Tuesday, June 9, 2015

Watford - Upwards And Onwards

Amidst all the excitement about Eddie Howe’s Bournemouth securing promotion to the Premier League, Watford’s similar feat has been a little overlooked, which is a shame, as the story is just as interesting. The turnaround since the Pozzo family purchased the Hertfordshire club, both on and off the pitch, has been remarkable.

Watford narrowly missed out on a Premier League place in the Italians’ first season in 2012/13, when Gianfranco Zola’s team was defeated 1-0 by Crystal Palace in the Championship play-off final with an extra-time penalty.

Zola had replaced the popular Sean Dyche and enjoyed immediate success, but struggled the following season, when the club appointed Beppe Sannino. After Watford finished a disappointing 13th, the writing was on the wall for Sannino, who resigned early in the 2014/15 season.

This set off an extraordinary sequence with five changes in the Head Coach in just 10 months, though the statistic is somewhat misleading: Oscar Garcia had to resign for health reasons; Billy McKinley declined the Assistant Head Coach position; and Slavisa Jokanovic, the former Chelsea midfielder who had guided Watford to promotion, exited stage left after the club rejected his salary demands.

In a sign of the Hornets’ growing ambition, they have now appointed Quique Flores, whose CV is truly impressive, having won the Europa League with Atletico Madrid and taken Valencia to the Champions League quarter-finals.

"Sound Czech"

Watford have continued to “progress under stable and ambitious ownership”, which is something of a new experience for their supporters, as the club had been in turmoil under previous owner Laurence Bassini, who was found guilty of financial misconduct by the Football League and subsequently banned from football for three years.

The club itself was placed under a limited transfer embargo, i.e. it could still sign players with prior permission from league officials, but suffered no points deduction. The leniency of the punishment was because the league viewed this as purely Bassini’s responsibility with the other board members being unaware of his indiscretions.

Fortunately, the group that sold the club to Bassini in 2011 (including Lord Ashcroft) had included clauses in the sale agreement that effectively allowed them to regain control after the businessman failed to meet those conditions. This enabled them to sell the club in June 2012 to the Pozzo family, who have a fine ownership record with Udinese (since 1986) and Granada (since 2009). The new owners took on the debts and brought stability to a club that was on the brink of administration.

Although some fans were understandably nervous about the impact of the Pozzos extending their football empire to England, the Italians sought to allay their concerns, stating, “Our vision of how we should be involved in professional football is to provide financial and technical support, so that success can be achieved over the long-term.”

To date, they have been true to their word, implementing a strategy that has been thoroughly tried and tested at their other clubs with much success: Udinese have become a force in Serie A, qualifying for the Champions League on a number of occasions; while Granada stormed back to La Liga after a 35-year absence.

"The only way is up"

Their achievements have been built on a formidable, global scouting network that has continually identified talented players with lots of potential that can be developed and then sold at a healthy profit, with Alexis Sanchez being the jewel in the crown of this strategy.

Watford have greatly benefited from being part of this group with many players being brought in from their Italian and Spanish “partners”, such as Matej Vydra, Odion Ighalo, Almen Abdi, Gabriele Angella and Joel Ekstrand from Udinese; and Juan Carlos Paredes and Ikechi Anya from Granada. Without access to the Pozzo portfolio, it is unlikely that Watford would have been able to attract players of this calibre, nor afford them, as they have been either loaned or sold on favourable terms.

The number of loans has reduced since the Pozzos’ first season, partly because there was little time for the Italians to do much else between their end-June takeover and the start of the 2012/13 campaign, but also because league rules have been tightened to include international arrangements.

That said, players arriving from Udinese and Granada, either via loans or permanent transfers, have still been highly influential in Watford’s successful promotion campaign. This approach has been unpopular with other clubs for obvious reasons, though arguably it is effectively a more sophisticated version of the “buy low, sell high” tactic used by many teams in order to survive.

As Gino Pozzo said, “If you look at the recent history of Watford, the project was: we need to sell all our best players as soon as an offer comes, because there weren’t the financial resources to hold on to them. Knowing that our financial resources are limited, we will have to go another way around to be able to challenge.”

