Millwall - Hard Times

Millwall narrowly missed out on bouncing back to the Championship at the first time of asking, losing 3-1 against Barnsley in the League One play-off final. Although this was not the outcome that Lions’ supporters would have desired, there were plenty of encouraging signs for The Den faithful. As chairman John Berylson observed, “This was going to be a rebuilding year and that has proved to be the case.”

The previous season had seen Millwall relegated after five years in English football’s second tier, which Berylson had described as “a massive disappointment to us all.” In truth, it cannot have been that big a surprise, given that his club had finished just above the relegation zone in each of the preceding seasons (19th, 20th and 16th).

Millwall’s progress in 2015/16 owed a lot to manager Neil Harris, who had been appointed interim manager in March 2015, then confirmed as permanent manager soon afterwards following improved performances by the team.

The club had struggled under his predecessors Ian Holloway and Steve Lomas, but Harris brought hope that he could be as successful as Kenny Jackett, who not only delivered promotion to the Championship in 2010, but also took the club to the FA Cup semi-final in 2013, where Millwall lost to the then Premier League club and eventual winners, Wigan Athletic.

"Back on board"

In his first full season Harris succeeded in restoring the club’s sense of identity and connection with the supporters. Of course, when many think of Millwall, they focus on the reputation of some of the club’s supporters, who have certainly been a “bit tasty” in the past, leading to the “no-one likes us, we don’t care” image.

However, even though some issues remain, this obscures the huge amount of work done in the community, e.g. the Millwall Community Trust. As Harris said, “this goes a little under the radar.” In reality, the local community is at the heart of the club, a recent example being when Millwall supported a successful campaign to save Lewisham Hospital A&E department.

The fans’ notoriety is just one of the challenges facing Millwall, though they also struggle with their geographical proximity to many bigger London clubs. On top of that, they have only competed twice in the top flight in their history (1988-89 and 1989-90) – though they did briefly lead the league in September 1989.

Furthermore, Millwall have always operated under severe financial constraints, once entering administration in 1997 before being bought out by Theo Paphitis, a local boy made good (and erstwhile star of Dragons’ Den).

The financial problems were eased in 2007, when Chestnut Hill Ventures (CHV), which has interests in financial services, retail, property and sport, invested £5 million into the club with Berylson becoming chairman. CHV is incorporated in America and own just over 70% of Millwall, but a crucial link with the supporters is also there with the Fan on the Board.

"The band wore blue and white shirts"

As you might expect, the club’s strategy is fairly down-to-earth, according to chief executive Andy Ambler, “developing a squad of players for the longer term who understand the Millwall philosophy… with the aim of gaining promotion to the Championship at the earliest opportunity with a squad that is capable of competing at that higher level.”

Harris is very much singing from the same song sheet: “You don’t have to be the best player. It hasn’t got to be 1,000 passes a game, it’s got to be high tempo, aggressive and you can’t ever shirk a challenge. It’s frowned upon.”

This has resulted in a focus on youth, as Ambler outlined: “There is a greater emphasis on younger players, mostly graduating from the Youth Academy. This is key to the strategy of the club, under the direction of Scott Fitzgerald. It is intended to invest further into the Academy, both in the quality of coaching and the facilities used, to enhance the opportunities to develop future players for the club. The directors regard this as a vital part of the future success of the club.”

Berylson is of the same opinion, “Having funded the Academy for some time, it is encouraging to see so many good young players coming through, which will be vital going forward. I want one or two young lads coming out of the Academy each year who can play (for the first team).” Recent examples of the production line include midfielder Ben Thompson and right-back Mahlon Romeo.

Millwall’s financials show quite clearly why they have to find a strategy that works for them, the most recent example being the hefty £12.0 million loss they reported in 2014/15. This was slightly higher than the previous season’s £11.7 million loss, despite revenue climbing £0.7 million (7%) from £10.5 million to £11.2 million.

Commercial income rose £0.4 million (26%) from £1.5 million to £1.9 million, mainly due to the refit of the retail outlet and improved merchandise. Match day income was also up £0.3 million (8%) from £4.3 million to £4.6 million, despite lower average attendances. Broadcasting income was flat at £4.7 million.

