Football Management

Commentary on the management of over 160 English football clubs by Dr John Beech, winner of the FSF Writer of the Year Award 2009/10 Twitter: @JohnBeech Curator of! Football Finance

Why I shall be especially grumpy this Saturday afternoon

Posted by John Beech on April 3, 2012

Football clubs ‘in poor financial health’” a headline on the BBC News website has just screamed (1).  Apparently “many clubs are continuing to spend too much, principally on players’ wages, as they always have done”.  What?  Surely not?  Well, OK, the said headline was in the Business section of the BBC website rather than their Sports section.

Begbies Traynor, who over the years have been Administrators of Chester City, Kingstonian, Lincoln City, Huddersfield Town, Northwich Victoria, Wrexham, Farnborough Town, Crawley Town, Scarborough, Bournemouth, Halifax Town, Southampton, and now Port Vale, have just completed a survey looking at the finances of Football League clubs.

Beneath the trite headline, there was some detail of interest.

Of 68 teams surveyed in those divisions, 13 have signs of distress such as serious court actions against them, including winding-up petitions, late filing of accounts and “serious” negative balances on their balance sheets.

That 19% compares to just 1% in the wider economy, the firm said.

In particular “the financially distressed clubs include three in the Championship, six in League One and four in League Two.”  Obviously the survey had been completed under conditions of confidentiality, so we can only speculate on which these thirteen clubs might be that are under short-term financial pressure, a temptation which I will resist, at least publically.

There are also the clubs which, to me, have potentially longer-term pressures because they operate on business models which may not be sustainable.  Two which have caught my eye with their recent publication of financial results are one likely to be relegated to the Championship, Wigan, and one about to be promoted out of the Football League, Southampton.

At Wigan (2), turnover was reported as up 16% on the previous year, although this, it was conceded, was “mainly due to the increased Premier League broadcasting rights contract”.   Worryingly though, net losses had risen from £4m to £7.2m.

Wigan fans might take some comfort from the fact that:

Net debt including bank borrowings and loans from David Whelan and his family remained virtually unchanged at £72.2m compared with £72.6m in the previous year Since the year end £48m of debt was converted to equity which significantly reduces the Club’s long term liabilities.

Chief Executive Jonathan Jackson commented:

This position would not have been possible without the continued financial support of Chairman, David Whelan. The post year end conversion of debt to equity has significantly strengthened the Club’s financial position and has, to a very significant extent, written off the debt owed to Mr Whelan.  The club cannot continue to make losses every year and we are continuing to shape all aspects of the Club to ensure the long term future remains positive both on and off the pitch.

Perhaps just a hint there that Mr Whelan’s pockets are not bottomless.  It was he who has called for control on players’ wages (3).  It was Wigan that managed to hit a wages/revenues ratio of an utterly unsustainable 208.3% in 2004/05 (posting passim).

Meanwhile over at Southampton another ‘debt for equity’ conversion was reported last Thursday (4).  The estate of former owner Markus Liebherr had ‘invested’ £33m over two seasons but had now converted these loans into shares.  (My reason for putting single quotes around ‘invested’ is that I do not see loans as investments.  If I had pushed my credit cards to their spending limits, would I talk in terms of MasterCard and Visa investing heavily in me?).

This conversion certainly takes the financial pressure off a club which last season made a net loss of £11m in gaining promotion from League 1.

The Liebherr family seem to be in that rare group of benefactors which includes Steve Gibson at Middlesbrough – those prepared to dig into their pockets deep and for the long term.  At Middlesbrough the club is “now free from debt owed to external providers” (5).

Looking along the South Coast from the perspective of a long-suffering Pompey fan (but who is number 1 a football fan rather than a club fan), a club in deep, deep trouble not least because it is still paying some players Premier League wages as it faces the drop, my eye caught on the wages/revenues ratio at Southampton, a very high 93%.

This counter-evidence in the discourse over the financial strengths and weakness of clubs is hardly typical.  While few clubs, correction, no English clubs, are as financially distressed as Portsmouth, the Begbies Traynor report paints a more typical picture.

As Portsmouth head for Southampton this Saturday, to be ‘entertained’ as the media like to phrase it, I’ll not be building my hopes up for a surprise Pompey victory.  The earlier derby this season may have been a draw, but Portsmouth now have a depleted squad, forced upon them by their financial circumstances (and as one might well argue, not before time).  No, I’ll be quietly fuming on the absurdity that the outcome on the pitch will have been determined ultimately by the lottery of how rich and how committed your club’s benefactor has been.  It may be a football match, but it certainly is being played in a context of competitive balance.  One club has been the subject of heavy financial doping, and is paying the price, and one is the subject of financial doping, but has so far kept the ‘habit’ under control.  One is a savage indictment of the failings of the benefactor model, and the other is fortunate enough to be able to say ‘OK so far’.

