A Tale Of Bristol City

Few clubs can have endured such a tumultuous start to the season as Bristol City. Following a very promising finish to last season, when the Robins won five and drew three of their last nine matches, the summer had seen the arrival of experienced manager Steve Coppell and England’s World Cup goalkeeper, David James. Although “Jamo” is clearly now in the twilight phase of his career, this still represented a notable coup for the Championship team and was a clear sign of the club’s intent.

Indeed, City highlighted Coppell’s record of taking both Crystal Palace and Reading into the Premier League, so all seemed set fair for an exciting year. However, the best laid plans of mice and men often go awry and such was the case at Ashton Gate with Coppell resigning after just one league game, citing a lack of motivation. As the man himself said with considerable understatement, the timing of his departure was not exactly ideal. Chairman Steve Lansdown agreed, “It caused uncertainty and dismay and set us back a long way in our preparations for the current campaign.”

This shambolic state of affairs was exacerbated by an unprecedented injury crisis, which meant that the club lost the services of many key players, including record signing and last season’s leading scorer, the prolific Nicky Maynard. It was therefore hardly surprising in the circumstances that City’s start to the season was so shaky with the team only winning once in its first 12 games.

"Steve Coppell - now you see him, now you don't"

Although there then followed a minor recovery of sorts, partly due to summer signings Brett Pitman and Jon Stead finding their shooting boots, the club has again struggled since Christmas. Instead of challenging for promotion, as was the original objective, Bristol City currently find themselves languishing just outside the relegation zone, which was not part of the plan at all.

Some might argue that City are setting their sights too high, given that they last played in England’s top tier more than thirty years ago, but they were perilously close to securing promotion to the Premier League in 2008, only missing out at the last hurdle when they were narrowly defeated 1-0 by Hull City in the Wembley play-off final. This was the culmination of a thrilling two seasons under the guidance of manager Gary Johnson, who lead the club to promotion from League One before finishing fourth in the Championship.

However, that was as good as it got for Johnson, who resigned just a few months later after the club plummeted to 16th position in the league, the final straw being a demoralising defeat to local rivals Plymouth Argyle. Bristol City’s form subsequently improved and the club ended the season in the mid-table respectability of 10th place under caretaker manager Keith Millen, who now has the job full-time after Coppell’s untimely exit.

Amidst all this turmoil, it might seem unreasonable for the club to even consider mounting a promotion charge, but, on the other hand, expectations among the club’s supporters should be fairly high, given that Bristol City have actually been among the highest spenders in the Championship over the last couple of years. Granted, their net spend of £3.3 million is a drop in the ocean compared to the likes of Manchester City and Chelsea, but everything is relative and this total is only exceeded by five clubs in the Championship, with Burnley leading the way after their budget was boosted by the brief sojourn in the Premier League. At the very least, Bristol City have not been a selling club, which is a fate suffered by half the clubs in the Championship.

The club’s determined chairman, Steve Lansdown, whose stated objective is “for the club to play at the highest level”, has funded this expenditure. It was this drive that initially attracted a manager of Coppell’s pedigree, “I liked what the chairman said about the club and his ambition: the plans for a new stadium and desire to win promotion to the Premier League.”

Lansdown made his fortune as one of the founders of financial services firm Hargreaves Lansdown, so much so that he was ranked at an impressive 150th position in last year’s Sunday Times Rich List, and he has been the driving force behind the club’s transformation from League One also-rans. He has frequently dipped into his own pocket to keep the club afloat, and has also made a couple of significant share sales to help fund the club’s bold plans for a new stadium.

"Keith Millen - a safe pair of hands"

When he raised £47 million in this way in April 2009, he wryly commented, “Hopefully, this shows everyone that I mean business.” Indeed, last October, he raised a further £58 million with another share disposal, though this time he merely observed that this would “free up cash for other ventures.” Lansdown still holds a 20% stake in his company, which would be worth around £500 million at the current share price of 524p, even after these share sales, so there is some real substance behind his grand scheme.

