Tuesday, May 5, 2015

Southampton - The Saints Are Coming

As a rule football clubs that go through a lot of change do not perform very well, but in recent times Southampton have proved to be an exception with significant upheaval at all levels seemingly not impacting their progress. Not only have the Saints had three managers in the last two years, but they have also experienced significant player turnover.

Nigel Adkins, the manager who led them to two successive promotions, was unceremoniously sacked after a poor start in the Premier League, paving the way for Mauricio Pochettino’s arrival, before the Argentinian in turn departed for Tottenham last summer, leading to the appointment of the former Dutch international Ronald Koeman in June.

During the summer they made a number of big money sales, including Luke Shaw, Adam Lallana, Dejan Lovren, Calum Chambers and Rickie Lambert, but successfully replaced them through the purchases of Dusan Tadic, Graziano Pelle, Fraser Forster, Shane Long, Sadio Mane and Florin Gardos plus some astute use of the loan market to bring in Toby Alderweireld, Filip Duricic, Eljero Elia and Ryan Bertrand (subsequently acquired permanently).

Such a large number of ins and outs is normally a recipe for disaster, but Southampton have taken this in their stride. They have also survived the loss of their ambitious executive chairman Nicola Cortese, who left the club in January 2014 after a disagreement over strategic direction with owner Katharina Liebherr, who took control following the death of her father Markus. In fact, they have managed to outperform their resources, finishing 8th in the Premier League in 2013/14, despite only having the 15th highest wage bill.

In the process they recorded their first annual profit since 2005 with a £28.7 million profit before tax representing a £35.8 million improvement on the previous season’s £7.1 million loss. Profit after tax was even better at £33.4 million thanks to a £4.8 million tax credit.

There were two main reasons for the better figures: (a) profit from player sales shot up £31 million from just £1 million the previous season to £32 million; (b) revenue grew £34 million (48%) from £72 million to a record £106 million, very largely due to the first year of the new Premier League television deal three-year cycle. There was also a £2 million compensation payment for Pochettino’s move to Tottenham included in Other Operating Income.

This was partly offset by the wage bill rising £16 million (34%) from £47 million to £63 million, while player trading costs also increased by £12 million (player amortisation £8 million, impairment of player values £4 million). Net interest payable was also up £2 million following a rise in external debt.

This sizeable profit represents a major turnaround for Southampton after eight consecutive years of losses, especially given the club’s severe financial difficulties following relegation first to the Championship in 2005, then to League One in 2009. Chief executive Gareth Rogers explained the approach: “We very much want to run this as a sustainable football club. It was a key aim when Markus Liebherr bought the company out of administration in 2009. The word sustainability pervades this place.”

The impact of exceptional payments on the 2012 figures should be noted with £9.5 million being paid following promotion back to the Premier League, mainly £5.3 million in bonuses and £4 million to a former loan creditor.

That was then, this is now, and Southampton were actually the second most profitable club in the Premier League in 2013/14, only beaten by Tottenham’s £65 million, which was largely due to the mega sale of former Saints’ academy star Gareth Bale to Real Madrid. The combination of the new TV deal and the Premier League’s salary restrictions have resulted in a major leap in profitability with 15 of the 20 clubs reporting profits, but Southampton have done better than most with £33 million, ahead of the likes of Everton £28 million, Manchester United £23 million, Newcastle United £19 million and Chelsea £18 million.

The importance of player sales can be seen by the five clubs who made most money from this activity also filling five of the top six places in the profit league: Tottenham £104 million, Chelsea £65 million, Southampton £32 million, Everton £28 million and Newcastle United £14 million.

Southampton’s figures for 2014/15 will be similarly boosted by player sales, as Lovren, Chambers and Lallana were all sold after the 30 June 2014 accounting close (though the net receipts for Lovren and Lallana will be reduced by sell-on fees to Lyon and Bournemouth respectively).

Player trading is clearly integral to Southampton’s achievements, but that is by no means the whole story, as it is really more about player development. As chairman Ralph Krueger explained, “We are Southampton, we don’t just buy success, we breed it.” Much of the club’s progress is down to Les Reed, the former FA technical director, who is responsible for all football operations, including the youth academy, scouting, recruitment, sports medicine and science, who echoed the chairman’s views: “Instead of buying one player, we produce five players.”

Although this approach could originally have been considered a financial necessity after the club went into administration, it has now become a deliberate strategy, supported by significant investment into a state-of-the-art training ground and cutting edge technology, including the famous “black box” where the club can use software it developed itself to assess players’ performances.

"All the Young Punks"

As at the date of the most recent accounts Southampton had spent £25 million on the Staplewood training ground with the total expenditure expected to be around £38 million. The chief executive emphasised the importance of this significant investment: “This demonstrates the club’s commitment to continue to develop the site into one of the leading training facilities in the Premier League in order to encourage the sustainable success of our academy.”

