Tuesday, August 25, 2015

Blackburn Rovers - Burning Down The House



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

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

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

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

"Stay on these Rhodes"

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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


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

To be fair, almost all clubs in the Championship lose money and are reliant on owners’ funding. In 2013/14 losses were reported by 21 of the 24 clubs – in stark contrast to the Premier League where the new TV deal, allied with wage controls, has led to a surge in profitability. The only clubs to make money in the Championship were Blackpool (with their highly dubious model), Wigan Athletic and Yeovil Town – and they have all since been relegated.


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


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

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


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

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


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

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


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

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


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

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


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


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


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

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


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

Looking at the Premier League television distributions, the massive financial disparity between England’s top two leagues becomes evident with Premier League clubs receiving between £62 million and £98 million in 2013/14, compared to the £4 million in the Championship. In other words, it would take a Championship club more than 15 years to earn the same amount as the bottom placed club in the Premier League.


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

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


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

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


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

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


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

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


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

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


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

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


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

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

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


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

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


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

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


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

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


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

To better explain this point, it should be noted that transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract – even if the entire fee is paid upfront. As an example, Jordan Rhodes was bought for £8 million on a five-year deal, so the annual amortisation in the accounts for him is £1.6 million.

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


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

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


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

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


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

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

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


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

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


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

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

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

"Best not to think about it"

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

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

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

"God put a smile on your face"

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

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

Tuesday, August 18, 2015

Ipswich Town - Forever The Same?



One of the most surprising sides in last season’s Championship was Ipswich Town, who managed to reach the play-offs on a shoestring budget. Although they were eliminated in the semi-finals by local rivals Norwich City, this was a great achievement that highlighted the progress made under Mick McCarthy.

When the experienced manager replaced Paul Jewell in November 2012, Ipswich were bottom of the Championship, but McCarthy successfully guided the club out of the relegation zone to finish in a comfortable 14th place. His first full season ended in a respectable 9th place in 2013/14, before he broke Ipswich’s many years of mid-table finishes by leading them to the play-offs.

Ipswich had a purple period in the late 1970s and early 1980s under Bobby Robson, when they twice finished runners-up in the old Division One, memorably won the FA Cup by defeating Arsenal in 1978 and also triumphed in the UEFA Cup in 1981 by beating AZ ’67 over two legs.

"Right Said Freddie"

However, relegation to the Championship in 2002 and the consequent loss of income contributed to the club going into administration the following year leading to the fire sale of key players. This ultimately paved the way for a takeover in December 2007 by businessman Marcus Evans, who acquired an 87.5% stake in the club.

He took on £32 million of existing debt that was previously owned by Aviva (formerly Norwich Union) and Barclays Bank for a much reduced price and made £12 million of additional investment. The debt had been incurred to finance extensions to Portman Road’s North and South stands and build a new training centre. The investment was split between £8.1 million preference shares (effectively a loan) and £3.9 million new shares.

Former chairman David Sheepshanks explained the decision to sell, “We believe Marcus Evans’ investment provides the best opportunity for the football club to move forward, return to the Premier League and stay there.”

"Who's David?"

Clearly, this has not quite worked out to date, as Ipswich have consistently finished in the middle of the Championship, at least until last season’s excellent efforts. Evans has conceded that he thought that promotion to the Premier League would be more straightforward when he bought the club: “Those people who sold the club did a very good selling job in persuading me that a little bit of extra money and one or two extra players was all that was needed.”

To that end, Evans initially provided his managers with enough funding to be competitive in the transfer market, but this did not achieve the desired objective, as the owner explained: “You would have hoped that money had resulted in better things, but look at Nottingham Forest – they lost £25 million last year and got nowhere. Look at Leicester, they spent 25 to 30 million for a couple of years running, I think, and didn’t manage to get promoted. So there are a lot of clubs out there that spent a lot more than Ipswich did and who ended up in exactly the same situation.”

This led to a change in Evans’ strategy, “I wanted to work with a manager who was going to try to and coach and make our players better, rather than give the manager the opportunity (to simply buy players).” The drive to more sensible cost management was also influenced by the introduction of the Financial Fair Play rules, which essentially force clubs to live within their means.


