Swansea City - Don't Let The Sun Go Down On Me

Even though Swansea City’s form has not been great, it still came as something of a surprise when manager Garry Monk was sacked this month, not least because the customary smooth succession to a capable replacement seems to have foundered. There have reportedly been talks with former Argentina and Chile coach Marcelo Bielsa, but coach Alan Curtis remains in charge for the time being.

With the Swans hovering close to the relegation zone, this feels like it might be the first genuine setback since the club’s steady recovery from near insolvency, when their financial difficulties inevitably spilled onto the pitch and they only avoided demotion to the Conference in 2003 by the skin of their teeth.

Since those trying times Swansea have become somewhat of a model club, surging up the leagues until they secured promotion to the Premier League in 2011. They are owned by a consortium of local businessmen and fans with a 21% share being held by the Supporters’ Trust. Furthermore, they have moved from the ramshackle, run-down Vetch Field to a spanking new stadium.

"Williams, it was really nothing"

People noted this success and started to talk of the “Swansea Way”, partly due to the way that the club has been run, but also referring to an attractive, passing style of play. They have been prudent, spending their funds wisely, as they are acutely aware of the problems off the pitch in their recent past.

The approach was summarised by chairman Huw Jenkins thus: “We don’t have dramatic changes. We make sure managers are comfortable and take on board our philosophy and stick to it. We run a common sense business and when clubs change their playing squads to suit a new manager, it seems completely wrong to us.”

The fruits of their labour have been clear for all to see, as Swansea won the Capital One Cup in 2012/13, thus qualifying for the Europa League. There was a series of encouraging mid-table finishes, culminating in what Jenkins described as “the best season in the club’s history” in 2014/15, as Swansea registered their highest Premier League finish of 8th (the second best of all time in the top flight) with their highest ever total of 56 points.

"Don't bet against the Fed"

However, things can quickly change and there has been a marked dip this season following an indifferent summer recruitment campaign. Portuguese international Eder has been ineffective, while French defender Franck Tabanou has been virtually non-existent and the new strike force of Andre Ayew and Bafetimbi Gomis has mainly flattered to deceive.

This led to Monk’s departure with the club clearly worried about the implications of dropping down to the Championship. As Jenkins explained, “With the recent uncertainty surrounding the club, the decision has been made in the best interests of Swansea City and its supporters.”

The riches available in the Premier League can be seen in Swansea’s accounts for the 2014/15 season, as the club broke through the £100 million revenue barrier for the first time. Despite this feat, profit after tax was £0.6 million lower at £1.1 million, though profit before tax actually rose £0.4 million to £1.7 million, as the latest accounts had a tax charge of £0.6 million, while the previous year benefited from a £0.4 million tax credit.

Importantly, Swansea changed their financial year-end from May to July in order to be more aligned to the football season, so the 2014/15 accounts cover 14 months. This means that costs are a fair bit higher than a normal year, as these are incurred over the whole period, while revenue is only slightly higher, as there is no additional match day or broadcasting income in June and July.

This helped contribute to wages increasing by £19 million (31%) to £83 million and other expenses rising £6 million (51%) to £19 million. Player amortisation and depreciation were also £2 million higher, though player impairment was reduced by £4 million.

Revenue rose by £5 million (5%), largely due to broadcasting income increasing by £4.5 million (6%) to £85 million, but there was also growth in commercial income, up £1.7 million (21%) to £10 million, and player loans, up £0.5 million to £1 million. On the other hand, match income was down £1.5 million (16%) to £7.7 million, mainly due to the lack of Europa League games.

All this meant that Swansea’s operating profit fell £18 million, though this was offset by the £19 million increase in profits from player sales, mainly due to Wilfried Bony’s transfer to Manchester City.

The expenses growth reflected the cost of playing in “the best league in the world”, as Swansea’s finance director Don Keefe observed, “These latest financial results continue to reveal the club’s desire to maintain investment to improve performance standards and, in particular, to compete successfully in the Premier League.”

Given the cost impact of a 14-month accounting period, making any sort of profit is not to be sniffed at, though it has become less of a rarity in the Premier League these days. In fact, no fewer than 15 of the 20 clubs in the top flight made money in 2013/14 (the last season for which all clubs have published their accounts).

Swansea’s achievement is even more impressive if you consider that half of the eight Premier League clubs to have published their 2014/15 results have reported worse figures, namely Everton, Manchester United, Southampton and West Ham. This is fairly typical in the years when there is not a new TV deal, as there is relatively little revenue growth, while wages keeps going up.