This will both enable the club to replace any sold first-team players from within, but also to sell its graduates for a healthy profit. A recent study by the CIES Football Observatory showed that Southampton had the most profitable academy in Europe, based on the sale of academy graduates like Lallana and Shaw since 2012.

Incredibly, this put the Saints above the likes of Real Madrid, Barcelona, Bayern Munich and Manchester United. As CIESC noted, “Southampton is an outstanding example of how youth training can constitute a key competitive advantage both sportingly and economically even in the richest league of the world.”

In this way Southampton have made around £45 million from player sales in the last three years. Indeed, without the £32 million profit from player sales in 2013/14, Southampton would have reported a loss of £3 million.

Given Southampton’s focus on player trading, it is worth exploring how clubs account for transfers, as it has a major impact on reported profits. 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 Southampton spent £16 million on a new player with a 4-year contract, the annual expense is only £4 million (£16 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 £19 million, the cash profit would be £3 million (£19 million less £16 million), but the accounting profit would be £15 million, as the club would have already booked £12 million of amortisation (3 years at £4 million).

Up to now, this has surely only interested accountants, but it’s become very relevant for Financial Fair Play (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. Like other clubs, Southampton are clearly keenly aware of this accounting treatment – though they also fully appreciate the impact on genuine cash flow.

Even though the annual cost of purchasing players is somewhat reduced in the profit and loss account, it is worth noting the impact of Southampton’s increasing gross spend in the transfer market via the increasing player amortisation, which has gone up from £3 million in 2012 to £27 million in 2014 (including £6 million of player impairment).

Obviously this is nowhere near as much as big spenders like Chelsea (£91 million) and Manchester City (£76 million), but it is still the 9th highest in the Premier League and will need to be kept under observation in future years.

Even though player trading (and particularly profits from player sales) have such an important impact on Southampton’s bottom line, we should acknowledge that the club has become profitable from its core business. This can be seen by looking at the EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which can be considered a proxy for the club’s profits excluding player trading. After many years of negative EBITDA, this has turned positive in the last two years, rising from £9 million to £28 million in 2013/14.

That is not bad at all, but it does show that Southampton are “only” the 10th most profitable club in the Premier League if player trading is excluded. To place this into context, Southampton’s EBITDA of £28 million is still a fair way behind the top five clubs: Manchester United £130 million, Manchester City £75 million, Arsenal £62 million, Liverpool £53 million and Chelsea £51 million. This is despite the far higher wage bills at those clubs, so it does go a long way to explain Southampton’s greater reliance on a player sales business model.

In fairness, Southampton have managed to grow their revenue by over 600% in just four years from £15 million to £106 million in 2014. They have observed that this is “a result of strong management action to improve the revenue activities of the club across all areas”, but it is essentially the result of two promotions in that period. In particular, £79 million of the £91 million growth since 2010 is due to significantly better TV deals in the Premier League. That said, match day is up £7 million (70%), while commercial income has increased £6 million (143%), so the club does sort of have a point.

Southampton’s 2014 revenue of £106 million is the 11th highest in the Premier League, up three places from the previous season. They have overtaken Sunderland £104 million and are within striking distance of Everton £121 million, Aston Villa £117 million and West Ham £115 million. Although all clubs significantly increased their revenue in the 2013/14 season, it is worth noting that only Stoke City grew more in percentage terms than Southampton (48%).

Of course, it is still miles below the English elite, e.g. Manchester United’s £433 million is almost exactly four times as much as Southampton’s £106 million, while four other clubs earn more than £250 million: Manchester City £347 million, Chelsea £320 million, Arsenal £299 million and Liverpool £256 million.

Such an enormous revenue disparity underlines the magnitude of Southampton’s challenge in trying to reach the top table. As Koeman put it, “You never know, but it’s not realistic at the moment to finish in the top four. The Europa League for us is like the Champions League for Manchester United and Arsenal.”

However, Southampton’s revenue is now the 25th highest in the world according to the Deloitte Money League, around the same level as famous old clubs such as AS Roma £107 million and Benfica £105 million.

This is on the back of broadcasting revenue of £79 million, which now accounts for 75% of Southampton’s total revenue (up from 66% the previous season). Match day revenue contributes 16% with commercial income only 9%, so only a quarter of their revenue comes from sources outside television (excluding player sales).

As you might imagine, Southampton’s reliance on TV money is one of the highest in the Premier League, but six clubs do have a greater dependency with Crystal Palace the “leader” at 82%.

Southampton’s share of the Premier League TV money increased by 76% (£33 million) from £44 million to £77 million in 2013/14 thanks to the new deal. Given the importance of this money to the Saints, it is worth analysing how this is distributed.

