Charlton Athletic - Into The Valley

It’s debatable which team has made the best start to the season in England, but Charlton Athletic certainly have a good case, as they have gained more points than anybody else (40 after 17 games), suffering only one defeat in the process, and currently sit proudly at the top of League One. Hopes are high that they will manage to achieve promotion, though they will nervously recall their elimination in the League One play-off semi-final a couple of seasons ago, when they narrowly lost on penalties to Swindon Town, thus consigning the Addicks to a longer stay in English football’s third tier.

Under the guidance of former player, Chris Powell, a fans’ favourite, but inexperienced in the managerial role, Charlton have come out of the starting blocks in fine form. The majority of the goals have been scored by the experienced duo of Bradley Wright-Phillips (“he’s better than Shaun”) and club captain Johnnie Jackson, but an influx of new players over the summer has given the club added impetus with notable contributions made by Danny Hollands, Rhoys Wiggins (both from Bournemouth) and Dale Stephens (formerly with Oldham).

However, Charlton fans would be forgiven if they felt that this was a bit of a come down compared to the recent highs of their time in the Premier League, which lasted seven uninterrupted seasons from 2000. Much of the credit for Charlton’s success during this period has to go to Alan Curbishley, who managed the club for 15 years, before leaving the Valley in May 2006 to take a break from football.

"Alan Curbishley - Don't Dream It's Over"

“Curbs” is recognised as Charlton’s second most successful manager, only behind the legendary Jimmy Seed, who led the South London club to two FA Cup finals in the 1940s, winning the trophy in 1947. Arguably, Curbishley’s achievement in the modern era is even more impressive, as he managed to establish Charlton as a solid mid-table side in the highly competitive Premier League on an insignificant budget. Although his team never really challenged for a Champions League place (though they did finish as high as seventh in 2004), by the same token they also comfortably managed to avoid being drawn into relegation battles.

Since those heady days, it’s been a miserable time with the club slumping to two relegations in three seasons, first from the Premier League to the Championship in 2007, then from the Championship to League One in 2009. After such a lengthy period of stability, the board then embarked on a series of ill-conceived managerial appointments, going through three coaches in the second half of 2006 alone.

The highlight of Ian Dowie’s turbulent period in charge was probably the look of astonishment on his face as he was served a writ on behalf of Simon Jordan, his previous employer at Crystal Palace, during the press conference that unveiled him as Charlton’s new head coach. After just two wins in 12 league matches, the board pressed the panic button and replaced the former Northern Ireland international with Les Reed, his assistant, who lasted only a few weeks before being unceremoniously dumped on Christmas Eve in favour of Alan Pardew.

"Bradley Wright-Phillips - Son of a Gun"

Although there was some improvement, Pardew was unable to avoid the drop. As Curbishley said, “No-one has a divine right to stay in the Premier League.” Nor indeed to bounce straight back, as Pardew discovered to his cost the following season. After a poor start to Charlton’s second campaign in the Championship, including eight successive games without a win, the club found itself in the relegation zone and Pardew left “by mutual consent” in November 2008. His replacement was Phil Parkinson, who was somewhat surprisingly appointed as permanent manager despite no discernible improvement in results during his stint as caretaker.

Little wonder that the former chairman, Richard Murray, admitted that the board had made “mistakes particularly in relation to the period following the departure of Alan Curbishley.” He can say that again. To paraphrase Oscar Wilde, “To choose one poor manager may be regarded as a misfortune; to choose four looks like carelessness.”

Not only that, but the club also threw out the cautious strategy that had served them so well in the past, as their ambitions extended to European football. To achieve that aim, they decided to hand the charismatic Dowie an enormous transfer budget, which he proceeded to waste on a selection of incredibly average players, including the likes of Djimi Traoré, Souleymane Diawara, Ben Thatcher, Andy Reid, Madjid Bougherra and Amdy Faye.

In total, the net transfer spend for the 2006/07 season amounted to an incredible £19m, according to the respected Transfermarkt website, which was more than the previous five seasons combined. Further funds were splurged on expensive loan deals for an unfit Jimmy Floyd Hasselbaink and a very raw Alex Song. As Murray put it with commendable under-statement, “The simple truth is that vast sums of money were spent on players who have proved not to be successful.”