However, costs came under pressure, as the wage bill increased by £1.3 million (9%) from £13.9 million to £15.2 million, which the club ascribed to the full year cost of strengthening the football management team and increases in player salary costs. Other expenses also rose by £0.7 million (15%) from £4.8 million to £5.5 million, due to “increased investment in the pitches at both The Den and the training ground, as well as a higher cost of football agent fees.”

Profit on player sales fell £0.3 million to just £0.1 million, but player trading benefited from a £0.4 million (38%) fall in player amortisation from £1.0 million to £0.6 million. On the other hand, depreciation rose by £0.2 million (67%) from £0.2 million to £0.4 million.

Interest payable was slashed by £1.1 million from £2.8 million to £1.7 million, still very high for a club of Millwall’s size, as CHV agreed that no interest would accrue in respect of the £20 million loan facility from 1 January 2015 to 30 June 2016 (when interest will begin to accrue again unless CHV agrees otherwise).

Of course, most Championship clubs suffer very heavy losses, usually subsidised by their owners, so Millwall’s losses were by no means exceptional in this division, though they were among the largest. In fact, only five Championship clubs reported losses larger than Millwall’s £12 million in 2014/15, namely Bournemouth £39 million, Fulham £27 million, Nottingham Forest £22 million, Blackburn Rovers £17 million and Brentford £15 million.

Very few clubs are profitable in the Championship with only seven making money in 2014/15 – and most of those are due to special factors, such as high player sales, loan write-offs, land revaluation or high parachute payments. Top of the pile were Blackpool with an £8 million profit, thanks to their “unique” business model that seems designed purely to favour their owners.

Millwall have struggled financially for many years, accumulating £63 million of losses in the last decade. The last time that they (very nearly) broke-even was way back in 2004, though the loss was only £2 million in 2011, when Berylson described the results as “a very big step forward” and the reduction in losses as “encouraging”.

The previous season the chairman had claimed, “I feel we have managed to reduce costs and become more efficient in almost every area, however there is still work to be done.”

Unfortunately, these improvements proved to be something of a false dawn, as losses rose to £6 million in 2013, then more than doubled to around £12 million in the last two seasons. This was frustrating, but perhaps only to be expected when looking at earlier comments from Berylson: “All our efforts must be focused on giving our manager the resources to continue to achieve the progress we have shown on the field.”

That approach is all too understandable in the ultra-competitive Championship, but Ambler recognised that it was not sustainable in the long-run: “Putting aside the (Financial Fair Play) rules, we should not be running this club at £8 million losses every year. We’ve got to find a strategy to increase revenues and get the best possible quad without spending too much money.”

One method used by clubs to fund their operating shortfall is selling players, though to be fair this is not an enormous money-spinner outside the top flight with the most profit made by Norwich City £14 million, followed by Ipswich £12 million, Leeds United £10 million and Cardiff City £10 million. Indeed, Millwall noted in their 2014 accounts “a trend towards lower transfer fees outside of the Premier League.”

That is certainly true, but Millwall’s profit from player sales of £108,000 in 2014/15 was one of the lowest in the Championship, only ahead of Rotherham United and Bournemouth.

In truth, Millwall have rarely made big money from player sales, the last reasonable sum being received in 2010/11 when Steve Morison was sold to Norwich City – which also helps to explain the overall lower loss that season.

You have to go all the way back to 2004 and 2005 to find the last time that Millwall reported £3 million of profits from player sales: 2004 included the sale of Steven Reid to Blackburn Rovers (plus an insurance settlement following the premature retirement of Richie Sadlier); 2005 included the sales of Tim Cahill to Everton, Darren Ward to Crystal Palace and Scott Dobie to Nottingham Forest.

The 2015/16 accounts will be boosted by a sell-on fee arising from the sale of Aaron Tshibola from Reading to Aston Villa for £5 million, as he was on Millwall’s books until the age of 13, though the amount has not been divulged. Otherwise, most departure were basically released for nothing.

Millwall’s underlying profitability has been getting worse, as seen by the reduction in EBITDA (Earnings Before Interest, Depreciation and Amortisation). This is considered to be an indicator of financial health, as it strips out once-off profits from player trading and non-cash items. This has been consistently negative at Millwall, but has declined in the last five years from minus £1.5 million in 2011 to minus £9.4 million in 2015.

