Monday, March 23, 2015

Aston Villa - Lost In The Supermarket

For a club of Aston Villa’s rich history, the past few years have been profoundly depressing, as they have spent most of that time at the wrong end of the Premier League table, desperately trying to avoid relegation. Their managerial merry-go-round has failed to improve matters, merely bringing their own version of doom (Alex McLeish) and gloom (Paul Lambert).

This has been matched by a dismal performance off the pitch with the club bleeding money through some hefty losses, financed by the American owner Randy Lerner pumping vast sums of money into Aston Villa – with no tangible success. Little wonder that this toxic combination has caused Lerner to put the club up for sale.

However, the mood has been a bit better at Villa Park since the enthusiastic Tim Sherwood was appointed manager last month. There are also some signs that there might be light at the end of the tunnel from a financial perspective, as Villa reported record revenue of £117 million in 2013/14, which helped them reduce their loss before tax by a hefty £48 million from £52 million to just £4 million. We shouldn’t go overboard here, as Villa still lost money, but it’s a step in the right direction.

The smaller loss was largely driven by the new Premier League television deal, which was worth an additional £28 million to Villa, but there was some useful revenue growth in commercial income £3 million and player loans £4 million. Expenses were also cut, notably player trading costs by £10 million (amortisation £4 million and impairment £6 million), wages by £3 million and  exceptional items (staff termination and onerous contract costs) by £2 million.

The improvement was neatly summarised by chief financial officer, Robin Russell: “By controlling costs we have been able to take advantage of the new Premier League broadcasting deal to bring the club closer to self-sufficiency.”

Russell added, “We are very pleased to be able to report improved results after a period of heavy financial losses.” You can say that again. Since Lerner bought Villa in July 2006, the club has accumulated losses before tax of £222 million – nearly a quarter of a billion pounds. In the five years between 2009 and 2013 alone the club lost £207 million, averaging £41 million a year. That’s an awful lot of money to finish 15th or 16th.

The best result in this period was a loss of “only” £18 million before tax in the 2011/12 season, but this was boosted by £20 million of exceptional items and £27 million profits from player sales, so the underlying figures were just as terrible as the other years.

The £20 million exceptional item refers to the once-off waiver of interest on £107 million of loans provided by Lerner. Although the club had been booking around £6 million of interest payable to the owner under the terms of the loan agreement, he never actually took a cash payment.

On the other side of the coin, Villa also booked £26 million of exceptional costs between 2011 and 2013, including £12 million in 2012 alone. These could justifiably be described as the costs of mis-management, as these include termination payments made to sacked coaching staff and the accounting cost of reducing the value of poor player purchases. There’s a price to pay for constantly bringing in new managers, who will want to recruit their own players, while getting rid of the deadwood accumulated by the previous regime. As Orange Juice one sang, you have to “rip it up and start again.”

The 2011/12 season was also enhanced by a record-breaking £27 million profit on player sales, largely due to the big money moves of Stewart Downing to Liverpool for £20 million and Ashley Young to Manchester United for £17 million. In fact, this activity had been fairly lucrative for Villa, earning them £79 million in the five years up to 2012. However, in the last two seasons the well has run dry with the club earning less than £2 million from player sales. The club argued that this was due to “the squad being rebuilt”, but a less charitable interpretation might be that there were few players worth buying.

Only four of the 15 Premier League clubs that have so far published their 2013/14 accounts have reported a loss, which places Villa’s improvement into context. The only clubs to have reported higher deficits than Villa are Manchester City (£23 million), Sunderland (£17 million) and Cardiff City (£12 million), who all have their own specific issues.

So, 11 clubs have made money (so far), largely off the back of the new Premier League TV deal. In fact, five clubs have made profits of more than £10 million: Manchester United £41 million, Everton £28 million, Chelsea £19 million, WBA £13 million and West Ham £10 million.

Revenue rose 39% (£33.2 million) from £83.7 million to £116.9 million in 2013/14, mainly coming from broadcasting, which was up 59% (£26.9 million) from £45.8 million to £72.7 million. Fees for player loans rose by £3.7 million from £2.0 million to a noteworthy £5.7 million, while commercial income was also up 12% (£2.8 million) from £22.9 million to £25.7 million. Gate receipts were virtually unchanged at around £13 million.

Villa’s revenue has also grown by 39% since 2009, which is another way of saying that there was zero revenue growth between 2009 and 2013. Revenue had risen from £84 million in 2009 to £92 million in 2011, but there was a reduction in revenue in 2012, largely thanks to worse performance on the pitch (dropping from 9th to 16th place in the Premier League and early exits from the cup competitions).

