Sheffield Wednesday - Working With Fire And Steel

Sheffield Wednesday are one of those clubs with a fine history that these days find themselves playing in the Championship. Wednesday spent most of the 80s and 90s in the top flight of English football, but have not been in the Premier League since 2000 and won the last of their First Division titles back in 1930.

Indeed, in recent times they actually spent two seasons in League One, England’s third tier, before promotion back to the Championship in 2012. Since then, they have not really threatened the promotion or play-off places, but there is now cause for a degree of optimism in the steel city following the arrival of new Thai owner Dejphon Chansiri.

His family owns the world’s largest producer of canned tuna, while Dejphon himself has a thriving property and construction company in Thailand. He acquired Wednesday for £37.5 million in January and has targeted promotion to the Promised Land of the Premier League within two years. He has already claimed to have cleared the club’s debts and given new head coach Carlos Carvalhal substantial backing in the transfer market.

"My name is Lucas"

Chansiri bought the club from Milan Mandaric, who had effectively saved Wednesday from going into administration when he bought the club for a nominal £1 in December 2010, but importantly negotiated terms to wipe out the club’s significant debts. In particular, he persuaded the Co-operative Bank to settle their £23 million debt for a £7 million payment.

Wednesday had faced a series of winding-up petitions from HMRC between July and November 2010 for unpaid VAT and payroll taxes, which were only withdrawn following Mandaric’s intervention.

Wednesday’s problems on the pitch went hand in hand with their financial difficulties, as Mandaric explained: “The decline of this great club can be traced back over the past decade. Both on and off the field mismanagement has seen a true footballing institution teeter on the edge of the financial abyss.”

"Tommy, can you hear me?"

Given these issues, Mandaric adopted a somewhat more cautious approach to spending: “I will not gamble with the long-term future of Sheffield Wednesday, this club has already flirted with financial oblivion far too closely in recent seasons.”

However, as the auditors noted in the annual accounts, the club continued to rely on the financial support of its parent company, which was “not legally binding and dependent on the intentions of the owner.” This lead to them noting a “material uncertainty which may cast significant doubt about the company’s ability to continue as a going concern.”

Strong stuff, but many clubs in the Championship rely on the goodwill of their owners and Wednesday are no exception. The hope would be that Chansiri continues to provide the club with the financial support required at this level.

Although Wednesday’s financial position is not ideal, in truth it’s not too bad for a Championship club, even though they reported a £5.6 million loss in 2013/14, the last season for which figures are available.

That said, the loss did increase from £3.7 million the previous season, as revenue dropped £1.1 million (7%) to £13.9 million, mainly due to a reduction in match receipts and commercial match day income; while the wage bill rose £0.6 million (5%) to £12.5 million, following an increase in player salaries and management costs. There were £0.1 million reductions in both depreciation and other expenses, but interest payable shot up by £0.3 million to £0.5 million.

Mandaric justified the loss when referring to “the difficulty of operating our club in the Championship whilst trying to remain competitive.” In fairness, Wednesday’s loss is quite small compared to most other clubs in this division, placing them a creditable 8th in the profit league.

As Mandaric observed, “we’re losing money, but not as much as some clubs”. That’s evident when you consider the stratospheric losses posted by the likes of Blackburn Rovers £42 million, Nottingham Forest £23 million, Leicester City £21 million, Middlesbrough £20 million and Leeds United £20 million.

In fact, the only clubs to make money in the Championship were Blackpool (with their highly dubious model), Wigan Athletic and Yeovil Town – and they have all since been relegated. 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.

Wednesday have consistently reported smallish losses over the past few years. The last time that they made an accounting profit was in 2011, which was boosted by a £21.4 million (non-cash) credit after the former owner agreed to waive all amounts owed. Excluding this exceptional item, the club would have made a £5.6 million loss instead of a £15.8 million profit.

After that adjustment, Wednesday would have made an aggregate loss of £27.8 million in the last six seasons, averaging a £4.6 million deficit each year. Mandaric acknowledged that “losses of this amount will need to be reduced in the future and ultimately I would hope the club can be self-supporting.”

Other once-off items to hit Wednesday’s books include £1.4 million in 2012 due to bonus costs relating to promotion back to the Championship and the change in football management during the season. There was another £0.25 million paid the same season to the Co-operative Bank for a promotion-related clause in their debt settlement.

Profit on player sales can also improve the bottom line, but this has not really been the case at Wednesday. The last time they made any meaningful money from transfers was back in 2008 £3.3 million, mainly due to the sale of Chris Brunt to WBA and Glenn Whelan to Stoke City, and 2007, thanks to Madjid Bougherra’s move to Charlton Athletic.

Since then they have made just £2.2 million in six seasons, including only £0.3 million in 2013/14. Although few Championship clubs make big profits on player sales with only two earning more than £5 million in 2013/14 (Wigan Athletic and Bournemouth), Wednesday’s was still among the lowest.

Player trading is by no means the only issue at Wednesday, as the underlying business is loss making. The club has made operating losses in each of the last six years, though there has been some recovery in the Championship to £3-4 million.

Unsurprisingly the operating losses peaked at £7 million in League One in line with lower revenue, as described by the club: “The cost base, in common with other football clubs, is relatively fixed in the short-term, hence unfavourable movements in revenue, including those arising from below budget on pitch performance, can lead to significant variation in profits.”