Nevertheless, Swansea’s annual profits in the last couple of years are among the lowest in the Premier League. For example, in the prior season their profit of £1 million was way behind Tottenham Hotspur £80 million, Manchester United £41 million, Southampton £29 million and Everton £28 million.

To an extent, this merely highlights the major impact that once-off player sales can have on a football club’s profitability. To reinforce this point, in 2014/15 Southampton made £44 million from player sales, mainly due to the transfers of Adam Lallana and Dejan Lovren to Liverpool plus Calum Chambers to Arsenal, while the previous season saw Tottenham Hotspur make an amazing £104 million (largely from the mega sale of Gareth Bale to Real Madrid) and Chelsea £65 million (David Luiz to Paris Saint-Germain).

In stark contrast, Swansea were the fourth worst in the Premier League at making money from this activity in 2013/14, generating just £5k. Fortunately, this significantly improved in 2014/15, when they made £19 million from player sales. Most of this was from Bony’s record move to City, but there were also gains from the sales of Michel Vorm to Tottenham and Chico Flores to Lekhwiya in Qatar.

Swansea’s focus on the bottom line is evidenced by them being consistently profitable over the last four seasons, making a total of £41 million profits before tax since promotion to the Premier League. Most impressively, Swansea had profits of £17 million and £21 million in 2012 and 2013 respectively. Indeed the latter profit was the highest achieved in the top tier that particular season.

The last time that Swansea made a loss was £11 million in 2011, which could ironically be considered as the price of success, because promotion triggered hefty bonus payments to the players and management staff plus additional transfer fees.

As we have seen, when football clubs make large profits it is often down to major player sales. This was certainly the case for Swansea in 2013, when the £21 million profit was essentially due to transfers, mainly Joe Allen to Liverpool, Scott Sinclair to Manchester City and Danny Graham to Sunderland.

Very little will come Swansea’s way from player sales in 2015/16, unless they make sales in the January window, as they have only earned around half a million to date from Jazz Richards’ transfer to Fulham.

Profits can also be boosted by other exceptional items. In Swansea’s case, they have made £7 million in compensation fees for management “transfers” in the last few years: £5 million from Liverpool in 2012 for Brendan Rodgers and his staff; £2 million from Wigan Athletic for Roberto Martinez in 2010. In contrast, next year’s books will have to absorb a £3 million severance payment to Monk.

As transfers can have such a major impact on reported profits, it is worth exploring how football clubs account for these deals. Even though this is fairly technical, the fundamental point is that when a club purchases a player the costs are spread over a few years, but any profit made from selling players is immediately booked to the accounts.

So, when a club buys a player, it does not show the full transfer fee in the accounts in that year, but writes-down the cost (evenly) over the length of the player’s contract. Therefore, if Swansea were to spend £15 million on a new player with a 5-year contract, the annual expense would be only £3 million (£15 million divided by 5 years) in player amortisation (on top of wages).

However, when that player is sold, the club will straight away report the profit, which is basically the sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold 3 years later for £18 million, the cash profit would be £3 million (£18 million less £15 million), but the accounting profit would be much higher at £12 million, as the club would have already booked £9 million of amortisation (3 years at £3 million).

Notwithstanding the accounting treatment, essentially the more that a club spends, the higher its player amortisation. Thus, Swansea’s player amortisation has shot up from just £1 million in 2011 to an £18 million peak in 2015, reflecting the years of higher spending in the transfer market since promotion to the Premier League.

However, Swansea’s financial results have also been influenced by the £7 million of impairment charges they have booked since 2011, most notably £4.7 million in 2014. This happens when the directors assess a player’s achievable sales price as less than the value in the accounts.

Going back to our example, if the player’s value were assessed as £4 million after 3 years instead of the £6 million in the accounts, then they would book an impairment charge of £2 million. Impairment could thus be considered as accelerated player amortisation. It also has the effect of reducing the annual player amortisation going forward.

In any case, Swansea’s player amortisation is still one of the lowest in the Premier League and is obviously miles behind the really big spenders like Manchester United (£100 million), Chelsea (£72 million) and Manchester City (£70 million).

Despite the use of impairment charges, the higher spending means that player values on the balance sheet have increased from just £3 million in 2011 to £50 million in 2015. Moreover, this accounting treatment actually understates the value of Swansea’s squad, as it does not fully reflect the real market value of its players.

Given all the accounting complexities arising from player trading, clubs often looks at EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation). Admittedly, this is a horrible acronym, but it simply shows how profitable a club is from its core business.