If any good at all is to come out of the ‘basket case’ circumstances Portsmouth finds itself in, it will be through a new and more sustainable financial model, which is why I fully support the community share offer from the Pompey Supporters Trust.  Post-commercial era football has totally lost it way.  Clubs have become the playthings of sugar daddies, and have, as in the cases of Portsmouth and Southampton, sugar daddies with no local connection.  Ownership has become a lottery, and fans have been betrayed as a consequence.  Football governance looks as it will receive only light-touch reform, but that is insufficient to set it back on a road where the results of games are determined in a context of competitive balance.  Financial Fair Play, whatever the extent to which it will actually prove successful, is a no brainer.  And fan ownership is the only way to ensure clubs are a part of the community whose name they are happy, and proud, to identify themselves by.

This posting is, for the moment, open to comments, but please bear in mind that this is not a fans’ forum – it is a personal blog, which is happy to encourage serious debate.  Trolls will have their comments deleted, as will those who favour the so-called banter of ‘scummers’ and ‘skates’.

5 Responses to “Why I shall be especially grumpy this Saturday afternoon”

  1. Jim Hughes said

    What I’ve seen reported of Southampton’s figures don’t entirely suggest tons of investment, last year’s £11m “loss” does not include the £12m sale of Alex Oxlade-Chamberlain to Arsenal, so arguably last year was a £1m profit. I believe the club now owns St Mary’s stadium as well as their training facilities, all of which is probably valued at more than £22m.

    If Saints get promoted to the premiership as looks likely then I can’t see the Liebherr’s spending big, thy’ve already shown it’s not their style, they seem to be astute and good at hanging onto their money.

    This is all rather different to Pompey’s recent rogue gallery of owners…

  2. Steve Grant said

    John, as I’m sure you’re aware, using figures from private limited companies is somewhat “dangerous” (poor choice of word but struggling for the right one there) as they are invariably 9 months out of date, as the clubs tend to submit them at the last possible moment.

    In the intervening period, Saints have sold a similar number of season tickets to last season (estimates anywhere between 13-15k) despite 30% price increases, heading for a 4k rise in average attendances, sold a star Academy product to Arsenal for an initial £12m, seen an increase in broadcast revenues simply by way of being in the Championship as opposed to League One as well as then being picked for live TV ten times (more than some of the Premier League sides). As a result, I would expect the wages/turnover ratio now to be far lower than the 93% recorded in last year’s accounts.

    No doubt the figures in the accounts for 2010/11 don’t make particularly pretty reading, especially on the back of the 2009 collapse into administration, but arguably the main reason the club was able to attract a new owner like Liebherr (and, despite his many faults, chairman Nicola Cortese has continued the good work on his own since Liebherr’s death in 2010) is because the club invested in its infrastructure in its better days, with a stadium, training ground and other land investments that meant the club was an attractive proposition for a new buyer.

    Portsmouth appear to have only been able to attract, shall we say, “unsuitable” owners, predominantly because the executives in charge of the club embraced anyone who would put them in the spotlight, but also because without that massive infrastructure investment, the club – as it was trying to be – would never be sustainable.

    The fans ownership model isn’t a guaranteed fix (although it’s a damn sight better than the iffy characters that have gone before), but I guess in this situation beggars can’t be choosers, and good luck to those in charge – they’re certainly going to need it – albeit AFTER Saturday afternoon, naturally…

  3. Paul said

    John, I have read your blog a number of times and I have greatly enjoyed it. A couple of times I have dared to mention that football is a business on various sites and seen the usual ‘it’s not like that’ response. Well it is!

    A couple of years ago my wife and I had the opportunity to buy a business or setup a new business. They are both fraught with danger and the unknowing but we opted for the latter. The main reason is that the owner of the existing business seemed to want a figure of money that bore no relation to the assets both tangible and non-tangible that he was offering! Coupled with the crippling debt he had accumulated it was very obvious he was trying to pull a fast one, transfer the shares and thus the huge amount owed to all and sundry!

    I am a Southampton fan and was never really concerned when we were in administration. On the face of it we appeared to have a club with a brand new stadium, excellent track record of developing young talent and a training facility in a prime New Forest location that was ripe for redevelopment. From an income perspective there was evidence in the past of a regular 32K fans in the Premiership and players had already been trimmed down or were on big cuts when we were relegated. The problem was our debts on the stadium to the mortgage company were simply not sustainable on a long term basis. We had saddled ourselves with too much debt to operate at a profit on an ongoing basis.

    We were lucky in the fact that the mortgage company, in the middle of a global financial crisis decided to accept turning a potential £33m long term liability into a £11m cash boost to their ailing balance sheet. The other debts were quite small and therefore quickly settled and immediately the slate was wiped clean to start again, albeit in the 3rd tier.

