Why Bolton Wanderers Have So Much Debt

Although this is the most open Premier League for many years, it is still somewhat of a surprise to see Bolton Wanderers sitting proudly in fifth place after just over a third of the season has been completed. Not only that, but they have achieved this with a brand of passing, attractive football that most fans thought beyond them. It’s a far cry from this time last year when Gary Megson’s team was being pilloried by Bolton’s own supporters for the awful combination of poor results and an ugly, negative playing style.

This inevitably resulted in the “Ginger Mourinho” being sacked in a desperate attempt to stave off the threat of relegation and the club replacing him with Owen Coyle, whose move from local rivals Burnley was highly controversial, not to mention acrimonious, but the change has paid off in the best possible way. Bolton steadily moved up the table for the rest of last season, ultimately finishing in a comfortable 14th position, while this year’s start has been the club’s most promising for some time.

Moreover, this has not been accomplished via the attritional football long associated with the Trotters, but with an attacking approach and a sense of panache that has the purists purring in appreciation. As the club’s accounts drily explained, “Owen has embarked upon a programme of evolutionary change to the playing style.” The manager has certainly worked a minor miracle with forwards Kevin Davies and Johan Elmander, whose transformation from lumbering plodders to skilful tyros has been nothing short of remarkable. Indeed, this led Barney Ronay in the Guardian to gush, “Bolton are a beautiful thing these days.”

"The dynamic duo"

Of course, Bolton have not been without success in the past, but they have not won much in their long history, even though they were one of only 12 founder members of the Football League. You have to go back all the way to the 20s for their most successful era, when they won the FA Cup three times, with their only other trophy coming in 1958, when they again won the FA Cup by beating Manchester United 2-0 with two goals from legendary centre-forward Nat Lofthouse. More recently, they qualified twice for the UEFA Cup in 2005 and 2007, but their real success has been to survive in the Premier League for ten consecutive seasons.

However, all that glitters is not necessarily gold and, in stark contrast to Bolton’s fortunes on the pitch, the club’s finances have seen better days. A couple of weeks ago the 2010 accounts revealed a huge loss of £35 million plus a significant rise in the net debt to £93 million, thanks to an unhealthy mixture of low turnover and an inflated wage bill. Just as Bolton’s side appear to be on the verge of great things, it looks as if it will have to be broken up by selling its best players, maybe as soon as the next transfer window.

Chairman Phil Gartside admitted that star defender Gary Cahill and Elmander may have to be sacrificed if the right offers come along, “If a Champions League team knocks on the door in January, that’s the best time to sell an asset, because those teams will pay the money.” This could be particularly relevant for Elmander, as the Swede is out of contract at the end of the season, so could leave for no fee, unless his contract is extended. Coyle has insisted that he is under no pressure to sell, stressing that the chairman and owner were already well aware of the financial situation in the summer, and they did not force his hand at that stage. He has a point, but cynics might feel that he is merely talking up the price and someone will still have to be sold in January to balance the books.

So just how bad is the debt?

If you look at it in purely numerical terms, quite frankly, it looks terrible. In fact, the net debt of £93 million is an astronomical sum and is the sixth highest in the Premier League. Outside of the Big Four of Manchester United, Chelsea, Arsenal and Liverpool, only Fulham have more debt than Bolton and it is arguable that two of those clubs will soon be in a better position, as Liverpool’s previous acquisition debt is being repaid by their new owners, while Arsenal’s debt is rapidly falling due to proceeds from property sales.

What’s even worse is that Bolton’s debt is increasing at a rate of knots. Having held steady in 2005 and 2006 at around £29 million, since then it has more than tripled, rising 45% in the last year alone from £64 million to £93 million. That’s worrying by anyone’s standards, as it indicates a business model that isn’t working.

At least there is no immediate pressure from the banks, as the composition of the debt has changed in the last 12 months with almost all of it (£85 million) now owed to the club’s owner, Edwin Davies, via his company Moonshift Investments Limited, leading Gartside to emphasise, “We are in a fortunate position in that a small percentage of our debt is owed to the bank” – though subsequent to the release of the accounts, Gartside has stated that the club has now agreed new banking facilities with Barclays.

"Cheer up, Phil. The team is in 5th place"

In the meantime, last year’s financials clearly indicate how much Bolton rely on the backing of their owner, as he has covered their increasing losses over the last few years. As Gartside put it, “Without Ed’s support, we would be watching a very different standard of football. He is the only reason we are in the Premier League. He has given us a huge amount of money.”

