Monday, March 16, 2015

Swansea City - A Design For Life

The past few years have been pretty successful for Swansea City. After becoming the first Welsh club to gain promotion to the Premier League in 2011, they have since firmly established themselves in England’s top tier, finishing 11th, 9th and 12th in the three seasons since then. During this period, they have also won the Capital One Cup, which qualified them for the Europa League, where they reached the knockout stage before being eliminated by Napoli.

In the process, they have continued to follow a prudent financial strategy As the club explained after promotion: “Our long term goals will cater for Swansea City remaining as a top flight club, but not in any way that puts the company’s financial stability at risk. This remains paramount in our management philosophy.”

This was evidenced by another robust set of figures in 2013/14 with Swansea reporting their third consecutive profit on the back of a £32 million increase in revenue to a record level of £99 million.

Profit before tax actually fell nearly £20 million from £20.8 million to £1.3 million in 2013/14, almost entirely due to no income being received for player sales, compared to £21 million the previous season. That was predominately from the sales of Joe Allen to Liverpool, Scott Sinclair to Manchester City and Danny Graham to Sunderland.

The revenue growth of £32 million was very largely driven by TV money, mostly due to the new three-year Premier League deal that commenced in the 2013/14 season plus some money from the Europa League exploits. There was also a useful increase of £2.4 million in commercial revenue. This was offset by increases on the cost side: wages £15 million, player trading £12 million (amortisation £7.6 million plus impairment £4.6 million) and other expenses £2 million. The club presented this as an increase in playing squad costs of £21.2 million plus an increase in other operational expenses of £8.5 million.

It was good to see the club once again make an operating profit of £1.3 million after last season’s £0.6 million loss. Also worth noting that the year-on-year reduction in profit after tax from £15.3 million to £1.7 million was only £13.5 million, due to a £5.6 million tax charge in the prior year.

Since promotion to the Premier League, Swansea have been consistently profitable, making a total of £40 million profits before tax in those three seasons. As we have already seen, the 2012/13 high profits were down to player sales, while the £21 million profit in 2011/12 was due to the club wanting to counteract the previous season’s £17 million loss. That had showed the price of success, as promotion triggered hefty bonus payments to the players and management staff plus additional transfer fees.

It should be noted in passing that the 2009/10 figures were adjusted the following season, because of a change in accounting policy in respect of the treatment of player acquisition costs, which improved profit by £0.6 million from £0.6 million to £1.2 million.

Although another Swansea profit is clearly impressive, it is actually one of the lowest reported so far in the Premier League for the 2013/14 season, as all clubs’ finances have been boosted by the new Premier League TV deal. To date, 11 of the 14 clubs that have published accounts have reported a profit, with Swansea’s £1.3 million being the second lowest. 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.

Fans will probably remember that Swansea eclipsed all their rivals the previous season, when their £21 million profit before tax was the highest in the Premier League, with the nearest challengers (Newcastle United £10 million and Arsenal £7 million) a long way back.

Revenue rose 47% (£31.6 million) from £67.1 million to £98.7 million, mainly coming from broadcasting, which was up 57% (£29.4 million) from £51.3 million to £80.7 million. There was also promising growth in commercial income: although this only rose by £2.4 million from £5.8 million to £8.3 million, this represented a 42% increase. Player loans also contributed £0.5 million in 2013/14, but match day income was down 7% (£0.7 million) from £9.9 million to £9.2 million.

Obviously, the main reason for the massive revenue growth in the last three years is elevation to the top flight, which has resulted in revenue increasing by a thumping £87 million from £12 million to £99 million. As the club accounts noted, this “amply demonstrates the rewards of gaining promotion.” The 2011/12 accounts were also enhanced by the £5 million compensation payment that Liverpool made to acquire the services of Brendan Rodgers.

Despite this growth, Swansea still have one of the lowest revenues in the Premier League. In 2012/13, only four clubs reported lower revenue. Although Swansea will be higher in 2013/14, having already overtaken WBA, the fact remains that their revenue of around £100 million is overshadowed by the elite clubs. At the top of the pile, Manchester United’s revenue of £433 million is more than four times as much as Swansea, while significant sums are also generated by Manchester City £347 million, Chelsea £320 million, Arsenal £299 million and Liverpool £256 million.

Nevertheless, Swansea’s £99 million still places them 29th in the Deloitte Money League within striking distance of European thoroughbreds such as Hamburg £101 million, Benfica £105 million, Roma £107 million and Marseille £109 million. In fact, the wealth from the TV deal means that no fewer than 14 of the top 30 clubs by revenue are from the Premier League. What is striking is that no club in the top 30 has a higher reliance on TV money than Swansea, where a staggering 82% of their total revenue comes from broadcasting.

The combination of the new Premier League deal plus TV money from the Europa League has increased broadcasting’s share of Swansea’s total revenue from 76% to 82% in 2013/14, leaving match day and commercial to account for just 8% apiece. That’s an incredible statistic: less than one fifth of Swansea’s revenue comes from sources outside television.