The size of Millwall’s negative EBITDA was far from uncommon with 15 clubs generating cash losses between £4 million and £12 million. In fact, only four Championship clubs had a positive EBITDA in 2014/15 (Blackpool, Wolves, Birmingham City and Rotherham) In stark contrast, in the Premier League only one club (QPR) reported a negative EBITDA, which is testament to the earning power in the top flight.

The only real revenue growth that Millwall have generated recently was off the back of their promotion to the Championship in 2010/11, when income rose by nearly 60% (£4.4 million) the following season. Berylson said that this was “as a result of higher attendances and commercial sponsorship, but most significantly a greater share of the Football League central television and sponsorship revenues.”

However, since that first season back, match day and commercial income have actually fallen, leaving TV as the only growth revenue stream. It is true that match day income was higher in 2013, benefiting from an FA Cup run to the semi-final.

Andy Ambler put his finger on the problem when he said that “the opportunities to increase revenue streams are very dependent upon the success of the team.” Thus, relegation at the end of the 2014/15 season will obviously have had an adverse impact on Millwall’s revenue.

This was confirmed by Ambler: “It is inevitable that operating in League One will reduce all revenue streams of the company. This may be mitigated should the team have a successful season as attendances and match day income are affected by the team’s performance and the club’s position in the league.”

Given the lack of growth, it is unsurprising that Millwall had the fourth lowest revenue in the Championship in 2014/15 with £11 million, only ahead of Rotherham United, Huddersfield Town and Brentford, and just behind neighbours Charlton Athletic. To place this into perspective, four clubs enjoyed revenue higher than £35 million (more than three times as much as Millwall): Norwich City £52 million, Fulham £42 million, Cardiff City £40 million and Reading £35 million.

Ambler noted that other clubs enjoyed “substantially more spending power than Millwall due to the parachute payments they receive.” Not only does this “create stiffer competition within the league”, but means that it is far from an even playing field.

However, even if we were to exclude this disparity, Millwall would still find themselves near the bottom of the table, though the revenue differentials would be smaller. That said, clubs like Leeds United, Brighton and Hove Albion , Derby County and Middlesbrough still managed to generate more than £20 million without the benefit of parachutes, thanks to their ability to attract larger crowds and earn money commercially.

Only 17% of Millwall’s revenue was sourced from their commercial operations in 2014/15 (up from 14% the previous season). The majority was derived from broadcasting with 42%, just ahead of match day 41%.

Millwall’s match day income increased by £0.3 million (8%) from £4.3 million to £4.6 million in 2014/15, despite a 2.5% fall in the average attendances from 11,182 to 10,902. This was partly because they hosted two more cup games, though ticket prices were also raised (around £1 a game) after many years of price freezes.

Commercial director Alan Williams commented, “It's a 4% rise and that helps our finances. A slight increase in revenue will make it a little bit more palatable for the chairman to maintain his current level of investment. We have to make money but we're sensitive to the fact that we must offer value for money. An increase after four years without an increase is acceptable I think.”

The match day income is not too bad, albeit less than half of table-topping Brighton (£9.8 million), especially as Millwall’s attendance was the fourth smallest in the Championship, only ahead of Brentford, Bournemouth and Rotherham. In contrast, Millwall’s average attendance of 9,108 in 2015/16 was the sixth highest in League One, even though it dropped by around 1,800 (16%).

This continued a trend of declining attendances, which have plummeted by around 3,300 from the recent peak of 12,439 in 2010/11 when Millwall finished ninth in their first season back in the Championship. That’s over a quarter of their crowd that have stopped turning up.

As a result, Millwall have frozen ticket prices for both the last two seasons in an attempt to boost crowds. As Williams said, “As everybody knows, this team plays better when the fans are behind them. When The Den is really rocking, the atmosphere is second to none.”

Some fans might have anticipated a price reduction in League One, though in fairness the club had not increased prices when the club had gained promotion. In any case, last month Ambler said that season ticket sales for 2016/17 were up on last year, presumably linked to the better displays on the pitch.

