoing investment and support. Although cash flow from operating activities is positive, the money required to fund investment in players has only been covered by frequent loans from the owners. In fact, since bet365 took control in May 2006, they have put in nearly £100 million (£95 million of loans and £2 million of share capital).

Although the Coates family might be keen to reduce their (financial) support, up to now they have still needed to sign some big cheques, advancing additional loans of £33 million in the last two seasons alone (£15 million in 2013/14 and £18 million  in 2012/13). Not only have they provided this funding, but they have also written-off £32 million of it by converting some of the loans to equity. In fairness, they can probably afford it, as the Sunday Times Rich List revealed that they had become the UK’s first betting billionaires.

However, the additional money from the 2013/14 Premier League TV deal, together with the adoption of the new Premier League financial fair play rules, which essentially prevent most of that higher revenue being used to increase wages (as has traditionally happened with previous TV deals), means that Stoke’s business model may well change to self-sufficiency.

Of course, this will only be the case if Stoke manage to extend their stay in the lucrative Premier League. There are encouraging signs that Mark Hughes’ team is more than capable of doing this, but the reality is that it will be even more of a dog fight in the bottom half of the table in future, as many clubs will do their utmost to stay at the top table for the very same reasons.

Monday, January 12, 2015

Chelsea - Hey Hey, My My (Into The Black)

By the standards of most clubs, Chelsea’s 2013/14 season was pretty good, as they finished 3rd place in the Premier League and were semi-finalists in the Champions League, but it must have felt a little disappointing after capturing silverware in each of the previous two seasons: the Europa League in 2012/13 and, most memorably, the Champions League and FA Cup in 2011/12.

However, this did not stop their progress off the pitch, as they reported record revenue of £320 million, up 25% on the prior year, and profit of £19 million (before tax), compared to a loss of £51 million in 2012/13. Equally importantly, given Chelsea’s history of being bankrolled by their owner Roman Abramovich, these results ensured that “UEFA’s break-even criteria under the Financial Fair Play (FFP) regulations continue to be satisfied.”

Chairman Bruce Buck was keen to note that the club’s new focus on its finances had not dramatically impacted their performance on the pitch, “while improving our financial figures, we remained competitive in football’s toughest competitions.”

In 2013/14 Chelsea improved their bottom line by £70 million, as they managed to convert a £51 million loss before tax to a £19 million profit. After tax, the figures improved from a £49 million loss to an £18 million profit.

The £70 million profit improvement was mainly driven by significantly higher profit on player sales (Luiz, Mata and De Bruyne), which increased by £51 million to £65 million, and revenue growth, including £39 million from the new Premier League TV deal and £29 million from sponsorship and merchandising income. This was partially offset by higher player costs with the wage bill up £20 million, amortisation (cost of expensing transfer fees) up £14 million and impairment (writing down player values) of £19 million.

This is the second profit Chelsea have made in three years and the largest since Abramovich became owner of the club in 2003. When they were making large losses, the club famously predicted that they would break-even one day and this has now become a reality, albeit a few seasons after they hoped to achieve this milestone. It should be noted that the £1.4 million profit registered in 2011/12 was largely due to £18.4 million profit on the cancellation of preference shares previously owned by BSkyB.

Of course, Chelsea have been making substantial losses in the Abramovich era, amounting to £631 million in the eight years up to 2011, including a hefty £140 million loss in 2005, as the owner poured money into the club to build a competitive squad.

Part of this is due to so-called exceptional items, which have increased costs by £121 million in the last decade, due to compensation paid to dismissed managers £61 million, impairment of player registrations £28 million, the early termination of a former shirt sponsor £26 million and tax on image rights £6 million.

However, it is profit from player sales that is having an increasing influence on Chelsea’s figures. In the seven years between 2005 and 2011, Chelsea made £73 million from this activity, but have made £108 million in just three years since then, most notably £65 million last season (up from £14 million), largely due to the sales of David Luiz to Paris Saint-Germain, Juan Mata to Manchester United and Kevin De Bruyne to Wolfsburg. In particular, Chelsea would have made a loss of £46 million instead of a £19 million profit without these sales.

