Tuesday, May 19, 2015

Middlesbrough - Take Me To The River

Having stormed past Brentford in the Championship play-off semi-finals, Middlesbrough are tantalisingly close to a return to the Premier League. If they manage to overcome Norwich City in the final, they will be back in the top flight after six long years, which would be a fine reward for owner Steve Gibson, who has been supporting the club (in both senses of the word) for so long.

Boro spent eleven consecutive seasons in the top division before relegation in 2009, winning the League Cup and reaching the UEFA Cup Final during this period, but promotion has to date proved elusive. They just missed out on the play-offs in 2012/13 when they finished 7th under Tony Mowbray, but a poor start to the 2013/14 campaign led to “Mogga” being replaced by Aitor Karanka, a former Spanish defender and assistant coach at Real Madrid.

This marked something of a departure for Boro, who had previously invested in a long line of British managers including Bryan Robson, Steve McClaren, Gordon Strachan and Mowbray. Although Boro only finished 12th in Karanka’s initial year, they have done much better in the Spaniard’s first full season.

Of course, for those with longer memories it is great news that Boro are still around to mount a challenge, given that they were minutes away from permanently folding in 1986, when they experienced severe financial difficulties, so much so that the gates to Ayresome Park were padlocked and they had to call in the provisional liquidator. The club was saved by a consortium led by then board member and current chairman Steve Gibson, who has continued to finance the club through good times and bad.

This can be seen in the 2013/14 accounts, where Boro reported a £20.4 million loss before tax (£15.6 million after tax once a tax credit of £4.9 million is taken into consideration), which was £2 million worse than the previous season’s loss of £18.5 million.

The higher loss was largely driven by a £3.1 million reduction in profit from player sales, but turnover also decreased 10% (£1.4 million) from £14.2 million to £12.8 million. Gate receipts were £0.8 million lower, in line with a reduction in the average attendance; income from cup competitions fell £0.4 million, as Boro were beaten at the first opportunity in both the FA Cup (to Hull City) and the Capital One Cup (to Accrington Stanley); and money from sponsorship and commercial deals also fell by £0.3 million.

This was offset by a 22% (£4.5 million) cut in the wage bill to £16.3 million and a net £0.8 million reduction in player trading costs (player amortisation £1.2 million lower, impairment in player values £0.4 million higher), though other expenses were £2.8 million higher.

It is worth noting that the operating loss, i.e. excluding player sales, improved by £1.2 million, though it was still pretty large at £21.1 million.

To be fair, almost all clubs in the Championship lose money and are reliant on owners’ funding. In 2013/14 losses were reported by 21 of the 24 clubs – in stark contrast to the Premier League where the new TV deal, allied with wage controls, has led to a surge in profitability. The only clubs to make money in the Championship were Blackpool (and their model is not one to be recommended), Wigan Athletic and Yeovil Town.

That said, Middlesbrough’s pre-tax loss of £20 million was one of the highest in the league, only surpassed by three clubs: Blackburn Rovers £42 million, Nottingham Forest £23 million and Leicester City £21 million.

This is nothing new for Boro, as they have consistently operated at a loss with the last few years being a sea of, well, red. In the last four reporting periods alone, they have made aggregate pre-tax losses of £71 million. As the accounts drily observed, “The Company operates in a challenging business environment and market sector where revenue streams can fluctuate significantly depending upon team performance on the pitch and costs can be unrelated to income generated.”

As a technical aside, Boro changed their accounting date in 2011, moving from a December year-end to a June close in line with other football clubs. This meant that the 2011 figures covered 18 months (the second half of season 2009/10 and the full 2010/11 season), while there were no accounts published for 2010.

The smallest loss registered by Boro recently was £0.3 million in 2009, which was not only the last time Boro were in the Premier League, but was also due to high profits on player sales of £17 million, largely from the transfers of Stewart Downing, Robert Huth and Tuncay Sanli.