The money is split into three elements: the UK TV deal, overseas TV deals and central commercial income. Much of this is split evenly between the 20 Premier League clubs, namely 50% of the UK deal and 100% of both the overseas deals and the central commercial income. The remaining 50% of the UK deals is divided into merit payments (25%), which is distributed depending one where you finish in the league, and facility fees (25%), which depend on how many times a club is broadcast live.

In this way, Southampton were helped by leaping six places in the league table from 14th to 8th. Each place in the league table is worth around £1.2 million, so it is still worth battling for position as the season draws to a close. However, they were held back a little by only being broadcast live 10 times, which is the contractual minimum, so they should receive more this season for this element.

Of course, there will be even more money available when the next three-year cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimate is that a club that finishes 9th in the distribution table (as Southampton did in 2013/14) would receive around £117 million a season, which would represent an additional £40 million.

Southampton could also earn more TV money if they qualify for the Europa League, though this is small beer compared to the Champions League, with England’s representatives earning between €3.8 and €5.9 million from Europe’s secondary competition in 2013/14. Following the new 2015/16 deal, the money will be higher, but qualification would still be somewhat of a double-edged sword, given that it is a major test of a squad’s strength and can have an adverse effect on Premier League performances (as shown by Everton and Newcastle in recent seasons).

Match day revenue rose slightly by £0.3 million (2%) from £16.8 million to £17.1 million, as a 5% rise in ticket prices more than offset a reduction in the average league attendance from 30,807 to 30,212. Despite this increase, Southampton’s revenue is still miles below Manchester United and Arsenal, who both generate more than £100 million from this activity, though it is above Aston Villa £12.8 million and just below Everton £19.3 million and West Ham £19.5 million.

Southampton’s match day revenue is outperforming their attendance, which is only 12th highest in the Premier League, because their ticket prices are on the high side (and were increased by a further 4% in the 2014/15 season).

However, Southampton’s renaissance can be seen through their improving attendances over the last few years with their 30,500 average since their return to the Premier League being 70% higher than the 17,800 low point in 2008/09.

Commercial income grew £1.5 million (18%) from £8.0 million to £9.5 million, due to “incremental increases on pre-existing sponsorship deals”, but this is still one of the lowest in the Premier League. Clearly, clubs like Manchester United £189 million and Manchester City £166 million are out of sight, but it is a little surprising that Southampton are below Stoke City, Fulham and WBA.

Chief executive Rogers has acknowledged the need to significantly improve the club’s commercial operations: “You look at what you can achieve and you look at our peers both in the Championship and in the Premier League, they are significantly ahead of us. Some of those clubs I believe that we should at least be on a par with, and, therefore, we need to work hard to match and to come up with those deals. Whilst commercially we absolutely want to grow, it’s not something that happens overnight. If you’re trying to sign long-term, significant contracts, they take a long time.”

That’s certainly evident when you look at Southampton’s main commercial deals, e.g. the shirt sponsorship with consumer electronics firm Veho is one of the lowest in the Premier League at £1 million a season (with only Crystal Palace having a smaller contract). Given the club’s booming brand, they should certainly aspire to securing a £3-5 million deal when the current agreement expires at the end of the 2015/16 season.

Southampton terminated its long-term kit contract with Adidas in December 2013 (after it released a controversial home shirt without the traditional stripes), but surprisingly there was no replacement in place, which meant that the 2014/15 kits were made in-house. Adidas will return as kit supplier for the 2015/16 campaign, but this will have an impact on this season’s financials.

The wage bill rose 34% (£16 million) from £47 million to £63 million, mainly “due to the strengthening of the first team squad”, though the number of employees did increase from 230 to 282. Despite this growth, the substantial revenue increase reduced/improved the wages to turnover ratio from 66% to 59%. It had been as high as 125% in 2012, though this did include £5 million of bonus payments for promotion to the top flight.

This was still the 9th highest wages to turnover ratio in the Premier League, but a lot better than WBA’s 75%. In fairness, 13 of the 20 clubs are in a fairly narrow range of 56-64%.

It is also striking how much Southampton have over-performed relative to their wage bill, as this was only the 15th highest in the Premier League in 2013/14. Only five clubs were below them (Stoke City, Cardiff City, Norwich City, Crystal Palace and Hull City) and two of those were relegated.

Nevertheless there is a clear bunching of clubs in the £60-70 million range, as the traditional bigger spenders like West Ham and Aston Villa have only grown a little, while the nouveaux riches like WBA, Stoke City, Swansea City and indeed Southampton have all had to significantly increase their wage bill in order to compete. The Saints are likely to further increase their wages in 2014/15.

Southampton’s net debt increased £6 million from £19 million to £25 million, as the £18 million rise in gross debt from £33 million to £51 million was partially offset by the £12 million growth in cash balances from £14 million to £26 million. This is a fairly high debt level for a club of Southampton’s size, which was admitted by Rogers: “What we can’t do is shy away from the fact that there is a significant debt sitting on the club, because of what’s been built and the past decisions the club has made.”