Actually, Davies has not exactly “given” the money to the club, as Bolton have to pay a price for his generosity. Last year, his company was paid £3.6 million in respect of “arrangement and guarantee fees” for the £85 million loan, which is linked to an interest rate of 5%. It’s also repayable on demand, though the directors have received assurances that repayment of the loans will not be demanded within 12 months of signing the financials statements. In fairness, these terms are an improvement on the previous year, when the interest rate was a very high 10% on a £23 million loan, which produced a £2m payment to Davies.

The loan is also secured by a floating charge on the club’s assets, while Moonshift is owed a further £2.7 million by the club for what is mysteriously described as a “player success fee”.

In short, it is clear that Davies’ funding has been vitally important to the club, but it is equally clear that this is a commercial investment that has provided the owner with a healthy income stream during a difficult economic climate. The club’s chief executive, Allan Duckworth, acknowledged that the owners’ loans charged interest “at a premium which reflects risk, which is high at a football club.” As a result, the club has been paying £4.5 million a year in interest, which is not massive, but it is a sizeable burden when the turnover is only around £60 million.

"Will Cahill be off in the next transfer window?"

In contrast, Mohamed Al Fayed has lent almost £200 million to Fulham interest-free, which makes a significant difference to the West London club’s financials. Furthermore, much of this debt is unsecured, which means that Al Fayed has no guarantee of repayment.

To be fair to Davies, Bolton were in dire straits when he paid £2.25 million in 2003 to increase his shareholding from 29.7% to 94.5%, effectively taking over the club and taking his total outlay at that stage to £14 million. The club had almost collapsed under the burden of debt accumulated from building the Reebok stadium and the adjoining hotel and offices with one of its banks, the Co-Op, seeking to force repayment of its loan. With other banks unwilling to lend, Davies was the only man to come forward and provide the money needed in order to avoid entering administration. For taking that risk alone, Bolton fans should be grateful, so he has arguably earned his reward.

Obviously much of the credit for the club’s progress must go to the players and various managers, not to mention old-fashioned attributes like good coaching, tactics and team spirit, but it is difficult to believe that Bolton would have done as well without Davies’ money. Indeed, Gartside stated, “That this achievement corresponds with Eddie’s investment in the club is not coincidental.” The importance of this funding is evident when examining Bolton’s financials.

The last time that the club made a profit was back in 2006 when they just about broke even, but since then the losses have been steadily rising: 2007 £2 million, 2008 £8 million, 2009 £13 million and 2010 £35 million. The widening of the loss in the last year, when it very nearly tripled, is most shocking, and cannot simply be ascribed to the £4 million cost of restructuring the management team. The truth is that there are fundamental flaws in Bolton’s operating model. Even the relatively small loss in 2007 was boosted by the once-off £3.5 million sale of naming rights for the training ground.

When Gartside recently raised the possibility of a wages cap in the Premier League, he exclaimed, “We keep upping the income and we keep losing money. It’s ridiculous.” Well, he’s half right, if you examine how Bolton moved from a £4 million profit in 2005 to a £35 million loss in 2010. Yes, there has been some revenue growth, but not much – and almost all of it has come from television. Gate receipts have actually fallen in that period. On the other hand, you can see why Gartside is concerned about wages, as these have grown by £21 million, which is almost double the gain from TV. On top of that, player amortisation has risen £14 million and other costs £10 million.

In short, Bolton’s small revenue growth has been eaten up and then some by the cost growth, mainly due to investment in the football team. They have eased their financial indigestion by reaching for the pill bottle named “Debt”.

In similar circumstances, other clubs have opted to redress the balance with the sale of players, but that is not the case for Bolton. In fact, profit from player sales actually dropped from £8 million in 2009 to just £0.1 million last year. As Gartside explained, “We are not a selling club, but a trading club. One of the problems we’ve had over the last three or four years is that we’ve not done much trading.” That’s true, but one of the other problems they have is that it will require a lot of player “trading” to make a meaningful dent in the losses. For example, Bolton averaged profits on player sales of £8 million in both 2008 and 2009, but that did not prevent overall losses of £8 million and £13 million in those years.

Nor are Bolton assisted by their ancillary activities. This analysis is based on the accounts of Burnden Leisure PLC, which is the parent company of the football club (Bolton Wanderers Football & Athletic Company Limited), but also includes the joint venture for a hotel (Bolton Whites Hotel Limited). Some see this as the saviour of the football club, but the reality is that this operation also loses money. The segmental analysis in the accounts reveals that the hotel produces annual revenue of around £8 million, but does not contribute anything to the bottom line, as it has reported losses for the last six years. In 2010, the loss was just under £2 million with trading conditions being described as “extremely testing”.