Chairman Bruce Buck played this down, “we financed player purchases from sales”, but there’s a lot more to it than that. The strategy is to acquire young talent and develop it in a cost-effective way, making extensive use of the loan system, notably at Dutch club Vitesse Arnhem, which appears to be an unofficial feeder club for Chelsea.

On a few occasions, a player will succeed in establishing himself in Chelsea’s first team, one example being goalkeeper Thibaut Courtois, but most players are effectively being developed for future (profitable) sales, while being placed in the shop window at the same time. Not every player will bring in big money, of course, but the strategy only needs a couple of lucrative sales to be successful. Although it will be far from easy to sustain these profits, we already know that next season’s accounts will also be boosted by the £28 million sale of Romelu Lukaku to Everton.

This approach has been questioned by some commentators, especially as an incredible 30 players have left Chelsea on loan this season, but the Blues are by no means the first club to adopt such a “buy low, sell high” strategy with Udinese having done similar for many years. Complaints would include treating players like stocks and shares, not to mention ensuring other clubs cannot buy this promising talent, but there are no rules against it – yet.

It is undoubtedly a smart strategy in the FFP era, as the club had to wean itself off its reliance on its Russian owner to cover its operating losses. Basically, any investment in a youth academy can be excluded from the FFP break-even calculation, while profits made from player sales are included in the analysis. Furthermore, if the players are loaned, then most of the wages are covered by the loanee clubs.

It remains to be seen whether more academy players make it at Chelsea, though there are high hopes for Ruben Loftus-Cheek, Lewis Baker and Izzy Brown in particular, but either way Chelsea’s new trading strategy has helped drive the improvement in their financials.

For this purpose, it is important to note how clubs account for player trading. When a club buys a player, it does not show the full transfer fee in the accounts in that year, but writes-down the cost (evenly) over the length of the player’s contract. So, if Chelsea splash £32 million on a new player with a 4-year contract, the annual expense is only £8 million (£32 million divided by 4 years) in player amortisation (on top of wages).

However, when that player is sold, the club reports the profit on player sales, which is essentially sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold 3 years later for £35 million, the cash profit would be £3 million (£35 million less £32 million), but the accounting profit would be £27 million, as the club would have already booked £24 million of amortisation (3 years at £8 million).

Up to now, this has surely only interested accountants, but it’s become very relevant for FFP. Furthermore, any players developed through a club’s academy have zero value in the accounts, so in these cases any sales proceeds represent pure profit. Chelsea are clearly highly aware of this accounting treatment. In fact, their annual report notes that the club has valued its playing staff at £353 million, while the accounts value is only £226 million.

Even Jose Mourinho has commented on Chelsea’s revised strategy: “We are making money to be able to spend money. In every transfer window Chelsea is losing players, is selling players. In the winter one we sold Mata; in the summer one we sold David Luiz and Lukaku. So Chelsea in this moment is not a spender – Chelsea in this moment is making more money in transfers than the money we spend.”

As well as player trading, Chelsea have significantly increased their ongoing revenue, which was up £64 million (25%) from £256 million to £320 million, driving through the £300 million threshold for the first time. Both broadcasting and commercial grew substantially, broadcasting up £35 million (33%) from £105 million to £140 million and commercial up £29 million (37%) from £80 million to £109 million, while match day was flat at £71 million.

In fact, since 2009 match day revenue has fallen 5% from £75 million to £71 million, while commercial more than doubled from £53 million to £109 million and broadcasting grew 77% from £79 million to £140 million.

Chelsea’s revenue of £320 million remains the 3rd highest in England, only behind Manchester United £433 million and Manchester City £347 million, though still ahead of Arsenal £299 million (in 4th place, natch).

All clubs in the Premier League have grown their revenue in the 2013/14 season, as they all benefit from the new TV deal, but the two Manchester clubs have increased their revenue by more than the others: City are £76 million up, United £70 million up, while Chelsea grew by “only” £60 million. In this way, the gap is getting bigger.

Chelsea had the 7th highest revenue in the world in 2012/13 with £260 million, according to the Deloitte Money League, which is obviously far from shabby, but was still a long way below the Spanish giants, Real Madrid £445 million and Barcelona £414 million, and Bayern Munich £370 million.