Revenue fell by £1 million (7%) from £14.9 million to £13.9 million, largely due to decreases in match receipts of £0.7 million (11%) to £5.5 million and commercial income of £0.6 million (13%) to £3.9 million, slightly offset by a £0.2 million (5%) increase in broadcasting revenue to £4.5 million.

As you would expect, revenue was lower in League One, declining by £4.5 million to £9.4 million in 2011. As the club put it, “A mixture of relegation, supporter dissatisfaction and the general economic downturn saw falls in revenue across all areas of the business.”

The other side of that coin is that revenue has increased since promotion, but only by £2.9 million. The growth is entirely due to the better TV distribution deal in the Championship, which has increased broadcasting revenue by £3.3 million. In contrast, commercial revenue has only increased by £0.1 million, while match receipts are actually down £0.5 million.

Following the reduction in 2013/14, Wednesday’s revenue of £13.9 million was only the 15th highest in the Championship, 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 simply demonstrates the importance of parachute payments for those clubs relegated from the Premier League.

If these were to be excluded, Wednesday would move up to a more healthy 10th place in the Championship revenue league, but even so their £14 million would still be a long way behind Leicester City £31 million, Leeds United £25 million, Brighton £24 million and Derby County £20 million. Given these numbers, Wednesday’s mid-table performance could be regarded as essentially par for the course.

Much of Wednesday’s revenue performance is driven by match day receipts, which account for 40% of their total revenue, followed by broadcasting 32% and commercial 28%.

In fact, only four Championship clubs have a greater reliance on match day receipts than Wednesday: Charlton Athletic 50%, Nottingham Forest 44%, Brighton and Hove Albion 43% and Millwall 41%.

Arguably Wednesday’s match day revenue is even higher, as their accounts also include £1.8 million of commercial match day income, but I have classified this within commercial revenue, as this is consistent with the £3.9 million listed in the club’s turnover figures for total commercial activities.

Either way, the importance of match day revenue to Wednesday is clear, so the £0.7 million (11%) reduction from £6.2 million to £5.5 million in 2013/14 is concerning, especially as this was as high as £6.5 million before relegation to League One in 2010. Revenue here is partly influenced by progress in cup competitions, which helped keep the figure high in 2010, but the 2014 fall was essentially due to a 12% decrease in the average attendance from 24,078 to 21,274.

Even so, Wednesday’s match day revenue of £5.5 million was the 9th highest in the Championship. To put this into perspective only three clubs generate more than £7 million (Brighton £10.4 million, Leeds United £8.6 million and Nottingham Forest £7.2 million).

Even more impressively, Wednesday’s average attendance of 21,274 was the 6th highest in the Championship in 2013/14 and climbed to 21,993 last season. Although this is a little disappointing, considering the 24,078 average achieved in the first season back in the Championship, there is little doubting the potential here.

As a recent example, you only have to look at the 38,000 crowd that watched the final home game in the League One promotion season. This nearly filled the 40,000 capacity at Hillsborough, one of the largest grounds in the country.

Wednesday had kept “Early Bird” season ticket prices static for many seasons, but have introduced a new match day pricing structure for the 2015/16 season, which features a number of steep hikes in some prices.

Whether this is the right move, especially given that South Yorkshire is the fifth most impoverished area of the country, is obviously debatable, but the objective is to help fund a promotion drive by maximizing revenues streams. This move is understandable to an extent, but the fans are only likely to be placated if promotion is delivered.

Chansiri justified the price increase as follows: “In the bigger picture, if we are to achieve our ultimate aim of promotion, we must embark on this journey together. I will lead that journey as your chairman, but I need as much help as possible along the way. Budgets must be achieved, we must work within the constraints of Financial Fair Play, and we do not have the benefit of parachute payments, unlike a significant number of our peers in the Championship, each of whom are aiming for the same destination. As our costs increase, so too must our revenues across the business.”

In 2013/14 Wednesday’s broadcasting revenue was £4.5 million, which was in line with the majority of Championship clubs, who receive the same annual sum for TV, regardless of where they finish in the league. This amounts 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. Other television money is dependent on whether a team reaches the play-offs; cup runs and the number of times a club is broadcast live.

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.

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 £65 million and £99 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.

If Wednesday were to somehow gain promotion, the financial prize for returning to the Premier League would be immense. Even if a team finishes last in their first season and go straight back down, their TV revenue would increase by £61 million (£65 million less £4 million) and they would also receive a further £65-75 million in parachute payments, giving additional funds of around £130 million.

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 estimate will be worth at least another £30 million a season. The size of the prize helps explain the behaviour of many Championship clubs, which are spending more than ever this season.

As we have seen, parachute payments make a significant difference to a club’s revenue and therefore its spending power in the Championship. 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%).

Revenue from commercial activities decreased by £0.6 million (13%) to £3.9 million in 2013/14, comprising commercial match day income £1.8 million (hit by the fall in attendances), retail and merchandising £1.5 million, catering £0.3 million and internet & other £0.2 million.

For a club with Wednesday’s history, their commercial revenue is fairly low and only the 13th highest in the Championship – though it should be noted that it is impacted by the outsourcing of the catering division in 2012.

One of Chansiri’s stated objectives is to raise the club’s commercial profile in the Far Ease, notably Thailand and Singapore. To that end, his family will act as principal shirt sponsor in 2015/16 to “illustrate to the whole of the football world our total support for this club.” It will be interesting to see how much this deal is worth, given that Leicester City’s Thai owner organized a lucrative marketing agreement with Trestellar Limited that boosted their commercial revenue to £18.6 million.