Swansea’s share of the Premier League TV money increased by 56% (£26 million) from £48 million to £74 million in 2013/14. Given the importance of this money to Swansea, it is worth analysing how this is distributed. The money is split into three elements: the UK TV deal, overseas TV deals and central commercial income. Much of this is split evenly between the 20 Premier League clubs, namely 50% of the UK deal and 100% of both the overseas deals and the central commercial income. The remaining 50% of the UK deals is divided into merit payments (25%), which is distributed depending one where you finish in the league, and facility fees (25%), which depend on how many times a club is broadcast live.

In this way, Swansea were helped by their attractive style of football, as they were broadcast live 13 times, which was a lot more than, say, Cardiff City (8 times) and so was worth an additional £2.3 million (£10.9 million less £8.6 million). Each place in the league table is worth around £1.2 million, so Swansea’s 12th place merited £11.1 million, compared to West Ham receiving £9.9 million for coming 13th.

Of course, there will be even more money available when the next three-year 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 11th in the distribution table (as Swansea did in 2013/14) would receive around £113 million a season, which would represent an additional £39 million.

Swansea’s performance in reaching the last 32 of the Europa League generated €4 million, which is not a huge amount of cash, but even the competition winners Sevilla only received €14.6 million. The big money is in the Champions League, where the English clubs averaged revenue of €38 million in 2013/14.

Match day revenue fell 7% (£0.7 million) from £9.9 million to £9.2 million. The additional money from the Europa League was not enough to compensate for the reduction in revenue from the domestic cups. Swansea played no home ties in these competitions in 2013/14, whereas the previous season included three home matches in the run to Wembley for the Capital One Cup triumph against Bradford City.

Swansea’s match day income is significantly lower than many other Premier League clubs. At the other end of the spectrum, Manchester United and Arsenal earn over £100 million match day income or more than ten times as much as Swansea. Put another way, they earn more in three matches than Swansea do in an entire season.

Swansea’s surge through the leagues has been matched with a rise in average attendance, which at 20,407 is more than five times as much as the low point in 2001/02.

However, this is still the lowest attendance in the Premier League with the next lowest, Crystal Palace and Hull City, being around 4,000 more. The problem is that the Liberty Stadium is too small to satisfy demand with around 98% of the capacity being sold and a lengthy waiting list for season tickets.

Therefore, the club has started negotiations with the local council to buy the Liberty Stadium and is looking at plans to increase the capacity form 20,800 to 33,000. It currently shares the stadium with rugby union side the Ospreys on a 50-year lease. Planning permission has been granted (subject to a few technicalities) for a stadium expansion, but the club cautioned that “work will only start when our projected cash flows allow us to continue.”

Commercial income was up an encouraging 42% (£2.4 million) from £5.8 million to £8.3 million. However, this was still one of the lowest in the Premier League. To place this into context, the top four earners commercially are Manchester United £189 million, Manchester City £166 million, Chelsea £109 million and Liverpool £104 million. No wonder that Swansea chairman Huw Jenkins admitted recently that the club was “miles behind” rivals commercially. This is presumably why commercial headcount increased from 18 to 55 in 2013/14, as Swansea look to improve this revenue stream.

As a sign of improvement, the shirt sponsorship with Chinese financial services firm Goldenway (with their GWGX brand adorning the shirt) doubled from £2 million to £4 million a season when it was extended by two years until the end of the 2015/16 season – “the largest agreement in the club’s proud 102-year history”. This increase will be reflected in the 2014/15 accounts. Similarly, the kit supply deal with adidas was also extended in 2014, but no financial details were divulged.

The wage bill shot up 32% (£15 million) from £48 million to £63 million, though the important wages to turnover ratio was still lowered from 72% to 64% due to the high revenue growth. Since promotion the wage bill has grown £46 million while revenue increased by £87 million, reducing the wages to turnover ratio from a horrific 149% (though to be fair the 2011 wage bill was inflated by bonus payments linked to promotion). Interestingly, the wages in Swansea’s first season back in the big time were amazingly low at £35 million – unsurprisingly the smallest wage bill in the Premier League that season.

Swansea’s wages, heavily based on performance-related contracts, are still among the lowest in the top tier, e.g. in 2012/13 only three clubs (Southampton, Reading and Wigan Athletic) had lower wages. Last season’s growth means that Swansea have already overtaken Norwich City and Stoke City and nearly caught up with West Ham and WBA, but they are still far away from the “big boys”, e.g. Manchester United and Manchester City both have wage bills north of £200 million.

It is only recently that Swansea’s directors started receiving payment for their efforts, but it is worth noting that the highest paid director (presumably Jenkins) earned £550,000 in 2013/14, including a £275,000 bonus for retention of Premier League status, which was significantly up from the previous year’s £250,000.

