Showing posts with label WBA. Show all posts
Showing posts with label WBA. Show all posts

Tuesday, July 12, 2011

West Bromwich Albion's Risk Averse Strategy


At one stage last season West Bromwich Albion seemed destined to be relegated from the top flight yet again, despite the sterling efforts of top scorer Peter Odemwingie and the tough tackling Youssouf Mulumbu, but a timely change of manager inspired a solid series of results in the last few months, culminating in the club’s best ever finishing position of 11th in the Premier League.

Under the leadership of Roberto Di Matteo, West Brom made a bright start to the campaign, including an impressive victory against Arsenal at The Emirates and a draw against Manchester United at Old Trafford, but a dramatic loss of form and a crippling injury list led to the young manager being sacked in February after a lengthy run of defeats.

He was replaced by the vastly experienced Roy Hodgson, who proved to be the right choice for the Baggies, even though his time at Liverpool had hardly been a great success. The introduction of a new manager gave the team the necessary impetus to avoid the dreaded drop, mainly thanks to Hodgson’s well known organisational skills.

Although it is never fun to replace a manager, the West Brom chairman, Jeremy Peace, explained that this decision gave the club “the best possible chance of remaining in the Premier League.” In all probability, he had absorbed the lessons from previous campaigns, when the Albion board had remained loyal to their managers for too long, resulting in relegation.

"Roy Hodgson - job done"

They did not have to search too far in their memory for examples, as this was the case with Tony Mowbray in 2008/09 and Bryan Robson in 2005/06. Both of them had performed well the previous season (Mowbray securing promotion from the Championship, Robson beating the drop on the last day), but arguably they should have been let go when things started to go awry and not when Albion’s fate had been determined.

West Bromwich Albion are a club with a lot of tradition, having been in existence since 1878 and one of the twelve founding members of the Football League. They have only been champions of England once, way back in 1919/20, but have a very good record in the FA Cup with five victories. For fans of a certain age, Albion might be best remembered for “Big” Ron Atkinson’s exciting team of the late 70s, featuring such legends as Bryan Robson, football’s original “Captain Marvel”, the dazzling winger Laurie Cunningham and the powerful centre-forward Cyrille Regis, which came close to winning the title on a couple of occasions.

West Brom have spent the majority of their history in the top flight of English football, but were playing in lower leagues for 16 long years between 1986 and 2002, before embarking on a decade of promotions and relegations that has made them the very definition of a yo-yo club. In fact in the nine seasons from 2001/02, Albion achieved promotion from the Championship on no fewer than four occasions, but were also relegated three times. Boing Boing Baggies, indeed.

"Peace in our time"

After one promotion to the Premier League, Jeremy Peace commented, “We know how hard it is to stay there.” You can say that again. Until this season’s impressive recovery, Albion had only once spent two consecutive seasons in the top division – and that was due to the near miraculous escape in 2004/05, when they became the first club to survive in the Premiership after being bottom at Christmas, albeit with the lowest ever points total for a team not relegated.

Many have attributed the reasons for the club’s continual ups and downs to its cautious financial approach, which is very clearly explained each year in the chairman’s statement in the accounts. For example, in 2008 he said, “We endeavoured to strike the right balance between organising the club’s finances in a sensible way and giving ourselves the best possible chance of establishing West Bromwich Albion in the top flight.”

The message is hammered home virtually every time that Peace makes a public pronouncement, “Since I’ve been at the club we’ve modeled our budgets on the worst case scenario of going down, then finishing seventh and seventh (in the Championship) and not coming back up. The rationale is: if we go off the edge of a cliff, we have to survive.” Or, more pithily, “We are not going to go mad and bankrupt this club.”

There’s no doubt that West Brom are a very well run business, but there are two sides to every story and the result of this prudence is a low transfer budget and wage bill. The focus appears to be more on survival off the pitch rather than survival in the Premier League.

"Youssouf Mulumbu - a bargain buy"

Nothing wrong with that, many would argue. Indeed, refusing to break the bank makes perfect sense when the fate of less conservative clubs is considered: just look what has happened to the likes of Portsmouth, Hull City, Sheffield Wednesday, Crystal Palace, Bradford City, Derby County, etc. The list of clubs that have become financial casualties after attempting to “live the dream” (© Peter Ridsdale) is a long and sad one.

