Tuesday, May 12, 2015

Crystal Palace - I'll Fly For You

Just five years ago Crystal Palace were in administration and the South London club’s prospects looked bleak before they were rescued by a consortium of wealthy businessmen, known as CPFC 2010 and fronted by Steve Parish. They purchased the club and, importantly, also managed to convince the bank to sell them the freehold of the ground.

Since those troubling times, which included a deduction of 10 points, the club has prospered, gaining promotion from the Championship only three years after its rebirth and enjoying two seasons in England’s top flight. The journey has not been completely smooth, as Palace have had to replace their manager three times in the Premier League, though even these changes proved very timely.

First, after a slow start on Palace’s return to the Premier League, Ian Holloway, the man who had guided the team to promotion, was sacrificed for the highly experienced Tony Pulis, who steered the team to safety with a strong finish to the season. After Pulis left just before the 2014/15 season commenced, the reins were handed to former manager Neil Warnock, but a poor run of results led to Alan Pardew’s arrival in January 2015. The former Palace player has repeated the previous season’s magic and Palace are again safe from relegation.

"Mile High"

This is a far cry from their previous woes. Let’s not forget that the club had also plunged into administration during the 1998/1999 season under owner Mark Goldberg before being saved by the flamboyant Simon Jordan. After some initial success, Jordan’s tenure went the same way in 2010 as the club built up significant debts and he failed to find a new buyer. Both these owners were Palace fans, but in itself this quality was no guarantee of success.

However, it can certainly be an advantage, so long as the strategy is the right one. Importantly, the current owners, who are also Palace supporters, have focused on the right things, leading to solid progress in all areas. As Parish said, “We continue to restore the club to health both on and off the pitch.” This has resulted in a new-found stability, which is a welcome relief for a club that nearly went out of business twice in the last 15 years.

The owners have provided funding in the form of loans and share capital that have allowed Palace to invest in the squad and the club’s infrastructure, both of which had unsurprisingly been somewhat neglected after the forced administrations. That’s not to say that Palace are by any means big spenders in the rarified air of the Premier League, but they have managed to consistently punch above their weight, defying expectations that they would rapidly return to the Championship.

Instead, the Eagles have soared, making good use of the financial benefits available after promotion. The massive turnaround can clearly be seen by the impressive £23.0 million profit before tax that the club reported for the 2013/14 season (£17.9 million after tax), which was a hefty £21.4 million improvement over the previous season’s £1.6 million profit. As Pardew commented, “The club is on a great financial footing.”

Following promotion to the Premier League, revenue increased by £76 million from £14 million to £90 million, largely due to the far higher broadcasting money, which was exacerbated by 2013/14 being the first year of a new TV deal.

However, this was partly offset by a £46 million increase in expenses, comprising higher wages, up £27 million to £46 million; player trading costs (amortisation and impairment of player values), up £6 million; and other expenses, which were £13 million higher. As the club stated: “The income and expense patterns change quite radically between the Championship and the Premiership and, although the income levels are high in the Premiership, so are the outgoings.”

In addition, profits from player sales were negligible in 2013/14, so were £14 million lower than the prior season. Against that, the club paid £5 million in promotion bonuses in 2012/13.

Since CPFC 2010 came into existence, Palace have been steadily improving their profitability with losses reducing in the first two years (2011 - £9 million, 2012 - £2 million), followed by increasing profits in the next two years (2013 - £2 million, 2014 - £23 million).

As a technical aside, it should be noted that the 2011 figures were restated to reflect the full impairment of goodwill (excess of the purchase price compared with the fair value of net assets acquired) following the acquisition of the club.

Going forward, Parish has observed that “The size of last year’s profit is unlikely to be repeated as first-team wages rise and we continue to strengthen the squad”, though he added, “However, I do expect a small profit this year.”

Nevertheless, it is striking that a club the size of Crystal Palace produced the 5th highest profit before tax in 2013/14 with their £23 million only surpassed by Tottenham Hotspur £80 million, Manchester United £41 million, Southampton £29 million and Everton £28 million. Although promotion to the top tier has undoubtedly helped Palace, they have still performed much better than the other two clubs that came up that season, namely Hull City (£9 million profit) and Cardiff City (£12 million loss).

What is also interesting is that Palace have achieved these high profits without the benefit of profits from player sales, which were worth less than £100,000. In contrast, three of the clubs that reported higher profits than Palace made substantial money from this activity: Tottenham £104 million (thanks to Gareth Bale’s transfer to Real Madrid), Southampton £32 million and Everton £28 million.