We will not know whether Chelsea’s position will change in the 2013/14 version until PSG publish their accounts, but the gap will close, partly due to Chelsea growing at a faster rate (23%) than Madrid (6%), Barca (0%) and Bayern (13%). This trend is exacerbated by the strengthening of Sterling with the exchange rate against the Euro improving from 1.1668 to 1.25.

As match day revenue barely changed in 2013/14, while both broadcasting and commercial grew significantly, its share of Chelsea’s revenue has dropped from 28% to 22%. Broadcasting is up from 41% to 44%, while commercial is up from 31% to 34%.

After finishing 3rd in the Premier League, Chelsea’s share of the new Premier League deal was £94 million, up £39 million (71%) from £55 million. All PL clubs get an equal share of half of the domestic deal and all of the overseas deals. The remaining 50% of the domestic deal is allocated based on a merit payment for finishing position and a facility payment based on number of games shown live.

Chelsea also received €43 million for reaching the semi-final of the Champions League, which was slightly higher (at least in Euro terms) than the €42 million they received from Europe the previous season: €31 million from the Champions League, despite elimination at the group stage, and €11 million for winning the Europa League, when they overcame Benfica in the final. Of course, it is not as high as the €60 million earned in 2011/12 when Chelsea beat Bayern Munich in a dramatic final to win the Champions League.

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

It’s worth exploring how the TV (market) pool is allocated. Chelsea’s share of the UK market pool is dependent on both how far they progress (compared to other English clubs) and their finishing place in the previous season’s Premier League. In this way, Chelsea (€18.5 million) earned less than Manchester United (€23.8 million), even though they progressed one stage further (semi-final compared to United’s quarter-final), as they only finished 3rd in the previous season’s Premier League, while United finished 1st.

Commercial revenue rose £29 million (37%) from £80 million to £109 million, partly due to increases in the Samsung shirt sponsorship from £13.8 million to £18 million and an extension in the Adidas kit supplier deal until 2023, which increased the annual payment from £20 million to £30 million. In addition, the club signed new partnerships with Rotary, Hackett, Coral, William Lawson’s, Indosat and Guangzhou R&F Football Club.

However, Chelsea are unlikely to improve on their 9th place in the Money League, as every other leading club is also focused on growing this revenue stream. In particular, Bayern Munich have managed to increase commercial income from £203 million to £233 million, more than double Chelsea. PSG’s numbers are inflated by their €200 million deal with the Qatar Tourist Authority.

To reinforce this point, in England Manchester United have increased commercial income by 171% (£119 million) to £189 million, which is better than Chelsea’s 106% (£51 million) over the same period – and that’s before United receive the full benefit of their massive new Chevrolet and Adidas deals. Similarly, Manchester City is now up to £166 million, driven by their Etihad sponsorship. Chelsea are still way above Arsenal, though the Gunners’ PUMA deal only starts from the 2014/15 season.

Time will tell whether former Liverpool managing director Christian Purslow, who has been recruited as head of commercial activities, will manage to bring in new sponsorship deals, though he certainly talks a good match (as seen in countless TV and radio appearances).

There have been numerous reports of Chelsea switching shirt sponsors from Samsung to Turkish Airlines next season, which would increase the value from £18 million to £25 million. This would be more in line with the £25-30 million deals that most other elite clubs have (Arsenal – Emirates, Real Madrid – Emirates, Barcelona – Qatar Airways, Bayern Munich – Deutsche Telekom), though still a long way short of Manchester United’s Chevrolet deal of £47 million (depending on US$ exchange rate).

Match day income rose slightly by £0.3 million (0.5%) from £70.7 million to £71.0 million. This was no surprise, as the club explained, “with Stamford Bridge filled to capacity year after year there was no scope for significant financial growth in this area. General admission ticket prices remain frozen at 2011/12 levels.” This revenue stream peaked at £77.7 million, thanks to the success in the Champions League and the FA Cup.