On the other hand, while Albion’s policy might be applauded by Michel Platini, it also makes it very difficult for the club to compete with clubs that are a little more cavalier with their spending. This risk averse stance has prevented Albion from moving to the next level, in contrast to clubs like Stoke City and Bolton Wanderers, and places them firmly among the favourites for relegation every season.

This is, of course, the eternal dilemma for clubs like West Brom that lack the natural financial resources of the leading clubs: Do they splash the cash in order to improve their chances of survival while risking their long-term financial future? Or do they take fewer chances with their money, thereby making it more likely that they will struggle on the pitch?

Clearly, West Brom got the balance right this season, as they ended up in a very respectable mid-table position, but they have not been so lucky in the last few years, leading to many fans questioning whether this safety-first strategy is the right one for the club.

"Scott Carson - an all too typical pose"

The man behind this frugal course of action is Jeremy Peace, who was appointed as a director in December 2000 and subsequently became chairman in June 2002 after a power struggle with the former incumbent Paul Thompson. As befitting a man with a background in corporate finance, there have been quite a few corporate reorganisations since then, the most recent of which saw the whole of the share capital of the club’s parent company, West Bromwich Albion Holdings Limited, being acquired in September 2010 by West Bromwich Albion Group Limited. The offer document stated that Pearce wished “to increase his control of the group” and the resulting movements left his shareholding at just under 60%.

When defending Albion’s transfer policy last year, Peace claimed that since he had become chairman in 2002, the club had invested a net £38 million in transfer fees plus a further £12 million in infrastructure developments at the Hawthorns stadium and the training ground. That’s a fair bit of cash for a club the size of West Brom, but the counter argument is that if they had increased their outlay, they would have got this back and more through a longer stay in the lucrative Premier League.

Even those at the club have been a little confused over whether Albion’s firm control on spending is the correct approach. Former manager Tony Mowbray first argued that it could work, “The teams with the biggest budgets and the best players in the world invariably win, but there’s got to be teams out there that break that mould”, citing the examples a few years ago of Villarreal in Spain and AZ Alkmaar in Holland. Later on in his tenure, after results turned sour, he referred to West Brom’s “very, very tight financial ship” with more than a degree of exasperation.

"Brunt and to the point"

There have been accusations that Peace is more interested in protecting his investment, rather than investing in the club’s development. While I have no way of understanding the chairman’s intentions, there is no doubt that he has done well financially out of his time at the Hawthorns, making a huge return of his initial investment of less than £3 million. Not only is the club estimated to be worth around ten times that amount now, but he has received a very healthy regular income stream.

Although dividends were last paid out in 2005, Peace’s remuneration is very good for a company with a turnover of just £28 million. According to last year’s offer document, Peace has a basic salary of £500,000 plus a discretionary bonus. He would certainly struggle to get a similar package at companies the same size in other industries.

Assuming that Peace was the highest paid director, he received £712,000 in 2010, up from £513,000 the previous year. In fact, he has trousered £1.8 million in the last three years. OK, this is not as high as some of his peers earn, e.g. David Gill at Manchester United, Garry Cook at Manchester City and Ivan Gazidis at Arsenal all earned a similar amount last year alone, but with the greatest of respect to Albion, they manage significantly bigger businesses.

In fairness (giving Peace a chance), West Brom’s financial performance in the period under his control has been very good with the club being profitable in four of the last six years. That included three years in the Championship, where it is extremely rare for clubs to thrive financially, but Albion still reported a £2.3 million profit last season. If non-cash items are excluded, EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) including profit on player sales was actually positive every single year.

This is very largely due to the operating profits, as the once-off profits on player sales have not been that significant, e.g. only contributing £2.9 million in 2009/10, though a further £1.7 million compensation was received after the management team of Tony Mowbray, Mark Venus and Peter Grant moved to Celtic. The only time this made a substantial difference to the results was in 2007/08, as the club faced a second year in the Championship, when profit on player sales was £18.1 million with Peace commenting, “My attitude changed then from not allowing players to go to saying we’ll let them go for the right price.”

However, one advantage of Albion’s conservative policy is that they don’t need to hold a fire sale of their star players if they are relegated. When Mowbray was confronted by this situation in 2009, he said, “We are not in a position where we have to get £20 million into the club quickly because of any shortfall of revenue after relegation.”