It should be noted that Villa changed the way they split their revenue among the various streams in 2013, so they restated the 2012 comparative, but not prior years. This means that the apparent reduction in match day income and consequent increase in commercial income since 2011 are misleading.

In 2012/13, the last season where we have accounts for all clubs, Villa’s revenue of £84 million was the 10th highest in the Premier League. Their £33 million growth to £117 million in 2013/14 has been matched by most other clubs, though they have overtaken West Ham.

There are two ways of looking at this. On the one hand, Villa will struggle to compete at the highest level, as there is a financial chasm between them and the top six clubs: Manchester United £433 million, Manchester City £347 million, Chelsea £320 million, Arsenal £299 million, Liverpool £256 million and Tottenham £181 million. United generate almost four times as much money as Villa – their revenue is an incredible £316 million more (for one season). On the other hand, Villa in turn earn more than clubs like Southampton, Swansea City and Stoke City, so really should be performing better than them.

In fact, Villa are the 22nd highest club in the Deloitte Money League, just ahead of famous clubs like Marseille, Roma and Benfica. Great stuff, but the problem is that every other Premier League club is also in the top 40 with 14 of them in the top 30, hence the club’s struggles in England’s top flight.

Note that the Deloitte Money League excludes revenue from player loans, so they have reduced Villa’s revenue of £117 million by £6 million to £111 million in their classification.

Villa’s reliance on TV money has become clearer than ever in 2013/14 with broadcasting accounting for 65% of total revenue (excluding player loans), up from 56% the previous season. In this way, commercial income has fallen from 28% to 23% and match day from 16% to 12%.

So Villa’s Premier League television money increased by 62% (£28 million) from £45 million to £73 million in 2013/14. The distribution in the Premier League is the most equitable in Europe with much of the money distributed evenly between the 20 clubs. That is the case for 50% of the domestic deal and 100% of the overseas deals.

However, 50% of the domestic deal depends on other factors: (a) merit payments – 25% depends on where a club finishes in the league with each place worth around £1.2 million; (b) facility fees – 25% is based on how many times a club is broadcast live. This has really hurt Villa’s revenue over the last few seasons, as they have dropped down the table.

As an example, if Villa had finished 6th in 2013/14, as they did between 2007/08 and 2009/10, they would have received around £90 million, i.e. £17 more than their £73 million. In fact, if Villa had maintained their run of 6th place finishes in the four seasons since 2009/10, they would have pocketed an additional £42 million. This highlights the tricky balance between sustainable spending and investing for success. Spending money is obviously not a guarantee, but a safety first approach can leave money on the table.

Of course, there will be even more money available when the next three-year Premier League cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimate is that a club that finishes 14th in the distribution table (as Villa did in 2013/14) would receive around £110 million a season, which would represent an additional £37 million.

The danger for Villa is that they would miss out on this bonanza in the worst case scenario of relegation to the Championship. New chief executive Tom Fox has stated that “relegation should not be in the lexicon of Aston Villa”, but at this stage of the season this eventuality cannot be ruled out.

Even though Villa would be protected to some extent by the parachute payment of £24 million that would be added to the £1.9 million given to all Championship clubs from the Football League’s own TV deal, they would still have to contend with a £46 million cut in TV money. That’s a lot to absorb, even if players have relegation clauses in their contracts. Furthermore, Villa would have to quickly bounce back, as the disparity will become absolutely colossal once the new 2016/17 TV deal kicks in, e.g. around £72 million, even with an increase in the parachute payment.

Gate receipts fell very slightly by 1% (£0.2 million) from £13.0 million to £12.8 million in 2013/14. This is around mid-table in the Premier League, but importantly is significantly lower than the elite clubs, e.g. both Manchester United and Arsenal earn over £100 million from match day income (or eight times as much as Villa). A small part of this will be due to the different ways clubs interpret match day income, but there is undoubtedly an enormous difference.

Villa’s average league attendance of 36,081 was the 9th highest in the Premier League, which is an impressive achievement considering their problems on the pitch, but it is only 84% of the 43,000 capacity at Villa Park. Only two other clubs in the Premier League had a percentage sold lower than 90%: Sunderland 84% and Cardiff City 83%.

Villa’s attendance actually increased in the last two seasons, having steadily declined from the 40,000 peak in 2007/08, though it has once again fallen this season to around 33,000 (as of 20 March 2015). That represents an 18% fall and 7,000 fewer fans (or customers, to put it into financial terms). This has clearly hit the club’s finances, as has the limited progress in cup competitions, e.g. in 2009/10 Villa reached the Carling Cup final and the FA Cup semi-final, which had a beneficial impact on match day revenue.