A key element of Lansdown’s aspirations for Bristol City revolves around the plans for a new 30,000 capacity stadium at Ashton Vale, close to the location of the club’s present ground. Funding for the £92 million development will come from a variety of sources, including the sale of Ashton Gate, which is likely to be converted to a supermarket, debentures, corporate boxes and stadium naming rights, though the accounts make it clear that additional funds will be provided by Lansdown “where necessary.” Despite this, Lansdown said he would not follow the example of Dave Whelan, Wigan Athletic’s chairman, who named the ground after his own business.

It was initially hoped that the Southlands housing development would contribute £5.5 million towards the project’s costs, but that was removed as part of the planning revisions agreed with the local council.

That would not be so bad, as Lansdown can easily cover the financial shortfall, but potentially much more damaging is the recommendation by an independent inspector that the entire 42-acre site should be registered as a town green, which would effectively rule out any development.

"Ashton Vale - if we build it, they will come"

This has come as a real blow to the club’s ambitions, especially as Bristol City Council had granted planning permission on the land. In fact, the council is still strongly supportive of the new stadium (and the economic benefits it would bring to the region), and has urged both sides to reach a compromise before the dispute ends up in court. As Lansdown explained, only 19 acres of the site would be needed for the new stadium, while nearly eight acres would be wetlands and the rest would be fields.

Unsurprisingly, having invested so much of his personal fortune into the project, Lansdown is not best pleased, “I bought the land in good faith, but if it loses value because town green status is granted, then it is tantamount to theft.” While it might be mildly amusing to remind the chairman of the warning on his own company’s documentation, namely, “The value of your investments may go down as well as up”, the man does have a point.

Club executives recently visited the site of Brighton and Hove Albion’s wonderful new stadium, which is a tangible example of how spirited local support can ultimately win the day in the face of small pockets of local resistance, though it also acts as a reminder that this can be a long drawn-out process, which can damage a club both on and off the pitch. Indeed, the club’s latest accounts baldy state that “the delays to our stadium project have not helped our position.”

"Another goal for Nicky Maynard"

Initially, the club had hoped that Ashton Vale might be ready in time for the start of the 2012/13 season, but that date has slipped to 2013/14 and if the town green decision goes against the club, there would inevitably be further delays (if the club opted to appeal) until possibly 2015/16.

The plans for the new stadium remain on track, even though England missed out on the opportunity to stage the 2018 World Cup. Although Bristol’s bid to be a host was based on the design for a new stadium, including the possibility to expand the capacity to 42,000 (the minimum number of seats required to host World Cup matches), this was just one of the events for which the stadium was planned. As Colin Sexstone, Bristol City’s chief executive, explained, “You don’t build a stadium for four games.” Unless you’re Qatar, as the cynics might point out.

Speaking of which, Sexstone has actually suggested that Bristol should sue FIFA on the grounds that they were misled in terms of the criteria required to win the bid, thus investing £250,000 in improving infrastructure, when that appears to have meant nothing in the final deliberations, though he may have had his tongue firmly in his cheek.

"Steady as you go"

In any case, the club believes that the new stadium is crucial to its future status. Although Ashton Gate has been Bristol City’s home for over a century, it does place constraints on its ambitions. Lansdown has described the old ground as “tired”, adding, “It would be wrong of me to say the club couldn’t survive. Of course it would. But could it survive as a good Championship side or a Premiership side? In my opinion, it wouldn’t. We need the infrastructure, we need the corporate entertainment areas.” The problem is a straightforward one, namely that the club does not generate enough revenue to consistently compete at those levels. Lansdown estimated that the new stadium would generate a third more match day revenue.

It’s not just the football club that would benefit either, as the local council spoke of the development bringing in £150 million of investment with at least a thousand more jobs. Bristol City’s chief executive, Sexstone, went further, revealing that the economic benefits of the project had been assessed at £260 million over the next 20 years.

Of course, there’s no such thing as a free lunch and the impact of the proposed new stadium has been keenly felt in Bristol City’s financials, most obviously in the club’s net debt, which has increased from £3 million to £20 million in the last two years, almost entirely due to a £15 million stadium loan, which is secured on the company’s assets. There is also £559,000 of accrued interest (Barclays base rate plus 2%), which is only payable after the loan is repaid in full.