The promotion effect can also be seen in the club’s activities in the transfer market. In the eight seasons before promotion to the Premier League, there was basically zero net spend (and precious little gross spend), but since then net spend has “soared” to £12 million. This included £71 million of expenditure on player acquisitions, including the big money signings of Wilfried Bony, Federico Fernandez, Ki Sung-Yeung, Pablo, Kyle Naughton and Jefferson Montero.

Even with this increase, Swansea are hardly recklessly extravagant. The approach was summarised in the accounts thus: “we will continue year on year to improve our playing squad, but in a sensible and cost effective manner.” It should therefore be no surprise that Swansea are among the lowest spenders in the Premier League. In the four years following promotion only three clubs had a lower net spend than Swansea’s £12 million, while Manchester United shelled out £260 million in the same period.

Swansea have made their strategy very clear: “The secret is to balance spending to maintain and improve performance on the pitch so we remain in the Premier League, and spending on new projects considered important to the wellbeing of the club going forward.” It’s a tricky balance, but it has (so far) worked rather well for the club.

Investments in infrastructure include the completion of a £6 million youth academy training facility, which should help improve the academy status from Level Two to Level One, and a new training complex at Fairwood, which became operational in February 2014. This has cost around £12 million, including £6.9 million in 2013/14 alone. Both these developments should help reinforce Swansea’s status in the future.

Of course, a good academy will not only produce players for the first team, but graduates can also be sold for a healthy profit. A recent study by the CIES Football Observatory showed that over the past six seasons Swansea had made the 11th highest sales of academy graduates, most notably Joe Allen and Ben Davies. Incredibly, this put the Swans just above Bayern Munich and Manchester United.

The club appears to have put its debt issues firmly behind. Indeed, they have had net funds over the last three years. These have decreased by £3.0 million from £3.5 million to £0.5 million in 2013/14, but gross debt was actually cut by £4.1 million from £5.3 million to £1.2 million with cash balances falling by £7.1 million from £8.8 million to £1.7 million.

Gross debt largely comprised £1.0 million owed to group undertakings plus £0.2 million of hire purchase contracts. Importantly, bank debt (£5.5 million in 2012) has been virtually eliminated.

It should be noted that total creditors have been rising and increased £7.2 million in 2013/14 alone, mainly due to Other Creditors, which are up to £22.1 million, probably due to the infrastructure investment. In addition, Swansea have contingent liabilities of £3.1 million for potential future transfer payments, dependent on player appearances and club success, and a possible £2.2 million of additional signing-on fees.

The only other balance sheet point that seems a little strange is a significant increase in the amount of goods and services purchased from Jaxx Bay Limited, a company controlled by director Martin Morgan, from £25,000 to £1.7 million in 2013/14. If I had to speculate, I would guess that this is again due to the development work done at the new training facilities, but no details are provided in the accounts.

The recently announced new Premier League TV deal will further boost clubs’ profitability, so Swansea should have no problem meeting the Premier League’s new Financial Fair Play legislation. This also 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.

"Ash the bash"

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.

All this lovely TV money also explains the interest in Premier League clubs from overseas owners. Even Swansea, who have been much praised for achieving so much without foreign investment, have been tempted by an approach from American businessmen John Jay Moores and Charles Noell, the former owners of Major League baseball team the San Diego Padres, who were reportedly seeking to acquire a 30% stake.

Whether any such approach succeeds, it is unlikely to break the model whereby the Supporters’ Trust owns 21.3% of the club (and has a representative on the Board), which is unique in the Premier League. There has been some noise about the dividends paid to Swansea’s directors (£2.4 million in 2013 and £1.0 million in 2014), but most fans seem to think that this is fair reward for all their efforts in first saving and then running the club so well.

So another successful year for Swansea. Financially, for a club of this size, their performance is remarkable – and next year’s figures will be further boosted by the £25 million January sale of Bony to Manchester City.

Clearly, much of their growth is due to promotion to the Premier League, but other clubs have had similar opportunities and blown it, so Swansea’s achievements should not be under-estimated. The Board understands that more needs to be done, particularly with the stadium and commercial income, which will each bring their own challenges, but you wouldn’t bet against them succeeding, given their track record.


  1. Thanks for excellent analysis. Helpful to those of us less skilled with balance sheets. On two point of fact: the Americans did not approach SCFC but were approached by SCFC shareholders looking to sell. And while the initial share sale to the Americans was 30% the terms were that it would increase to 66% over a number of years, giving the Americans control of the club. It's fallen through apparently but it seems club shareholders wish to sell (with the exception of the Supporters Trust which has refused) meaning it may be a matter of to whom and when rather than whether...

  2. Much appreciated article. I would like to query one thing. The current 2-year sponsorship deal with Goldenway was reported in the press as being worth £4 million, Unless you know otherwise, I would assume that this is over the term of the deal, in which case the £2 million a year deal is nothing to shout about - and barely an improvement on their previous 32Red deal.

    Increasing commercial revenue is a big area for improvement at Swansea.


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