In the Premier League, the vast majority of all but the elite clubs’ income is derived from broadcasting, but this is not the case in the Championship. Here, most clubs receive just £4 million of central distributions, regardless of where they finish in the league, comprising £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 for clubs relegated from the Premier League 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.

In 2015/16 clubs received parachute payments ranging from £10.5 million to a massive £25.9 million. In fact, two of the clubs receiving the largest payment, namely Burnley and Hull City, went on to gain promotion. As the saying goes, “money talks”.

Nevertheless, it should be noted that these payments are not necessarily a panacea, for example Middlesbrough also secured promotion last season, even though their broadcasting income of £6.2 million in 2014/15 was less than half the size of those clubs boosted by parachutes.

From 2016/17 parachute payments will be even higher, though clubs will only receive these for three seasons after relegation. My estimate is £75 million, based on the percentages advised by the Premier League (year 1 – £35 million, year 2 – £28 million and year 3 – £11 million). 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.

There are some arguments in favour of these payments, namely that it encourages clubs promoted to the Premier League to invest to compete, safe in the knowledge that if the worst happens and they do end up relegated at the end of the season, then there is a safety net. However, they do undoubtedly create a significant revenue disadvantage in the Championship for clubs like Millwall.

Following relegation, Millwall will have received even less TV money: £680k from the Football League central distribution and a £360k solidarity payment, amounting to just over £1 million. As Ambler said, “The major factor to affect football-related income (in 2015/16) is the reduction in League and TV levies, which drops away dramatically in League One.”

Millwall’s commercial income in 2014/15 rose by £0.4 million (26%) from £1.5 million to £1.9 million, but this was still one of the lowest in the Championship, only ahead of Wigan £1.5 million. Again, few Championship clubs score big commercially, but six clubs earned more than four times as much as Millwall: Norwich City £12.8 million, Leeds United £11.3 million, Brighton £8.9 million, Watford £8.6 million, Derby £8.5 million and Wolves £7.8 million.

The club has two shirt sponsors: Wallis Teagan, a local building and maintenance company, have extended their arrangement for the 2016/17 season; while the back-of-shirt sponsor is taken by Oil Brokerage Limited. In the past, Millwall have, rather admirably, foregone commercial income when taking Prostate Cancer UK as their sponsor in 2013/14.

The Italian company Errea has replaced Macron as the kit supplier from the 2016/17 season. The shirt will be a striped design replicating the kit worn by the record-breaking Millwall side of 50 years ago that went 59 home league games without defeat.

Ambler expects commercial income to go up in future, as the 2015/16 accounts will benefit from a full year of operation of the new retail outlet and kiosks, while it is also hoped that the successful staging of a Wigan Warriors rugby league game at The Den will open up new opportunities.

"Jimmy, Jimmy"

Nevertheless, perhaps the best opportunity that Millwall has to generate more revenue is by developing the land adjoining the stadium. They have a regeneration plan to create affordable housing, student accommodation, retail and office space, a hotel and conference centre plus a facelift for the stadium.

However, Lewisham council has thrown a spanner in the works by unexpectedly preferring to allow a private developer, Renewal, to undertake the entire regeneration programme. It has threatened to sell the freeholds of the land next to The Den on which the club (and the Millwall Community Trust) hold leases, using Compulsory Purchase Orders if necessary.

Millwall’s view is that the football club should be at the heart of a “thriving and brighter community”, while its own development scheme “provides an opportunity to bring more financial stability to the club by generating non-football revenues, which are vital to the long-term future of Millwall FC.”

"Advice for the young at heart"

This was reinforced by Ambler: “It’s a once-in-a-lifetime chance to make sure what is built on our doorstep actually works for the club.” He added, “If this goes against us, it makes it more difficult to thrive and become self-sufficient. We haven’t got enough income generation outside the actual football that will help us when we do need injections of cash.”

Berylson went further, describing the decision as “a challenge which threatens the club’s very survival.”

Indeed, a petition to “Defend Our Den” gained over 19,000 signatures, which must have been a contributing factor to the council deferring the decision in a February meeting. That was good news, but hardly definitive, as Ambler admitted: “We are under no illusion this is over or the battle is won and would urge people to keep signing the petition. We have effectively gone into extra-time.”