The rest of the debt comprises: £4.1 million debt element of convertible shares (classified as debt, due to the holders’ redemption rights); an interest-free loan of £335,000 from the Football League, which is repayable in two years; and a negligible bank overdraft of £85,000.

The key point here is that the majority of the club’s debt is owed to Lansdown, as the large overdraft and loan stock that the club carried in previous year’s has effectively been repaid, which means that the club will not come under pressure from creditors, as long as Lansdown is in charge. This is also what UEFA describes as “good” debt, as it has been accumulated in order to fund revenue-generating investment into a new stadium. The other benefit is that the club’s cash flow has benefited from the much lower interest charges.

"Steve Lansdown - the man with a plan"

That said, this strategy has weakened the balance sheet, resulting in net liabilities of £10 million, compared to £4 million of net assets five years ago. As Lansdown explained, “It looks a bit of a mess at the moment, because of the push we have made to make the football club more successful.” This is a fair point, and it should also be acknowledged that the club’s assets are under-valued in the accounts.

First, the players are shown as intangible assets at a net book value of £3 million, while Transfermarkt has estimated that the sales value in the real world would be more like £19 million. Second, the current stadium at Ashton Gate is shown in the books at £9 million, retaining a valuation made in 1995, while it is reported that Sainsbury’s have made an offer of around £20 million for the land.

Even so, the auditors have still included the dreaded “Emphasis of Matter” statement in the accounts, ominously warning, “These conditions indicate the existence of a material uncertainty which may cast significant doubt about the group’s ability to continue as a going concern.” This is clearly not great news, as it means that the club is dependent on securing additional finance, but it should not necessarily be taken as a sign of impending disaster, as the same statement has appeared in the accounts for the last five years.

The reason that the club can continue to operate in this way is because Steve Lansdown has funded the club’s shortfall each year - and has pledged to continue to do so for the foreseeable future. As he put it in 2009, “There should be no doubt that we have adopted an aggressive strategy, but the board is committed to ensuring the club is not put at risk because of this.”

Just as well, as Bristol City have consistently reported losses over the last few seasons. In fact, the figures are getting worse, as the losses in the last two years have been the highest ever recorded: the £6.6 million in 2008/09 was bad enough, but last year this rose by more than £5 million to £11.8 million. Small beer by Premier League standards, but a significant deficit for a club whose turnover is only £11.1 million.

In fairness, much of this reflects the investment in the stadium development and the training ground at Failand, so the hefty loss is “not surprising” according to Lansdown, but it is also due to the money spent on new players. Indeed, Lansdown admitted, “The stadium in the past year has cost us £2 million, but it’s in football where most of the losses occurred. We pushed the boat out on expenditure at the beginning of last season and that is why these accounts look as bad as they do.” This is absolutely correct when you look at the rise in wages and player amortisation, which is the principal factor behind the worsening profits in the last two years.

"Brett Pitman - rejected Blackpool for Bristol City"

Even if we exclude the exceptional new stadium development costs and the non-cash items like amortisation and depreciation, there would still be a large loss of £6.8 million, which underscores the weaknesses in the current business model. Some clubs compensate for such a shortfall by selling players and making large profits on sale, but this is not the case at Bristol City. In the last three years, the club has only made around £1 million profit via this route with the last time any meaningful sums were produced coming in 2007 (£1.7 million, mainly from the sale of Leroy Lita to Reading) and 2008 (£2.2 million, mostly due to David Cotterill’s sale to Wigan Athletic).

It is true that the £3.7 million fees incurred in the stadium development over the last two years, which have been correctly charged to the profit and loss account, should be capitalised once the stadium is definitively approved, which would mean a cost credit in a future year. As such, the losses in the last two seasons have effectively been over-stated because of these exceptional charges.

At this point, I should note that these figures are from the accounts for the club’s holding company, Bristol City Holdings Limited, which owns 100% of both Bristol City Football Club Limited and Ashton Gate Limited, so include both football and stadium revenue.