    To an investor this was a good opportunity; there were obvious assets and proven potential.

    If we turn to Portsmouth I am concerned that if I was an investor, looking for an opportunity to invest in a football club I would carry out a similar valuation of assets and potential. I find a menagerie of various people and companies having asset stripped or secured their loans on what assets the club had in terms of valuable assets. Old players with little or no sale value, but on absurdly high wages, on long-term contracts, a dwindling fan base (which is understandable) and a rented training facility in Eastleigh.

    Even if an investor was attracted they would want to perform a similar clean settlement of creditors to that described above and immediately put their own plans in place. How can they do this when people are claiming the club owe them (after they decided to play football manager with it just to win a cup) £17m and they have secured this on all the assets etc. and that’s just the position of one of the previous owners! What exactly are the assets and investment potential that Portsmouth as a company is offering?

    I assume an investor would need to assess the assets, nobody can seem to work out what they are left with that is owned by the company, unsecured, or what their current market value is (as I think that if you secure a £17m debt on a £4m ground, the creditor gets £4m). What is the potential income, well neither Southampton nor Portsmouth is Man U but 17,000 to 22,000 fans is simply not Premiership in number. There would have to be huge investment of both the ground and training facilities and there is no guarantee the fans will arrive. Due to the lack of potential and current facilities players will not come for less than a hugely inflated wage packet (as proven) so again this is cost and a huge potential risk.

    In this present day and age of lack of problems in the football industry, that your blog post articulates, why would anyone take such a risk unless of course they are Russian multi-billionnaire, but then they would simply buy a proven club at the highest level or with obvious potential, like Man City, or next year West Ham.

    I have based much of the above through chats, blogs and rumours and hope I am wrong and that it’s not as messy as it seems.

    I really hope that the supporter’s trust thing comes off as it would be terrible for your club to disappear but as a company it’s in a shocking mess. The problem I see with the supporters trust is simply that you may just about scrape enough to afford to send the blood suckers packing with 10p in their £17m pounds but what about the huge investment needed to turn a struggling club with aging assets into a club on the up? There is a risk that people will lose their money if that happens and I think it would be fair to point that out to investors who may be committing their life savings to saving their club.

    You have pointed to the huge investment by the owners of Middlesbrough and Southampton in your post which is surely way and above what was required to buy the club out of administration but the trust makes no mention of this. That surely is wrong; dragging a starving man from drowning in a lake will not save him for very long without the food to make him stronger and eventually feed himself?

    There is a very real chance I have all of the above completely wrong, I am no expert in these matters, but am interested in the workings of such investment transactions so please put me right so I might learn from someone far more qualified. These might also be nagging fears of potential trust investors; they would be my mine, so your response may also help the cause.

    Good luck on Saturday and anything can happen in a derby…..

  4. […] …whiff of money: For something different, Dr. John Beech comments on the financial status of selected English clubs. […]

  5. kski said

    John – Steve G and Paul have answered thoroughly. The comparison between SFC and PCFC is akin to apple and pears. If Mastercard choose to loan you unsecured funds regardless of your assets then that is their risk, and they are charging you handsomely to mitigate the risk. The Liebherrs have invested in a club with a new 32k stadium, land and an enviable training ground at in the Forest,(where £12m or so is being spent). The club has a record of producing young talent. Even after the the sale of Oxlade C for £12m, one could argue that the squad is now worth £30m. After all i f Andy Carroll is worth £35m how much are Lambert & Llalana worth? All of a sudden the investment of £22m plus working capital looks reasonable.
    More importantly, the Germans/ Swiss came with a five year plan, they had a clear idea of objectives and were prepared to back their scheme. As a SFC fan I am deeply concerned about the high wages. I hope we stick with our squad and live in the land of the fiscal reality.
    The comparison with PFC (who have now suffered two insolvency events in two years), and currently have no assets that are not leveraged is not tangible. Even in our our worst period before admin – Lowe ran a reasonably tight ship, it was a reduction in the overdraft facility at Barclays that cashflow to dry up.

    Your reports have always struck me as fair but to plead financial doping prior to this Saturday begs the question ” did you feel equally uneasy when we played you in 2010, and you beat us 4 -1″, one could argue as we were taking our medicine, PCFC were being financially doped to the tune of £25m by HMRC in unpaid bills, who with the other £57.5m of unsecured creditors, who have not yet received a penny of the agreed CVA1. It is true SFC benefited by admin and stadium debt was written down by c£13m, all other creditors were paid. Compare this against the £110m from CVA1, and the £32m being discussed from CVA2 excluding Chanrai, at Portsmouth and it is clear that PCFC have received 10x as much medication.

    if you are looking for fiscal prudency and efficiency, perhaps the German/Swiss territories and better than the Emirates and HK?

    Hope you have a good Saturday – I have a feeling it wil be nervy match!

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