Given the size of Bolton’s turnover, they are almost bound to struggle financially. If we look at the Premier League revenue from 2008/09 (the last season when we have comparatives for all clubs), we can see that only four clubs reported lower revenue than Bolton (£52 million from football income) – and two of those (Hull City and WBA) ended up being relegated.

You would expect Bolton to be significantly behind the Big Four (Manchester United £279 million, Arsenal £224 million, Chelsea £206 million and Liverpool £185 million), but they also earn a lot less than clubs like Aston Villa (£84 million) and Everton (£80 million), while even Stoke City generated more income (£54 million). In the 2009 annual report, Gartside voiced his concerns, “Addressing this polarisation of clubs and increasing revenue differentials will be the major strategic issue for the Premier League over the coming years.”

Given these limited resources, Bolton’s lengthy tenure in the Premier League has to be considered a fantastic achievement, though it can be looked at in two contrasting ways: either they are punching well above their weight, or they are spending way above their means and are only propped up by a generous benefactor.

The revenue mix is particularly revealing. Match day revenue of £5 million is pitifully small, while commercial revenue of £9 million is actually inflated by including £3 million of unexplained “other football income”, leaving the underlying balance as a tiny £6 million. What this analysis also highlights is the enormous reliance on broadcasting revenue, which represents over 70% of Bolton’s total football income.

If we again look at season 2008/09, we can see that only Wigan are more dependent on TV revenue than Bolton. It’s little different in 2009/10 with Bolton earning £39 million of their £54 million total revenue from the small screen. As such, their turnover is heavily influenced by the timing of broadcasting deals, with the £8 million increase in 2008 revenue being almost entirely due to the new Sky deal.

Happily for Bolton, they can anticipate a similar increase in revenue from next year, as the central payments from the latest three-year deal, which kicked off in the 2010/11 season, will climb by about a third, largely thanks to the increase in overseas rights. TV really has become football’s equivalent of the goose that lays the golden egg, but that fable did not have a happy ending and some believe that the next sale of TV rights in 2013 might bring in less money, due to a number of threats (market saturation, competition, legislation, technology).

At present, Bolton are one of the beneficiaries of the Sky revolution with £37 million of their £39 million broadcasting income emanating from Murdoch’s empire. Surprisingly, Gartside has argued that clubs like his should receive even more from the central distribution pool, even though the Premier League already distributes TV revenue more fairly than any other major European League with 50% of the domestic rights and 100% of the overseas rights allocated equally.

However, not all of the money is allocated in this manner. Merit payments account for 25% of the domestic rights with each place in the final league table being worth £800,000. In addition, the remaining 25% of the domestic TV rights comes from the facility fee, which is based on how many times Sky broadcast a club’s matches live. Each team must be broadcast a minimum of ten times a season with a maximum of 24, but this tends to benefit the big clubs. For example, in each of the last two seasons Bolton have been shown the minimum ten times, while we have had the pleasure of watching Manchester United the maximum 24 times.

So, the difference between Manchester United’s TV allocation of £53 million and Bolton’s of £37 million is around £16 million, of which £9 million is due to merit and £7 million comes from the number of live matches. That does not seem too unreasonable to me. In fact, given that the overseas rights have become a far larger proportion of the total deal, in relative terms the smaller clubs are receiving more than ever before. Of course, the real differential in terms of TV revenue comes from the Champions League, which in fairness is outside the control of Scudamore and Co.

At least TV revenue has been increasing, but this is not the case for gate receipts, which have been declining and now account for only 10% of football income. Despite a slight increase in this revenue stream in 2010, thanks to three more home matches, gate receipts have fallen 45% from their peak of £9.8 million in 2006 to £5.4 million in 2010. Most of this can be attributed to average attendances plummeting from 26,000 to 22,000, but even when there was a temporary increase in crowds in 2009, the money still diminished, as Bolton have reduced ticket prices in an attempt to entice fans back, including the introduction of cheaper season tickets, £49 for children and £299 entry level for adults.

A couple of years ago, the club admitted that falling attendances were a real concern, pointing to factors such as price, kick-off times and levels of TV coverage, but it may simply come down to the effects of the recession, which have hit the north-west of England very hard. It should also be noted that their catchment area includes plenty of other clubs, so there’s a lot of competition for the floating fan.

"Welcome to Planet Reebok"

Whatever the reasons, the fact remains that Bolton’s average attendance last season was the fourth lowest in the Premier League and was actually smaller than seven clubs in the Championship and one in League One. This obviously causes them huge financial problems when competing against other clubs. OK, the likes of Manchester United and Arsenal may be out of sight with their match day revenue of over £100 million, but Bolton’s competitors for European qualification also generate much higher gate receipts than their £5 million, e.g. Spurs £40 million, Aston Villa £23 million and Everton £22 million.