On the face of it, the steep decline in Swansea’s EBITDA from £23 million to £3 million in 2015 should be a little concerning, but this is partly due to the 14 month accounting period last year, which includes more costs. In reality, EBITDA has been solidly positive at Swansea since promotion with last year’s increase driven by the new TV deal in 2014.

That said, this also outlines the challenge for clubs like Swansea, as the EBITDA is significantly higher at the leading clubs, even though they have much larger wage bills: Manchester United £120 million, Manchester City £83 million, Arsenal £64 million, Liverpool £53 million and Chelsea £51 million.

Swansea’s massive revenue growth from £12 million in 2011 to £103 million in 2015 has been very largely due to the club’s elevation to the top flight, which the accounts noted, “amply demonstrates the rewards of gaining promotion.”

In effect, there have been two revenue uplifts: first, from £12 million to £65 million in 2012, which highlights the enormous disparity in TV money between England’s top two leagues; second, the increase from £67 million to £99 million in 2014, thanks to the new TV deal commencing that season.

In fact, virtually all of the £39 million revenue growth since the first season back in the top flight is from TV (£36 million), even though commercial income has nearly doubled from £5.2 million to £10.0 million and match income is up a third from £5.8 million to £7.7 million.

Swansea’s achievement in finishing 8th in the Premier League is really put into perspective when you compare their revenue to other clubs: in 2013/14 their revenue of £99 million was only the 13th highest in the top tier.

It should be a similar story in 2014/15, as their revenue growth of £5 million is in line with many of the clubs that have reported to date (Southampton £8 million, West Ham £6 million, Manchester City £5 million and Everton £5 million), though Arsenal’s new commercial deals resulted in a hefty £31 million increase.

Either way, the fact remains that their revenue of £103 million is overshadowed by the elite clubs. At the top of the pile, Manchester United’s revenue of £395 million (reduced in 2014/15, due to not qualifying for Europe) is around four times as much as Swansea, while significant sums are also generated by Manchester City £352 million, Arsenal £329 million and Chelsea £320 million.

More encouragingly, Swansea now have the 29th highest revenue in the world, according to the Deloitte Money League, which allows them to pay higher wages than famous clubs such as Ajax and Lazio. They are within striking distance of European thoroughbreds such as Hamburg £101 million, Benfica £105 million, Roma £107 million and Marseille £109 million.

The problem is that these additional riches do not help Swansea much domestically, as there are no fewer than 14 Premier League clubs in the world’s top 30 clubs by revenue (and all of them are in the top 40).

What is striking is that no club in that top 30 has a higher reliance on TV money than Swansea, where a staggering 82% of their total revenue comes from broadcasting. That leaves only 11% from commercial activities and just 7% from match day income.

Unsurprisingly, only Crystal Palace (also 82%) are more dependent on TV for their revenue, but in fairness the majority of Premier League clubs are also heavily reliant on this revenue stream. In fact, all but the top six clubs get at least 60% of their income from broadcasting.

In 2014/15 Swansea’s share of the Premier League TV money rose 9% from £74 million to £81 million. The distribution of these funds is based on a fairly equitable methodology with the top club (Chelsea) receiving £99 million, while the bottom club (QPR) got £65 million.

Most of the money is allocated equally to each club, which means 50% of the domestic rights (£22.0 million in 2014/15), 100% of the overseas rights (£27.8 million) and 100% of the commercial revenue (£4.4 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, Swansea were helped by their attractive style of football, as they were broadcast live 12 times, which was more than, say, Stoke City (9 times) and so was worth an additional £1.5 million (£10.3 million less £8.8 million). Each place in the league table is worth around £1.2 million, so Swansea’s 8th place merited £16.2 million, compared to receiving £11.1 million the previous season for coming 12th.

The blockbuster new TV deal starting in 2016/17 only reinforces the need to stay in the Premier League. My estimates suggest that Swansea would receive an additional £37 million under the new contract for finishing in the same position as 2014/15, increasing the total received to an incredible £117 million.

This is based on the contracted 70% increase in the domestic deal and an assumed 30% increase in the overseas deals (though this looks to be on the conservative side, given some of the deals announced to date). Of course, if they were to finish lower in the league table, they would earn a bit less.

Given the figures, it is obvious why Swansea are so scared of relegation and why they felt they had to sacrifice Monk. If they were to drop down, they would get around £38 million in the Championship, including a £35 million parachute payment and £2 million distribution from the Football League, compared to at least £92 million in the Premier League.

Of course, this would be considerably higher than those Championship clubs without parachute payments, who receive only £5 million, but it’s still a considerable reduction in revenue that would require major cuts in the wage bill, i.e. selling the club’s better players.