This was a fairly profitable activity for Boro while they were in the top tier with the club earning £44 million between 2008 and 2011, also making good money from the sales of Jonathan Woodgate, Luke Young, Lee Cattermole, George Boateng, Adam Johnson, Brad Jones and David Wheater in this period.

However, since relegation there has been a steep reduction in profits from player sales. In fact, the club specifically noted that the widening of the 2013/14 loss was largely because they did not make as much money from player sales.

Again this is hardly unusual in the Championship with only two clubs (Wigan Athletic and Bournemouth) making more than £5 million from player sales in 2013/14. Actually only seven clubs made more than £2 million. That said, Middlesbrough’s £684,000 was among the lowest in the division.

Boro’s revenue has declined dramatically since relegation to the Championship, falling by 78% (£45 million) from the £58 million peak in 2008 to £13 million in 2013/14. Most of this decrease (£34 million) is due to the far lower TV deal in the Championship, but there have also been sharp reductions in commercial income (£6 million) and gate receipts (£5 million).

The near 60% decrease in gate revenue from £8.8 million to £3.8 million was described by Boro as “the financial effect of the team’s performance”, which was fair comment after languishing in mid-table in the Championship for a number of seasons.

The 2008 reporting period included half of the 2007/08 Premier League central TV distribution of £35 million and half of the 2008/09 distribution of £31 million. Boro’s revenue was subsequently enhanced by parachute payments from the Premier League (£12 million in 2009/10, £15 million in 2010/11 and £4 million in 2011/12), but, as the club said, it “failed to benefit from the on-field investment” enabled by those payments.

It is also worth noting the impact that a good cup run can have, most notably in 2006, which included the impressive achievement of reaching the UEFA Cup final, the FA Cup semi-final and Carling Cup quarter-final.

Boro’s progress this season is all the more striking when their relatively low revenue is considered. In 2013/14 their £13 million was only the 17th highest in the Championship, being around one-third of the top three clubs: QPR £39 million, Reading £38 million and Wigan Athletic £37 million.

Money often talks in football, so it is no surprise that two of the four clubs with the highest revenue were promoted that season: QPR and Leicester City. The exception to the rule was Burnley, who had the 11th largest revenue, but even they generated £7 million more than Boro with £20 million.

Of course, those total revenue figures are heavily influenced by the parachute payments received when clubs are relegated from the Premier League. If these were to be excluded, a slightly different picture emerges with Leicester City on top of the pile with £31 million, followed by Leeds United £25 million, Brighton £24 million and Derby County £20 million.

Boro’s revenue is fairly evenly split between the three main revenue streams: commercial 36%, broadcasting 34% and match day 30%. If Boro do secure promotion, then the mix would significantly change with a much greater share being contributed by broadcasting.

In 2013/14 Boro’s broadcasting revenue fell from £4.7 million to £4.4 million, including cup competitions. In the Championship most clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to just £4 million of central distributions: £1.7 million from the Football League pool and a £2.3 million solidarity payment from the Premier League.

However, the clear importance of parachute payments is once again highlighted in this revenue stream, greatly influencing the top eight earners, though it should be noted that clubs receiving parachute payments do not also receive solidarity payments. Other money is dependent on whether a team reaches the play-offs, cup runs and the number of times a club is broadcast live.

Looking at the Premier League television distributions, the massive financial disparity between England’s top two leagues becomes evident with Premier League clubs receiving between £62 million and £98 million, compared to the £4 million in the Championship. In other words, it would take a Championship club more than 15 years to earn the same amount as the bottom placed club in the Premier League.

Obviously there is never a good time to be relegated, but Middlesbrough’s timing was really bad, given that the Premier League distributions have significantly increased since their time away via two new three-year contracts, which have basically doubled the revenue, e.g. last place has gone up from £31 million to £62 million – and that’s before the recent blockbuster deal commences in 2016.