All these figures are from the accounts of the football club, but the differences with the financials of the holding company are very small. No accounts have yet been published for the new company, WBA Group Limited, but we can see from the accounts of the former parent undertaking, WBA Holdings Limited, that in the three years between 2007 and 2009 the differences were not higher than £1 million, mainly operating expenses.

One point that is striking about the club’s accounts is the excessively prudent accounting treatment of impairing (or writing down) the value of the players’ registrations each time the club is relegated. In particular, this reduced the club’s reported profits by £17.8 million in 2009 and £9.4 million in 2006. If these adjustments had not been made, then West Brom would have reported a large profit in those years too instead of losses. In other words, without these non-cash accounting entries, the club would have been profitable in every one of the last six years.

Although the chief executive, Mark Jenkins, has claimed, “it’s what a lot of clubs choose to do”, this is actually the exception rather then the rule. Although there is some merit in the argument that players would have to be sold a little cheaper after relegation, it seems absurd that they would lose so much value. Indeed, part of this adjustment has often been reversed when players have been sold for more than the revised value. The suspicion is that this accounting treatment is more about lowering fans’ expectations in the transfer market rather than a reflection of reality.

The fact remains that West Bromwich Albion have been a consistently profitable operation, whatever the accounting creativity might suggest, which is something that very few others manage in the demanding world of football. Indeed, they were one of just four Premier League clubs that made a profit in 2009/10, their profit before tax of £0.5 million only surpassed by Arsenal, boosted by hefty player sales and property development, and their Black Country neighbours Wolverhampton Wanderers.

Granted, Albion were in the Championship that season, but it’s the same story in the lower division with only four clubs making a profit (Burnley, Leeds United, Reading and Swansea City), so the club’s ability to run its business well is no mean feat and should be duly recognised, as it’s an achievement that few others have accomplished.

This is particularly impressive if you consider the club’s revenue disadvantages. In 2009/10, their revenue was only £28 million, which might have been one of the highest in the Championship, but pales into insignificance compared to the big hitters in the Premier League, where six clubs generated more than £100 million. The top four in the Money League, in particular, appear to be on a different planet: Manchester United £286 million, Arsenal £224 million, Chelsea £210 million and Liverpool £185 million.

This helps to better explain West Brom’s prudent policy. As Mark Jenkins explained, “If you don’t have the huge resources of the teams in the top half, you must make the money you have go as far as you can.” Like many other clubs these days, Albion are hugely reliant on television revenue. In the Championship, this accounted for 61% (£17 million) of their total turnover with match day income only worth £6 million and commercial revenue less than £5 million.

In the Premier League, this trend will be further exaggerated, as the TV deal is worth substantially more. My estimate for Albion’s 2010/11 revenue is £61 million, largely based on £48 million of TV income, which is a fairly safe assumption, as the Premier League has already released figures for the distributions last season. This would bring Albion’s dependence on TV money to just under 80%, a very large figure, but no worse than the likes of Wigan Athletic and Blackburn Rovers.

Obviously, West Brom’s revenue has been on a rollercoaster ride in the past few years, moving up or down, depending on whether the club has just been promoted or relegated, e.g. leading to a £20 million increase in 2009, followed by a £19 million decline in 2010. These movements are very largely down to the differences between the TV deals in the Premier League and Championship, though the blow has been softened by parachute payments.

In fact, Albion’s TV revenue of £17 million in the Championship in 2009/10 largely consisted of the Premier League parachute payment of £12.4 million. The Championship fixed distribution only amounted to £3.5 million (£2.5 million from the Football League and £1 million solidarity payment, again from the Premier League), though there were also £1.3 million fees for cup games and being shown live.

This is the reason why talk of a £90 million bonanza after promotion to the Premier League is a bit misleading for clubs like West Brom. This is normally calculated based on a minimum of £40 million TV money (for the club finishing bottom) plus £48 million future parachute payments and at least £2 million from higher gate receipts and improved commercial deals.

However, two points should be made here: first, the incremental growth in TV income for West Brom is “only” a minimum of £24 million (£40 million less £16 million); second, the parachute payments are spread over four years: £16 million in each of the first two years following relegation, £8 million in years three and four. That’s still a tidy sum, but it’s not available all at once.

