Monday, January 5, 2015

West Ham - Stadium Arcadium

Although West Ham had some trials and tribulations during the 2013/14 season, they finished up in a comfortable 13th position in the Premier League and also reached the semi-final of the Capital One Cup. In the process, the Hammers reported the highest revenue and profit in the club’s history, leading vice-chairman Karren Brady to comment, “2013/14 was a satisfactory year for the club both on and off the pitch.”

To add to the good news, the club also signed an agreement to sell their Boleyn Ground in preparation for the move to the Olympic Stadium for the 2016/17 season.

West Ham’s profit before tax of £10 million was a significant £14 million improvement on last year’s loss of £4 million, as revenue rose £25 million (28%) from £90 million to £115 million. The profit growth was almost entirely attributable to the £25 million extra income from the new Premier League TV deal, partially offset by increases in player costs: the wage bill was up £8 million, while player amortisation was £4 million higher.

The last time that West Ham managed to make a profit was £6 million in 2005/06. In the intervening seven years, they made cumulative losses of £144 million before moving into the black in 2013/14. In fairness, the small £4 million loss in 2012/13 already represented a step in the right direction, as the club had been averaging £23 million annual losses before then.

Although Brady commented, “most areas of income increased”, it is clear that the £25 million growth in 2013/14 is very largely due to the new TV deal, as broadcasting revenue rose £23.6 million (46%) from £51.8 million to £75.4 million. Match receipts increased £1.5 million (8%) from £18.0 million to £19.5 million, while commercial income was actually virtually unchanged at £20.0 million.

Since 2009, West Ham’s revenue has grown 51% (£39 million) from £76 million to £115 million. Again, the majority of this growth is down to TV money, which rose £31 Million (71%) from £44 million to £75 million, though commercial income did grow £6 million (40%) from £14 million to £20 million and match day was up £2 million (11%) from £18 million to £20 million.

The impact of relegation to the Championship is evident from the £34 million decrease in 2012 with all revenue streams being adversely impacted.

Around two-thirds (66%) of West Ham’s revenue now comes from Broadcasting, up from 58% the previous season with Match Day and Commercial both contributing 17%.

Despite significant growth, West Ham’s 2014 revenue of £115 million is still a lot lower than the Premier League elite, e.g. Manchester United’s £433 million is over £300 million higher. On the other hand, West Ham did have the 8th highest revenue in the Premier League (and indeed the 29th highest in the world) in 2012/13.

As famous investor Warren Buffett once said, “A rising tide lifts all boats”, and in this way it is clear that all Premier League clubs will benefit from the new TV deal. In fact, we already know that Everton have overtaken West Ham in 2013/14 with their revenue increasing to £121 million, largely due to Everton’s TV money increasing at a faster rate.

Although West Ham’s Premier League TV distribution rose by £25 million from £49 million to £74 million, their increase was slightly dampened by the lower league position (dropping from 10th to 13th). Everton’s share increased by £33 million, boosted by a higher finish (5th place compared to 6th the previous season) and more live televised matches (16 compared to 14). Looking forward, West Ham’s share should be higher in 2014/15 if they maintain a better league position.

Given West Ham’s enterprising start to this season, it is interesting to note how much money they might make from qualifying for Europe. Last season, English clubs in the Europa League earned an average of €4.6 million (Tottenham €5.9 million, Swansea City €4.0 million and Wigan Athletic €3.8 million), while English teams in the Champions League (an unlikely, but not impossible objective) earned an average of €38 million. On top of that, there would be additional gate receipts and higher commercial income (based on contract clauses).

This money will be even higher from the 2015/16 season when the new Champions League deal commences. UEFA recently told the European Club Association that clubs could expect a 30% increase in revenue, but the uplift may be even higher for English clubs, as BT’s exclusive acquisition of UK rights is apparently double the current arrangement.

Match Day receipts rose 8.5% (£1.5 million) from £18.0 million to £19.5 million. Even though the average league attendance fell 2% from 34,720 to 34,007, match day revenue still rose in 2013/14, largely due to season ticket price rises plus money from the Capital One Cup run.

West Ham’s match day revenue of £20 million is a long way short of leading clubs, e.g. both Manchester United and Arsenal generate more than £100 million, though a more reasonable comparative might be Tottenham, who earn twice as much (£40 million) as the Hammers.

This weakness should change with the move to the Olympic Stadium for the 2016/17 season, which is a major financial coup for West Ham. Even though the total cost of the stadium is more than £600 million, the club will only pay a once-off fee of £15 million for stadium conversion plus an annual rent of around £2.5 million. Note: the accounts include Olympic Stadium project costs in Exceptional Items: 2013/14 £0.5 million, 2012/13 £1.4 million.

This will create a number of commercial opportunities, including premium hospitality packages, where Brady has stated, “we will not have enough seats to fulfill demand.” That said, it will be interesting to see whether the club will be able to fill the 54,000 capacity stadium, but there should certainly be an increase in revenue.

Commercial revenue was essentially unchanged at £20 million. Even though retail and merchandising rose 3% (£0.2 million) to a record high of £6.3 million, other commercial activities fell 2% (£0.3 million) to £13.7 million.

Even though Brady proudly proclaimed that West Ham are “officially recognised as one of the world’s leading football brands by Brandfinance, placing us again in the top 9 of Premier League clubs in the world’s most valuable football brands”, the fact remains that their commercial income pales into insignificance compared to heavyweights such as Manchester United, who generate £189 million from this activity. That comparison might be unfair, but it is worth noting that Tottenham earned £45 million and Aston Villa £25 million (in the 2012/13 season).