The financial prize for returning to the Premier League would be immense for Boro. Even if they were to finish last in their first season and go straight back down, their TV revenue would increase by £58 million (£62 million less £4 million) and they would then receive a further £63 million in parachute payments, giving a total increase of £121 million. If gate receipts and commercial income were to rise to previous Premier League levels, that would be worth another £11 million, giving a grand total of £132 million. That’s an awful lot to be effectively riding on one match, i.e. the Championship play-off final.

The parachute payments are linked to the size of the TV deal, specifically to the equal shares received by Premier League clubs for both the domestic and overseas deals: 55% in year 1 (£24.1 million), 45% in year 2 (£19.3 million) and 25% in each of years 3 and 4 (£9.7 million).

These payments will surely increase as part of the new 2016/17 deal, so the potential upside following promotion would be even higher – especially if Boro could survive in the top flight for more than one season. Little wonder that Steve Gibson said, “We want promotion as quickly as realistically possible.” The size of the prize explains why so many Championship clubs push the boat out in an attempt to reach the highly lucrative Premier League.

Of course, Boro would also have to spend more to improve their playing squad, but the net impact on the club’s finances would undoubtedly be positive, as can be seen by the clubs that were promoted in 2012/13 (Cardiff City, Hull City and Crystal Palace). All three of them significantly increased their expenses, particularly the wage bills, but still substantially improved their operating profits due to the huge revenue growth.

Crystal Palace are probably the closest to Boro in terms of finances and they turned a £12 million operating loss into a £23 million operating profit, as revenue rose from £15 million to £90 million, while wages went up from £19 million to £46 million.

Obviously promotion is by no means a fait accompli, but the club apparently has a financial “plan B” if this does not happen. The accounts of Gibson’s holding company stated, “(Boro) are hoping to mount a serious challenge for promotion to the Premier League with all the attendant benefits, but with a clear cost management plan in place in the event of the club continuing to perform in the Championship.”

Gate receipts dropped 18% (£0.8 million) from £4.6 million to £3.8 million in 2013/14 following a 1,000 fall in the average attendance. This is a concern, as chief executive Neil Bausor explained, In the absence of Premier League TV money, the main income stream for Championship clubs is gate receipts.”

Boro’s £3.8 million is the 14th highest in the Championship, but to put this in perspective only three clubs generate more than £7 million (Brighton £10.4 million, Leeds United £8.6 million and Nottingham Forest £7.2 million).

Boro’s average attendance of 15,800 was mid-table in last season’s Championship, a fair way behind clubs like Brighton (27,283), Leeds United (25,088), Derby County (24,933) and Leicester City (24,916).

Clearly Boro’s attendances have fallen significantly in the Championship, exacerbated by the tough economic climate in the North East. The 2013/14 attendance was down 44% on the 28,400 achieved in the last Premier League season in 2008/09 and even more from the 2004/05 high of 32,000, though this season’s resurgence has brought some of the crowd back with the average rising to 19,562. Not bad, but that still leaves a lot of gaps at the Riverside, which has a capacity of just under 35,000 seats.

It is to Boro’s credit that they did not increase the prices for season cards for nine consecutive seasons (while also introducing an offer of a free drink at each home game), though there was a £2 rise in the match day rates for the 2013/14 season. As Bausor noted, “We recognise that the support of the people of Teesside is of paramount importance if we are to achieve our ambitions.”

However, the club has just announced that they will raise prices for the 2015/16 season by 6-7% (though it will be higher for over-65s and under-18s). Although such moves are never going to be universally popular, it is understandable that the club needs to somehow generate more money if Boro are to compete at a higher level and their prices would still be among the lowest in the Premier League.

Commercial revenue decreased by 5% (£0.2 million) from £4.9 million to £4.7 million. This comprises sponsorship and commercial income £3.4 million and merchandising £1.25 million. That’s not too bad and is actually the 9th highest in the Championship. It may be a long way behind Leicester City £19 million (boosted by a major marketing deal with Trestellar Limited) and Leeds United £12 million, but no other clubs manages to earn more than £8 million.