That gross debt includes £14.7 million owed to Liebherr (including £0.8 million of accrued interest), a £14.5 million bank loan secured on the shareholder’s personal estate plus £21 million of other loans. Some £19 million of this was owed to the Vibrac Corporation, a company based in the British Virgin Isles that has provided finance to several Premier League clubs, though this debt has since been repaid using an additional £20 million loan from Liebherr that was made since the end of the accounting period to June 2014. This means that all of the club’s financial debt is now effectively owed only to the owner.

This is a sign of Liebherr’s support, as Rogers confirmed: “There was an opportunity to clear the entire debt of the football club and take out money that had been put in, but Katharina didn’t do that. Instead she allowed us to re-invest all of the money, either in fees or contracts. And she also put another £20 million in.”

"Grazie, Graziano"

At some stage the owner will surely want some of this money repaid, but not at the expense of the club’s development, as the accounts explained: “Financial plans are in place, which target an improvement in this position over the medium to longer term in order to further support the ambitions of the club to achieve financial sustainability and be able to invest further in football activities both on and off the pitch.”

The club has also made use of transfer fee funding, i.e. stage payments, as can be seen by the increase in transfer fees payable to £26 million, though Southampton are in turn owed £35 million by other clubs. In addition, the accounts note that there is an additional net £12.6 million payable as a result of sales and purchases made since the accounting year-end.

Given Southampton’s improving profits, it may have come as a surprise to some supporters when director Hans Hofstetter said a year ago, “we have inherited a difficult situation financially”, but this is basically down to the difference between accounting profits and cash flow. This was explained by Rogers: “The club has risen quickly in a short period and committed itself to high levels of expenditure both on the development of Staplewood Training Ground… as well as significant future transfer fees.”

This can be seen by looking at the cash flow statement for the last two seasons where EBITDA of £37 million was boosted by £8 million of favourable working capital movements to give £45 million of cash flow from operating activities. That’s great, but  £40 million was then spent net on player purchases with a further £26 million invested in capital expenditure (such as the training ground) and £2 million on interest payments, leaving a deficit of £23 million before financing. This was funded by a combination of loans from the owners and Vibrac Corporation, producing a cash surplus of £24 million, which was required for the summer 2014 transfer expenditure.

Liebherr had put in £52.7 million of funding by the 2014 accounts, but a further £20 million was injected after that date, increasing her contribution to a cool £72.7 million. However, in 2013 she wrote-off the £38 million of loans made up to June 2012 by converting these into equity capital, leaving the amount owed to her at £34.7 million (£14.7 million in the 2014 accounts).

Interestingly Southampton’s cash balance of £26 million was only a little below Newcastle’s £34 million, but the two sets of supporters have greeted the news very differently, as there is an expectation from Saints fans that their board will invest the money (and invest it well), while Ashley is not trusted to do the same.

In this way, Southampton have spent a gross £138 million in the transfer market in the last three seasons with a net spend of £44 million, compared to net sales of £35 million in the previous nine seasons.

Despite this increase, Southampton are not exactly splashing the cash compared to other leading clubs. In the same period, the usual suspects all spent more than £100 million (Manchester United £222 million, Manchester City £164 million, Chelsea £132 million, Arsenal £107 million and Liverpool £100 million), while Southampton were also outspent by West Ham, Hull City, Aston Villa and QPR.

The difference with Southampton is that it feels like they have a long-term plan where any sales are made on their terms and at their price. Rogers confirmed this: “We make decisions based on what is the best thing for the club at the time. We don’t need transfer fees to fund the operating costs of the club. We don’t need to sell any players in the summer.”

That is certainly true, but the support of the owner will still be important for a while. There have been some reports that Liebherr would like to sell the club, but if she does it will be in a considerably better position than when her father rescued it from administration.

There are obviously no guarantees that the Southampton model will continue to work, as it is very difficult for clubs to continually change their key staff (whether that be executives, managers or players) and continue to flourish. However, their recovery since the dark days of administration has been truly impressive, being achieved through a combination of sound business practices and solid football knowledge.

The objective is to focus on what Southampton can influence, as Rogers explained: “What we can do is create a club that maximizes on-field performance through best business practice, innovation, sustainability and profitable commercial growth.” Importantly, the approach is still geared towards the playing side with the chief executive adding: “We believe it is possible to be a well-managed, well-structured football club that is successful both on and off the pitch.”

It’s still too early to say that they have definitively made it, but in their own under-stated way the Saints are indeed coming.

Monday, April 20, 2015

Newcastle United - In A Rut

As Newcastle United’s passionate supporters endure yet another frustrating season, it all seems a far cry from the days when they were known as “The Entertainers”. Mid-table mediocrity appears to be the pinnacle of the club’s ambition, while a cup run is to be frowned on, as it might weaken the chances of remaining in the top flight, where they can continue to benefit from the lucrative Premier League TV deal.