This is very different from the previous season’s financials, where Palace made £14 million profit from player sales, mainly Wilfred Zaha to Manchester United and Nathaniel Clyne to Southampton, which the club rightly described as “a great testament to our continued investment in the Academy.” If the £5 million once-off bonus payment arising from promotion were also excluded, the reported profit before tax of £1.6 million that year would have instead been a £7.7 million loss.

If similar adjustments are made over the last few years, then we can see that the underlying losses were actually increasing in the Championship from £1.6 million in 2011 to that £7.7 million in 2013. However, no such factors were present in 2014, highlighting the significant improvement in profitability following promotion.

There will be at least one exceptional item in the 2014/15 accounts, as Palace will then book the £3.5 million compensation payment made to Newcastle United to secure Pardew’s services. This has to be considered money well spent, given the positive results achieved by “Pards” since his arrival, which have arguably avoided a costly relegation.

It is also possible that the exciting winger Yannick Bolasie might be sold. Even though Pardew would be loath to lose such an attacking talent, it would be difficult to refuse an offer in the region of £20 million.

Steve Parish observed that “the improved (2013/14) profit stemmed mainly from increased broadcasting income, combined with prudent financial planning and management.” That cautious approach is underlined by Palace having the highest operating profit margin in the Premier League of 25%, way ahead of the next best club, Manchester United 14%.

Operating profit margin is calculated as operating profit (i.e. profit before tax excluding player sales and interest payable) divided by revenue and is a measure of a club’s underlying profitability. What this shows is that Crystal Palace have successfully managed their cost base and are operating in a genuinely sustainable manner.

One reason for Palace’s impressive profitability is relatively low player amortisation, which is the annual cost of expensing player purchases. To clarify this point, transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract – even if the entire fee is paid upfront. As an example, Scott Dann was bought from Blackburn Rovers for a reported £1.5 million on a three-and-a-half-year deal, so the annual amortisation in the accounts for him is £429,000.

As a rule, low player amortisation normally reflects low spending on player recruitment, so the higher investment in the playing squad recently has increased the annual amortisation charge from £1 million to £7 million (including impairment).

However, despite this growth, Palace’s player amortisation is still one of the smallest in the Premier League. As might be expected, it is miles lower than big spending clubs like Chelsea £91 million, Manchester City £76 million and Manchester United £55 million, but it is also only around a third of clubs like Stoke City and West Ham, both around £18 million. However, this expense will certainly increase in the next accounts following further outlays on player purchases.

As player trading (and particularly profits from player sales) have had a limited impact on Palace’s figures, the improvement in their bottom line is very largely due to the profitability of their core operations. This can be seen by looking at the club’s EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which can be considered a proxy for the club’s profits excluding player trading. This was slightly declining (and negative) in the Championship, but has shot up in the Premier League, jumped from minus £6 million to £30 million in 2013/14.

The growth is pretty good, but what’s particularly impressive is that Palace’s EBITDA is actually the 9th highest in the Premier League, around the same level as West Ham. Obviously, they are a long way behind the top five (Manchester United £130 million, Manchester City £75 million, Arsenal £62 million, Liverpool £53 million and Chelsea £51 million), due to their significantly higher revenue generating capacity – despite the far higher wage bills at those clubs.

Palace’s revenue has grown by more than 600% from £12.7 million to £90.4 million since 2011, the first year as CPFC 2010 Limited. This is almost entirely as a result of promotion to the Premier League, which has contributed £76 million of the £78 million growth over this period.

The main reason for the increase in 2012 was a successful Carling Cup run where Palace reached the semi-finals, beating Manchester United on the way.

Even after the massive revenue growth, Palace’s 2014 revenue of £90 million was still only the 17th highest in the Premier League, ahead of just three clubs: WBA £87 million, Hull City £84 million and Cardiff City £83 million. They were also just behind Fulham £91 million and Norwich City £94 million, both of whom ended up being relegated, which really underlines the magnitude of Palace’s achievement in evading the drop. In fact, they did much better than that, outperforming their revenue to such an extent that they actually finished 11th.

Of course, Palace’s revenue is still miles below the English elite, e.g. Manchester United’s £433 million is nearly five times as much, while four other clubs earn more than £250 million: Manchester City £347 million, Chelsea £320 million, Arsenal £299 million and Liverpool £256 million.