Nevertheless, the impact of the Premier League TV deal can be clearly seen in West Brom’s revenue growth, as their TV revenue rose significantly every time a new deal was signed. This was the case in 2009, following the 3-year deal for 2008-10, and then again in 2011, thanks to the 2010-13 deal, which grew a lot on the back of a substantial rise in overseas rights.

The distribution methodology of the Premier League TV revenue is therefore of particular interest to Albion. Much of it is shared out equally, namely 50% of the domestic rights and 100% of the overseas rights, but the rest of the domestic rights money is allocated differently: (a) 25% is for merit payments, where each place in the final league table was worth £757,000. Its importance can be seen by looking at the difference between the £7.6 million Albion received in 2010/11 after coming 11th against the £0.8 million received in 2008/09 when they finished 20th. (b) The remaining 25% comes from the facility fee, which is based on how many times Sky broadcast a club’s games live. Each match is worth around £500,000, so Albion actually received £1 million more in facility fees in 2008/09 (12 matches) than 2010/11 (10 matches).

This is one way in which the rich get richer in the Premier League, as the leading clubs tend to earn more by consistently finishing in higher positions and are broadcast more frequently than the “lesser lights”. That said, the range between the TV earnings of the top club compared to the bottom club in England is relatively narrow, so last season Manchester United received £60 million, while West Ham got £40 million. However, the top clubs’ total TV revenue is usually much higher, mainly due to the money those teams earn from the Champions League.

Match day revenue of £6 million declined £0.7 million in the Championship, as the average attendance fell from 25,800 to 22,200. This was fairly typical of the trend in previous years of the attendance being around 25,000 in the Premier League, falling to 22,000 in the lower division. Indeed, in 2010/11 the crowds again climbed back to 24,700, though this is still one of the lowest in the Premier League, only ahead of three clubs: Bolton, Wigan and Blackpool.

West Brom’s gate receipts may be a little low, but they are about the same level as clubs like Blackburn, Bolton, Birmingham and Wigan. To place this into context and highlight the size of Albion’s challenge, both Manchester United and Arsenal receive more than 15 times as much match day income at £100 million and £94 million respectively. Perhaps more pertinently, Wolves earned 75% more than Albion with £10 million.

Another reason for the decrease in gate receipts is due to Albion cutting ticket prices by a third since 2007, partly in recognition of the difficult economic conditions in the West Midlands. Furthermore, the club has frozen the price of season tickets for the last two years with an adult season ticket giving a saving of up to 34% (the equivalent of approximately six free games). As of 1 July, West Brom had sold 17,500 season tickets and they were well on course to beat last year’s tally of 18,000.

In fairness, Albion’s crowds are close to the full capacity at the Hawthorns of 26,484. After investing around £4 million in stadium refurbishment in the last couple of years, notably the West Stand, Jeremy Peace recently announced plans to increase the capacity to 30,000 by 2014, regardless of which division the club finds itself in, though, true to form, he could not resist mentioning the “apparent financial insanity of such a move.”

Commercial income is also on the low side at only £5 million, a figure that is comfortably surpassed by virtually every other Premier League club. While it is undoubtedly a tough market, it is quite telling that Wolves generate more than twice as much commercially as their local rivals. Merchandising has held steady at around £2 million a year, but sponsorships and other commercial income fluctuate, so were £3 million in the Championship, but £1.5 million higher in the Premier League.

The club has advised potential investors that it faces strong competition in the West Midlands in attracting sponsors, particularly as many of its local rivals also play in the Premier League, which helps explain why it went without a principal shirt sponsor for two seasons between 2008 and 2010, having different sponsors on a game-by-game basis. This uncertain situation changed last season when Homeserve paid £750,000 and the club has recently inked a two-year agreement with Bodog, an online gaming company, for a club record £1 million a year.

Things seem to be looking up commercially, as chief executive Mark Jenkins commented, “Following our most successful Premier League campaign, there was a great deal of interest in becoming our club sponsor.” Similarly, Adidas have replaced long-serving Umbro as kit supplier in a deal worth £1.5 million a season, an increase of £0.5 million.

There’s still a long way to go before West Brom can secure sponsorship deals at the exalted level of the leading clubs, such as Manchester United and Liverpool, who both receive £20 million a year in shirt sponsorship, but at least they’re now on a par with clubs like Sunderland, Stoke and Wolves.