Commercial revenue rose by an encouraging 12% (£2.8 million) from £22.9 million to £25.7 million, comprising £9.4 million sponsorship and £16.3 commercial income. This is almost exactly the same as Newcastle United’s £25.6 million, but (stop me if you’ve heard this one before) is significantly lower than the top six clubs. For example, Manchester United’s commercial revenue is up to £189 million, more than seven times as much as Villa, followed by Manchester City £166 million, Chelsea £109 million, Liverpool £104 million, Arsenal £77 million and Tottenham £45 million.

The disparity is most evident when comparing the shirt sponsorship deals. Villa have a two-year deal with Dafabet, an Asian online betting website, worth £5 million a year that runs until the end of this season. This looks very low compared to the major clubs, who continue to increase their deals, e.g. Manchester United and Chelsea have both announced huge new deals recently, United for £47 million with Chevrolet and Chelsea for a reported £38-40 million with Yokohama Rubber.

It’s a similar story with Villa’s kit supplier, Macron, who have a four-year deal worth £15 million (£3.75 million a year), running until the end of the 2015/16 season. Not bad, but it pales into significance next to match Manchester United’s “largest kit manufacture sponsorship deal in sport” with Adidas, which is worth £750 million over 10 years or an average of £75 million a year from the 2015/16 season.

In fairness, most clubs outside of the absolute elite have struggled to secure such massive deals and Villa would have to enjoy a sustained run of success to substantially improve their commercial deals.

They are placing a lot of hope in Tom Fox, who was previously the chief commercial officer at Arsenal. Although he has arrived with a solid reputation on the back of signing two substantial sponsorship deals with Emirates and Nike, some fans of the North London club were disappointed in his lack of progress in securing secondary sponsors. He will have to go some to significantly grow Villa’s commercial income, though there has been talk of selling naming rights to the famous Holte End stand.

Villa cut their wage bill by 4% (£2.5 million) from £71.9 million to £69.3 million in 2013/14, reducing the wages to turnover ratio from 86% to 59%. In fact, wages have fallen by 17% (£14 million) from the peak of £83.4 million in 2011. Since then Villa have “rationalised the playing squad” and exercised “tight control of players’ wages”, so that the wage bill has been held at around £70 million, despite £25 million of revenue growth in the same period. To be fair, the wages to turnover ratio was an unsustainable 91% in 2011.

In 2012/13 Villa’s wage bill was the 8th highest in the Premier League, only behind the usual suspects plus the basket case known as QPR. However, they are one of the few clubs not to substantially increase their wages in line with the new Premier League TV deal, so in 2013/14 they have been overtaken by Sunderland and largely caught up by the likes of Everton, WBA, West Ham and Swansea City. Of course, the “big boys” are nearly out of sight: Manchester United £215 million, Manchester City £205 million, Chelsea £193 million, Arsenal £166 million and Liverpool £144 million.

It is instructive to compare Villa’s wages with Tottenham, a club with similar aspirations. Back in 2008, both clubs had a wage bill around £50 million before Villa initially surged ahead in the next two seasons. However, Villa’s relative austerity since then has resulted in Tottenham’s wages being £24 million higher in 2012/13 and I suspect the gap will be even higher when Spurs publish their 2013/14 accounts.

There is one myth that should be nailed, namely that Randy Lerner has not funded transfers since the profligate Martin O’Neill era. It’s true that there was a slowdown in the following two seasons, but Villa have a net spend of £49 million in the last three seasons, averaging £16 million a  year. This compares pretty favourably with the £84 million O’Neill spent in four seasons or £21 million a year. As the wonderfully named director General Charles Krulak explained: “The idea that Randy had not put money into the club and that Paul Lambert’s hands were tied is simply not true. It’s hogwash.”

Obviously this £49 million net spend is way below the expenditure in the same period by the leading clubs such as Manchester United £222 million, Manchester City £164 million and Chelsea £132 million, but it was still the 8th highest in the Premier League and fans are entitled to expect a bit more bang for their buck. In fairness, the figures are a little misleading, as only one player, Christian Benteke, arrived for a sum above £5 million, so the suspicion is that many ordinary purchases have been made. As the club’s accounts once put it: “The acquisition of players and their related payroll costs are deemed the core activity risk and… the directors are mindful of the pitfalls that are inherent in this area of the business.”