Of the total turnover of £11.1 million in 2009/10, around three-quarters (£8.6 million) came from football with a quarter (£2.6 million) from the stadium. If we consider the stadium revenue to be commercial, then there is a remarkably even split between the three revenue streams with match day contributing 37% (£4.1 million), television 35% (£3.8 million) and commercial 28% (£3.2 million).

The television money is mainly sourced from the Football League central distribution of £2.5 million that is made to all Championship clubs, which was significantly increased last season, plus a £1 million solidarity payment from the Premier League. Although it’s great that the “best league in the world” passes some of its money down through the English football pyramid, it is also true that this represents a tiny proportion of their wealth.

Much of the stadium revenue comes from hosting major rock shows, including the likes of Bon Jovi, The Who, Rod Stewart, Elton John and Ronan Keating in recent years. OK, it’s not my taste in music, but it sure does bring in the cash. This can be easily seen by the decline in stadium revenue in 2010 from £3.9 million to £2.6 million, which Lansdown said was because they did not have a concert in the year.

"David James - the people's champion"

Football income is obviously dependent on the club’s success, which is clearly demonstrated by the revenue more than doubling in 2007/08 from £4.3 million to £8.8 million following City’s promotion from League One to the Championship. The cup competitions are now treated with thinly veiled contempt by Premier League clubs, largely due to the feeble prize money, though these can still make a useful contribution to other clubs, e.g. if a Championship club reaches the sixth round of the FA Cup, it receives £338,000 compared to just £27,000 if it is eliminated in the third round, not to mention additional fees of £144,000 if a match is televised live.

However, this all pales into insignificance if the club can somehow achieve promotion to the promised land of the Premier League. As Lansdown explained, “I think most clubs in the Championship run with big losses. The dream we’re all after and what we’re spending the money to try and achieve is the television money and the commercial rights that go with being a Premier League club.”

And he’s not wrong if you compare the huge disparity between Bristol City’s £11 million revenue and the £54 million earned by Bolton Wanderers in the Premier League. The gate receipts at the two clubs are more or less the same (Bristol City £4 million, Bolton £5 million), but there is an enormous difference in TV revenue: Bristol City have £4 million, while Bolton receive around ten times as much at £38 million. Given the size of the prize, the “balls out” strategy employed by many clubs to secure promotion makes a little more sense, though clearly only a few can be elevated each season.

Hang on a minute, I hear you saying, that’s a lot of money, but didn’t I read somewhere that the Championship play-off was worth £90 million? Well, yes it is, but not all in one fell swoop. Following yet another increase in the Premier League television deal, the club that finishes bottom this season will earn around £40 million, but it will also be in line for £48 million in parachute payments over four years (£16 million in each of the first two years, and £8 million in each of years three and four). On top of that, you would expect gate receipts and commercial income to be higher, hence at least £90 million more revenue.

The parachute payments are designed to help soften the financial blow of relegation, on the assumption that the clubs cannot immediately reduce their operating expenses, which is very considerate of the Premier League, though some would argue that they actually distort competition in the Championship, as they give relegated teams an unfair advantage. It smacks a little of “once you’re in our club, we will do everything we can to keep you in (and the others out).”

"Jamie McAllister - flower of Scotland"

Given City’s proximity to the relegation places, it’s also worth taking a quick look at the TV money earned by League One clubs. I’ve taken Brighton and Hove Albion as an example, purely because they are the current league leaders (and it maintains the alliteration). Although not on the same scale as the gap to the Premier League, relegation would still make a nasty dent in the club’s financials with television money falling almost £2 million to £656,000.

Bristol City’s match day revenue also suffered last season, falling from £5.1 million to £4.1 million, as average attendances dropped by 13% from 16,816 to 14,600. This was partly down to lack of success on the field, aggravated by early exits in both cup competitions, and partly due to the poor economic climate. The club has launched a number of initiatives to counter this trend, including half-season tickets covering the final 12 Championship matches, where adults can watch a game for just £19, and many “pay on the day” schemes to encourage support.