Boro have a five-year shirt sponsorship deal with Ramsdens, the UK’s largest independent pawnbrokers, running until the end of the 2017/18 season. The financial terms have not been divulged, but it is reportedly worth “seven figures”. Since 2009 the kit supplier has been Adidas, who replaced the previous deal with Errea, which ran for 15 seasons.

The wage bill was slashed by 22% (£4.5 million) from £20.7 million to £16.3 million, reflecting the club’s attempts to cut costs. This reduced the wages to turnover ratio from 146% to 127%, which is still unsustainably high. The last time that this ratio was at a reasonable level was in the Premier League (59% in 2008 and 75% in 2009). Even though the club has focused on cost reduction since relegation with “player wages reducing season on season following transfer sales of players on expensive Premier League contracts”, it has not proved possible to cut wages at the same rate as the revenue decline.

Almost every club in the Championship has a dreadful wages to turnover ratio with 10 of them being more than 100%, meaning that the revenue is not enough to cover the wage bill, let alone any other costs. Even so, Boro’s 127% is the 5th highest in the division with the only clubs “boasting” a worse ratio being QPR 195%, Bournemouth 172%, Nottingham Forest 165% and Millwall 132%.

However, that does not mean that Boro have one of the highest wage bills, but is more a reflection of their relatively low revenue. In fact, their 2013/14 wages of £16 million were actually only the 13th highest in the Championship. Obviously QPR’s £75 million was a ridiculous sum for England’s second tier, but Leicester’s £36 million was more than twice as much as Boro. Perhaps it is not surprising that these two clubs ended up gaining promotion, but the fact that Burnley achieved the same on a budget of £15 million should give some encouragement to less wealthy clubs.

It is likely that Boro’s wage bill will have risen in 2014/15 following the arrival of players like Kike, Adam Clayton and Emilio Nsue, not to mention three season long loan signings for Patrick Bamford, Jelle Vossen and Ryan Fredericks.

Although Boro have not gone overboard in terms of spending, it is clear that Gibson has sanctioned some significant investment in the playing squad in their latest bid to escape the Championship. During their stay in the Premier League the club had frequently spent big, though not always wisely (the heavyweight purchases of Alfonso Alves and Mido come to mind), but it had to turn the taps off after relegation, leading to £30 million of net sales in the four years between 2009 and 2013.

However, in the last two seasons Boro have had a net spend of £8.9 million. That might not sound much, but it is in fact the 5th highest in the Championship in this period, only behind Fulham, Cardiff City, Norwich City and Nottingham Forest.

To be fair, this comparison has to be treated with some caution, as the figures are distorted by clubs that were in the Premier League the previous season, either because of high spend when they were in the top flight or large sales following their relegation. Furthermore, many deals are “undisclosed” in the Championship, so might have no reported value. That said, it is clear that Middlesbrough have had one of the highest net spends in the Championship and have “gone for it” this season.

Boro’s gross debt increased slightly to £77 million, though this is entirely owed to Steve Gibson’s company. It is repayable on demand, but is unsecured and interest-free. In 2012 all the bank debt was repaid and replaced by inter-company loans to the owner. This has saved Boro a lot of money in terms of interest payments, e.g. interest payable was £4.0 million in 2011 and £5.1 million in 2009.

Furthermore, Gibson has effectively written-off £55 million in the last three years by converting this amount from loans to equity capital. This was split between £50 million in 2012 and £5 million in 2014 (the maximum permitted under Financial Fair Play regulations). As chief executive Neil Bausor put it: “The club continues to hold the enviable position of being without any external debt and with a very stable ownership.”

Of course, many clubs in the Championship have built up substantial debt with Boro’s £77 million only the 6th highest behind Bolton Wanderers £195 million, QPR £185 million, Brighton £131 million, Ipswich Town £86 million and Blackburn Rovers £80 million.

