Although some sections of the Aston Villa support have become less enamoured with manager Martin O’Neill recently, there have been very few protests against Randy Lerner, even though American owners are hardly flavour of the month with football fans (especially those in the north west of England). This approval is hardly surprising when you consider Aston Villa’s progress since Lerner replaced “Deadly” Doug Ellis four years ago. From finishing barely above the relegation places in 2006, the club has reached the comparatively giddy heights of 6th place in each of the last two seasons. As O’Neill rather acidly pointed out to the press last week, this season Villa (unluckily) lost the Carling Cup Final and have reached the FA Cup Semi Final, while they still have a chance of qualifying for the Champions League.
However, you only have to look at Manchester United to realise that success on the pitch is no guarantee of an owner’s popularity. The Glazers are universally reviled, despite their team winning all the silverware available during their tenure. The difference with Lerner is that not only has he put his hand in his own pocket, unlike his parsimonious predecessor and his fellow transatlantic owners, but he has also demonstrated great respect for Villa’s traditions. On the financial side, he has invested in new training facilities, kept the price of season tickets low and foregone considerable sponsorship money by opting to advertise the name of a local children’s hospice on the team’s shirts. He has also renovated the historic Holte Hotel near the ground, commissioned a statue of Villa’s pioneering chairman William McGregor and even paid for the 1982 European Cup winning team to parade at Villa Park.
"You don't have to be mad to work here, but it helps"
Former Villa manager, Graham Taylor, has praised the owner, “Lerner, of all the foreign buyers, seems to understand not to interfere; he lets his manager manage”. Lerner probably did not need to get a tattoo of the Aston Villa crest on his ankle to win over the Villa faithful, but it can’t have hurt (well, it probably did, but you know what I mean). A couple of years ago, Dave Woodhall, editor of fanzine “Heroes and Villains” and a Supporters’ Trust board member, gushed, “The fans worship the ground Randy walks on. He can’t do anything wrong. He’s got the common touch and it seems like he genuinely cares”. Heady stuff.
So where does this man of the people come from? You won’t hear much from the owner himself, as he’s been very low-key since assuming control, refusing to do any TV or radio interviews. Good for him, but you do wonder whether it’s because he is afraid of damaging his reputation as a successful businessman, given that his wealth is, not to put too fine a point on it, inherited from his father, Alfred (You Can Call Me) “Al” Lerner, the late chairman of MBNA, formerly the world’s largest independent credit card issuer. Randy was also passed control of the NFL franchise for the Cleveland Browns when his father died in 2002, but the team has consistently been one of the worst in the league, only managing to qualify once for the play-offs under his ownership.
"Silent, but deadly"
OK, let’s give the poor guy a chance to step out of his old man’s shadow: how has he done at Aston Villa? We’ve seen that he’s improved the team’s performance, but how has the club fared off the pitch? Not very well, to be completely candid. The latest accounts (up to 31 May 2009) revealed a record loss of £46.2m, despite increasing turnover by 11% to £84.2m. Maybe this was a blip? Nope, the club also made a loss last year, albeit of “only” £7.3m. Or, put another way, the club’s loss increased by an incredible £38.9m in just twelve months. Frankly, the profit and loss account looks awful. In fact, the loss would have been even higher without the £2.9m “profit on disposal of players’ registrations”, i.e. player sales. This was one of the reasons why the loss was lower in the previous year, as the profit from player sales was higher at £11.8m.
At this point, I should clarify that we are quoting the figures from a company called Reform Acquisitions Limited, which is the parent company for Aston Villa’s five (yes, five!) companies, including Aston Villa FC Limited, whose principal activity is described as “professional football club”, and, confusingly, Aston Villa Football Club Limited, whose principal activity is “commercial and retail operations”. The ultimate holding company is Reform Acquisitions LLC, which is registered in the Good Old US of A, with the controlling party being Mr. R Lerner. God knows why football clubs indulge themselves with such an intricate inter-company structure. It’s not as if football is a particularly complex business. It’s almost as if they want to make it difficult for the average punter to understand what is going on.