Given that the average attendances are much lower than Ashton Gate’s capacity of 21,500 (though it can be reduced to 19,000, depending on how away fans are segregated), it raises the legitimate question of whether the club’s desire to move to a new stadium makes sense. There is a risk that Ashton Vale could be a white elephant, though, in fairness to Bristol City, their plans do not depend on taking on vast amounts of debt, assuming that Lansdown continues to provide the financing.

"Gary Johnson - where did the magic go?"

Clearly, Bristol City’s match day revenue is never going to reach the heights of clubs like Manchester United and Arsenal, who both earn more than £100 million a season, but increasing this income stream to the levels of the likes of Bolton, Birmingham, WBA and Blackburn is a realistic target, which presumably means that the Premier League vision is not completely ridiculous.

Furthermore, even if the club were to remain in the Championship, this does not necessarily mean low crowds. In fact, more people watched Championship matches last season (9.9 million) than attended Serie A games in Italy.

As Lansdown has indicated, there is also scope for growth in commercial revenue. The shirt sponsorship is provided by DAS, a legal expenses insurance company, who replaced the Bristol Trade Centre in 2008. Both fine businesses, no doubt, but you would expect the club to secure more lucrative deals if they reached the top tier. Similarly, the club has fairly recently signed a new kit supplier deal with Adidas, replacing Puma, but such agreements normally also include success clauses, based on promotion.

On the cost side, like all football clubs, the wage bill is by far the largest element, but it’s a real humdinger at Bristol City, having risen inexorably to £13.8 million, which is an incredible 124% of turnover. To place that into context, it’s even more (worse) than big-spending Manchester City’s ratio of 107%, though, in fairness, this ratio tends to be higher in the Championship, largely down to the far lower revenue.

The club is painfully aware of the “challenging financial position” that is caused by “higher wage bills”, but Lansdown pointed out that “the increase in wages is to a certain extent inevitable, if we are to compete in the Championship and have aspirations of getting into the Premier League.”

Despite the steep 35% rise in wages from £10.2 million in 2009 to £13.8 million, Lansdown has admitted that the club did not really get value for money last season. They took on a lot of loan players (Saborio, Sno, Agyemang, Iwelumo, Maierhofer and Velicka), who contributed little to the cause, while they also had to give former manager Gary Johnson a pay-off.

Even after all this expenditure, City’s wage bill is by no means the largest in the Championship, though it may well further increase this season, due to the change in management at the beginning of the season. Steve Coppell’s departure has clearly cost the club money, as some of the players he recruited during the summer were not rated so highly by Keith Millen, who has introduced his own selections.

"Marvellous Marvin Elliott"

Indeed, Millen has been informed by Lansdown that he will need to reduce the squad, which he has described as “too big and imbalanced.” It was as high as 35 before the January transfer window, which is way above the chairman’s target of 24. However, for this to have any meaningful effect on the wage bill, this would mean selling (or releasing) the higher earners, like David James, Nicky Hunt, Kalifa Cissé and Damion Stewart, which might damage the team’s promotion prospects.

The extent of the club’s financial challenge is illustrated if we analyse what it would have to do to get back in line with UEFA’s recommended maximum limit of 70% for the wages to turnover ratio. Either they would have to cut wages by £6 million (44%) or increase revenue by £8.6 million (77%). Neither choice appears very credible in the short-term, though the revenue target would be easily achieved, if the club did reach the Premier League.

How prescient Lansdown was in 2008, when he cautioned, “It is going to be increasingly difficult to keep wages under control if we wish to progress as a football club.” Then again, this did represent something of an about turn from the chairman, when you consider his words back in 2006, “The current wage structure in football is simply unsustainable. Clubs will be reducing their wage bills, because they have to if they want to survive.” To be fair to Lansdown, these two diametrically opposed points of view perfectly sum up the dilemma facing most football clubs.