Most of the fans’ displeasure is aimed at owner Mike Ashley, a highly successful businessman who has turned around the club financially, but who clearly favours profit over performance. He has made a series of strange choices, such as hiring his mates Dennis Wise and Joe Kinnear, that have slowly drained the supporters’ spirits, leading to widespread protests and even an organised match boycott.

The stark contrast between the depressing displays on the pitch and what the club described as “strong results” off the pitch have not helped matters, as these only underline the lack of investment from the board. The accompanying statement from managing director Lee Charnley was hardly a battle cry: “I am pleased to report a positive set of results which confirms the healthy financial position the Club now finds itself in and is a reflection of the prudent and measured manner in which we operate.”

In any case, it was an impressive achievement for Newcastle to nearly double their profits from £9.9 million the previous season to £18.7 million in 2013/14, driven by record revenue of £130 million. The £34 million (35%) revenue increase was largely due to the additional money from the new Premier League TV deal, while there was also useful growth in commercial operations. Profits on player sales were £3 million higher at £14 million, mainly from the sale of Yohan Cabaye to Paris Saint-Germain in January 2014.

The revenue growth was partially offset by a £29 million increase in expenses, mainly due to player costs with the wage bill up £17 million to £78 million and player amortisation £7 million higher. Other expenses also rose £5 million.

Thanks to the new TV money, most Premier League clubs actually reported profits in 2013/14 with only five clubs making a loss. That said, Newcastle’s post-tax profit of £19 million was the fifth highest in England’s top tier, only surpassed by Tottenham Hotspur £65 million, Southampton £33 million, Everton £28 million and Manchester United £24 million.

This is nothing new for Newcastle, as the club’s stated objective is “to achieve a sustainable financial position, able to operate without reliance on external bank debt or additional long term financial support from our owner and meet UEFA’s Financial Fair Play requirements.”

In fact, this is the fourth consecutive year that Newcastle have made money and they have accumulated profits of £63 million since 2011. The first three years of the Ashley era saw losses between 2008 and 2010, but since then the club has been very firmly in the black.

Newcastle are one of only three Premier League clubs that have managed to report profits in each of the last four years (Arsenal and WBA being the other two). The Geordies’ aggregate profits of £63 million in that period are almost exactly the same as Arsenal, who have been the poster boy for financial success in the football world, and are only beaten by Tottenham, who have benefited from the mega sale of Gareth Bale to Real Madrid. It’s little wonder that supporters are enraged by this level of profit, especially when they compare it with the absolute poverty of the playing squad.

Newcastle’s profitability is further emphasised by their high profit margin (profit divided by revenue) of 14%, which is the fifth highest in the Premier League, only surpassed by Tottenham 36%, Southampton 32%, Everton 23% and Crystal Palace 20%.

In fact, Newcastle would actually be even higher in the profitability league if (once-off) player sales were excluded. Although Newcastle made £14 million from this activity in 2013/14, this was dwarfed by the profits on player sales made by Tottenham £104 million, Chelsea £65 million, Southampton £32 million and Everton £28 million. Without such substantial player sales, only Crystal Palace would have a higher profit margin than Newcastle.

That said, player sales have had a significant impact on Newcastle’s profits over the years, contributing £117 million since 2008 and £68 million in the last four years alone with Andy Carroll’s move to Liverpool being the standout transfer. Newcastle would have made small losses without this activity – until 2014.

Although these sales have helped Newcastle balance the books, they have clearly weakened a squad that is already small by Premier League standards. There appears to be a clear strategy of using Graham Carr’s scouting network to recruit younger players with potential and then placing them in the shop window before profitable sales to a larger club (or just one with more ambition). In fairness, this approach seemed to be working when Newcastle finished 5th in 2012, also qualifying for the Europa League, but there has been even less investment since those heady days.

This can be seen by Newcastle’s player amortisation of £20 million, which is one of the smallest in the Premier League. As a rule, this normally reflects low spending on player recruitment, though it should be acknowledged that Newcastle do tend to sign players on long-term contracts, which reduces the annual amortisation charge.

To clarify this point, transfer fees are not fully expensed in the year a player is purchased, with the cost being written-off evenly over the length of the player’s contract – even if the entire fee is paid upfront. As an example, Siem de Jong was bought for £6 million on a six-year deal, so the annual amortisation in the accounts for him is £1 million.

Even though player trading (and particularly profits from player sales) have had a sizeable impact on Newcastle’s figures, the improvement in the profitability of their core operations has also been important to their bottom line. This can be seen by looking at the club’s EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which can be considered a proxy for the club’s profits excluding player trading. This was steadily declining from 2006 and was actually negative in 2009 and 2010, but since then it has been rising and jumped from  £15 million to £27 million in 2013/14 alone.