"Loovens - Building on Fire"

In 2014/15 Wednesday’s shirts were emblazoned with the Azerbaijani “Land of Fire” logo, as worn by Atletico Madrid and Lens, which had been secured by Hafiz Mammadov, who at one stage had looked like he would take ownership of the club from Mandaric. The value of this arrangement was not disclosed, beyond the fact that it was “financially significant” and a “six-figure deal”. This replaced the 2013/14 deal with WANdisco, a global software development company.

Retail sales are also expected to improve after a three-year kit deal commencing in 2014/15 was signed with Sondico, part of the Sports Direct family of brands.

The wage bill rose by 5% (£0.6 million) from £11.9 million to £12.5 million, increasing/worsening the wages to turnover ratio from 80% to 90%, though part of the growth was due to the club’s decision to change the manager (Dave Jones) in December 2013.

This means that wages have risen by £4.2 million (51%) since promotion, which is considerably more than the £2.9 million (27%) revenue growth in the same period. Nevertheless, Wednesday’s wage bill is still one of the smallest in the Championship with only six clubs below them – though one (Watford) was promoted the following season.

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.

Wednesday’s wages to turnover ratio of 90% is not great, but it is only the 14th highest in the Championship. Given the relatively low revenue, many clubs in the second tier have a dreadful wages to turnover ratio with 10 of them being more than 100%, including QPR 195%, Bournemouth 172%, Nottingham Forest 165% and Millwall 132%.

Arguably, Wednesday’s lack of spending on wages contributed to their troubles, as their wages to turnover ratios before relegation were all on the low side, even though they steadily increased their wage bill to £9.6 million in 2010. This again highlights the challenges outside the top flight.

Player amortisation has been steadily rising since promotion, but is still only £1.0 million, again one of the lowest in the Championship. To put this into perspective, the highest player amortisation was at QPR £16.6 million, Blackburn Rovers £7.2 million, Wigan Athletic £6.8 million and Nottingham Forest £5.7 million.

As a reminder, 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 – even if the entire fee is paid upfront. As an example, Marco Matias was bought for a reported £3 million on a four-year deal, so the annual amortisation in the accounts for him would be £750,000.

In the same way, the lack of spending in the transfer market is reflected in the balance sheet, with the value of player (intangible) assets only £1.3 million in 2014.

Given their financial difficulties, it is no surprise that Wednesday have spent very little on player recruitment: just £2.6 million gross spend in the eight seasons up until 2014/15, offset by £6.4 million of sales, giving net sales of £3.8 million. Mandaric “tried to support the manager wherever possible”, but it’s been a whole new ball game since Chansiri arrived.

On the day he was announced as the new owner, he preached prudence: “I believe that there needs to be some investments into the club, but just throwing money at it is not a guarantee of success. We need to do it in a smart and sustainable manner. Some clubs throw a whole lot of money at it in the transfer market, but are not successful.”

However, he has bankrolled some major purchases with more than £9 million spent to date this summer on 15 players, including the likes of Marco Matias, Lucas Joao, Fernando Forestieri, Rhoys Wiggins and Lewis McGugan. In the past few days, there have been rumours of big money bids for a new striker, with Ross McCormack, Jordan Rhodes, Matej Vydra and Gary Hooper all being mentioned, so the spending might not have stopped there.

This is a big change for Wednesday, whose £0.3 million net sales over the last two completed seasons (2013/14 and 2014/15) was one of the lowest in the Championship. Although 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, it is evident that Wednesday have been comfortably outspent by their rivals, so have effectively been competing with one hand tied behind their back.

Wednesday’s gross debt increased by £1.5 million to £12.7 million in 2014. Almost all of this (£11.3 million) was owed to Mandaric’s company (“The debt is not club debt, it’s my debt as far as I’m concerned”), but there was also a £1.4 million overdraft.

This is a significant improvement on the situation when Mandaric took control with the last accounts before his takeover in 2010 showing debt of £42.6 million, including £21.5 million owed to the bank. Following the Serb’s arrival, the club benefited from the £21.4 million waiver of the previous ownership’s loan and the settlement of the external debt. More recently £0.8 million of debt was converted into share capital in November 2014.

That said, the debt had been creeping up in the last four years before Chansiri’s appearance and the accounts also include £5.1 million of other loans in accruals that are not classified as net debt for some reason. To an extent, this is all irrelevant now, as it has been claimed that the club is debt free – to be confirmed when the 2014/15 accounts are published.

In addition, the club had contingent liabilities of £0.9 million, split between transfer fees of £505,000, dependent on future appearances, and loyalty bonuses of £392,000, if players are still with Wednesday on certain dates. On top of that, in the event of promotion to the Premier League before 31 May 2021, payments will become due to players, staff and loan note holders (£1.3 million) and the Co-operative Bank (£750,000).

Using Wednesday’s definition of debt, their £12.7 million was one of the lowest in the Championship, as many clubs have built up substantial debt (very largely owed to their owners) in their pursuit of promotion, especially Bolton Wanderers £195 million, QPR £185 million, Brighton £131 million, Ipswich Town £86 million, Blackburn Rovers £80 million and Middlesbrough £77 million.

Wednesday’s cash flow from operating activities has been negative since 2009, requiring funding from the owner to balance the books with £11.3 million put in by Mandaric in the last four years. Hardly any money has been spent on player recruitment (net) or capital expenditure, though £1.3 million of interest payments have been made in the last six years, including £0.5 million in 2014 alone.