As a result Ipswich have spent virtually nothing on player purchases in the last three seasons, but paradoxically this approach has delivered better results on the pitch, thus defying the conventional wisdom that high spending equates to success. Whether the reliance on free transfers and bringing through young players will continue to work is debatable, but the recent improvement is there for all to see.

In the three seasons up to 2010, Ipswich averaged annual gross spend of £2.5 million and net spend of £2.2 million in the transfer market, but since then this has been slashed with gross spend averaging just £0.2 million and net sales of £3.5 million. Mick McCarthy explained the policy last year: “We’re not going to be going out and buying anybody or paying money for anyone. It will be Bosmans and loan deals.” For example, Ipswich have currently brought in on loan the young prospects Ainsley Maitland-Niles from Arsenal and Ryan Fraser from Bournemouth.


Of course, everything is relative, but over the last two completed seasons (2013/14 and 2014/15), Ipswich’s net sales of £3.6 million placed them a lowly 20th in the Championship net spend table out of 24 clubs. Although this comparison has to be treated with some caution, as the figures are distorted by clubs that were in the Premier League the previous season, either because of high spend when they were in the top flight or large sales following their relegation, it is evident that Ipswich have been comfortably outspent by their league rivals.


The more prudent policy has been reflected in Ipswich’s financials, e.g. the most recent published accounts for the 2013/14 season showed that the loss before tax was reduced by £2.6 million from £9.8 million to £7.2 million, even though revenue was down £0.3 million, mainly due to lower commercial income, and profits from player sales also fell £0.3 million.

The improvement in the bottom line was a result of £3.3 million cost savings, including a £1.1 million reduction in the wage bill to £13.9 million, player amortisation being cut by £1.7 million, other expenses down £0.4 million and depreciation being £0.1 million lower.


Although a £7 million loss might not sound  overly impressive, it has to be assessed in the context of England’s second tier, where the harsh reality is that most clubs make hefty losses, largely as a result of their natural desire to reach the lucrative Premier League. In fact, only three of the 24 clubs in the Championship were profitable in 2013/14 (Blackpool, Wigan Athletic and Yeovil Town) – and they have all since been relegated.

Ipswich’s loss placed them firmly in mid-table in the Championship profit league, but this was considerably better than the losses made by the likes of Blackburn Rovers £42 million, Nottingham Forest £23 million, Leicester City £21 million, Middlesbrough £20 million and Leeds United £20 million. As Evans lamented, “Wouldn’t it be nice if… you could turn a profit in the Championship, but I’m afraid that’s not the case.”


The last time that Ipswich reported a (small) profit was back in 2007, but they have consistently lost money since then with the £16 million loss in 2012 being the third worst in the Championship that year. This was explained by finance director Mark Andrews, “We brought in some experienced players in the 2011/12 season, Paul Jewell’s first season in charge, which kept the playing squad costs high.”

This was a common theme in the first few years following Evans’ acquisition, as “the investment in the first team squad” produced  worsening losses up until the wake-up call in 2012. After that losses have been reduced for the last three years (2012 – £16 million, 2013 – £10 million and 2014 – £7 million) and are expected to fall again in the next of accounts.


Ipswich’s best results in recent times have been boosted by large profits on player sales, most notably in 2011/12 when this contributed £10.8 million, largely due to the transfers of Connor Wickham to Sunderland for £8 million and Jon Walters to Stoke City for £2.75 million. Without these sales, Ipswich would have registered another hefty loss of £14 million. Similarly, the £0.1 million profit in 2007 was heavily influenced by the £3.5 million of player sales, mainly the sell-on fee for former Ipswich striker Darren Bent’s move from Charlton Athletic to Tottenham Hotspur.

In much the same way, the 2012 loss would have been even higher without the exceptional sale of the land at the training ground to Marcus Evans for £1.3 million, producing a £0.5 million profit after the costs were deducted. The other side of that particular coin is the club now has to pay the owner £40,000 annual rent.


Profits from player sales amounted to a grand total of just £1.5 million in the last three years, including £0.5 million in 2013/14, which was only the 16th highest in the Championship that season. In fairness few clubs in this division make big money from this activity with only two generating more than £5 million: Wigan Athletic £13.4 million and Bournemouth £6.9 million.