The focus on financial management is clear when looking at the most recent published accounts from the 2013/14 season, when the club maintained its recent trend of more or less breaking-even, though the bottom line did fall by £0.5 million from a £0.2 million profit to a £0.3 million loss.

Revenue was £1.4 million lower at £16.7 million, while profit on player sales also fell £1.1 million to £1.5 million, which mainly came from the transfers of Britt Assombalonga, Jonathan Hogg and Craig Forsyth. This was largely offset by a £1.1 million reduction in expenses, including £0.9 million in wages, and £0.4 million in player amortisation and impairment.

In addition, other operating income was £0.6 million higher, mainly due to a contribution from bondholders related to the LNOC Limited dispute (though other expenses also included £0.2 million legal and professional services for this matter), while the previous season included the final rent payment from Saracens rugby club.

However, it should be noted that the 2012/13 figures were boosted by Watford’s participation in the Championship play-off finals, which increased revenue and profit by £2.6 million and £2.2 million respectively. Therefore, on a comparable basis, revenue actually rose by £1.1 million, while profits would have been £1.7 million higher. This is why the club claimed that the “financial performance has seen areas of impressive growth.”

In itself, this is a pretty impressive accomplishment, but it is even more notable if we consider the fact that most clubs make hefty losses in England’s second tier, largely as a result of their natural desire to reach the lucrative Premier League. In fact, only three of the 24 clubs in the Championship were profitable in 2013/14 (Blackpool, Wigan Athletic and Yeovil Town) – and they have all since been relegated.

Watford’s small loss of £0.3 million was actually the 4th best in the league table of profits and losses, which on the one hand makes their achievements on the pitch all the more striking, but on the other hand is the outcome of their relationship with Udinese and Granada. Nevertheless, it is still considerably better than the losses made by the likes of Blackburn Rovers £42 million, Nottingham Forest £23 million, Leicester City £21 million, Middlesbrough £20 million and Leeds United £20 million.

Over the years, Watford have tended to make (small) losses, “as the club endeavours to remain a competitive force in the Championship.” A while back, former chairman Graham Taylor articulated the club’s challenge thus: “With reduced television incomes and the continued financial constraints continuing to be felt across all walks of public life, the move towards a sustainable and profitable football-based business becomes a tougher and more difficult challenge with every passing year.”

The exceptions are 2007 and 2011 when Watford reported large profits of £8 million and £10 million, but there were specific factors driving those results. In 2011 £13 million of inter-company debt between the club and Watford Leisure PLC was waived as part of the requirements of the secured bond issue, while 2007 was boosted by profits from player sales of £8 million, including the record transfer of Ashley Young to Aston Villa.

Traditionally Watford have compensated their operating losses with profits from player sales: 2007/08 £7.4 million – Marlon King and Hameur Bouazza; 2008/09 £3.7 million – Danny Shittu and Darius Henderson; 2009/10 £5.1 million – Mike Williamson, Tommy Smith and Tamas Priskin; and 2011/12 £6.4 million – Danny Graham, Marvin Sordell and Will Buckley. In 2012 the club observed, “The trading of players remained critical to reducing the club’s losses.”

However, the Pozzo regime has moved away from this policy, as explained by chief executive Scott Duxbury, “Our aim is to establish a business plan that makes the club self sufficient as quickly as possible. The previous business plan covered significant losses through player trading. We don’t want to do that, we want to keep the players, remain competitive, and we think the best platform to get to the Premier League with no timescale being put upon it is to become a sustainable Championship club.”

Thus, profits from player sales have reduced in the last two years to just £2.6 million and £1.5 million. The latter was only the 11th highest in the Championship in 2013/14, though in fairness few clubs in that division make big money from this activity with only two generating more than £5 million: Wigan Athletic £13.4 million and Bournemouth £6.9 million.

Watford’s drive to becoming self-sufficient can be seen by the reduction in operating losses from £6.8 million in 2012, the last season before the new owners arrived, to £2.1 million in 2013 and £1.4 million in 2014. The operating loss had actually been as high as £10.9 million in 2008.