"I've just seen the accounts"
However, you don’t have to look too far to identify the main reason for the dramatically higher loss, as the operating expenses jumped by nearly 50% (£34.3m) from £70.8m to £105.1m. The primary driver for this growth was staff costs, which grew by a massive £20.2m from £50.4m to £70.6m in a single year. This was after the 2008 accounts reported that the wage bill had more than doubled to £50m. The accounts say that this “reflects the costs of improved salary packages required to attract top professionals to the football club”. To be fair, it’s worked, as the club has attracted a lot more people with headcount for “players, football management and coaches” significantly growing from 86 to 134, though there is no explanation as to why the club felt it needed to increase its staff by over 50%.
An investigation in The Times last week entitled “Money Game” examined the Premier League clubs’ wages to turnover ratio, revealing Aston Villa to be above UEFA’s recommended upper limit of 70% at 76.8%, but the real figure is actually even worse at 83.7%, as the newspaper used figures from the Aston Villa FC Limited accounts instead of the Reform Acquisitions Limited accounts. This is by no means the worst in the Premiership, but it’s far from ideal, especially as a more comfortable target for a company would be 50%, as opposed to 70%. For example, the ratios for Manchester United and Arsenal (excluding property development) are 44% and 46% respectively.
"Carling Cup - close, but no cigar"
Another reason for the enormous rise in operating expenses can be found in Note 29 on page 31 (the very last page) of the accounts, namely “management charges” of £7.7m that “were incurred from Reform Acquisitions LLC”, i.e. Randy Lerner. This is a strange one, as the accounts do not specify what these charges cover. All we know is that there was no such fee booked in 2008. As at the date when this year’s accounts were published, the amount was described as remaining “outstanding”, so it looks like it has not been paid. Given that the accounts state, “None of the directors received remuneration in relation to their services to the company and the Group”, it looks likely that this is some form of alternative compensation to Lerner, but if it is for just one year, it does seem rather steep.
Of course, the fundamental cause of Villa’s increase in costs is the significant spend in the transfer market. During Lerner’s reign, the club has invested an estimated £125m on new players, though has recouped some £40m from sales, resulting in a net spend of around £85m, which is near enough the figure Martin O’Neill defended last week, “I must stand up for myself somewhere along the way. By the time August comes around, I’ll have been here four years. I’ve invested £80m. That equates to £20m (a year) at the end of it all”. He might not feel that’s much, but it is a lot compared to Villa’s turnover. In a way, the expenditure is understandable following the Ellis era of low investment; especially as it’s clearly an attempt to improve an average squad in order to eventually qualify for the extremely lucrative Champions League.
"Rhapsody in (claret and) blue"
On the other hand, the spending spree of the last two years in particular is clearly not sustainable. The 2009 accounts mention £42.7m “invested in the acquisition of new players”, but it did not stop there, as “the manager continued the development of the team after the year end through the 2009 summer transfer window by acquiring the registration of seven new players and releasing several players to other clubs”. This resulted in an additional net spend of £29.4m. So, despite selling Gareth Barry to Manchester City, Zat Knight to Bolton and Craig Gardner to Birmingham for a combined total of around £20m, the net spend was almost £30m, implying that the cost of buying the new players was around £50m. Gulp, that’s a lot of money for the likes of Stewart Downing, Richard Dunne, James Collins, Stephen Warnock, Fabian Delph and Habib Beye (“Sunday, Monday, …”).
Whatever the merits of these players, it is certain that next year’s wage bill will be even higher than the £70m reported in the latest accounts, as that did not include any of the players who signed last summer. In fact, it would have been higher anyway, because of the full year effect of players bought in between June 2008 and May 2009, but heaven knows what it will be after this “supermarket sweep”. This is probably why the accounts specifically mention this policy as a financial risk: “The acquisition of players and their related payroll are deemed a core activity risk and, while assisting the manager in improving the playing squad, the directors are mindful of the pitfalls that are inherent in this area of the business”. One piece of good news on these transfers is a low contingent liability of £2.0m, which is for “the payment of additional amounts upon the fulfillment of specific conditions in the future”, e.g. number of appearances, international caps, etc. On the other hand, this could indicate poor negotiation skills, as it implies that the upfront payments are higher than they might be.