"Johnnie Jackson - Put Your Hands Up For Charlton"

To a certain extent, the board’s decision to take a few more risks was understandable, especially with a lucrative new Premier League television deal on the horizon, but it felt like a case of throwing the baby out with the bath water. To put it bluntly, Charlton got ahead of themselves, as outlined by the former Charlton midfielder Danny Murphy, “People were actually moaning at the time that we ‘only’ finished in mid-table. It’s only now that people realise how much of an achievement that was.”

To coin a phrase, be careful what you wish for. The ensuing relegation resulted in “financial turmoil” according to Murray, as there was a significant reduction in TV income, gate receipts and sponsorship deals. The problem was that Charlton had built up a Premier League infrastructure and wage bill that could not be supported on the revenue from lower leagues. As Murray explained, “In many respects, the longer a club remains in the Premier League, the more its cost base increases and relegation – even with the two-year parachute payments – still makes life difficult.”

In Charlton’s case, this meant severe financial difficulties with the club reporting a series of large losses and debts spiraling out of control. This was an all too familiar story to older fans, as the club had come very close to going out of business in 1984 after similar reckless spending, including the astonishing signing of former European Footballer of the Year Allan Simonsen from Barcelona.

"Dale Stephens - Smile Like You Mean It"

Returning to more modern times, it had become clear that Charlton required substantial funds to move forward, hence the board’s frantic search for new investors. Many names have been in the frame, including two owners who subsequently opted for other London clubs, namely Tony Fernandes (QPR) and David Sullivan (West Ham). The former Leeds United and Cardiff City chairman Peter Ridsdale was also linked, but fortunately this did not come to pass, as Charlton had already suffered enough from trying to “live the dream.”

More credibly, a bid from Swiss-based fund manager Sebastien Sainsbury was reportedly rejected, while the Dubai-based Zabeel Investments got as far as tabling an indicative cash offer of around £50 million before pulling out of negotiations in October 2008, largely due to the downturn in the global economy.

Matters came to a head in the summer of 2010, when the existing companies were wound up after an Extraordinary General Meeting, which left Richard Murray in control of a new holding company, Baton 2010 Limited. For those interested in corporate actions, this replaced CA 2010 plc (formerly Charlton Athletic plc), which was the owner of the football club, Charlton Athletic Football Company Limited.

Nevertheless, the directors still had to put £5 million into the club to avoid administration, which might sound overly dramatic, but Murray emphasised the importance of this money, “This has been a critical time for the club. Our future was uncertain and financially this was potentially one of our darkest hours.”

"Why does it always rain on me?"

Murray had effectively bought enough time to find new investors, which he managed to do four months later, when a consortium represented by popular former chief executive Peter Varney bought a controlling interest (90%) in Baton 2010 Limited via its acquisition vehicle CAFC Holdings Limited (incorporated in the offshore tax haven of the British Virgin Islands), leaving Richard Murray with a 10% stake.

The key players in the new ownership are new chairman Michael Slater, described as “a lawyer and businessman” on the club’s website, and Tony Jimenez, the ubiquitous “international property developer”, who respectively own 23% and 28% of CAFC Holdings Limited. Some concerns have been expressed about the latter’s involvement, partly based on his brief time as vice-president (player recruitment) at Newcastle United, when he clashed with then manager Kevin Keegan, and partly due to his checkered record as a director (16 of 17 companies dissolved, according to the Guardian).

However, the new men have been welcomed with open arms by the old hands at Charlton. Murray said, “I now believe I am passing the club to the right people who can secure its long-term future.” Varney added, “Charlton’s finances are not in a good state and the fans can rest assured that this is in the best interests of the club.” In addition, some continuity is ensured by the presence of both Murray and Varney on the new board.

There remain some doubts among fans, especially after the new owners rapidly back-tracked on a promise to support manager Phil Parkinson. On their arrival, Slater said, “It's certainly not our intention to make any change. Phil's done a great job. We're third in the league and that speaks for itself, so we're going to have a sit down with Phil over the next few days and we'll give him every support.”

"Michael Slater & Tony Jimenez - Welcome Interstate Managers"

Less than a week later, Parkinson was shown the door, with Slater explaining, “Clearly, improvement is needed on the field. The team has not won in the league since November and recent performances have simply not been good enough. Last night's defeat convinced us as a board that change is required now.” Of course, this move could also be construed as decisive action, though it did not actually produce the desired end result of promotion to the Championship, even if a play-off place was secured.