As the club’s accounts stated, “The major risk continues to be relegation from The Barclays Premier League and the adverse effect it would have on liquidity, operational activity and our ability to realise future plans.”

Swansea’s 2013/14 figures had been boosted by their Europa League adventures, but only to the tune of €4 million, even though they got out of their group, memorably defeating Valencia in the Mestalla Stadium, before being eliminated by Napoli in the last 32.

Match day revenue fell 16% (£1.5 million) from £9.2 million to £7.7 million, due to the lack of Europa League competition (six home games) in 2014/15. This revenue stream peaked at £9.9 million in the 2012/13 season, largely thanks to progress in the domestic cups, including 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 around £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.

In fairness, Swansea should be commended for their ticket pricing strategy, as they have not raised prices in the five years they have been in the Premier League. In fact, they cut season ticket prices by £10 for the 2015/16 season and have announced a price freeze for the 2016/17 season. According to the BBC’s Price of Football survey, Swansea have the second cheapest “most expensive” season tickets in the Premier League.

Vice-chairman Leigh Dineen explained the thinking: “We will continue to work hard on reducing the price of football for our supporters wherever and whenever we can. Our supporters will always remain the lifeblood of this club and the Board of Directors believe these season ticket prices remain exceptional value for money to watch quality football at the Liberty Stadium.”

Furthermore, the club also agreed to subsidise the price of tickets purchased through the Jack Army membership scheme for away fixtures, so that no adult would pay more than £22 for a game.

Swansea’s advancement through the leagues has been matched with increases in attendances, facilitated by the move to the Liberty Stadium in the summer of 2005. Last season’s average attendance of 20,555, slightly higher than the previous year, is more than 12,000 higher than the last season at the old Vetch.

However, this was still one of the lowest attendance in the Premier League, only ahead of Burnley and QPR in 2014/15. 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, as it would not want to invest in a facility where it is only a tenant. It currently shares the stadium with rugby union side Ospreys on a 50-year lease.

Although planning permission has been granted for a stadium expansion to increase the capacity from just under 21,000 to 33,000, there is still much to agree with the local council before any development.

"I could be happy"

As finance director explained: “Any plans for an expansion of the East Stand at the Liberty Stadium cannot go ahead until we have negotiated a fair and equitable deal with the City and County of Swansea which is in the best interests of the club and not to the detriment of our available resources.”

The potential purchase price has been reported as £20-25 million, but the club would want a long-term payment schedule (over 15-20 years) to reduce their risk, especially if they were to be relegated.

Jenkins emphasised that any stadium expansion should not damage the playing squad, “so the club is not held back financially when it comes to the No. 1 priority of putting a team on the pitch and making sure we remain competitive in the Premier League.”

Commercial income was up an encouraging 21% (1.7 million) from £8.3 million to £10.0 million, but this was still one of the lowest in the Premier League, only above Crystal Palace and Hull City in 2013/14. To place this into context, the top five earners here are Manchester United £196 million, Manchester City £173 million, Chelsea £109 million, Liverpool £104 million and Arsenal £103 million. No wonder that Jenkins has admitted that the club is “miles behind” rivals commercially.

However, there are some signs of improvement, as the shirt sponsorship with Chinese financial services firm Goldenway (with their GWFX 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”.

Similarly, the kit supplier deal originally signed with adidas in 2011 was extended in 2014. No financial details were divulged, but it is estimated to be worth £1.5 million per season.

The reported wage bill shot up 31% (£19 million) from £63 million to £83 million, thus increasing the wages to turnover ratio from 64% to 79%, but this is misleading, as the figures include 14 months of wages, while revenue is effectively only 12 months (match day and broadcasting are unchanged).

If we were to pro-rate the wage bill for 12 months, then it would be a more respectable £71 million with a wages to turnover ratio of 69%. That would still represent a 12% (£8 million) increase in wages, but that would be altogether more reasonable.

Even so, this would still be one of the highest wages to turnover ratios in the Premier League with only West Brom, Fulham and Sunderland reporting worse ratios (in the previous season). In fairness, Swansea have significantly improved from a horrific 149% in 2011 (though the wage bill was inflated that season 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 in 2011/12.

Swansea’s wages, heavily based on performance-related contracts, are among the lowest in the top tier, though they have been steadily increasing, so in 2013/14 they had the 13th highest wage bill. This is partly due to the increase in staff numbers, e.g. football headcount rose from 167 to 222 in 2014/15.

Clearly, they still managed to over-achieve by finishing 8th last season, but Jenkins does not like to use that argument as an excuse: “We’ve never accepted that because of the money, we should be grateful and happy where we are. There is always the challenge to compete and you’ve got to find ways of doing that.”