Villa’s net debt was slashed by £87.5 million from £189.5 million to £102.0 million, mainly due to Lerner converting £90 million of loan notes into share capital in December 2013, “reducing the club’s debt load and accelerating the process towards long-term stability and financial self-sufficiency.” Gross debt of £104 million mainly comprises owner debt of £86 million (£69 million owed to the parent undertaking and £17 million of loan notes), though the bank loan and overdraft is up from £13.6 million to £18 million.

Potential additional transfer fee payments (based on contractual conditions such as number of appearances and retention of Premier League status) decreased from £8.4 million to £4.2 million, though there are now also contingent liabilities of £2.75 million payable upon the change of ownership of the football club.

Although Randy Lerner did not inject any additional funds into Villa in 2013/14, he has been a most generous owner. On top of the initial £66 million paid to acquire the club in 2006, he has put in the best part of £300 million, split between £125.5 million of share capital, £114.5 million of loan notes and £46 million loans from the parent undertaking. In addition, he has cancelled repayment of £97.5 million of loans.

According to the club, Villa  should have no problems with Financial Fair Play: “In terms of regulations, players’ payroll for the year complies with the Premier League’s Short Term Cost Control Rules and forecast results for the three years ending 31 May 2016 currently meet the Premier League’s Profitability and Sustainability Rules.”

Villa will have to be aware of the restriction whereby 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. This only applies to the income from TV money, so if Villa want to “go for it” and substantially increase their wages, they will have to grow revenue via new sponsorship deals, higher gate receipts or profits from player sales.

It is difficult to know what Villa can do to improve their situation. Initially under Lambert, they appeared to be following a youth policy, but that appears to have been largely abandoned. There are a couple of youngsters like Jack Grealish, Callum Robinson and Lewis Kinsella coming through, but Villa’s academy does not seem to be as successful as it has been in the past in producing talented youngsters.

"Big Ron"

Randy Lerner appears to have had enough, which is hardly surprising after he has spent so much for so little return on the pitch. Effectively, Villa are back to where they were when he acquired them. In May 2014, he put the club up for sale and you could feel the man’s pain: “I have come to know well that fates are fickle in the business of English football. And I feel that I have pushed mine well past the limit. I owe it to Villa to move on, and look for fresh, invigorated leadership, if in my heart I feel I can no longer do the job.”

He put the prospective sale on the back burner last summer, basically after no buyer could be found, but there are whispers that talks are ongoing with potential purchasers. Any deal would surely only take place in the summer after Villa’s fate is known, as relegation would severely impact the price.

The club has gambled on reducing the investment in the playing squad, especially with the tightly controlled wage bill, as it focuses on a sustainable future, which is an admirable strategy – so long as it does not backfire and result in the dreaded relegation. Tom Fox summed up the club’s (modest) ambition: “We’ve got by far the best house on the worst street in town. Our aim is to get to be the smallest house on the best street and try to build it up from there.” After many managerial debacles, Villa’s supporters will hope that Tim Sherwood is indeed the right man for the job.


  1. You misquoted Fox at the end there. He said the next target for Villa was to become the "smallest house on the best street and build from there." Fox reckons Villa are eight years behind the current top six which indicates the pig's ear Lerner has made of it all.

    New owners and sponsorship deals more fitting for a club of Villa's size and history could very quickly turn these figures around.

    Thanks for the analysis.

  2. Ah, yes. You're right. Missed out an important word there. Now corrected. Thanks for the tip.

  3. Does Crystal Palace not release revenues?

  4. I think this is a fantastic article. I've been waiting for this since the accounts came out.

    One thing which would be a great addition is looking a bit more to the future.

    Yes we made a £4m loss but that is almost exactly the annual cost of Darren bent, who's contract finishes this summer. Shay given still a great asset is on a large deal also due to finish.

    Essentially promoting a youth striker and utilising our other keeper would mean we maintain the squad and also save a whopping £7m+ per year through those two salaries leaving the club.

    Add to that (hopefully) a nice sponsorship increase of a similar 12% we suddenly find ourselves making a nice little bit of money.

    The key is to mix youth with much fewer but higher quality signings.

    Comparing against the top six whilst useful to show the difference in the premier league isn't really what I was looking for. More about how we fit with the rest and why we shouldn't (at least) be finishing 7-8 each year.

  5. The problem is that there are seven clubs (Everton, Southampton, Swansea, West Ham, Stoke, Newcastle, and Aston Villa) who think they should be finishing 7-8 (or better) each year. Luck and competency will decide which ones succeed in this ambition. Aston Villa has lacked both recently.

  6. Looking forward to your update following the take over


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