So what will Charlton’s strategy be going forward?

Slater has outlined a much-needed down-to-earth approach, “Our plan is to run the club on a sensible financial footing and develop a commercial plan to ensure we make progress on and off the pitch to meet the expectation of the fans. What we won’t do is create unrealistic, pie-in-the-sky expectations.” Having said that, it is clear that to achieve a sustainable model, Charlton need to gain promotion. Therefore, Slater has added, “Nobody can guarantee success, but we did not come to Charlton to run it as a League One club. It is not a viable business in this division.”

This can be seen by the rising debt levels, which nearly pushed the club over the edge. Back in 2005, Charlton actually enjoyed net funds of £4 million before that calamitous 2006/07 season drove debt up to £23 million. The last published accounts for the holding company are from 2009, when the debt was £24 million, but we can make a pretty good estimate of what the debt levels were in 2010, based on the debt reported by the football club and the notes in their accounts, which suggest that debt reached £34 million – “significant” according to Slater.

This comprised £14.6 million of corporate convertible bonds, £7 million of director loans (of which £5.3 million was added in 2010), £6.8 million of bank loans, a £5.3 million overdraft and a £0.3 million loan from the Football League.

As part of the company restructuring in August 2010, a number of steps were taken to reduce this debt burden. The bonds were converted into shares in CA 2010 plc, while the directors’ loans have been designated as interest-free unless the club is promoted and only repayable over a five-year period in the event of promotion to the Premier League. In addition, the bank loans have been renegotiated to delay the repayment dates (mainly from 2013 to 2015), though the quid pro quo is a higher interest rate: £2.5 million at 7.2%, £3.2 million at LIBOR + 2.5% and £1 million at LIBOR + 3%.

The growing debts are a natural result of the club’s unsustainable business model, which has produced a series of hefty losses since 2006, adding up to around £44 million in the last five years. In fairness, the losses have been getting smaller since the £11.5m registered in the annus horribilis of 2008, with £8 million reported in 2009 and £6.6 million in 2010, the improvement partly due to a £3 million reduction in interest payable.

As the revenue has fallen due to Charlton’s fall down the divisions, Charlton have made strenuous efforts to slash their costs in line with their new status and vastly reduced revenue. In 2007, their total expenses were £56 million, but they managed to cut this to £20 million in 2010, a reduction of 64%. This was essential as revenue fell by 74% in the same period from £36 million to just £9 million. Of course, the problem is that this reduced investment has been reflected in poor performances on the pitch.

The more astute among you will have noticed the other problem, which is that the revenue has always been insufficient to cover costs. Even if non-cash expenses such as depreciation and amortisation are excluded, the EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) is solidly negative, e.g. a £9 million loss in 2010.

"Meet Danny Hollands"

Losses have been compensated to some extent by profit on player sales, though the last substantial sale was Darren Bent to Tottenham in 2007. Without that £11 million profit, the 2007 loss would have been even larger than 2008 at £21 million, which is awful on a turnover of £36 million. In fact, the last time that Charlton made a big profit (£11 million) was in 2004, which was almost entirely due to the sale of Scott Parker to Chelsea.

Even the £1.4 million profit in 2005 would have been a loss without an exceptional £2.8 million insurance payment for injured players. The harsh reality is that Charlton have been living above their means for some time, so something had to give.

As a technical aside, it should be noted that the profit and loss account figures have been taken from the holding company, Charlton Athletic plc, for the years between 2005 and 2009, but this was not possible for 2010, as no accounts were issued. Instead, I have taken figures from the football club, Charlton Athletic Football Company Limited, for 2010. Looking at these two companies’ financial results in previous years indicates that any differences are immaterial, so this should be a reasonably safe approach.

What is indisputable is the catastrophic effect that the two relegations have had on Charlton’s revenue. In fact, it already started falling in the Premier League in 2007, as the club received a smaller merit reward for the lower final league position. Parachute payments over the next two seasons were not enough to prevent revenues falling by more than a third from £36 million to £24 million. However, the real damage was inflicted in 2010 by the double whammy of dropping into League One coinciding with the end of the parachute payments, so revenue plummeted to £9 million, which represents a fall of nearly 80% from the £42 million generated in 2006.