The accounts emphasise the owner’s financial commitment to sustain the club’s ambition to return to the Premier League: “The going concern basis of the company depends on funds from The Gibson O’Neill Company Limited, the ultimate parent undertaking, who will continue to provide financial support for the company for the foreseeable future.”

Without Gibson it is difficult to imagine how Boro could possibly compete in the Championship, as he essentially puts around £1 million into the club every month to cover its losses. He could potentially sell up at some stage, but realistically Boro would not be the most attractive option to overseas investors – though that might change if they do indeed reach the promised land of the Premier League with its fabulous TV money.

Nonetheless, Gibson cannot simply buy success, as Boro now need to comply with the Financial Fair Play (FFP) regulations. As the chairman explained: “Balancing the books for FFP is challenging, but we continue to provide the maximum level of funding for the first team squad that we are able to.”

"Don't push me, cause I'm close to the Edge"

Under the existing rules, clubs are only allowed a maximum annual loss of £8 million (assuming that any losses in excess of £3 million are covered by injecting equity). Boro confirmed that the 2013/14 “losses were compliant with the Football League FFP requirements, as a significant proportion of them were allowable as Exceptional Items under those rules.”

It should be noted that FFP losses are not the same as the published accounts, as clubs are permitted to exclude some costs, such as youth development, community schemes, promotion-related bonuses and depreciation on fixed assets.

The current rules will continue to apply for the 2014/15 and 2015/16 seasons (though the maximum allowed loss is increased to £13 million from the second season), but will change from the 2016/17 season to be more aligned with the Premier League’s regulations, e.g. the losses will be calculated over a three-year period up to a maximum of £39 million.

FFP encourages clubs to invest in youth development, which is an area of focus for Boro, whose academy under Dave Parnaby is regarded as being one of the most productive in England. Gibson is rightly proud of its achievements, including the awarding of the important Category One status.

"Spanish Bombs"

This has been a trying time for Boro supporters. As Gibson said: “The last few years have been challenging for all of us. When we dropped out of the Premier League we wanted to bounce straight back up and that hasn't yet happened.”

Karanka sounded the battle cry at the beginning of this season: “I know where we deserve to be – in the Premier League. It's my job to make sure that happens, and step by step we are building a new future for our club. The club is ready, the players are ready and the supporters are ready.”

There are no guarantees in football and Boro could yet fall at the final hurdle, but they are now very close to achieving that dream. After all the financial struggles and the many frustrating years, when Gibson’s support has been so vital, that would really be something.


  1. very informative and interesting, thank you

  2. Your statto's are always eye opening, but this opened my eyes wider. I always thought the Boro being a 'bigger' club would do better on the revenue. Obviously winning the Premier League jackpot would help them.
    Deep,deep admiration for Steve Gibson.

  3. The chasm between the PL and Championship, and the threat it poses to English football, is never more clearly illustrated than in one of your illuminating analyses of Championship clubs' financial results.

    For instance QPR deserve admonishment for their brazen, reckless spending way beyond their means, just to be PL relegation fodder. Then again, you can sympathise when you look at how the likes of Boro are toiling against the backdrop of heavy annual losses and ever-rising wages.

    And kudos for the Adam Clayton caption.

  4. Two comments Mr Ramble:

    1. Are the signs for percentage growth in the top table correct? For example, EBITDA increased by £0.4m but this is shown as negative growth.

    2. Do you feel that the FFP rules are adequate for meeting the objectives of the rules? In particular, I don't see how they improve the economic and financial capability of the clubs or encourage the clubs to operate on the basis of their own revenues. My reading of several championship club's finances are that the rules aren't encouraging break-even performance but for a club to operate in perpetuity at an "acceptable" level of losses. However, this is only sustainable in the long-run if clubs manage to "hold on" to their generous benefactors. Whilst Middlesbrough are in the envious position of having a dedicated "fan" as their benefactor, many clubs do not. I worry for the future of the Football League that the environment that currently attracts these benefactors may one day change and leave many clubs in severe financial difficulties.

  5. Great articles, can we have some more European clubs please


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