The need for financial support was referenced by Mandaric when he introduced Chansiri: “His enthusiasm, his drive to win the games and, of course, financial backing will allow him to be a top chairman for this great club.” Apart from player purchases, there is a need to invest in infrastructure, such as the stadium, the pitch and the training facilities at Middlewood Road.

The 2013/14 accounts confirmed that Wednesday have complied with the new Football League rules in respect of Financial Fair Play (FFP), adding, “we remain confident that the club can continue to operate within the current FFP regulations.” The £0.8 million conversion of debt into equity in November 2014 implied that this was the amount that was required to be in line with the allowed FFP losses.

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. This more relaxed approach should help facilitate Chansiri’s spending plans.

"Long May you run"

FFP encourages clubs to invest in youth development, which is an area of focus for Wednesday, whose academy was granted Category Two status under the Elite Player Performance Plan (EPPP). However, there is a price to pay with a “considerable” increase in investment in the academy taking the costs above £1 million.

The concern with EPPP is that the changes in the contractual position of players under 16 might produce a situation where clubs such as Wednesday become feeder clubs, “ultimately subsidising the costs of youth development for those able to attract the best available talent without paying the true value to the club that worked so hard developing the player.”

"Under my thumb"

There is no doubt that supporters have been put through the wringer in the past few years, very nearly going all the way “from the Ritz to the rubble” as big Wednesday fans Arctic Monkeys once sang, but Chansiri’s money might just change that.

He certainly talks a good match: “I’m developing plans over the short, medium and long term to maximise the sporting potential of Sheffield Wednesday in a healthy and sustainable manner. We feel that if we make smart decisions and savvy investments that within a couple of seasons, it’s very possible to get to the Premier League.”

The owner’s dream is to celebrate Wednesday’s 150th anniversary back in the Premier League, which would mean returning to the top flight for 2017. That’s obviously very far from a done deal, but at least the Owls now have a fighting chance.

All Change At Leicester City

Leicester City’s home defeat against Portsmouth on Saturday might not have definitively ended their hopes of securing a Championship play-off place, but it has certainly put another nail in the coffin. The recruitment of Sven-Göran Eriksson initially looked like a masterstroke, as the Swede inspired a dramatic improvement in the team’s fortunes, including a run of seven wins and one draw after the turn of the year, but Leicester’s surge up the table has virtually ground to a halt in March. However, few leagues are more competitive than the Championship and while there’s life, there’s hope, particularly as the Foxes are still only five points away from featuring in the end-of-season play-offs.

Although Sven’s reputation has been somewhat tarnished in recent times, not least by the miserable experience as director of football at Notts County, the recruitment of a manager with such international pedigree (Benfica, Lazio, Manchester City among others) still represents something of a coup for the East Midlands club. The Swede’s reputation has helped tempt a number of familiar faces into joining Leicester’s promotion challenge, including former England international Darius Vassell and a veritable army of other players on loan, including Nigerian powerhouse Yakubu.

Of course, such an influx of new players can be a double-edged sword: on the one hand, it can improve the quality of the squad, but on the other hand too many changes are difficult to quickly absorb. Despite the fact that every politician now routinely places change at the forefront of his manifesto, it’s not that easy to put into practice, which might help explain Leicester’s current struggles.

"Yak attack"

At least the funding for the new players is an impressive show of commitment from the club’s new Thai owners, Vichai Raksriaksorn and his 25-year-old son Aiyawatt, known as Top, who lead the consortium that bought the club from Milan Mandaric last August. Vichai is estimated to be worth around £115 million, which apparently ranks him 27th on the Forbes list of the richest men in Thailand, but it is Aiyawatt who runs the club on a day-to-day basis. The source of the family’s wealth is the King Power duty free business, which has the monopoly on retail business at Bangkok Airport and signed a three-year shirt sponsorship deal with Leicester just a week before the takeover.

So far, so good, but many fans were uncomfortable with the lack of transparency around the deal, including minor details like how much money the club had been sold for, who exactly had bought the club and what had happened to the club’s debts. In fairness, many of the questions have now been answered with the accounts revealing that 100% of the club was sold to Asia Football Investments including the assignment of all shareholder loans, with the ultimate owner being Vichai through his company K Power Sports Limited (based in the British Virgin Isles). Moreover, the Football League finally ratified the change in ownership in October under their new (presumably more stringent) regulations.

However, the new owners’ objectives are still not crystal clear, at least to this observer. Indeed, in November, Leicester City revealed that there was, in fact, a second major shareholder, namely Cronus Sports Management, owned by Iman Arif, an Indonesian businessman who is prominent in the Asian mining industry and is also a member of the Indonesian Football Federation, which now has 20% of the club’s shares. The remaining 80% stake remains with Asia Football Investments. Of course, the amended ownership structure does not imply any Machiavellian manoeuvres, but it might encourage the detractors to raise a quizzical eyebrow. At least Leicester’s chief executive, Lee Hoos, is a believer, describing the new owners as “the real deal”, and, to be fair, they have certainly put their money where their mouth is to date.

"Meet the new bosses"

Doubts about the motives of the new investors may seem overly cynical, but when it comes to football clubs, the motto is surely, “once bitten, twice shy.” In particular, Leicester City fans don’t have to look too far for empty promises, as Milan Mandaric promised to “take the Foxes back to top flight football” when he came to the club in February 2007, but instead presided over Leicester’s first ever season in the third tier of English football, when they were relegated to League One in 2007/08.