However, Albion fans should not expect their club to suddenly go crazy with the board promising to “continue to control costs in a prudent manner.” As with all other football clubs, the most significant expense is the wage bill and West Brom managed to cut this by 26% (or £8 million) in 2009/10 from £31 million to £23 million following relegation. Although this was one of the highest in the Championship, the club admitted that even this was “only sustainable whilst we benefit from the Premier League parachute payments” and the point is that they managed to reduce it from a level that was one of the lowest in the Premier League.

This sensible approach was explained by Jeremy Peace, “We dovetail our players' contracts to fit (our) three-year model. We don't want to be liable for contracts we can't pay if the parachute money runs out. We also flex contracts downwards by between 25% and 40% if we go to the Championship.” Indeed, Albion are one of the few clubs that mention the total wage liability for the remainder of player contracts, which was estimated at £33 million in the Championship, though it was acknowledged that this would increase during a Premier League season.

Even with the lower wage bill in the Championship, the wages to turnover ratio was quite high at 80%, a fair way above UEFA’s recommended 70% upper limit. That said, according to the latest Deloitte study, the average in that division was 88%, as clubs extended themselves in order to reach the riches of the Premier League, so Albion are still better than most in that respect. Albion’s wages to turnover ratio is also (naturally) dependent on the turnover, so it averages 73-80% in the lower division and 57-65% in the Premier League with its higher revenue.

Pearce has noted an obvious issue with the wages to turnover ratio, namely that it effectively means different things to different clubs: “If Manchester United have £200 million of revenue and they spend 55% of it on player wages, you have £110 million. If you have about £50 million and you spend the same percentage, you have about £25 million (sic), so the budget isn’t as big.”

This is reflected in West Brom’s position in the wages league. It would be unfair to compare the £23 million that they paid in the Championship in 2009/10 with the larger amounts spent in the top tier, as the club acknowledged that they would have to pay higher wages “in order to be competitive and therefore have a longer presence in the Premier League.” However, even if we were to assume a 50% increase to £35 million (£4 million more than the last time Albion were in the top flight), this would still leave them in the bottom three, only ahead of Wolves’ £30 million and Burnley’s £22 million.

The challenge faced by Albion was outlined by former manager Tony Mowbray, “Historically the money you spend relates to where you finish in the league. The teams with the biggest budgets finish at the top. The teams with the smaller budgets finish at the bottom.” This theory has been borne out over the years, including last season when the five teams with the highest wage bills (all well over £100 million) finished in the top six of the Premier League: Chelsea £173 million, Manchester City £133 million, Manchester United £132 million, Liverpool £114 million and Arsenal £111 million.

Having said that, the total wage bill was inflated last season by an innovative bonus scheme for staying up, whereby each player in the 25-man Premier League squad was given £5,000 a point, resulting in a payment of £235,000 (for 47 points), which worked out at a total cost of nearly £6 million.

Player amortisation, the cost of writing down transfer fees over the length of a player’s contract, is normally an important expense at football clubs, but it is very low at West Brom at only £3 million last season, partly due to the club’s aggressive impairment policy and partly due to the relatively low amounts spent in the transfer market.

West Brom’s net transfer spend in the last decade is only £28 million and it’s actually been falling in that period, as only £10 million was spent in the last five years, compared to £18 million in the previous five. Indeed, last season, when you would have expected some major investment after the team’s return to the Premier League, the net expenditure was only £4 million, which was one of the lowest in the division, meaning that Di Matteo had to largely “keep faith” with the existing squad.

In the past, Peace has explained his transfer philosophy: “A club has to bring in the right type of players with half an eye on where we might end up whether that be the Premiership or the Championship.” In fairness, this is where Albion’s reputation as a yo-yo club must hurt them, as players are wary of joining them for fear that their time in the top flight will be brief, while players are also tempted to jump ship after relegation.

This is one of the reasons why Albion recruited Dan Ashworth in 2008 as Sporting and Technical Director with responsibility for recruitment, the other being “to ensure our limited resources are invested wisely.” An indication that this policy was beginning to bear fruit came when West Brom was represented by three players at the 2010 World Cup, but Roy Hodgson has warned that the scouting staff will find it increasingly difficult to unearth unpolished gems for small sums of money like the Cameroonian playmaker Somen Tchoyi and Scottish midfielder Graham Dorrans.