That is more important than ever when you see how the wage bills of the mid-term clubs are converging around the £70 million level, e.g. West Ham £73 million, Southampton £72 million, Swansea £71 million, Stoke City £67 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 £517k in 2014/15, down from £550k in 2013/14, though that included a £275k bonus for retention of Premier League status. Both payments are significantly up from the £250k earned in 2012/13.

The promotion effect can also be seen in the club’s activities in the transfer market. In the six seasons before promotion to the Premier League, there was hardly any gross spend, but this has now increased to average annual expenditure of around £16 million, including the signings of Wilfried Bony, Federico Fernandez, Ki Sung-Yeung, Pablo, Kyle Naughton, Jonjo Shelvey, Eder and Jefferson Montero.

However, even with this increase, Swansea are hardly recklessly extravagant, as big money sales have produced a very low net spend. Their 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 last two years Swansea actually had net sales of £3 million, one of only two clubs with a surplus in the transfer market (Southampton being the other one). As might be expected, the spending league table is lead by Manchester City and Manchester United, but Swansea have also been comfortably outspent by the likes of Crystal Palace, Leicester City, Sunderland, Bournemouth and Watford.

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 that has worked well for the club, though they might come to regret the lack of quality recruitment this summer if they don’t avoid the dreaded drop.

After three years of enjoying net funds (cash higher than debt), Swansea returned to a net debt position of £22 million in 2014/15, comprising gross debt of £25 million less £3 million cash. Gross debt comprised a £15 million overdraft, £8 million of other loans, £1 million owed to group undertakings plus £0.6 million of hire purchase contracts.

It should be noted that total creditors have been rising and increased £37 million in 2014/15 alone to a hefty £73 million. In addition, Swansea have contingent liabilities of £6 million (up from £3 million) for potential future transfer payments, dependent on player appearances and club success, and a possible £19 million of additional signing-on fees (significantly up from £2 million).

Although Swansea’s debt is still one of the smallest in the Premier League (with five clubs having debt above £100 million), this situation is one that will need careful monitoring following last season’s increase and potential future commitments.

To be fair, Swansea have been investing in the club infrastructure, specifically on new training bases at Fairwood (first team) and Landore (academy), including £3 million in 2014/15 and £6.9 million in 2013/14. This will be of long-term benefit to the club, but cash is tight, as noted by the finance director: “we recognise that we need further injection of funds before we can commit to any more significant capital investment programmes.”

This is highlighted by last season’s cash flow statement. Although Swansea generated £6 million from operating activities, further boosted by a new £8 million loan, they spent £24 million on players, £3 million capital expenditure and £1 million on dividends, thus requiring a £15 million overdraft.

Since promotion, Swansea have had £76 million of available funds, largely driven by £57 million cash from operating activities, supplemented by a £13 million increase in the overdraft plus a net £6 million increase in net loans. They have spent £53 million (70%) on bringing in new players and invested £18 million on infrastructure plus £4 million in dividends.

Interestingly, the player investment in the cash flow statement is a lot higher than the net spend reported in the press, which could be due to a number of reasons, such as the timing of stage/conditional payments for player sales or high agent and signing-on fees (not included in transfer figures).

There has been some noise about the dividends paid to Swansea’s directors, 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.

Swansea’s unique ownership structure, with 21% held by the Supporters Trust and a fan elected on the board, has been described by the Premier League’s chief executive, Richard Scudamore as “ideal”, but the need for outside investment is clear, especially when you compare their cash balance with their Premier League rivals: Swansea have less than £3 million, while 11 clubs have more than £20 million.

Indeed, last season they held discussions with 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 an initial 30% stake (rising to 66% in a few years), but these came to nothing and they seem to have moved their interest to Everton.

"You're gonna hear me roar"

The club is keen to focus on developing its academy and is hopeful that its investments will help secure the Category One status. The good news is that the Premier League has already promoted Swansea’s U21 and U18 teams to the higher level this season, pending an audit of its facilities. As academy manager Nigel Rees said, “It means the boys will be competing against some of the very best players and teams at their age level. It’s all part of their development by creating a clear pathway towards the first team.”

Swansea’s recovery from near disaster at the turn of the Millennium is a fabulous story (“Jack to a King”), as a fading, provincial club climbed back up the leagues, all the time playing entertaining football and running the club in the right way.

However, football can be a harsh mistress, so no club can afford to rest on its laurels. To continue their impressive progress, Swansea will need to appoint the right man to manage the team in order to retain their Premier League status. There will be many hoping that they can do it.