Although Mandaric is clearly a very charismatic individual with an ability to inspire supporters with his ambition and visions of success, his achievements have not always matched up to the fine rhetoric. He often spoke of bringing financial stability to Leicester City, overlooking the inconvenient fact that the club recorded large losses in every single year of his tenure, while spending all of the turnover and more on the wage bill. To his credit, he personally covered Leicester’s funding and has underwritten the club’s losses, but it is difficult to get the specifics on exactly how much money he put into the club.

Certainly, when Mandaric first approached Leicester, his bid was deemed unsatisfactory by several shareholders with one claiming that it did not have “a hope in hell” of succeeding. The highly regarded David Conn of the Guardian suggested that he paid no more than £600,000 for his shares, though he pledged to invest a further £9 million into the club. Importantly, however, he did guarantee debts of around £20 million, including £17 million owed to the US finance company Teachers for the financing of the construction of the Walkers Stadium.

"Put your hands up for Milan"

The man himself said that he “will have failed”, if Leicester were not “in the Premiership in three years”, but being criticised for missing that optimistic target is perhaps a trifle harsh. It is however entirely reasonable to challenge his assertion that “when I leave, the club will be in far better shape than it is now.” Here, the report card is fairly damning: the club is still mid-table in the Championship, while the losses and debts have grown.

Chief executive Lee Hoos begs to differ, arguing that Mandaric should primarily be applauded for bringing new investors to the table. With its undertones of Macbeth, “Nothing in his life became him like the leaving of it”, this is faint praise indeed and raises the awful spectre of Mandaric’s departure from Portsmouth, where the new owners did not exactly work out too well for the south coast club.

At least the auditors have given Leicester’s accounts a clean bill of health for the last two years, which was not the case in 2007/08, when they included the dreaded “Emphasis of Matter” statement, ominously warning, “The financial statements have been prepared on a going concern basis and the validity of this depends on the directors being able to obtain additional funds from the ultimate controlling party to enable the company to continue in business.” To put it simply, there was a risk that Leicester City would go bust, unless the owners stumped up the cash, so Mandaric’s commitment to “stand by the club” was important for its survival.

"No Turkish delight for Darius Vassell"

Long-suffering Foxes fans are no strangers to seeing their club hit financial difficulties, as the club entered administration in October 2002 following relegation from the Premier League, when they were hit by a perfect storm of debts arising from the construction of a new stadium, the collapse of ITV Digital and a high wage bill. The club only escaped from insolvency four months later when ex-player Gary Lineker and a group of local businessmen bought them for £5 million, but creditors received just 10p in the pound, including HM Revenue and Customs, who had to write-off more than £6 million of the outstanding tax bill.

Leicester’s cause has not been helped by the managerial merry-go-round taking place at the Walkers Stadium, despite the 2005 accounts stating, “The appointment of a manager is arguably the most important decision a football can make.” If that were indeed the case, you’d think that they would take a little more care when making such decisions. Incredibly, Eriksson is the fifteenth manager Leicester have had since 2004, though I may have lost count, and is the ninth appointment since Mandaric took the reins. Maybe the board thinks that practice makes perfect, but that has not prevented them appointing some real duds, such as Gary Megson (9 games) and Martin Allen (4 games).

The last two departures beggar belief. Nigel Pearson, the best manager Leicester have had since Martin O’Neill, guided the team back to the Championship and nearly got them promoted to the Premier League the very next season, but his reward for these magnificent efforts was to be effectively forced out of the club. His replacement, Paulo Sousa was sacked after just nine games in charge, the day after Mandaric insisted that his manager should be given more time. Richard Bevan, the chief executive of the League Managers’ Association, complained, “How can a chairman expect to deliver success at a football club when a talented manager is recruited and dismissed within two months?”

"Making plans for Nigel"

Apart from the unnecessary cost of paying compensation for all these managerial ch-ch-ch-ch-changes (© David Bowie), there is the additional expense of continually having to bring in new players that suit the incoming manager’s tactics, while the consequent lack of stability is hardly conducive to success on the pitch. It takes time to transform a team’s playing style, but Leicester have not been willing to grant their managers that luxury.

It’s not so long ago since Leicester enjoyed some success. After being promoted to the Premier League in 1996 under O’Neill, they finished in the top ten four years in succession and also won the League Cup twice, which meant qualification for Europe. However, things have gone downhill since the departure of the man from Northern Ireland. Peter Taylor’s ill-fated reign is remembered for some truly abysmal transfer purchases, including the dreadful striking partnership of Ade Akinbiyi (£5.5 million) and Trevor Benjamin (£1 million).

After the club was duly relegated in 2002, Micky Adams somehow managed to get the Foxes straight back up, but it was a Pyrrhic victory, as the club did not have the means to survive at the highest level, so they only lasted a solitary season before immediately dropping back down to the Championship in 2004.

"Andy King - Prince of Wales"

Thus, Leicester have been excluded from the riches of the Premier League for seven seasons, though it was a case of “so near, so far” last year, as they finished fifth in the Championship and only lost on penalties to Cardiff in the play-off semi-final. Having got so close, most people must have thought that this would have been the perfect time to build on the season’s efforts. Instead, Mandaric opted to drive Pearson away, before recruiting a completely different manager, Sousa, who decided that he would replace many of the stars with untried foreign players with predictably bad results, bringing us neatly to Sven’s turn to throw the dice.