Without high player sales, Ipswich lose money, so the good news (from a financial perspective) is that the next two years’ accounts will both benefit from this revenue stream: (a) 2014/15 will include the sale of Aaron Cresswell to West Ham for £3.75 million plus add-ons; (b) 2015/16 has Tyrone Mings’ move to Premier League new boys Bournemouth for £8 million.


Revenue was essentially flat in 2013/14, falling by 2% (£0.3 million) to £13.6 million, mainly due to commercial income decreasing by 6% (£0.3 million) to £3.9 million and gate receipts dropping 2% (£0.1 million) to £5.0 million. This was partially offset by a 2% (£0.1 million) increase in broadcasting, thanks to a rise in the Football League distribution.

That said, revenue has slumped by 21% (£3.7 million) from the £17.2 million recent peak in 2011, which was boosted by reaching the Carling Cup the semi-final and a profitable FA Cup match at Chelsea. All revenue streams have fallen since then, especially gate receipts, which are 25% (£1.7 million) lower, in line with a reduction in average attendances. The 24% (£1.2 million) decline in commercial income is partly ascribed to the poor economic situation affecting customer spending. The £15% (£0.8 million) decrease in broadcasting is largely linked to the cup runs in 2011.


Following this slight reduction, Ipswich’s revenue of £13.6 million was only the 16th highest in the Championship in the 2013/14 season, a long way behind the top three clubs: QPR £39 million, Reading £38 million and Wigan Athletic £37 million. In fact, six clubs earned more than £30 million that year.

Of course, to a large extent, this only demonstrates the importance of parachute payments for those clubs relegated from the Premier League. As David Sheepshanks once said, “the gap has grown greater than ever between most Championship clubs and those which have parachute payments.”


If these were to be excluded, Ipswich would move up to 12th place in the Championship revenue league, but even so their £14 million would still a long way behind Leicester City £31 million, Leeds United £25 million, Brighton £24 million and Derby County £20 million. Given these stats, Ipswich’s traditional mid-table performance is perhaps less surprising.


Ipswich’s revenue is fairly evenly split between match day 36%, broadcasting 35% and commercial 29%, which is broadly similar to the previous season, though broadcasting has gone up from 33%.


In 2013/14 Ipswich’s broadcasting revenue was £4.7 million, which was in line with the majority of Championship clubs, who receive the same annual sum for TV, regardless of where they finish in the league. This amounts to just £4 million of central distributions: £1.7 million from the Football League pool and a £2.3 million solidarity payment from the Premier League.

Other television money is dependent on whether a team reaches the play-offs, cup runs and the number of times a club is broadcast live, so Ipswich should see their TV revenue rise in 2014/15, having qualified for the play-offs. However, the major impact of parachute payments is once again highlighted in this revenue stream, greatly influencing the top eight earners, though it should be noted that clubs receiving parachute payments do not also receive solidarity payments.

Looking at the Premier League television distributions, the massive financial disparity between England’s top two leagues becomes evident with Premier League clubs receiving between £65 million and £99 million, compared to the £4 million in the Championship. In other words, it would take a Championship club more than 15 years to earn the same amount as the bottom placed club in the Premier League.


If Ipswich had managed to battle their way through the play-offs last season, the financial prize for returning to the Premier League would have been immense. Even if a team finishes last in their first season and go straight back down, their TV revenue would increase by £61 million (£65 million less £4 million) and they would also receive a further £65-75 million in parachute payments, giving additional funds of around £130 million.

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

This might feel a little bit like Jim Bowen on “Bullseye” saying to the losing contestants, “come and have a look at what you could have won”, but it is worth highlighting the size of the prize for promotion – especially as it undoubtedly drives the behaviour of many Championship clubs.


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

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


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

It is worth noting that if Ipswich were to be promoted, then they are contractually bound to make additional payments to players, coaches, staff, players’ former clubs, season ticket holders and certain convertible loan note holders. This is not quantified in the latest accounts, but was given as £8.2 million in 2013, down from a high of £12.6 million in 2011.


Gate receipts dropped 2% (£0.5 million) from £5.1 million to £5.0 million in 2013/14 following a fall in the average attendance of 400. Nevertheless, Ipswich’s mach day revenue is the 10th highest in the Championship. To put this into perspective only three clubs generate more than £7 million (Brighton £10.4 million, Leeds United £8.6 million and Nottingham Forest £7.2 million).