"A winning smile?"
Apart from an increase in salary costs, buying new players also impacts the profits via higher amortisation. This is a result of the accounting treatment for players, whereby the transfer fee payable and any associated costs are capitalised and amortised (written-off) over the term of the player’s contract. For example, Stewart Downing was bought for £12m on a four-year contract, so his amortisation cost is £3m a year. Indeed, amortisation costs rose from £17.8m to £22.9m in 2009. On the flip side, the players are treated as assets in the accounts, so have strengthened the balance sheet with intangible assets increasing from £38.7m to £57.3m.
Never mind the losses, here’s the owner. The argument goes that it does not matter if the club makes losses, so long as it is supported by Randy Lerner. This point was developed by Lerner’s right-hand man, the wonderfully named General Krulak (who sounds like he should be a character in the Teenage Mutant Ninja Turtles, but is actually a respected former Marine), when he commented on the latest accounts, “Everyone needs to relax a bit. Football is a business and like any business that you want to get moving, you need to make investments. That is what we have done. We expected to be in the red at this time and are not surprised at all. We knew about the wage bill costs, we knew what we were doing when we had Acorns as our sponsor, we knew what we were doing when we brought in a large number of players, etc, etc. No one should worry or be concerned. We are going to be fine”. Okey-dokey, after that, at least nobody should feel like chanting, “You don’t know what you’re doing”.
It’s certainly true that Lerner has put his money where his mouth is. By my reckoning, he has invested almost £270m in Aston Villa to date, comprising £62.6m for the initial takeover, followed by £108m in equity and £97m in loans. The 2009 accounts list the equity (fully paid share capital) as £95.5m and debt (loan notes) as £84.5m, but Note 29 listing events after the balance sheet date also mentions increases in the nominal capital and loan notes of £10m on 28 August (£5m each) and £15m on 14 October (£7.5m each). However, unlike many other owners, the financing has not gone towards improving the ground, either through expansion or building a new stadium, but rather on providing the manager with funds to sign a new squad of players on substantially higher wages.
Of course, everyone in the world of football seems to be concerned with debt these days, so most attention is inevitably focused on this part of the balance sheet. Aston Villa’s reported net debt has increased by 18% from £72.3m to £85.2m, though this would be nearly £100m if the post balance sheet loan notes of £12.5m were included. The net debt as at 31 May 2009 comprises £84.5m loan notes and £9.2m of bank loans and overdrafts less £8.5m cash. Although the debt is getting larger, it still looks reasonable compared to Manchester United, as it’s much lower (£100m vs £716m) and, in stark contrast to the Glazers, is financed from Lerner’s own company, rather than banks. However, it is high compared to most other clubs in the Premier League. According to The Times review, only four clubs have more debt than Villa: obviously Manchester United, Liverpool and Arsenal, but also (worrying drum roll) Portsmouth.
"Stars in their eyes"
The interest charged on the debt is at a standard rate of LIBOR plus 2%, which is currently very low at below 3%, but it should be noted that if LIBOR rose to 5%, then the club would have to pay 7%. The accounts report £5.7m interest payable, including £4.5m on the loan notes (which goes to Lerner) and £0.8m on bank loans. This may not seem much, but it does represent about 5% of revenue. If that is added to Reform Acquisition Limited’s £7.7m management fees, then you could argue that Lerner took out nearly 15% of revenue, which would be excessive if repeated every year. So Lerner’s approach is rather more hard-nosed than has been reported in the media. This is not necessarily a bad thing, even though some clubs are lucky enough to have owners who do not charge interest on their loans (Stoke City and Fulham, to name but two). All I am saying here is that Lerner is not quite the saint that some Villa fans would seem to believe.