Parish argues that this is just another barrier to overcome: “You have to infect the whole thing with a belief system. The people who say, ‘well, they’ve got more money than us, so we will lose’ are weak.” Stirring words, but while it’s good to avoid defeatism, history tells us that the sheer size of the financial disparity undoubtedly gives those clubs a major advantage on the pitch.

In the Championship Palace had a fairly typical, evenly balanced revenue mix with match day contributing 42% (£6.2 million), commercial 31% (£4.4 million) and broadcasting 27% (£3.9 million), but this has substantially changed in the Premier League where TV is king. As a result, broadcasting is now worth an astonishing 82% (£74.2 million) of total revenue, with match day down to 10% (£9.3 million) and commercial falling to 8% (£6.9 million).

Perhaps unsurprisingly, no club is more reliant on TV than Crystal Palace, though half of the clubs in the Premier League depend on TV for more than 70% of their turnover.

Palace’s TV revenue shot up from £4 million in the Championship, comprising payments from the Football League pool and Premier League solidarity payments, to an amazing £74 million in the top flight, almost entirely due to their share of the Premier League TV money of £73.2 million.

The distribution methodology is fairly equitable with the top club (Liverpool) receiving around £98 million, while the bottom club (Cardiff City) got £62 million. The lion’s share of the money is allocated equally to each club, which means 50% of the domestic rights (£21.6 million in 2013/14), 100% of the overseas rights (£26.3 million) and 100% of the commercial revenue (£4.3 million). However, merit payments (25% of domestic rights) are worth £1.2 million per place in the league table and facility fees (25% of domestic rights) depend on how many times each club is broadcast live.

In this way, Palace’s climb up the league table really helped boos their revenue. For example, if they had only just escaped relegation (by finishing 17th), their merit payment would have only been £4.9 million, compared to the £12.4 million they actually received. It is therefore still worth battling for position as the season draws to a close. However, Palace were held back a little by only being broadcast live 10 times, which is the contractual minimum, receiving £8.6 million, compared to, say, Aston Villa’s £13.1 million for being shown live 16 times.

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 13th in the distribution table (as Palace did in 2013/14) would receive around £111 million a season, which would represent an additional £38 million.

Gate receipts have also grown in the Premier League, rising by 51% (£3.2 million) from £6.2 million to £9.3 million, largely thanks to the average attendance increasing from 17,278 in the Championship to 24,114 in the top flight. Although season ticket prices went up by an average of 21%, they had been frozen for fans purchasing up until the end of the previous April – and they are still among the cheapest in the division.

This is obviously an area of focus for the owners, as Palace’s match day revenue is one of the lowest in the Premier League. To place their £9 million into context, both Manchester United and Arsenal generate over £100 million a year from this revenue stream, which means that they earn more from three matches than Palace do in an entire season.

In fact, Parish emphasised this in the first set of accounts the club published post-administration: “Off the field the key aim is to increase income, the best way to do this is by increasing attendances. To support this we have invested in the match day experience.” Importantly, he added that bigger gates would also be attracted by a “better quality of football”, which has proved to be very astute, as attendances have increased by nearly 10,000 from less than 15,000 in the administration season, as the club has progressed up the league table.

Nevertheless, Palace’s average attendance was the second lowest in the Premier League in 2013/14, only above Swansea City, partly due to the low capacity of Selhurst Park, which only holds around 26,000 seats. The redevelopment of the stadium, possibly starting with a new main stand, is essentially a necessity for the team to be able to compete on a long-term basis.

The challenge will be to modernise the ground without losing the vocal, intimidating atmosphere that is part of the Palace ethos. As Parish put it, “Not having a sanitised stadium where you are religiously enforcing sitting down in every part of the stadium, where you allow the fans to express their opinions – as long as they are not offensive.”

The other area where Palace need to improve is commercial income. Although this increased by an impressive 55% (£2.4 million) from £4.4 million to £6.9 million in 2013/14, this is still the second lowest in the Premier League. Clearly, clubs like Manchester United £189 million and Manchester City £166 million are out of sight, but a more realistic aspiration might be to match the commercial revenue of clubs like Stoke City £14 million, Fulham £12 million and WBA £11 million.