The trend in player amortisation, namely the annual cost of writing down the cost of buying new players, also reflects the changing approach, as this has increased from £0.2 million in 2007 (the last season in League One) to £2.2 million. Indeed, if we look at Bristol City’s transfer activity over the last eight seasons, it is clear that this is no longer a selling club. In the four years up to 2007, the club had net proceeds of £4 million, while in the last four years the pendulum has swung and City have incurred net spend of £9.6 million. Again, this is hardly crazy money, but it does show a marked change in intent since the promotion to the Championship.

This strategy is explicitly outlined in the accounts, where the club affirms that the principal factor affecting profitability is the success of the team, which is why it commits “substantial sums of money for the acquisition and development of new players.” That said, manager Keith Millen demonstrated an admirable commercial outlook, when he accepted City’s need to sell before they can buy, even going further, “We need to be bringing in players who have a long-term future at the club and whose valuation is going to go up. You need to have saleable assets.”

However, this is not so straightforward these days, as transfer revenue for lower league sides has virtually dried up. Records may have been smashed in the upper echelons of the Premier League this month, but precious little money found its way outside the select few. This means that clubs in the Championship have needed to make judicious use of the loan system and Bristol City are no exceptions. They took Danny Rose (he of the once in a lifetime goal against Arsenal) and Steven Caulker from Tottenham Hotspur on season-long loans, while Irish international striker Andy Keogh has recently joined them on a three-month loan from Wolves.

Exorbitant transfer fees and wage demands mean that the club’s academy is another important element of its strategy. The development of home grown youth players for the first team, like Christian Ribeiro and Cole Skuse, is a possible route to financial salvation. Indeed, the club has described it as essential, which explains the continued investment into the academy training facilities.

In the meantime, the club will have to rely on the support of the board to see it through what it describes as “difficult times.” There are huge cash outflows (£22 million) in the last two years alone before financing eliminates the deficit. This effectively means Lansdown, who, as we have seen, has provided a £15 million stadium loan and also provided capital by purchasing £13 million of new shares. There is little sign of this financial support coming to an end with the latest accounts stating, “Since the year end Stephen Lansdown has agreed to subscribe for additional shares and/or loan stock in the coming year should the need arise.” In short, Bristol City literally owe Lansdown a great deal.

This business model works fine as long as Lansdown is around to pick up the tab, but there must be concerns about what would happen if he were to exit stage left. His involvement is already partially restricted, as he lives in Guernsey as a tax exile, so can only be in the UK for 90 days in a year. Although the man himself has reassured supporters with a promise that he “won’t leave this football club in the lurch”, he has also warned that he may consider walking away, if plans for new stadium at Ashton Vale are thwarted.

There’s a palpable sense of disappointment in his voice, when he considers other options if that eventuality came to pass: “Plan B will have to be to retrench to Ashton Gate and see what we can do there. We will have to cut our cloth accordingly and we won't be having the same dreams and ambitions as we do at the moment.” He continued to say that if the new stadium did not progress, he would essentially get things set up properly and then look to hand over the club to someone else, maybe an overseas investor, to finish the job.

"Christian Ribeiro - the future boy"

Hopefully, that is not the case and the club will eventually be able to move into a new stadium, where they would have a fighting chance of becoming self-sufficient. At its simplest, the club “needs to increase its turnover and control its costs”, which is an obvious point, but one that was emphasised in the chairman’s statement in the last accounts. In the absence of a new stadium, that looks very hard to do, at least without compromising the club’s ability to challenge for promotion to the Premier League, so for the foreseeable future large losses are likely to be the order of the day.

It is clear that Bristol City are following a “speculate to accumulate” strategy, or, as they put it, “setting down foundations to establish a top-class football club and stadium facilities.” With appropriate fanfare, Lansdown told a supporters’ meeting that with a new stadium the “sky is the limit”, painting a picture of Bristol becoming an international city “to rival the likes of Barcelona and New York.”

OK, that might be a bit over the top, but there’s little doubt that a city of Bristol’s size (England’s sixth largest) could one day support a Premier League team. For the moment, the club would probably do better to look over their shoulder rather than too far ahead, as the first priority must be to survive in the Championship this season. In the future, if and when Ashton Vale is built, then who knows?