Revenue has fallen since the £28.8 million peak in 2007, which was the last time Watford were in the Premier League, when they received £16.7 million of central TV distributions. Parachute payments of around £12 million a year kept the revenue at the £21-22 million level in the following two seasons, but this dropped to £11.3 million in 2010 once they ceased.

Since then, Watford’s revenue has risen by 48% (£5.4 million), almost entirely in the period after the Pozzo family’s arrival. In particular, commercial income has nearly tripled from £2.8 million to £8.1 million. In reality, the underlying growth is even higher, as 2010 included £1.4 million from a fund raising concert by one of the club’s presidents, Sir Elton John. The accounts do not fully explain this striking commercial growth beyond saying that the growth is due to “improved commercial performance of the business.”

Despite this growth, Watford’s revenue of £16.7 million was only the 13th highest in the Championship in the 2013/14 season, a long way behind the top three clubs: QPR £39 million, Reading £38 million and Wigan Athletic £37 million. In fact, six clubs earned more than £30 million that year.

Of course, to a large extent, this only demonstrates the importance of parachute payments for those clubs relegated from the Premier League. If these were to be excluded, Watford would move up to 6th place in the Championship revenue league, only behind Leicester City £31 million, Leeds United £25 million, Brighton £24 million, Derby County £20 million and QPR £17 million.

The significance of commercial income to Watford’s business model can be seen by this revenue stream accounting for nearly half (48%) of their total revenue, up from 43% the previous season. Broadcasting contributes 29%, while match day is only worth 23%. Broadcasting will obviously be much more important in the Premier League, where most clubs of Watford’s size are hugely reliant on TV money.

In 2013/14 Watford’s broadcasting revenue was unchanged at £4.8 million. 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 major impact 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. Watford’s TV money has sometimes been influenced by FA cup runs, e.g. it was up at £5.4 million in 2012 due to the 4th round FA Cup match against Tottenham being televised.

Obviously Watford will earn substantially more TV money in 2015/16 following promotion, as can bee seen by the Premier League television distributions, which underline the massive financial disparity between England’s top two leagues. In 2014/15 Premier League clubs received between £65 million and £99 million, compared to the £4 million in the Championship. In other words, Watford’s broadcasting revenue will increase by at least £61 million in the top flight.

It could be even more, depending on where the club finishes in the league (with each place worth an additional £1.2 million) and how many times they are televised live (where each club is paid facility fees, with a contractual minimum of 10 games).

All this is before the recent blockbuster Premier League deal that starts in 2016/17, which I calculate will be worth at least another £30 million a season, so Watford have every incentive to stay up.

Even if they were to finish in the bottom three and go straight back down, they would still benefit from parachute payments. Up to now, these have been worth £65 million over four years: year 1 £25 million, year 2 £20 million and £10 million in each of years 3 and 4.

However, the Premier League has recently announced changes to this structure, whereby from 2016/17 clubs will only receive parachute payments for three seasons after relegation, although the amounts will be higher (my estimate is £75 million, based on the advised percentages of the equal share paid to Premier League clubs: year 1 55%, year 2 45% and year 3 20%). Of particular interest to Watford fans is the additional fact that clubs that go straight back down will only receive parachute payments for two seasons (instead of three).

The financial prize for returning to the Premier League is therefore immense for Watford. As well as broadcasting revenue, match day and commercial income should also rise following promotion, so total revenue should (conservatively) rise to at least £80 million.

Of course, Watford will also have to spend more to improve their playing squad, but the net impact on the club’s finances will 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 Watford 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.

Match day revenue fell £1.8 million (32%) from £5.6 million to £3.8 million, though the previous season included £1.6 million from the run to the play-off final. This is a solid mid-table position in the Championship, but a fair way behind Brighton £10 million, Leeds United £9 million and Nottingham Forest and Leicester City with £7 million apiece.