In fact, Palace’s shirt sponsorship deal with Neteller (a service from online payments provider, Optimal Payments) is the lowest in the top tier at less than £1 million. Continued success in the Premier League should help drive a more lucrative deal, as the accounts noted, “the visibility of the club and the sponsors does get a very wide coverage in UK and across all the footballing world where Premiership matches are televised.” That said, it will not match the sponsorship deals at the top end, e.g. Manchester United’s Chevrolet deal is worth £47 million, while Chelsea have recently signed a new agreement with Yokohama Rubber for £40 million.

Palace also signed a new kit supplier deal for the 2014/15 deal with Macron, who replaced Avec, a subsidiary of Nike, as a sign of their more elevated status.

Given Parish’s commercial background, it is hardly unexpected that the owner is keen to “create a brand position for the club” that could be the source of future sponsorship income, based around qualities like its South London identity, a magnificent crowd atmosphere and player development. Parish himself noted that “over-achieving and ambition, a bit of showbiz and excitement, a certain style of playing – with wingers – have been part of our DNA, our brand for many years.”

The wage bill more than doubled, rising £27 million from £19 million to £46 million in 2013/14, but the important wages to turnover ratio was reduced from 129% to 51%, due to revenue growth (though the prior season also included £4.6 million of promotion bonus payments). In addition, the number of full-time players, managers and coaches increased from 57 to 88, reflecting the fact that “the depth of the squad is bigger than in the Championship” in order to have enough cover to cope with the more challenging requirements of the Premier League.

Palace's wages to turnover ratio is actually one of the best in the Premier League, only beaten by Manchester United's 50%, but is considerably lower than other clubs, e.g. WBA 75%, Fulham 75% and Sunderland 67%.

That is because (and stop me if you’ve heard this one before) Palace have one of the lowest wage bills in the Premier League, only ahead of Hull City, which goes a long way to explaining their high operating profits. To place this into context, recent opponents Manchester United’s wage bill of £215 million is nearly five times as high as Palace’s £46 million. While this might be an unrealistic comparison, it is worth noting that no fewer than nine clubs have a wage bill in the £60-70 million range, which highlights Palace’s test.

However, Parish has observed that “Just because a player is being paid 10 times more does not mean he is 10 times better than another professional footballer.” This point has some merit, as can be seen by the three clubs relegated in 2013/14 all “boasting” higher wages than Palace: Fulham £69 million, Cardiff City £53 million and Norwich City £50 million.

That said, there is normally a strong correlation between a club’s wage bill and sporting success, so Palace will have to somehow increase revenue to fund wages growth (assuming that they do not abandon their sustainable approach). Indeed, Parish has already indicated that the wage bill is likely to rise again this season, as the squad is strengthened.

One group that has not increased the wages is the directors and owners, as they have not taken any salaries from the club and have provided their services and guidance free of charge.

After many years of net sales, including some forced player selling as a result of administration, Palace have made net transfer expenditure of £52 million in the last two years (per the Transfer League website).

Incredibly, this is the 6th highest in the Premier League over that period, only behind the usual supsects (Manchester United, Manchester City, Arsenal, Chelsea and Liverpool). However, in many ways this is simply the logical result of promotion, as the club explained, “We had to assemble a team to compete in the Premiership in a reasonably short window”, adding “It is the intention of the board to strengthen the squad further to give the club the best chance to compete at the very top level.”

Palace have managed to do this without taking on any external bank debt. The only debt that the club has is £10.7 million of interest-free shareholder loans, split between the four owners: £3.0 million from each of Steve Parish, Stephen Browett and Jeremy Hosking plus £1.7 million from Martin Long. In fact, once £27.2 million of cash is considered, the club actually has net funds of £16.5 million.

In addition, £2.7 million is owed to other football clubs for transfer stage payments, while Palace also have quite high contingent liabilities of £10.4 million. As well as the usual supplementary transfer payments dependent on things like number of appearances, there is a specific sum of £5.1 million set aside for if the club retains its Premier League status. Palace have made good use of such self-financing incentive schemes in the past, both for avoiding relegation and winning promotion.

Given Palace’s previous flirtations with bankruptcy, their new prudent approach to debt is a breath of fresh air, as Parish explained: “We are not going to mortgage the future of the club, it is as simple as that. It is important we have a football club to support and we don’t put ourselves through the things we have been through in the last few years. That is the primary objective, to stay in business.”

This attitude is evident from looking at the cash flow statement, which includes no external funding since the club exited administration. Instead, the owners have provided £14.7 million of financing, split between the £10.7 million of debt and £4.0 million of new share capital. In fact, the club has not needed any additional funding since 2012.