Despite the fact that so many of the club’s actions are seemingly designed to undermine the team’s performance, the stated objective is still promotion to the Premier League. Last year, this was expressed in a more balanced fashion: “Returning the club to a position of financial and operational stability matched by a sustainable football model that will in turn springboard the club to Premiership status.”

Since then, the strategy would appear to have been modified in favour of gambling on attaining that elusive position in the Premier League, because “retaining a strong football squad to fight for a promotion place limited the amount of sensible cost reduction we could enforce.” Translation: we’re going to over-spend on wages in the hope that the (theoretically) better players will drag us over the finishing line. This has been exacerbated by the flood of loan players, though, to be fair, Leicester are far from alone in pursuing such a policy, as the size of the prize is so vast. It also paid off a couple of years ago when the club bounced back from League One, assisted by a relatively high wage bill (for that division).

Although Mandaric said that his aim was “to return Leicester City to a self-sustaining business”, the harsh reality is that the club’s current business model is almost certain to produce losses, unless they: (a) manage to sell a player for serious money; or (b) gain promotion to the Premier League. The last time that the club made a profit (£1.7 million) was in 2005/06, when its revenue was boosted by the final parachute payment of £6.5 million following relegation from the Premiership.

Since then, Leicester’s total losses for the last four years add up to a frightening £33 million, including the club’s record deficit of £14.2 million in 2007/08, though this was impacted by £4 million of exceptional charges (£3 million for goodwill impairment following the acquisition of the club in 2003 and £1 million for management restructuring).

Last year’s loss of £7.5 million was £1.3 million higher than the previous year, even though the revenue rose nearly 50% from £10.9 million to £16.2 million, as wages increased by £3.3 million to £14.5 million and the profit on player sales fell £2.5 million to £1.4 million. Once again, chief executive Lee Hoos re-iterated the strategy, “Coming on the back of a promotion-winning season in 2008/09, these figures reflect our attempts to capitalise on the momentum generated by our immediate return to the Championship.”

"Richie Wellens shows his battling spirit"

New vice-chairman Aiyawatt Raksriaksorn hinted at a new ethos, “Of course, we don’t want to write off losses every year. We will try to make it break even first. That is the target. Then we will look to make a profit.” Sounds good, but the chances are that the losses will get worse before they get better, as the club spends the additional funding provided by the Thais on bringing in new players, further driving up the wage bill.

To be fair to Leicester (and other clubs of their ilk), they have to spend to remain competitive in the Championship, especially as the revenue at clubs that are relegated from the Premier League is effectively boosted twice, first by the substantial funds they receive while in the top tier, second by the parachute payments. In this way, the Premier League really is the gift that keeps on giving – or at least for another four years, as teams receive a total of £48 million in parachute payments following relegation (£16 million in each of the first two years, £8 million in each of years three and four).

Let’s take Burnley, one of the sides competing with Leicester for a play-off place. Last season, the Clarets’ revenue of £45 million was significantly higher than Leicester’s £16 million, almost entirely due to the difference in broadcasting income (£34 million compared to £5 million), as the revenue from gate receipts and commercial activities was near enough the same. Following relegation to the Championship, Burnley’s projected revenue will still be much more than Leicester, purely due to the £16 million parachute payments. That’s hardly a level playing field, so begins to justify Leicester’s apparently suicidal financial strategy.

This is why people refer to the Championship play-off final as one of the most lucrative matches in world football with the value estimated at £90 million. Even if the promoted club came straight back down, it would receive £40 million TV income plus £48 million parachute payments plus additional gate receipts and commercial revenue. Of course, if it finished higher in the Premier League, the club would receive even more TV money and every season survived adds another £40 million to the coffers. It’s incredible to think that just one place in the football pyramid can make such a difference.

In truth, the financial gap between the Premier League and the Championship continues to grow, which is why clubs are so desperate to reach the promised land of the top division. Of course, it is still possible to do this without risking the financial health of the club, but it’s not easy and many are not willing to patiently wait for players to be developed and a successful team to be built.

The television money in the Championship is mainly sourced from the Football League central distribution of £2.5 million that is made to all clubs, which was increased last season, plus a £1 million solidarity payment from the Premier League. The latter funding was introduced in 2007/08, but it doesn’t really make any meaningful impression on the revenue gap between the two leagues.

Gate receipts increased from £4.5 million to £5.7 million last season, following the return to the Championship, which saw an 18% increase in the average attendance from 20,253 to 23,943, and additional income from reaching the play-offs. This is an impressive demonstration of the fans’ support for their club, especially attracting more than 20,000 in League One, and highlights Leicester’s potential. In fact, the average crowds last year were higher than five Premier League clubs (Fulham, Bolton, Burnley, Portsmouth and Wigan).

"Kyle Naughton - loan star"

This year, the attendances have held up, despite the tough economic environment, averaging 23,623 after 17 matches, which is the fourth highest in the Championship. This was partly due to an early bird scheme for season ticket renewals, which is being repeated this season with a small price increase of £1 per game. Not a huge amount, but I can’t help noting that the new owners had pledged not to raise ticket prices.

The club moved away from Filbert Street in 2002 to the Walkers Stadium, a spanking new 32,500 all-seater stadium. Former shirt sponsors Walkers, the Leicestershire based crisp manufacturers, signed a ten-year deal for naming rights that same year, and the agreement was renegotiated in 2007, when they again paid a “seven-figure sum” to extend the deal until 2017. The new owners have spoken of their desire to rename the ground as the King Power Stadium, but it is not yet clear whether Walkers would be willing to walk away. They have also talked about plans to increase the capacity by nearly a third to 42,000 if they secure promotion.