That is not too bad, but is only the 11th highest in the Premier League and is a long way behind the top five, despite the far higher wage bills at those clubs: Manchester United £130 million, Manchester City £75 million, Arsenal £62 million, Liverpool £53 million and Chelsea £51 million. In other words, if player trading were to be excluded, Newcastle would not be one of the more profitable clubs in the Premier League, which might help to explain their somewhat prudent approach.

This is partly due to Newcastle’s seeming inability to growing revenue under Ashley. Before the big man arrived, Newcastle’s revenue was £87 million in 2007, which has since increased to £130 million in 2014. On paper a 49% (£43 million) growth is reasonably impressive, but the devil is in the detail, as this has been entirely driven by the centrally negotiated Premier League TV deals, which have helped produce a £52 million growth in this period. This can be seen by the leaps in 2008, 2011 and 2014 (2011 obviously also impacted by the promotion from the Championship).

The other revenue streams have actually fallen under Ashley’s command with match day revenue decreasing 23% (£8 million) from £34 million to £26 million and commercial income dropping 7% (£2 million) from £28 million to £26 million (though this was also impacted by the outsourcing of the club’s catering operation sin 2009). To be fair, commercial income has grown an impressive £86% in the last two years, but it still has not returned to the pre-Ashley levels.

Given Ashley’s reputation as a smooth commercial operator, this is highly embarrassing, especially as last year’s accounts included this gem: “Match day and commercial revenue is a key driver, because that’s where the club can compete with – and outperform – its competitors to enhance its spending capabilities.”

Newcastle’s revenue of £130 million is the 7th highest in England, which sounds great, but the problem is that it is a long way behind the other leading clubs: Manchester United £433 million, Manchester City £347 million, Chelsea £320 million, Arsenal £299 million, Liverpool £256 million and Tottenham £181 million. This massive financial disparity shows how difficult it is for Newcastle to challenge at the highest level, as interim manager John Carver acknowledged: “We can threaten the top teams, (but) we’re not going to win the Premier League.”

However, importantly, he added: “But if we invest right, why can’t we go after the European spots, the Champions League spots?” Some might argue that this is another example of Carver’s unfounded optimism, but he sort of has a point, given that Newcastle’s revenue is clearly the “best of the rest”, ahead of Everton £121 million, Aston Villa £117 million, West Ham £115 million and Southampton £106 million.

Newcastle actually went up six places in the Deloitte Money League to 19th, just behind Atletico Madrid (Champions League finalists, remember) £142 million, Napoli £138 million, Inter £137 million and Galatasaray £135 million, but here’s the thing: there are six English clubs ahead of them. In many ways, it would be better to have less income, but be higher placed in the domestic league, as the competition in England is much tougher from a financial perspective. From this season 14 of the Premier League clubs are in the top 30 worldwide by revenue, while all 20 clubs are in the top 40.

Broadcasting now accounts for 60% of Newcastle’s total revenue, up from 53% the previous season, with match day and commercial each worth 20%. As former manager Alan Pardew said, “The Premier League is the be all and end all, because of the TV money.”

The new three-year deal helped increase Newcastle’s share to increase by £32 million from £45 million to £77 million with further improvement coming from the merit payment, as Newcastle climbed six places in the league table. In fact, they received more money than two teams that finished above them in the league (Southampton and Stoke City), as they were shown live more often, which resulted in higher facility fees (25% of the domestic deal).

The only other variable element in the Premier League distribution is the merit payment (also 25% of the domestic deal), which depends on where you finish in the league. Interestingly, if Newcastle had managed to repeat their feat of finishing 5th in 2011/12 in the last two seasons, they would have banked around £18 million extra.
All other elements are equally distributed among the 20 Premier League clubs: the remaining 50% of the domestic deal, 100% of the overseas deals and central commercial revenue.

Of course, this is just the first year of the current Premier League TV deal and there will be even more money available when the next three-year cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimates are that a club finishing 10th will receive around £118 million a season, which would represent an additional £41 million for Newcastle (assuming they can again reach these “heady heights”).

The Premier League television growth more than offset the loss of Europa League TV money, which was worth €5.3 million in 2012/13. However, that run to the quarter-final had also demonstrated the difficulties of operating with such a tiny squad, as Pardew’s stretched resources meant his team struggled in the league, plummeting to 16th place and flirting with relegation.

The reduced number of home fixtures from no European competition was also a factor in the 7% (£1.8 million) decrease in match day revenue from £27.8 million to £25.9 million. Newcastle’s match day revenue is the seventh best in England, but it is a long way behind Manchester United £109 million, Arsenal £100 million, Chelsea £71 million, Liverpool £51 million, Manchester City £47 million and Tottenham £44 million.