All three revenue streams have been adversely affected. Since 2006, match day income fell from £13 million to £6 million and commercial income from £7 million to £2 million, but it is television where the impact has been most significant, falling by an incredible 95% from £22 million to £1 million.

Television money in League One is mainly sourced from the Football League central distribution of £640,000 that is made to all clubs plus a solidarity payment of £108,000 from the Premier League. Both of these were scheduled to increase in 2010/11 to £656,000 and £335,000 respectively.

Obviously, there is never a good time for a football club to be relegated, but it is fair to say that Charlton’s timing was particularly bad, as they missed out on the significant growth in TV deals. As an example, they received £18 million for coming 19th in their last season in the Premier League in 2007, but Blackpool got £39 million for finishing in the same position last season. Similarly, while Charlton’s relegation was cushioned by £23 million of parachute payments, Blackpool will receive £48 million (£16 million in each of the first two years, and £8 million in each of years three and four).

This huge increase was criticised by Charlton’s former chief executive, Steve Waggott, “This will create a worrying divide for clubs in the lower leagues. Some chairmen believe the proposal has shifted the inequality in the English game further down the divisions, while others feel this has created a Premier League 2 in all but name.”

Although the real TV riches remain in the Premier League, it would still be very worthwhile for Charlton to win promotion to the Championship, as the new deal in that division is worth £4.7 million (£2.5 million central distribution plus £2.2 million solidarity payment), which is much higher than League One’s £1 million.

However, there is a cloud on the horizon in the shape of the new Football League three-year TV deal from 2012/13, which has been reduced by 26% or £23 million a season, reflecting what Football League chairman Greg Clarke called, “a challenging climate in which to negotiate television rights.” As there was no interest from BBC, ITV or even ESPN, the only serious contender was Sky, who could thus secure the package with a much lower bid.

Despite that change, television money is still the great divider between leagues. As a comparison in 2009/10, if we compare Charlton’s revenue against typical clubs in the higher leagues, e.g. Nottingham Forest in the Championship and Blackburn Rovers in the Premier League, we can very clearly see that factor at play with substantial differences between the TV revenue: Charlton £1.2 million, Forest £4.3 million and Blackburn £42.6 million. The other revenue streams are not too dissimilar. In fact, Charlton’s match day income of £5.8 million is only slightly lower than Blackburn’s £6.2 million.

The lack of a level playing field was noted by Charlton’s former chairman, Derek Chappell, after relegation to the Championship in 2008, “This demonstrates starkly the gulf between the Premier League and the Championship in financial terms due to the different levels of broadcast income.” More prosaically, the last annual report observed that the “divisional status” was the club’s principal risk, as this “has a significant impact on the level of revenue streams generated by the company and its ability to trade profitably.”

This has also been felt in match day income, partly due to attendances falling from over 26,000 in the Premier League to an average of 15,600 in League One last season and partly due to reductions in ticket prices. Even so, according to a survey this summer by the BBC, Charlton are the fifth most expensive team to watch in League One, only surpassed by Leyton Orient, Brentford, Hartlepool and Huddersfield.

In order to attract fans to The Valley, the club has employed some innovative, imaginative marketing methods, most notably the Valley Express coach service, which offers fans around Kent return transport to the stadium. When it became clear that Charlton were going to be relegated from the Premier League, the club made an offer of a free season ticket for the 2008/09 season to all season ticket holders who renewed before the end of April 2007 if Charlton gained immediate promotion back to the Premier League. More recently, their offer of “football for a fiver”, when tickets to the match against Exeter in February 2011 were priced at £5, attracted a bumper crowd of nearly 25,000.

Such initiatives have helped maintain Charlton’s crowd as one of the highest in League One. In fact, their 2010/11 average was the third best in League One, only behind Southampton and Sheffield Wednesday, and actually above 10 clubs in the Championship, including promoted Swansea City – and local rivals Crystal Palace.

The Valley is one of Charlton’s top assets, as the stadium has been extensively modernised at the cost of around £37 million and now boasts a capacity of just over 27,000. The club also has planning permission form Greenwich Council to extend the capacity to 31,000 and potentially even 40,000 if the club ever returned to the promised land of the Premier League.