Anyone with a basic understanding of accounting will know that accounts can be presented in a number of ways, but you can’t really argue with the cash flow. If a club gets this wrong, it ends up not paying players or even worse those unfriendly folk at Her Majesty’s Revenue and Customs, which potentially will give you your day in court. In short, cash is extremely important, right? This is where Aston Villa’s accounts give most cause for concern. Even though cash has increased in the last two years, this is only after taking Lerner’s financing into consideration. In 2009, if you exclude the £70m financing (£35m loan notes plus £35m shares issued), there was a cash outflow of £47.9m. This negative cash flow would be even worse if creditors had not increased by £19.1m, which could be for a number of reasons, including paying suppliers more slowly.
Does this really matter? Well, yes it does, according to UEFA, or more specifically their Financial Fair Play initiative, which will come into force for all clubs involved in European competitions from 2012-13, ensuring that all clubs break-even and be self-supporting. UEFA explained this thus, “It is to stop clubs making losses consistently, and having a backer to pay them off. That way of funding clubs, from outside owners, inflates players' wages, and too often an owner finds he cannot fund the losses any more and the club is in crisis. Only the English Premier League clubs, and clubs in Italy, have this sugar daddy model, and it is not sustainable for football”. It would be horribly ironic if Villa were finally to qualify for the Champions League and then not be allowed to compete, as they did not satisfy the financial regulations.
Given that they have just reported a massive loss of £46m, how on earth could they reach break-even? At the risk of sounding like Sybil Fawlty (“specialist subject – the bleeding obvious”), they would have to either increase revenue or cut costs. On the revenue side, it’s not all gloom and doom, as the club appears to have much leeway to raise more cash. At £84m, Aston Villa’s revenue is a long way behind other major teams according to the Deloittes Money League 2010 (Manchester United £279m, Arsenal £224m, Chelsea £206m and Liverpool £185m). OK, you would expect the Big Four with the benefit of Champions League TV money to earn a lot more, but even Tottenham have revenue of £113m – nearly £30m more than Villa.
"Experienced centre-half or an intangible asset?"
The club’s ticket prices are notoriously low, so it might be possible to charge an additional £100 or so a season, which would not be enormously popular, but could bring in an additional £5m – though I accept that average attendances and season ticket sales have fallen at Aston Villa. The shirt sponsorship that is currently donated could be charged on a commercial basis, which could be worth up to £15m a season (based on Liverpool’s reputed £20m deal with Standard Chartered Bank). Of course, most football revenue comes from television these days and Villa are no exception with almost 60% (£49m) of their turnover sourced from broadcasting. We already know that each Premier League club will benefit by an additional £7.5m per annum from the recent overseas rights deal, but the really big windfall would only arise from Champions League qualification, which is worth at least £25m a season. Of course, Villa could always sell more players …
The other alternative is to clamp down on the spending and there is some evidence that that is just what is happening. After many years of being backed to the hilt in his frequent forays into the transfer market, Martin O’Neill had to admit in the January transfer window, “We are not looking at players at this minute, because we have to sell. Do I have to sell to buy? We wouldn’t be the only club in that position”. This must be causing a degree of friction between manager and owner, even though General Krulak rushed to smooth down any ruffled feathers, “Both Randy and Martin are on the same sheet of music and both know where the club needs to go”.
"What more can I do?"
The elephant in the room is what would happen to the club if Randy Lerner decided to take his ball away? Martin O’Neill, for one, does not believe that Lerner would leave, “Aston Villa is not a plaything for Randy Lerner. He's really genuine about this club. As far as I can see, he has absolutely no intention of selling the club to make a profit”. Of course, Harry Redknapp said similar complimentary things about Sacha Gaydamak at Portsmouth and look what happened to them once the moneymen withdrew. Lerner does appear to be the real deal with his wealth estimated at $1.5 bln, but it’s not beyond the realms of possibility, especially if he chooses to spend more time with the under-performing Cleveland Browns. What would then happen to the interest payments and debt?
Lerner’s apparent strategy of splashing out a lot of money on new players in order to reach the promised land of the Champions League is a bit of a gamble, to say the least, but the problem is that if he does not invest in improving the squad, Aston Villa are almost certain not to qualify. Damned if you do, damned if you don’t. That’s why Randy Lerner could be considered both a hero and a villain.