West Ham’s shirt sponsorship with global foreign exchange broker Alpari is worth £3 million a season for three years until the end of the 2015/16 season. This is more than they earned from their previous sponsor SBOBET, who were signed in the 2008/09 season (on a reduced fee) as a replacement for, who went into administration and defaulted on their sponsorship. The club’s kit supplier deal is with Adidas, who replaced Macron in 2013, until the end of the 2014/15 season with a value estimated at £2 million a year.

Given the greater exposure afforded by the Olympic Stadium, the value of the next deals for shirt sponsor and kit supplier should both be considerably higher.

Wages rose 14% (£8 million) from £56 million to £64 million, but the wages to turnover ratio improved from 63% to 56%, the lowest ratio “since this was first calculated 15 years ago”, following the 28% revenue growth. Interestingly, wages have actually fallen £3 million (4%) since the peak of £67 million in 2009, while revenue has increased by £39 million in the same period.

The amount paid to the highest paid director, believed to be Brady, fell from £1.6 million to £636,000 in 2013/14, presumably as last season included a hefty bonus for securing the Olympic Stadium.

West Ham’s wage bill of £56 million was only the 14th highest in the 2012/13 season, almost exactly in line with their league placing the following season. Even though this has increased to £64 million, to place this into context, it is around a third of the two Manchester clubs (United £215 million and City £205 million), while Arsenal’s wages are over a £100 million higher at £166 million.

West Ham’s improved performance on the pitch should perhaps be no surprise, given the recent “major investment in the first team squad”, as evidenced by the increased activity in the transfer market. In the decade up to the 2011/12 season, West Ham was somewhat of a trading club with a net spend of zero, but they have significantly ramped up their purchases in the last three seasons with a net spend of £67 million.

In 2012/13 West Ham spent big on Matt Jarvis, then bought Andy Carroll and Stewart Downing at the start of the 2013/14 season before really motoring this season, purchasing Enner Valencia, Cheikou Kouyate, Diafra Sakho, Aaron Cresswell, Morgan Amalfitano and Mauro Zarate. In addition, the club has also made good use of the loan market, bringing in Alex Song from Barcelona and Carl Jenkinson from Arsenal.

In fact, over that three-year period, West Ham were the 6th highest net spenders in the Premier League, only beaten by those clubs that manager Sam Allardyce frequently refers to as “the big boys”: Manchester United, Chelsea, Manchester City, Liverpool and Arsenal.

This spending spree has been financed by the owners, David Sullivan and David Gold, putting in more money as shareholder loans, which have increased to £49 million. This is over half of the club’s gross debt of £92 million, leaving £42 million of external debt and £0.6 million of debenture loans under the Hammers Bond Scheme.

Although net debt fell £4 million from £78 million to £74 million, gross debt actually slightly increased £1 million from £91 million to £92 million with the net fall being driven by the £5 million rise in cash balances from £13 million to £18 million. Since 2010 gross debt has more than doubled from £45 million to £92 million, but external debt is down £2 million with the growth funded by the club’s owners as their loans have increased by/to £49 million.

External debt includes bank loans of £26.7 million with interest charged at 3% over LIBOR, which have been refinanced until December 2016, though the club has repaid £5.5 million after the 2013/14 accounts were finalised, and a short-term facility with Vibrac, an offshore loan corporation, secured on Premier League TV money. This arrangement was renewed for a further year for £18 million in August 2014 after the previous £15 million loan was repaid.

Karren Brady has stated that any outstanding bank debt that is secured on the club’s ground has to be repaid before the move to the Olympic Stadium. She hopes that the proceeds from the sale of the Boleyn Ground to Galliard Homes will cover the £15 million conversion fee plus “some of our bank debt”. Given current repayment patterns, this should be down to less than £20 million at that time, as this will not include the Vibrac loan. Incidentally, the owners’ loans are unsecured subordinated to the secured bank loan.

According to the profit and loss account, West Ham’s net interest payable of around £5 million is among the highest in the Premier League, albeit considerably lower than Manchester United and Arsenal. However, the cash payment is only £2 million, as the interest on the owners’ loans (6-7%) will not be paid or added to the loans until the loans are repaid. Accrued interest currently stands at £6.3 million.

Sullivan and Gold have now invested a total of £75 million into the club, including £3.5 million in 2013/14 “to allow the manager to go into the transfer market to cover our injury crisis and buy the emergency players we needed to secure our Premier League status.” The owners invested £24 million into the club during their first year in 2009/10 and, importantly, £32 million in the form of loans in 2011/12 to cover the revenue reduction in the Championship. Sullivan and Gold now own 86.2% of the club.

Of course, much of the increase in profitability is due to the Premier League’s new Financial Fair Play legislation, which ensures that the majority of the increased money from the new TV deal remains within the club and does not simply go to higher player wages (and agents’ fees), as has invariably been the case with previous increases. In summary, top flight clubs cannot make a loss in excess of £105 million aggregated over a three-season period between 2013 and 2016 and the amount of money clubs can spend from the new TV deal on wages is restricted.

Specifically, clubs whose player wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years. However this restriction only applies to the income from TV money, so any additional money from the higher gate receipts, new sponsorship deals or profits from player sales can still be spent on wages. Although Allardyce was worried that this might prevent the purchase of Andy Carroll, this turned out not to be the case.

Although it will be a wrench to leave the atmospheric Upton Park, there is little doubt that the club has secured a great deal at the Olympic Stadium. Brady enthused about its “enormous commercial and brand opportunities” and promised “a strategy to deliver sell-out crowds”. That will depend to some extent on how the team is performing on the pitch. While Allardyce’s side has played some enterprising football this season, only time will tell whether this can be maintained, allowing the club “to deliver much more in years to come” (to once again quote Brady).

1 comment:

  1. Their balance sheet doesn't look that strong, but from what you've said, compared to the past its great!


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