Arguably, the Walkers Stadium is already Premier League standard, but this is actually a burden at the moment. Lee Hoos explained the problem, “It is difficult in the Championship, because it is a very expensive infrastructure here at the Walkers Stadium and the training ground. It isn’t cheap to operate and what is an asset in the Premier League is a hindrance in the Championship.” Mandaric went further, “Anywhere but in the Premier League, this stadium is a liability financially, because we have a £17m debt that has to be serviced.”

"The theatre of crisps"

Back in 2005, the club announced in its accounts that it was “committed to further expanding its commercial activities”, but this has proved to be easier said than done: retail and merchandising revenue is effectively unchanged (£1.5 million in 2005 and £1.6 million in 2010), while sponsorship and advertising has hardly grown (from £2.5 million to £2.9 million). Income from conferences, banqueting and catering has actually decreased from £3.3 million to £0.9 million, though this is partly due to outsourcing catering to Compass in 2008.

As of this season, the shirts are sponsored by King Power, the owners’ company, in a deal running three years, though no financial details have been divulged. Similarly, there is a new three-year kit deal with Swiss firm BURRDA. Again, no news on revenue, but the club did describe it as “the biggest in Leicester City’s history.”

The new owners have outlined their vision of taking the club to a global market, building on their experience in retail marketing. In fact, one of Sven-Göran Eriksson’s first tasks as Leicester manager was to take the team to play a friendly in Bangkok against the Thai national side. However, it is far from certain that Leicester’s new Asian connections will automatically raise their profile in the Far East. A leading Thai journalist at the Bangkok Post, Wanchai Rujawongsanti, argued, “I don’t think they would be able to become a popular side in Asia. Fans in this part of the world are only crazy about top Premier League sides such as Manchester United, Liverpool, Chelsea and Arsenal.”

On the cost side, the wage bill is the key factor. Wages rose almost 30% last season from £11.2 million to £14.5 million, reflecting the promotion to the Championship. This was exactly the same as the wage bill the last time they were in that division two years ago in 2008 and is actually less than the £17 million they paid out in 2005, so it’s not as if their spending is out of control. The problem is that their revenue is low and has decreased after the loss of the parachute payment, so the important wages to turnover ratio is still of concern. Although this has come down from the high of 103%, it still stands at 89%, which is considerably above UEFA’s recommended maximum limit of 70%., and may well worsen this season, as a result of the new players recruited first by Sousa, then Eriksson.

Even though Leicester have spent relatively big on wages, the same accusation cannot really be leveled at the club with regard to the transfer market. In fact, in the last eight years their net spend has been only £3 million. Even this represents an increase on previous years, when the Foxes made good money from player sales, moving on the likes of Emil Heskey, Neil Lennon and Gary Rowett.

These days, the club’s sights have been lowered, so few big money purchases are made, but equally little money has been received when transferring players. The most expensive signing last summer was Martyn Waghorn from Sunderland at just £3 million, while Sven’s costliest acquisition to date is the uncompromising defender Sol Bamba from Hibernian for a fee of £250,000.

That said, Leicester’s net spend of £2 million over the last two seasons amazingly still leaves them among the highest spenders in the Championship with only seven clubs paying out more. There are three reasons for this apparent anomaly. The first two are fairly obvious: one is that the clubs in the Championship are strapped for cash; the second is that half the clubs in that league have simply sold more players than they have bought.

The other reason for the low spend is more interesting, namely that the use of the loan system has shot up in the Championship this season. Championship rules allow clubs to take up to six players on loan at a time and to include up to five of them in an 18-man match day squad. However, the main driver of the growth is the Premier League’s introduction of a 25-man limit in the size of the squad. Players aged 21 and under are not included in the cap, so logically clubs have taken on more quality young players.

They need playing time, so Premier League clubs are now more willing to loan players, even funding some of the wages during the loan period. This is particularly relevant for leading clubs, who have allowed many of their players to go out on loan to the Championship: Tottenham 9, Arsenal 7, Chelsea 7, Manchester City 7, Manchester United 5 and Liverpool 3.

Many clubs have taken advantage of this trend, few more so than Leicester who have taken an incredible 12 players on loan so far this season, only surpassed by Sheffield United. Some of the more experienced professionals like Roman Bednar, Curtis Davies and Chris Kirkland have failed to make an impact at the lower level, but promising youngsters like Kyle Naughton (from Spurs), Jeffrey Bruma (Chelsea) and Ben Mee (Manchester City) have cemented their places in Leicester’s defence.

However, it is the eye-opening loan signings of international strikers Yakubu (from Everton) and Diomansy Kamara (from Fulham) that really signals the intent of Leicester’s new Thai owners. Although they have not yet provided the funds for any major permanent signings, all these loan players have not come cheap. While some of the wages will no doubt be subsidised by their Premier League employers, this must be having a detrimental effect on Leicester’s wage bill, which the owners have to cover. Yes, some of the loan stars are youngsters, whose salaries are probably not that high, but the sheer quantity of loan players is likely to have greatly increased the club’s costs.

Indeed, the latest accounts specifically mention that since the books closed the new owners have injected a further £10.85 million of working capital into the business by way of parent company loans. This is on top of the £29.5 million net debt reported as at 31 May 2010, so the current borrowings probably amount to over £40 million – or a worrying 2.5 times the club’s annual turnover. In fairness, very little is owed to the banks, as £22 million of this comes from the owners.