Chelsea’s match day revenue is around £30 million lower than Manchester United, Arsenal, Madrid and Barca, as they have much bigger stadiums. This explains why the club has spent so much time searching nearby locations for a new stadium, but they were outbid for the Battersea Power Station and have ruled out moves to sites in Earls Court and Old Oak Common. The club now appears to be focusing on expanding Stamford Bridge’s capacity form 42,000 to 55,000, though this would be a tricky, lengthy exercise, so revenue is unlikely to meaningfully increase here for many years.

Wages increased by £20 million (12%) from £173 million to £193 million, though the wages to turnover ratio lowered from 67% to 60% following the 25% revenue growth. This ratio has improved every year from the recent 82% peak in 2010. Note that these wage figures have been adjusted for exceptional items, e.g. in 2013/14 the reported staff costs of £190.6 million have been adjusted for a £2.1 million credit for the release of a provision for compensation for first team management changes.

Chelsea therefore still have the third highest wage bill in England of £193 million, behind Manchester United £215 million and Manchester City £205 million, but ahead of Arsenal £166 million.

In Euro terms, Chelsea’s €241 million is just behind Real Madrid €250 million and Barcelona €248 million, but ahead of Bayern Munich’s €215 million – though this depends on the exchange rate used (1.25 here, as this is likely to be the 2013/14 Deloitte Money League rate).

Although Chelsea are still spending big in the transfer market, e.g. this summer saw the arrival of £32 million Diego Costa from Atletico Madrid and £30 million Cesc Fabregas from Barcelona, net spend is declining, thanks to equally big money sales, such as David Luiz £40 million and Romelu Lukaku £28 million (and, by the way, major kudos to whoever secured so much money for those sales).

That said, if we look at the last three seasons, only Manchester United have outspent Chelsea: £231 million against £137 million. Both Chelsea and Manchester City £128 million have clearly been impacted by the advent of FFP, so much so that Arsenal and Liverpool are now spending at similar levels.

Even though Chelsea still report substantial operating losses in the P&L, the operating cash flow has been positive for the last two seasons after adjusting for non-cash flow items, such as player amortisation and depreciation, and working capital movements. Nevertheless, Chelsea still require funding from the owner to cover player purchases and other investments, resulting in £51 million net financing in 2013/14.

However there is no debt in the football club, as this has all been converted into equity by issuing new shares. That said, the club’s holding company, Fordstam Limited, does have around £1 billion of debt (£984 million as of June 2013) in the form of an interest-free loan from the owner, theoretically repayable on 18 months notice.

Given Chelsea’s several years of heavy financial losses, many observers had believed that they would fall foul of FFP, but that has not been the case, as confirmed by the club: “The latest financial results combined with those from the previous two years mean that for the second monitoring period for FFP we will fall comfortably within the limits set by UEFA, who measure expenditure against the income from football-related activities. Chelsea also complied with FFP criteria over the first monitoring period.”

The club has taken advantage of some of the allowable exclusions for UEFA’s break-even analysis, namely youth development, infrastructure and (for the initial monitoring periods) the wages for players signed before June 2010. As we have seen, FFP is now being addressed by the new player trading model, but it is clear that this legislation has been at the forefront of Chelsea’s thinking.

Even the self-proclaimed “Special One” has got involved, though not without a degree of irony: “Chelsea is working in relation to Financial Fair Play, but I think it is a contradiction, because it was to put teams in equal conditions to compete and what happened really with the Financial Fair Play is a big protection to the historical, old, big clubs, which have a financial structure, a commercial structure, everything in place based on historical success for years and years and years.”

Hence, Chelsea’s new focus on living within its means. That will mean using a combination of profits from player development (and sales) and further increases in commercial income. As Bruce Buck put it, “Going forward, we have ambitious plans to build a pioneering global commercial programme, partnering with innovative and market-leading organisations from around the world. In the era of FFP, we must progress commercially to continue the circle of success to invest in the team and get results.”

In the meantime, Chelsea’s 2013/14 results are maybe best summarised by the wonderful Neil Young, “out of the blue and into the black”, as they have demonstrated that it is possible for them to remain successful while also balancing the books.
Related Posts Plugin for WordPress, Blogger...