At least the deferral allows the club more time to state its case and work towards a more beneficial partnership with the council.

Millwall’s wage bill in 2014/15 rose £1.3 million (9%) from £13.9 million to £15.2 million, leading to a slight increase in the wages to turnover ratio from 132% to 135%. Since being promoted to the Championship in 2010, Millwall’s wages have shot up by £8.8 million (138%), while revenue has only grown by £3.7 million (50%) in the same period.

The 2013 rise included significant bonuses for reaching the FA Cup semi-final, while the 2014 increase was partly due to the high cost of loan players, e.g. Steve Morison, together with those recruited to cover injuries.

Up until 2013 Millwall had managed to keep the wages to turnover ratio below 100%, though it was still on the high side, but wages have really outpaced revenue since then. Ambler neatly summed up the dilemma: “There will be continued pressure to increase further the budget if needed to remain competitive.”

Of course, wages to turnover invariably looks terrible in the Championship with no fewer than 10 clubs “boasting” a ratio above 100%, but Millwall’s 135% was the fourth highest (worst), only behind Bournemouth 237% (inflated by promotion bonus payments), Brentford 178% and Nottingham Forest 170%.

That said, Millwall were hardly one of the big spenders in the Championship, as Ambler explained, “Despite the continuous rise in the player wage cost, the club is still budgeted to have one of the lower quartile wage bills in the league.” In fact, Millwall’s wage bill was only the 17th highest in the Championship in 2014/15, significantly lower than clubs benefiting from parachute payments, e.g. Norwich City £51 million, Cardiff City £42 million and Fulham £37 million.

Naturally the wage bill will have fallen in 2015/16, as explained in the accounts: “A substantial reduction in the player salary budget for this year. This is due to the Divisional Pay Structure policy of the club whereby the salary of players is reduced as a result of playing in a lower division and reflects the expiration of a number of contracts which were not renewed at the end of last season, many of which were for highly paid players.”

Another aspect of player costs that had been steadily rising at Millwall is player amortisation, which is the method that football clubs use to expense transfer fees. In line with higher sums spent on bringing players into the club, player amortisation grew from just £63k in 2007 to a peak of £1.0 million in 2014, though it did fall back to £0.6 million in 2015.

As a reminder of how this works, 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 via player amortisation. As an illustration, if Millwall were to pay £2 million for a new player with a five-year contract, the annual expense would only be £0.4 million (£2 million divided by 5 years) in player amortisation (on top of wages).

Even so, Millwall’s player amortisation of £0.6 million was still one of the lowest in the Championship, especially compared to those clubs relegated from the Premier League in recent times, i.e. Norwich City £13.2 million, Cardiff City £11 million and Fulham £10.7 million. This highlights how little money Millwall have spent in the transfer market.

Although there have been many player movements at Millwall, many of them have been free transfers with several being released. The objective in most seasons seems to be to balance the books, but it is also striking to see how little has been raised from player sales after 2007.

In the nine years since then there have been net sales of £1.6 million, almost entirely due to Steve Morison’s departure in 2011. Ironically, Morison was one of only two signings made by Harris last summer, while selling or releasing 18 players following relegation.

Millwall’s net debt decreased in 2015 by £9.7 million from £29.8 million to £20.1 million, as gross debt was cut from £30.3 million to £20.8 million, while cash was slightly higher at £0.6 million. Debt had been steadily rising from £7.3 million in 2011, but the 2015 reduction was largely due to CHV waiving £8.4 million of unpaid interest.

In addition, £2.8 million of the cash raised from issuing £12.4 million of new share capital was used to repay loans. This was similar to the open offer in 2011, where £7.9 million of the £10.1 million cash raised was used to convert loans into equity.

Without CHV effectively writing-off £19.1 million of debt through this combination of equity conversion and waiving interest, gross debt would have been almost twice as high as the current balance at around £40 million.

In 2013 various loan facilities and PIK notes provided by CHV, ranging from 9% to 15%, were consolidated into a new loan facility amounting to £20 million at 12%. This is a non-convertible loan secured by a fixed and floating charge over current and future assets.