The terms of the new loan from the Thais are unknown, but the previous parent company loans of £11 million which they took on are unsecured and non-interest bearing. They are repayable on demand, though Asia Football Investments confirmed that they would not seek repayment of these loans within 12 months of the date of signing the accounts if such payment would prejudice the ability of the club to settle its other obligations, so there is some comfort there.

The other substantial debt of £17 million is connected to the building of the stadium, which is the subject of a hire purchase contract. Interestingly, the repayment terms depend on which division of the football league the club plays in, so presumably promotion to the Premier League would imply higher annual charges. There are also £1.6 million other third party loans, which attract interest at 1.23%, and £0.4 million bank loans, secured on the club’s property, with interest payable at 1.75% above the bank base rate.

The chairman of the Football League, Greg Clarke, who ironically was chairman at Leicester City when the Foxes went into administration with large debts, has warned of the dangers facing clubs, “Debt's the biggest problem. If I had to list the 10 things about football that keep me awake at night, it would be debt one to 10. The level of debt is absolutely unsustainable. We are heading for the precipice and we will get there quicker than people think.” Sobering stuff from a man who has been there, seen the sights and bought the t-shirt.

"La Bamba"

Even so, Leicester’s balance sheet looks reasonably healthy at first glance with net assets of £5 million, but that is largely due to the £41 million value ascribed to the stadium, based on a revaluation performed in 2009. On closer inspection, for amounts falling due within one year, the net current liabilities stand at £21 million, excluding the £10.85 million loans made since the accounts were published.

Of course, the net book value of the players, considered as intangible assets in accounting circles, is significantly under-stated at £3 million, as they are worth significantly more in the real world with the directors’ market valuation of the squad being £16 million. The only problem is that in order to realise that value, the club would have to sell the players, which would leave a few gaps in Sven’s formation.

The fact is that Leicester continue to require funding from the owners to pay for their strategy, as can be seen from the cash flow statement. Large cash outflows have been financed by money from share capital payments and increased borrowing, which has amounted to £20 million in the last four years and is now up to £31 million with the addition of the latest £10.85 million loan.

The issue was neatly encapsulated in the latest accounts: “The directors have determined that whilst the business could continue to operate without obtaining significant additional monies, the achievement of the objective to secure a return to the premiership will require additional funding.” That’s fine from a financial perspective, so long as your wealthy owner continues to pump money in, but nobody has bottomless pockets and Vichai Raksriaksorn has already complained that the consortium has had to invest more than they thought when they bought the club.

The “sugar daddy” model is one that has come to be accepted by football fans everywhere, but it does carry risks if the benefactor one day decides to exit stage left, which could happen for a plethora of reasons. As a pertinent example, the last time a Thai took over an English football club it ended in tears, when Thaksin Shinawatra, the exiled former Thai prime minister, sold Manchester City only a year after he arrived, having fallen out with a certain Sven-Göran Eriksson.

Clearly, not all Thai investors are cut from the same cloth, but a reasonable question might be whether Leicester’s new owners have the wherewithal to fund their dream of getting the club into the Premier League. The £115 million that Raksriaksorn is reportedly worth might be a fortune to the likes of you and me, but it’s debatable whether it’s enough to cover many years of losses at a football club in an era when billionaires are the entrepreneur of choice.

"Diomansy - maybe not forever"

That might explain a growing trend whereby foreign businessmen are increasingly looking to invest in Championship clubs, as they can buy them more cheaply than Premier League clubs, hoping to secure a larger return by funding a promotion to the top flight.

Either way, it’s difficult to fully understand what the owners’ intentions are for Leicester’s future. Chief executive Lee Hoos is convinced that this is a long-term project, “They said they are not here for one year, two or three, they are here for the long run. This is about long-term sustainability for the club.”

On top of that, Mandaric proclaimed that the deal would “strengthen the squad and youth academy by bringing additional financial support and introducing a new global network of contacts and access to player talent”, but Vichai has admitted that the goal of his consortium is “to build Thailand as a football academy for Asia in the future.” A noble objective, for sure, but it’s not clear exactly what implications this might have for the Foxes.

Leicester City is clearly a club with a lot of potential, which is what has attracted the new owners and indeed Eriksson, who commented, “The target for this club is to reach the Premier League, hopefully this year. If not this year, then next year. I think the ambition of the club is fantastic. If they did not have that ambition, then I would not be interested.” And there lies the crux of the matter: what will happen if Leicester are not promoted in the next two years? Will Sven stick around? Will the Thais be happy to cover the inevitable losses if Leicester remain in the Championship?

"Yuki Abe - Leicester's turning Japanese"

As Mandaric once said, “There is no money in football unless you are in the Premier League”, which is why Leicester (and others) try to spend their way to the top. However, this is a risky strategy, as only three teams will be promoted each season. No club has a divine right to be in the top tier, though Leicester are undeniably better equipped than most, as Sven explained, “I think they have everything here: the stadium, the training ground and the fans. There is everything to be a Premier League club. It’s only the table which doesn’t look very good.”

And that’s the point – the team still needs to do the business on the pitch. While promotion might look like a long shot right now, there will be many twists and turns in the dog-eat-dog Championship before the play-off places are decided. If Leicester’s exciting new signings do manage to gel under Sven’s shrewd guidance, then they might just fulfill the dreams of the new owners – and indeed the legions of fans that have followed them through thick and thin.