It’s also fair to say that Albion have not always been successful with their purchases (Luke Moore and Scott Carson at £3 million apiece come to mind), but this is perhaps inevitable, given the budget restrictions placed on them. As Mowbray lamented, “Invariably we are in a market where we can only afford young or inexperienced players.”

Where Albion have been quite astute is in the timing of their sales with many players leaving initially on loan deals with a view to a permanent sale afterwards, which has helped them in their tax planning. This was the case for Curtis Davies’ big money move to Aston Villa, but also applied to Jonathan Greening. Paul Robinson and Tomasz Kuszczak.

As a natural consequence of Albion’s parsimonious approach, their debt is very low at just £10 million, which is a bank overdraft secured on the club’s assets, though this has been steadily increasing since the club had net funds of £6 million in 2005. This is attributed to “continued infrastructure improvements at the stadium and the training ground” plus “investment in the playing squad.”

The balance sheet also includes £10 million owed to group undertakings, but this may well net out to zero on consolidation in the holding company (as in previous years). I note that last year’s offer document mentioned the possibility of debt increasing to finance the cash offer, but it was stated that this would not exceed £6 million.

The cash flow statement is quite revealing. In the years that Albion compete in the Premier League, they generate a reasonable amount of cash from their operating activities, but this is then used up by expenditure on player registrations and other assets. As Mark Jenkins commented in December 2009, “Compared to other clubs we’re relatively strong, but we are nearly £7 million in debt. We have had one season in the Premier League and yet the cash position has hardly changed.”

This means that the cash flow over the past six years is slightly negative at £10 million, though this has been boosted by the issue of new capital to existing shareholders and loans in 2005. However, the club has still managed to pay off some of those loans since then. The question the fans might ask is whether it would have been preferable to maintain those loans (or even take on a bit more debt) in order to strengthen the squad.

The club should be praised for improving its facilities, especially the academy and training ground, which should pay dividends (in football terms) in future years and boosts the value of the club’s assets. In fact, the balance sheet is fairly robust with net assets of £6 million, though it also has a couple of hidden reserves. First, the land and buildings are almost certainly worth more than the value in the accounts, while the book value of the players of under £7 million (largely due to the impairment policy) is absurdly low. The respected Transfermarkt website gives a market value of over £60 million for the first team squad.

"Put your hands up for West Brom"

It’s therefore a little surprising that the club received no firm offers in 2008 when it invited “proposals ranging from a long-term relationship with a new substantial shareholder all the way through to someone who may want to take the club over.” While Peace accepted that “the reality is that to be successful in the Premier League a club of our size needs significantly more financial backing”, Albion did not really give prospective investors much of an opportunity, as the process only lasted six weeks, so some have questioned whether he really is a willing seller.

Of course, even if the price paid for the club were quite low, any purchaser would still have to put in substantial funds, in the same way that Steve Morgan had to pledge £30 million when he bought Wolves, so it’s hardly a no-brainer investment. That said, it could be an attractive buy, so long as it remains in the richest league in the world.

Indeed, every season that the club survives in the Premier League is worth well over £50 million in revenue, which should generate a healthy surplus with Albion’s strategy. This will be a challenge, but the club has consistently topped The Times’ Financial Fair play league, which identifies those clubs that obtain the best results per money spent.

"James Morrison - rider on the storm"

West Brom are not a million miles away from getting the balance right, hence the splendid result in last season’s Premier League. If Hodgson can maintain his record of outperforming his budget for a couple of seasons, the financial gap between Albion and less well-managed clubs will increase, giving them more room to manoeuvre. At the moment, the club is caught in a “chicken and egg” situation, where frequent relegation supports the prudent approach, but that policy might well be the reason for those relegations.

Jeremy Peace encapsulated his ethos, when he stated, “The problem is ambition, a terrible word which means spending money. It can wreck a club.” You can see where he’s coming from, but this might be the moment to up the ante. Although spending money is clearly no guarantee of success, a gentle loosening of the purse strings might make a big difference to West Brom’s prospects. There’s no need to go mad, but it should not be beyond the wit of a savvy board like Albion’s to find a happy medium.

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