Ipswich’s average attendance of 17,111 was actually the 8th best in last season’s Championship, but a fair way behind clubs like Brighton (27,283), Leeds United (25,088), Derby County (24,933) and Leicester City (24,916).


Ipswich’s attendances had been on a declining trend for a number of years, falling by a worrying 18% (3,800) from 20,900 in 2008/09, but the charge to the play-offs resulted in a 2,500 upswing in 2014/15 to 19,603. That’s not bad at all, but it still leaves a lot of gaps at Portman Road, which has a capacity of just over 30,000 seats. An example of what might be achieved in the Premier League was seen in the play-off semi-final against Norwich, which attracted a bumper crowd of 29,166.

Ticket prices are among the most expensive in the second tier, but had been frozen for many years until an increase in 2014/15 (upper tier 6%, lower tier 3%), which was followed by a further 3% rise for the 2015/16 season.


Even though commercial income fell by 6% (£0.3 million) from £4.2 million to £3.9 million, the club was at pains to advise that “sales improved in the second half of the season showing signs of recovery.” Once again, this is somewhat of a mid-table performance, being the 12th highest in the Championship. It may be a long way behind Leicester City £19 million (boosted by a major marketing deal with Trestellar Limited) and Leeds United £12 million, but only three other clubs manage to earn more than £5.2 million.

The shirt sponsorship is with the Marcus Evans Group, who originally signed a five-year deal in 2008 worth a reported £4 million in total, which has been subsequently extended each season. In a return to their glory days, Ipswich replaced Mitre as their kit supplier with Adidas in a four-year deal starting in 2014/15, which has reportedly already increased retail sales.

Evans understands that commercial success is linked to the team’s displays, even if his views are tinged with a lot of corporate speak: “We work very hard maximising revenues for the club on a commercial basis, but ultimately our product is about what the team delivers on the pitch. And, like any business, if your product is of good quality, you’ll make more money and sell more of your product.”


The wage bill was reduced by 7% (£1.1 million) from £15.0 million to £13.9 million, lowering/improving the wages to turnover ratio from 108% to 103%. Wages have been cut by nearly a quarter from the £18.0 million peak in 2012, when the wages to turnover ratio was as high as 119%.

Given the reduction in revenue in recent years, this is not exactly unexpected, especially as former Ipswich chief executive Simon Clegg marked the supporters’ cards back in 2012: “We have made cost savings and we will need to make more cost savings. Reducing the wage bill is certainly what we’re looking at.”

Ironically, Clegg’s own departure has assisted this process, as the remuneration for the highest paid director fell from £153,000 to £58,000 in 2014.


Clearly, the business model is still not ideal if revenue is not sufficient to cover the wage bill, let alone any other expenses, but almost every club in the Championship has a dreadful wages to turnover ratio with 10 of them being more than 100%. Even so, Ipswich’s 103% is the 9th highest in the division, though significantly better than clubs like QPR 195%, Bournemouth 172%, Nottingham Forest 165% and Millwall 132%.


The £14 million wage bill was also only the 15th highest in the league, underlining how much of an outperformance Ipswich’s feat in finishing 6th last season represented. In particular, it was significantly lower than the likes of Leicester City, Reading, Blackburn Rovers and Wigan Athletic, whose wages were all above £30 million. QPR were even higher at £75 million, but that was simply ridiculous in the second tier.

The recent lack of spending in the transfer market has been reflected in Ipswich’s profit and loss account via player amortisation, which has fallen from £5.1 million in 2009/10 to £1.0 million in 2013/14.


To explain this point, transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract – even if the entire fee is paid upfront. As an example, when Grant Leadbitter was bought for £2.65 million on a three-year deal, the annual amortisation in the accounts for him was £0.88 million.

In the same way, the lack of big money buys from other clubs has impacted the balance sheet with the value of player (intangible) assets decreasing from £6.4 million in 2010 to just £0.7 million in 2014.


Of more concern is the growth in debt, which rose by £3.7 million from £82.5 million to £86.2 million in 2014. This means that the debt has increased by more than 140% from the £35.7 million in the last accounts before Evans’ takeover in 2007. The club stated that this was down to “ongoing funding and player investment”.

When Evans bought Ipswich Town, former chairman David Sheepshanks said, “He's committing serious resources. Marcus is taking all the risk in our pursuit of Premiership football and increasing success”, and that has indeed been the case, as almost all the debt is owed to various Marcus Evans’ companies.