Although this is a fair amount of debt for a club of Millwall’s size, it could be described as “soft” debt, as it is owed to the owners. It was originally repayable in July 2015, but the repayment date has been extended twice, most recently to July 2017.

Furthermore, it was nowhere near being the largest debt in the Championship. To place Millwall’s £21 million balance into perspective, four clubs had debt over £100 million, including Brighton £148 million, Cardiff City £116 million and Blackburn Rovers £104 million. Bolton Wanderers have not yet published their 2015 accounts, given their much-publicised problems, but their debt was a horrific £195 million in 2014.

The 2014 accounts noted, “Finance costs are now increasing annually as the level of borrowing by the company increases”, though it might surprise some supporters to see that Millwall’s net interest payable of £1.7 million was the highest in the Championship in 2014/15, ahead of Cardiff City £1.3 million, Blackburn Rovers £0.9 million and Ipswich Town £0.7 million.

Of course, Millwall did not actually pay any interest. Indeed, as we have seen, the owners have in fact written-off substantial sums of accrued interest. As a technical aside, Millwall credited the write-off directly to the retained reserves and not to the P&L as some other clubs have done in similar circumstances.

The cash flow statement reveals the extent of the owners’ support with £35 million of funding provided in the last seven years through £24 million of loans and £11 million of share capital.

It should be noted that a total of £22.5 million has been raised by issuing new share capital, but £10.7 million was used to convert loans into equity, while there were £0.5 million of costs associated with the open offer, leaving £11.4 million of available cash.

On top of this, after the 2015 accounts were closed CHV bought more shares, raising a further £2.6 million.

These share offerings “strengthened the balance sheet and reduced the company debt position, whilst providing the funds for the football club to continue to progress.”

The owners’ funding has been almost entirely used to simply cover the club’s losses: £32.5 million (92%) since 2009. In contrast, very little money has been spent on player purchases (£1.4 million net) and infrastructure investment (£1.0 million).

This is the issue with CHV as owners: on the plus side, they have picked up the tab by covering losses every season; on the other hand, there has been a lack of investment in the playing squad and the club’s facilities.

That said, it is clearly imperative that Berylson continues to put his hand in his pocket and he has promised to do so: “I have agreed to fund the club on an ongoing basis by way of shares and am as fully committed as ever.”

"Right Said Fred"

Millwall have toiled to comply with the Football League’s Financial Fair Play (FFP) regulations, actually failing to meet the target in 2014/15. The maximum loss allowed was £6 million, assuming £3 million was covered by equity investment, and after excluding allowable deductions such as infrastructure and academy investment.

However, the Football League confirmed that Millwall would “not face any further sanction following the club’s relegation to League One, as it was not deemed to have gained any significant advantage.” If the Lions had managed to stay up, that would have triggered a transfer embargo, as was the case with Nottingham Forest, Fulham and Bolton Wanderers, while Bournemouth were fined £7.6 million after promotion to the Premier League.

Following Millwall’s relegation to League One, they had to comply with that division’s Salary Cost Management Protocol (SCMP). As a rule, player salary costs cannot be more than 60% of revenue, though there is a higher, transitional target of 75% for clubs like Millwall in their first season after relegation.

Importantly, for these purposes, equity investment from owners is classified as revenue, which helps explain CHV’s recent issue of share capital. Consequently, Millwall have confirmed that they are in compliance with the SCMP regulations.

"Shane is the Name"

Even though dropping to League One would hardly have been part of the club’s playbook, things are looking up at The Den. Manager Neil Harris has done a good job to date and has given the fans something to cheer about: “The biggest thing for me is that the club has to have an identity, the team has to have an identity, a Millwall identity. It has to have a spirit about it.”

Harris continued, “I think there was a little bit of heart and soul lost with the fans in the team, especially last year with relegation.” However, performances were much improved in 2015/16, even though they fell at the last (play-off) hurdle. Ambler is certainly keeping the faith, “I think the run we had in the second half of the season has given people a lot of optimism for this year. We are hopefully going to challenge in the top six.”

Let’s hope so, as this is a club with strong links to its community. Somewhat at odds with their reputation, it is clear that many do care.