This is despite Newcastle having a supporter base that is the envy of almost every other club with an average attendance of over 50,000 being the third highest in the country, the mismatch with revenue being due to lower ticket prices and corporate hospitality. While the club does deserve praise for its “commitment to keeping ticket prices affordable for our supporters”, including freezing season ticket prices for next season, it is noticeable that most of the initiatives were only introduced after attendances fell, as the board attempted to once again fill the ground.

Either way, since the promotion back to the Premier League in 2010 attendances have been steadily rising and are once again over 50,000. The loyalty of the fan base was shown by the fact that Newcastle’s crowds were the fourth highest in England even when they played in the Championship, which is an incredible statistic.

Commercial revenue shot up 50% (£8.5 million) from £17.1 million to £25.6 million as a result of “lucrative” new deals with shirt sponsor Wonga and a long-term extension with kit supplier Puma. Charnley commented: “The most pleasing aspect in this set of accounts has been the growth in our commercial revenue and it has been our strongest year in that respect.”

It is indeed a fine performance, especially as it followed 24% growth the previous season, but it is worth noting two points: (a) commercial income is still lower than the £27.6 million that Ashley inherited seven years ago; (b) it still pales into insignificance compared to the commercial income at the top six clubs: Manchester United £189 million, Manchester City £166 million, Chelsea £109 million, Liverpool £104 million, Arsenal £77 million and Tottenham £45 million.

It might be argued that such comparisons are a tad unrealistic, but it’s a similar story if you lower your sights to the mid-tier clubs. Before Ashley arrived Newcastle’s commercial income was at the same level as Tottenham, but the North London club has grown this revenue stream by 47% while Newcastle have fallen by 7%. In the same period Aston Villa have caught up, while West Ham and Sunderland are much closer.

In fairness, Newcastle’s £6 million shirt sponsorship with Wonga is only surpassed by the deals made by the top six clubs, even though the association with a provider of payday loans at extortionate rates feels horribly cheap. That said, the disparity is again enormous with Manchester United earning £47 million a year from their Chevrolet deal and even Tottenham signing a £16 million agreement with AIA.

Even though the club said that it is working hard to add new sponsors, this is clearly challenging with the ubiquitous presence of Sports Direct advertising that surely puts off other potential partners. This policy reached its zenith when the famous St James’ Park stadium was officially renamed the Sports Direct Arena, as a temporary measure to “showcase the sponsorship opportunity to interested parties”. Although Wonga paid to have the name restored as part of their commercial agreement, the damage was done in most people’s eyes.

There was a significant 27% increase of £16.6 million in the wage bill from £61.7 million to £78.3 million, lowering the wages to turnover ratio from 64% to 60%. This surprisingly large rise is down to an additional six months wages for six players purchased in the January 2013 window plus bonus payments for finishing in the top ten of the Premier League.

Only now has the wage bill gone back above the 2009 level of £71 million. There has been just £7 million of wages growth in that time, while revenue has increased £44 million, though, in fairness, the 2009 wages to turnover ratio of 83% was unsustainable in the long-term.

Furthermore, although the current wages to turnover ratio of 60% is “within the club’s desired range”, it is still one of the highest in the Premier League, which is again a reflection of Newcastle’s low revenue growth.

Most clubs increased wages in 2013/14 as a result of the additional TV money, but Newcastle’s growth was higher than most, moving them up from 11th to 7th position in the wages league, which is where they should be based on their revenue. Of course, they are still miles behind the elite clubs: Manchester United £215 million, Manchester City £205 million, Chelsea £193 million, Arsenal £166 million, Liverpool £144 million and Tottenham £100 million.

However, if we compare Newcastle’s wages with their current rivals, we can see that back in 2008 they were ahead (in some cases a long way ahead), but the gap has dramatically closed over the last few years. Even after Newcastle’s substantial 2014 increase, only West Ham had lower growth in that period with the other clubs growing at a far higher rate. The 2014/15 wage bill is also likely to fall by at least £10 million, as the performance bonus is unlikely to be paid this season, which means that many clubs will converge on the £65-70 million level.

Specifically, Tottenham increased their wage bill by £47 million in that period, compared to Newcastle’s growth of just £8 million, meaning that a £17 million difference in Newcastle’s favour in 2008 has been converted to a £22 million shortfall in 2014 (and it was as high as £34 million the previous season).

Since Ashley’s arrival Newcastle have basically been a selling club with many years of net sales. Although the club had a net spend of £25 million in the two seasons following promotion, they have essentially broken-even in the last two years. In fact, they somehow managed to go 18 months without signing a full-time professional player, which is some going (and the height of optimism) in such a competitive league.

Unsurprisingly Newcastle’s net spend in the last two years is one of the lowest in England’s top flight, only “beaten” by Tottenham, whose figures were greatly boosted by the Bale sale. To place this into context, in the same period Crystal Palace had a net spend of £52 million, Hull City £50 million, Leicester City £20 million and even Sunderland £19 million – and none of these clubs is exactly rolling in cash.