The debt includes £8.1 million of preference shares, which pay a fixed cumulative dividend of 7% (provided there are profits available for distribution) and are redeemable after five consecutive seasons in the Premier League.


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

The club has emphasised that it is not in debt to any financial institution, as explained by finance director Mark Andrews, “''Most Championship clubs are carrying debt but the majority of debt carried at Ipswich Town is not external, it is owed to the Marcus Evans Group.” This is indeed true, but there is still a degree of risk associated with such an arrangement, as the annual accounts noted: “the club remains dependent upon ongoing financial support from its principal shareholder.”


From a cash perspective Ipswich basically balance the books, but only because Evans increases his loan each year, as the cash flow from operating activities remains stubbornly  negative. The lack of investment over the last eight years is striking with the net player purchases (in cash terms) adding up to only £2.4 million and the spend on infrastructure improvements just £0.2 million. In that period, Evans has provided £32 million of additional loans, while £13.5 million has come from increases in share capital.

Simon Clegg explained Ipswich’s dependency on the owner a couple of years ago: “We only survive because Marcus Evans can afford to put in £4 million or £5 million of his own money every year to keep the club afloat.”

This is worth remembering when people talk about the slowdown in transfer spending, as Evans himself pointed out: “I certainly didn’t stop, in my mind, investing in the club, because I was still spending four to five million pounds a year in wages and whatever limited transfer fees we might have been involved with. Just because we weren’t spending on transfer fees, it did not mean that we weren’t spending in other areas.”

"Tommy Gun"

Evans can certainly afford this level of support, as his wealth rose £65 million last year to £765 million, according to the Sunday Times Rich List, but the accounts note that “there can be no certainty that this support will continue indefinitely.”

However, Evans has spoken of the emotional pull of Ipswich Town, even though he is a self-confessed Chelsea fan: “When you get so tied up in a club, you get completely entwined very quickly with that new club.” Indeed, he claims that he has had opportunities to sell, but he has no interest in doing so.

On top of that, he has good financial reasons for hanging in there, as Sheepshanks explained after the takeover: “Marcus Evans was attracted because Ipswich is a community club and he supports the club's values, but clearly it is a business. He does stand to make a huge profit, but the good news for our supporters is that his interests are aligned with the club. He will not make that profit until the club can pay it, and that means making it to the Premier League.”

"With a rebel yell"

The lack of transparency has been an issue, e.g. the club’s ownership was transferred from Marcus Evans Investments Limited to Marcus Evans Worldwide Holdings (IOM) Limited without explanation in October 2014, but Evans has at least recently given a wide-ranging interview to the East Anglian Daily Times.

In any case, Evans cannot simply buy success, as Ipswich now need to comply with the Financial Fair Play (FFP) regulations, which means reducing ongoing losses.

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.

"Ainsley Maitland-Niles (Conservative)"

The 2013/14 accounts note that Evans waived £1.6 million of loans in November 2014, which implies that this was the amount that was required to be in line with FFP (as this is considered to be equivalent to injecting equity).

The current rules will continue to apply for the 2014/15 and 2015/16 seasons (though the maximum allowed loss is increased to £13 million from the second season), but will change from the 2016/17 season to be more aligned with the Premier League’s regulations, e.g. the losses will be calculated over a three-year period up to a maximum of £39 million. This is not necessarily good news for Ipswich, as the more relaxed rules should theoretically benefit the relegated clubs that enjoy substantial parachute payments.

"Cool Hand Luke"

When Mick McCarthy was appointed manager in 2012, he said: “The long-term ambition is to take the club back into the Premier League”, which seemed very optimistic at the time. However, after many years of, frankly, mid-table mediocrity, this no longer appears to be such a pipedream. As Evans said, “It definitely feels as though we’re going in the right direction.”

Furthermore, the owner has confirmed that the money received from the Tyrone Mings transfer will be re-invested into the first team, though it is not clear whether this relates to a transfer budget or the wage bill.

Either way, Ipswich should be applauded for their efforts in building a competitive team, while spending so little. If they can go a little further this season and actually secure promotion from the ultra-competitive Championship in spite of their economic disadvantages, it would be a minor miracle of our times, but, as somebody once said, football’s a funny game.
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