Ticket prices were increased for the first time in four years (by an average of 3%) for the 2014/15 season, highlighting the dilemma facing all but the wealthiest of football clubs, which Duxbury explained, “As chief executive, I have a responsibility to both the supporters of this club and the board of directors to deliver a commercially sustainable and progressive football club. I also have a specific duty to supporters to deliver a competitive and fair season ticket price to ensure they are able to continue supporting this club on its incredible journey.” Even though the club has announced that prices will be increased for a second consecutive season in 2015/16, this will be for a superior “product” in the Premier League.

Watford’s average attendance in 2013/14 was 15,512, about the same as former Premier League mainstays, Bolton Wanderers and Birmingham City, but a long way below the top four clubs (Brighton, Leeds United, Derby County and Leicester City), who all attracted at least 10,000 more spectators.

However, that represented a decent improvement from the 12,704 low in 2011/12 and the positive trend has continued with the average attendance rising to 16,664 in the 2014/15 promotion season.

In preparation for their return to the top flight, Watford have just announced the construction of 700 more seats at Vicarage Road to increase capacity to just over 21,000. These will be in the new East Stand (named after Sir Elton John) that was completed in December 2014 at the cost of around £3.5 million. This was funded by the owners, who had pledged to deliver increased supporter accommodation once attendances regularly reached the 15,000 level.

Commercial revenue slightly increased by £0.3 million (4%) from £7.8 million to £8.1 million, but the underlying increase was again higher, as the prior season included ä1 million due to reaching the play-off final. Watford’s commercial income is actually the 4th 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 it is notably better than most clubs in the division.

In fact, the significant increase in commercial income since the Pozzo family took charge is even more impressive than the reported figures, given that catering has been outsourced (thus reducing revenue and costs).

Watford have a three-year shirt sponsorship deal with online casino 138.com that runs until the end of the 2015/16 season. The terms have not been divulged, but Duxbury has stated that it is “worth more financially” than the previous agreement with former sponsor SI’s Football Manager. Since 2012 the kit supplier has been Puma, who signed a three-year deal, which has presumably been extended, as they have just launched the new kit for the 2015/16 season.

The wage bill fell £0.9 million (7%) from £12.8 million to £11.9 million, largely due to a once-off payment of £0.7 million the previous season for restructuring following the Pozzo takeover, plus lower bonus payments due to slipping to a 13th place finish. It is also worth noting that the number of players was reduced from 60 to 52.

The wages to turnover ratio was maintained at 71%, which is the lowest since the time when the club was receiving parachute payments. As a comparative, the ratio the season after these stopped was a worryingly high 97%.

Almost all clubs in the Championship have terrible wages to turnover ratios, e.g. QPR 195%, Bournemouth 172% and Nottingham Forest 165%, but Watford’s is one of the best at only 71%. In fact, this was only beaten by Blackpool 48% and their “model” is not one to be recommended.

The £12 million wage bill was also one of the lowest, though it is likely to be advantaged by the various loan agreements with Udinese and Granada. Even so, it was significantly lower than the likes of Leicester City, Reading, Blackburn Rovers and Wigan Athletic, whose wages were all above £30 million, QPR were even higher at £75 million, but that was simply ridiculous in the second tier.

Nor have Watford splashed the cash when purchasing players, though again they have benefited from working with their partner clubs. Up until the Pozzo family arrived, Watford were basically a selling club with net sales of £26 million over the previous seven seasons, even including their brief period in the Premier League in 2007. Importantly, while they still had net sales in the last two seasons, this has greatly reduced to just £1 million.

As a result, their “spend” is much lower than many other Championship clubs in this period, though 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 described as “undisclosed” or simply “signed” in the Championship, so have no reported value, when you would expect some money to have changed hands.

Gross debt increased by £3.3 million from £10.0 million to £13.3 million, though this is still much less than the £23.0 million in 2010, thanks to the £13 million loan waiver in 2011. Most of the debt comprises the £5.6 million owed to the parent company, Hornets Investment Limited, or secured bonds of £6.0 million, which are the result of canceling inter-company loans. In addition, there is a £0.7 million bank overdraft, a £0.6 million loan from Watford FC Community Sports and Education Trust plus a £0.3 million director’s loan.