Much of the work was done between 1985 and 1992, after the club was forced to leave The Valley, due to a combination of safety factors and a dispute with a former landlord over car parking. Charlton had to ground-share, first with Crystal Palace and then West Ham, before finally returning to The Valley in December 1992.

"Rolls Rhoys Wiggins"

However, although it’s great to be back home, The Valley is somewhat of a double-edged sword these days, as the costs of running such a large stadium are much higher than those incurred at other League One clubs, who tend to have much smaller grounds. It’s the same story for the splendid 37-acre training facilities in New Eltham.

As might be expected, due to the reduced exposure offered by the lower leagues, Charlton’s commercial income has also fallen away from £7 million in the Premier League to £2 million in League One. This trend was exacerbated by their shirt sponsor Llanera, a Spanish property group, going bust halfway through a 4½-year deal worth £6.6 million. Charlton have had little luck with their shirt sponsors, as All:Sports also went into administration in 2005.

The current shirt sponsors are Kent Reliance Building Society (KRBS), who signed a three-year deal starting in the 2009/10 season. The figures were not divulged beyond a “significant six-figure” annual sum, but the deal is said to be one of the largest in League One, comparing very favourably with many teams in the Championship. After many years with Joma, the kit supplier was changed to Macron last season in a four-year deal described as “the biggest kit contract in the club’s history.”

Charlton’s wage bill reflects what they have strived to do in the face of diminishing revenue, namely to implement a programme to cut costs. Since the peak in 2006, revenue has decreased by 78% (or £33 million) and the wages have more or less fallen in line by 70%, though the absolute reduction is “only” £24 million. This has produced a deeply concerning wages to turnover ratio of 112%, now that there are no more parachute payments. To place that into context, big spending Manchester City’s ratio last season was 107%.

Actually, this has always been an issue for Charlton, and this important ratio even looked unimpressive in the last two seasons in the Premier League: 82% in 2005/06 and 95% in 2006/07. Recent years have also included what the club described as “significant” pay-offs to departing players and managers, e.g. Alan Pardew reportedly received a seven-figure sum. Hence, the need for the club to offload high-earning players and make many back office staff redundant.

The trend in player amortisation, namely the annual cost of writing down the cost of buying new players, also reflects the club’s changing circumstances, as this has decreased from £6.5 million in 2007 (the last season in the Premier League) to a negligible £1.2 million in 2010.

Indeed, if we look at Charlton’s transfer activity over the last 12 seasons, it is clear that Charlton has become a selling club, largely out of necessity. In the seven years up to 2007, the club had net spend of £54 million, while in the last five years the pendulum has swung and Charlton have generated net proceeds of £37 million from the transfer market. Admittedly, most of that came in the year immediately following relegation from the Premier League, when they sold Bent, Reid, Diawara and Luke Young.

However, it is likely that any young talents developed by the club will leave sooner rather than later, unless Charlton secure promotion to a higher tier, as was seen by the sale of youth internationals Jonjo Shelvey to Liverpool for an initial £1.7 million and Carl Jenkinson to Arsenal for £1 million. That said, since the takeover there have been signs that the new owners will be more willing to loosen the purse strings in a bid to get promoted, as explained by chairman Michael Slater, “The board knows what you know – that the only way out of League One is to invest in the playing squad.”

"Jonjo Shelvey - Don't Look Back in Anger"

The players actually represent a “hidden” asset on the balance sheet, as their net book value in the accounts was only £339,000 as at June 2010, while the value in the real world is considerably higher – £9.5 million according to Transfermarkt. Overall, the club has net assets, which were reported as £2.6 million in the last available accounts for the holding company (June 2009). This included £35 million for land and buildings, primarily covering The Valley.

The 2010 accounts for the football club also note possible additional net transfer fees receivable of £4.1 million, though this is far from certain, as it depends on achievements made by some of the players sold by Charlton, including the number of appearances, trophies won and international caps.

Nevertheless, the cash flow statement demonstrates how important the directors’ support and commitment has been to the club. Every year since 2006 the cash flow from operating activities has been negative and only improves if the club sells players. Incidentally, the relatively high cash inflow from player sales in 2008 is largely due to Darren Bent’s transfer, even though that took place in 2007, as the cash was only received in the 2007/08 accounting year. Actually, payments for a transfer of that magnitude are normally made in installments, so cash from a major player sale is rarely available immediately.