The impact of promotion to the Premier League is particularly striking as Palace generated an impressive £49 million from operating activities in 2013/14, spending £20 million on player purchases (net) and £6 million on capital expenditure, while putting £24 million into the bank account.

The capex was used in many areas, including the purchase of the training ground at Copers Cope Road in Beckenham for £2.3 million, new bar and restaurant facilities in the stadium, improvements to the retail catering areas and a new pitch with undersoil heating (though on recent evidence the pitch still leaves a lot to be desired).

That is a lot of investment for a club of Palace’s size, but Parish believes that it is absolutely necessary: “We had been under-invested for various reasons for 20 years – that was when we last had any major infrastructure addition – so there’s a lot to do.” More positively, this is also aimed at changing the psychology of people: “infrastructure, training ground, stadium – we can make it the best it can be.”

Interestingly Palace’s cash balance of £27 million was only a little below Newcastle’s £34 million, but the two sets of supporters have greeted the news very differently, as there is an expectation from Eagles fans that their board will invest the money (and invest it well), while Mike Ashley is not trusted to do the same. To that point, Palace’s accounts note that the club has spent £13 million on purchasing new players since 30 June 2014, while only receiving £1 million proceeds from player sales.

There has been much media speculation about some sort of new investment to take Palace “to the next level”, specifically mentioning American private equity investor Josh Harris, who owns the Philadelphia 76ers basketball team and the New Jersey Devils in ice hockey, but Parish is at pains to say that “it has to be right” for him and his three co-owners.

It is not hard to see the appeal on both sides. Investors would be attracted by Palace’s recent progress and (especially) the blockbuster Premier League TV deal, while the club would secure the funding it needs to improve its facilities. As Parish put it, “I need to move the club forward as quickly as I can without taking risks and diverting money from the playing side to do the infrastructure.”

He was swift to allay supporters’ concerns: “Nobody is going to take this football club over and put it in debt and ruin five years of work that we’ve put in.” So investors would only be brought in if they were right for the club. The key word here is “investors”, as opposed to buyers, with Parish still running the club on a day-to-day basis.

"Game, set and match to Murray"

In the meantime, Crystal Palace have come a long way (baby) since the days of administration. As Parish said, “The first thing we needed to do was pull some rabbits out the hat, get to the Premier League and stay there. We have achieved that in a financially prudent way.”

Mission accomplished, but now it is all about building an established Premier League side “whilst continuing to minimise financial risk”. That is a tough challenge and the possibility of relegation in future seasons must still be a concern, given Palace’s meagre financial resources. Then again, under the new ownership this club has outperformed for the past few seasons and would prefer to look forward rather then behind them.

Their manager Alan Pardew neatly summed up the club’s current position: “We have got a good base of players here and with three or four additions to the group in the summer, we could be strong candidates for the top ten. But we need to recruit well. It is the key to progressing in the Premier League.”

Obviously, that is easier said than done, but it will be interesting to see if the Eagles can continue flying high. It has certainly been enjoyable following Palace’s Phoenix-like rise from the ashes, but the Premier League can be an unforgiving place, and only time will tell if they can maintain their momentum.


  1. Thank You simple easy to understand and very interesting. As a Palace fan really appreciated the effort put into this

  2. Fantastic.
    Up the Palace.

  3. Well written and insightful article. Thank you.

  4. Brilliant work. Come and visit the Palace some time when you're in the UK.

  5. Very interesting, but demonstrates just how important it is to remain in the PL. I also think we need to exploit our name and location with marketing in the US. We sound to the ignorant like we are the royal family's personal team, which in the US will go down a treat. I'm serious, we should milk that for all it's worth to build up a better commercial income and close the gap on teams like Sunderland, Villa and Newcastle (in financial terms, clearly I don't want the gap closed in footballing terms as that would be the wrong way). Then one day we might win something better than the ZDS trophy or the Championship play offs (we must have a few of those in the trophy cabinet!!)

  6. excellent article

  7. Excellent review, easy to read and understand. Good luck in the future to a well run and well managed Club.
    Fulham supporter

  8. This was really helpful, thank you for the hard work you've put into this, truly professional.

  9. Thanks for a very clear analysis.

  10. Excellent article. Getting a large modern Main Stand built, without threatening the finances or league status of the club is the next big challenge.

  11. Could do with more detail ;)


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