The debt owed to the parent company increased by £2.6 million, largely due to two loans provided for the building of the East Stand. The first is a £1 million loan with 4.5% interest per year repayable on 30 September 2015, while the second is a £1.75 million loan repayable in five equal instalments commencing on 31 December 2015 with  interest again accrued at 4.5%. The rest of this debt is unsecured, carries no interest and has no fixed repayment date.

The secured bonds are owed to Lord Ashcroft, non-executive director David Fransen and former chairman Graham Simpson, whom Duxbury described as “partners rather than creditors”. The repayment schedule was activated on promotion to the Premier League, but it has been reported that this will be completed over two years. At that point Watford should be debt-free, especially with the influx of cash from the top flight.

In any case, Watford are well down the debt league in the Championship, significantly below Bolton Wanderers £195 million, QPR £180 million and Brighton £131 million.

However, Watford also had high contingent liabilities under various transfer agreements of £8.5 million, which included £8.1 million relating to clauses for promotion to the Premier League or international appearances. As a result of promotion, these payments will crystallise, so Watford’s costs will increase, either directly or via increased amortisation of transfer fees. There are also likely to be sizeable bonus payments linked to promotion, so supporters should expect to see a large loss in the 2014/15 accounts, though this should pave the way for future gains.

On the other hand, Watford had sums receivable from other clubs in respect of transfer fees, of which £2.2 million became due after the accounts closed.

Watford’s cash flow once more reflects the change in strategy under the new owners. Although the net cash inflows/outflows are fairly similar, there has been a marked improvement in cash generated from operating activities and a consequent reduction in the amounts produced from player sales. The owners have also provided loans to fund increased capital expenditure, basically the East Stand development.

Although the Pozzos have not advanced a massive amount of cash, their generosity has come in other forms, most obviously on the playing side. They have also reiterated that they are “committed to new investment into the business in respect of playing staff and to update the facilities at the stadium.”

As well as making excellent use of the other clubs in the group, the club has stated that developing young players remains a “high priority”. Duxbury has emphasised that “the academy is central to our future”, making good use of the special relationship with the Harefield Academy.

"Thank you for sending me an Angella"

Pozzo has also introduced longer contracts for youth players like the promising Tommy Hoban. He observed, “We were surprised that a club that works with young players is not committed to young players. They had one, two-year contracts. Why? It was a mixed message. By changing that idea – to say that the players are here to fully develop to a top, top level – then they will sign longer contracts for the next three or four years.”

Promotion may have come sooner than the owners (and the fans) anticipated, but it is clear that they have arrived with a good plan. As Gino Pozzo explained, “We are here for the long term. This is not a case of a foreign owner with an injection of money looking for a quick return. We wish to establish Watford as a Premier League club… self-sufficient over time. Longevity to us is key to success. It is only over many years that success can be judged.”

The last two occasions that Watford reached the top flight were eminently forgettable, but this time it feels like it might just be different.


  1. Well informed. Thorough. Fascinating. Thank you.

  2. Informative, accurate, interesting & very much an education! Superb stuff!

  3. What a thorough, considered analysis of the true picture. Fascinating read for fans of the club like myself, perhaps certain sections of the popular media would do well to spend a little time perusing this. Long-term, sustainable growth is the only way forward for football and the Pozzo family have an admirable, proven track-record in that respect. We are lucky to have them.

  4. A really solid piece of financial and strategic analysis. Watford feels like a club that is laying foundations for longevity and success. As this piece shows, what happens off the pitch weighs heavily towards a club's fortunes on pitch. With so much football analysis that is one-dimensional or overtly emotional, it's great to read an objective and thorough analysis. Would love to read similar treatments on Bournemouth and NCFC.

  5. Sounds like they have a great platform financially to make a go of it in the PL. Most other teams make heavy losses reaching for the promised land of PL TV revenues (QPR anyone?), then have to decide whether to double down, or bank most of it for the sake of the club's long-term existence.

    Watford, on the other hand, could invest in the squad to a reasonable degree without risking a negative spiral if they failed to stay up. I wonder whether the owners will encourage the team to do so.


Related Posts Plugin for WordPress, Blogger...