The directors’ support has been crucial in keeping Charlton going on several occasions, such as the £5.5 million share issue in 2005 to “support investment in the first team squad”, the £5 million loans made in 2007 and the £14.6 million convertible corporate bond issue in 2008 that allowed the club to repay short-term bank loans and provided it with working capital. Since then, the directors have provided a further £7 million in loans. Interest payments on the loans and the bonds have been suspended, even though they have been booked in the profit and loss account. In addition, Richard Murray provided £3 million of funding for working capital in August 2010.

In short, it is unlikely that the club could have survived without these regular injections of cash from the directors.

So what does the future hold for Charlton Athletic?

Given the new owners’ track record to date, the chances are that they will continue to follow a prudent strategy, though if Charlton are still among the League One leaders around Christmas, it would not be that great a surprise if the board splashed some cash in the January transfer window in order to improve their chances of getting over the finishing line. They would desperately want to avoid a repeat of their play-off heartache by securing an automatic promotion spot, as this club really needs to be in the Championship.

"Matt Taylor - Heads Held High"

That said, the club has to be conscious of the new scheme to be introduced in the Football League from the 2012/13 season that is designed to lower spending on wages. This is a version of UEFA’s Financial Fair Play regulations called the Salary Costs Management Protocol (SCMP) that already operates in League Two, where clubs are only allowed to spend 60% of their turnover on wages. This will be reduced to 55% and also apply to League One. Championship clubs will not be allowed to spend more than they earn.

Charlton are well aware of the future restrictions, as confirmed by chief executive Stephen Kavanagh, “In signing 16 players this summer, we’ve had to take wage capping into account.” Even though they have savagely cut their payroll, Charlton would still have to halve their 2009/10 wage bill of £10.2 million to be in line with the proposed rules, which would be a major challenge. Promotion would be a far better alternative, though there are obviously a few other clubs that will have say in that particular discussion.

Equally important to Charlton’s prospects will be their academy, which has been praised by a number of knowledgeable observers. Even though it is difficult to compete with the larger London clubs, Charlton can offer their youngsters a Premier League standard training ground and an opportunity to play with many of their academy graduates going on to feature in the first team, such as Chris Solly and Scott Wagstaff. On their heels, there are England U17 internationals Jordan Cousins and Diego Poyet, son of Gus, the former Spurs and Chelsea player.

"Big Ben Hamer"

Michael Slater confirmed the focus on youth, “I can’t stress enough the importance of our investment in scouting and the academy – it’s essential for the club’s success in the medium to long term.” His views were echoed by Stephen Kavanagh, “We cannot ignore the fact that investing in the academy provides a long-term financial benefit for the club.”

Whether the revised compensation scheme under the new Elite Player Performance Plan (EPPP) will damage this strategy, only time will tell, but it does appear that the days of a young star moving for large sums might be coming to an end. However, Kavanagh is confident that Charlton “can make the most of the new system.” Although it would have meant receiving less money from Sean McGinty’s move to Manchester United two years ago, he pointed out that he Premier League had also agreed to increase its grant for Football League clubs' youth set-ups by around £300,000 per year.

He added, "With no guarantees that any club will produce a player talented enough to be wanted by the bigger clubs, this is a significant sum, because clubs are effectively being paid run to their academies, whether they produce players to be sold on or not.” In other words, a bird in the hand might be worth two in the bush.

"Michael Morrison - Pressure Point"

In many ways, Charlton’s decline is a cautionary tale to those in the Premier League. Even though they were considered to be a well-run club, one season of madness set them on a vicious downward spiral, as they struggled to cope with the effects of relegation.

However, this is club with considerable potential, otherwise it would not have attracted new investors at a time when so many other clubs are effectively in the shop window. Not only do they have a good stadium and training ground, but they also have a sizeable fan base and a large catchment area. Furthermore, the government is funding considerable regeneration in their neighbourhood, including building many new homes and improving travel infrastructure.

After a hideous few years, Charlton fans may once again allow themselves to look to the future with a degree of optimism. That’s certainly Michael Slater’s view, “It wasn’t so many years ago that this club was a regular in the Premier League. There’s no reason why that can’t happen (again) in the near future.”