John Carver believes that the club will spend big in the summer: “They have to invest in the team and I have had assurances they’re going to.” Given Ashley’s track record, the fans would be forgiving for treating this with a degree of scepticism and it may be that any spending is only funded by selling experienced players like Tim Krul, Cheick Tiote and Moussa Sissoko.

Net debt has been cut by £38.6 million from £133.5 million to £94.9 million, as the £4.5 million overdraft has been cleared and replaced by cash balances of £34.1 million. There is no longer any external bank debt with the remaining debt of £129 million being entirely owed to Ashley: £18 million repayable on demand and £111 million repayable after more than one year.

Gross debt has therefore been cut by £21 million from the peak of £150 million, but this is still £52 million higher than the £77 million debt Ashley inherited in 2007. To be fair, the switch from external to owner debt has saved a lot of money in annual interest payments (which were as high as £8 million in 2008), but it is striking that none of the debt has been converted into equity, as is the case with many football club owners, e.g. Ellis Short has capitalised around £100 million of loans at Sunderland.

Newcastle have adopted a policy of paying transfer fees upfront, rather than spreading payments over a number of years, so they owe other clubs less than £3 million. In some ways, this is an admirably prudent approach, but it does restrict Newcastle’s ability to spend more on bringing players in. There are also £2 million of contingent liabilities, but the club says that their criteria for payment are not expected to be met.

That said, Newcastle have been pretty good at generating cash in the last few years with £33 million from operating activities in 2014 alone, which was boosted by £8 million from player sales. After spending £3 million on fixed assets, they had £39 million positive net cash flow. Not only have Newcastle not required any additional financing for the last three years, but they actually made an £11 million repayment of Ashley’s loan in 2012.

Newcastle’s £34 million cash balance is one of the highest in the Premier League, but it is only just above Crystal Palace £27 million and Southampton £26 million. The difference is that it feels as if those clubs have a clear vision, while Newcastle’s strategy is much more limited.

The club have invested £29.8 million on six new players since these accounts were finalised (though have also recouped £12.6 million from player sales), but they have not really strengthened the squad if this season’s results are any guide. It is likely that the remainder of the funds will be spent on infrastructure such as the training ground.

Mike Ashley should be given some credit for stabilising Newcastle’s financial position with the club emphasising that the owner has not “taken any monies from the club”, which is not the case for many other owners who happily pay themselves salaries and dividends, not least the previous Hall and Shepherd regime at Newcastle.

Strictly speaking, it is accurate that Ashley does not directly benefit from his acquisition of Newcastle United, but there is substantial indirect benefit for his company. For example, the accounts note that the club purchased £2.8 million of goods from Sports Direct (up from £0.8 million), but more importantly the stadium is absolutely plastered with his company’s branding.

"Goodbye Krul World?"

In the past, the club has argued that this free advertising is worth less than the savings made from removing the requirement to pay bank interest, which may well be true, but the argument feels as tacky as, well, the products in Ashley’s retail outlets. Now it’s strictly business, so much so that they might as well be playing The Manic Street Preachers’ “You Stole the Sun from My Heart” over the stadium’s PA system.

Back in the dark days of the 2008/09 season Ashley twice tried to sell the club, but he no longer seems to be so keen to make an exit. Last year he said he would not sell “at any price” until 2016 at the earliest, but it’s difficult to believe that there isn’t a price that might tempt him.

He is certainly under no immediate financial pressure to sell, as his net worth was up to £3.75 billion, according to the 2014 Sunday Times Rich List. That said, the club is now a far more attractive prospect to potential investors, as it is more financially stable and has the bonus of the amazing new Premier League TV deal on the horizon.

"When we was Fab"

The financial improvement is no small achievement and supporters only need to look at Sunderland to see how big spending does not guarantee success, but there is the nagging feeling that Newcastle should aim higher. If they had ploughed back the £60+ million of profits made over the last four years into the playing squad, then they would have had a fighting chance of competing at the top end of the table instead of languishing among the also-rans. As The Ruts so memorably sang, when “you’re in a rut, you gotta get out of it.”

The ultimate goal of a football club is not to make profits, but to challenge for trophies. The Champions League might not be a realistic objective, but a club like Newcastle should be comfortably finishing in the top eight every season. Even if you consider Newcastle to be a purely business proposition, it is not enough to make profits without investing in your assets – and that means the playing squad, which requires a significant overhaul.

The former Newcastle board got many things wrong, but it is difficult to argue with the strategy expressed in their last annual report, which was “to secure the club’s position among the top teams in England and compete in Europe on a regular basis. Success on the pitch brings financial reward in terms of enhanced gate receipts and increased broadcasting and other revenues.”

The big question is whether Mike Ashley is the man to deliver this virtuous cycle?
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