There should be no issue with the ground, as the Reebok Stadium is a modern, all-seater with an appropriate capacity of just under 29,000, though some would prefer the location to be nearer the town centre, as opposed to Horwich, a suburb of Bolton. The club moved to the new stadium in 1997, after playing at Burnden Park for over 100 years, with a view to generating more income, not just from football, but other facilities including a hotel, conference centre and restaurant.

Ever since the new stadium was built, Reebok have been an important part of Bolton’s commercial revenue. They acquired the stadium naming rights, which have been extended until 2016, continue to provide the club’s kit and were the shirt sponsors until 2009, when they were replaced by betting specialist 188BET in a two-year agreement.

"The Flying Finn"

Gartside described this as a “fantastic and lucrative deal”, but the reality is that the £750,000 they receive annually is one of the smallest in the Premier League and is actually lower than the £950,000 that Reebok used to pay. This is part of an innovative “two for the price of one” purchase from 188BET, who also sponsor Wigan for £650,000. Clearly, you would not expect Bolton to match the £20 million earned by the likes of Manchester United and Liverpool, but they could certainly aspire to get the same as neighbours Blackburn Rovers, who earn twice as much (£1.5 million) from their contract with Crown Paints.

Corporate hospitality has also suffered, down 25% in 2010 as a result of the business downturn, while merchandising and licensing sales might have grown by an “encouraging” 16%, but it’s still only worth £1.4 million.

It remains to be seen whether the club can drive growth in these areas, but there may be some hope if Bolton can continue to deliver success on the pitch, while “re-branding” themselves as an exciting team. Gartside alluded to this a couple of years ago, “Commercial success of a football club will to a large extent reflect longer term success on the field.”

So Bolton suffer from structural revenue challenges, but the 2010 £35 million loss was primarily blamed on “further investment in the football team”, resulting in an increase in player wages and amortisation. In order to “improve the quality and depth of the squad”, the likes of Chung-Yong Lee, Zat Knight, Paul Robinson, Sam Ricketts and Sean Davis were added, while loan agreements were taken out for Jack Wilshere, Ivan Klasnic and Vladimir Weiss. As a consequence, the wage bill increased by a hefty 14% last year from £41 million to £46 million.

However, this was far from an isolated incident as wages have risen by over 80% since 2005, while in the same period revenue only increased by 20%, contributing to a very high wages to turnover ratio of 86%. This is not only way above UEFA’s recommended maximum limit of 70%, but has been described by chief executive, Allan Duckworth, as “unlikely to prove sustainable in the long term.”

In fairness, it’s not as if Bolton’s wage bill is excessive in absolute terms, as they currently lie 12th in the wages ranking for clubs in the Premier League. As we speak, they could actually be even lower, as they could easily be overtaken by Blackburn, Fulham and Wigan when those clubs publish their 2010 accounts, while newly promoted Newcastle certainly pay more.

Moreover, the club is well aware that the wage bill is too high, as they have been adversely impacted by two important factors, one of which is specific to Bolton, while the other has affected all clubs. First, the consecutive changes in management have “led to the club carrying a larger than optimum playing squad and backroom team.” Second, the club wanted to shed players in the summer, but the transfer market has died with far fewer deals taking place.

This meant that no senior players left the club during the season, resulting in the senior squad increasing in size from 24 players to 30, while the full squad of players averaged 57 compared to 45 in the previous season. Gartside promised that the club’s wage position would recover next summer when nine players will be out of contract, “If you took four or five players out of the squad, you’ve probably got £8 million of salaries that you don’t need.” It’s an obvious area to target and one that should not be too difficult to improve.

You would have to believe that the board directors were capable of addressing the financial issue, given that they are very comfortably rewarded for their efforts. Last year, the highest paid director (most likely Gartside) trousered a hefty £584,000, including a £156,000 bonus, while the other director (presumably Duckworth) received £483,000, including a £178,000 bonus. If they make this much money, when the company reports a record loss of £35 million, heaven knows how much they would be paid if the club actually made a profit. Nice work if you can get it.

"The boy can play after all"

The logical result of the club’s recent transfer policy has been a significant increase in player amortisation from £2 million in 2006 to £16 million in 2010 with this expense rising 33% last year alone. The concept of amortisation confuses many people, but it is simply how accountants handle player transfers. Instead of booking 100% of the player’s transfer price as a cost in the year of purchase, accountants treat players as assets, so the cost is capitalised and written-down (amortised) over the length of his contract. At the end of the contract, he is considered to have no value, because he can then leave the club on a free transfer.

It’s probably easier to understand with an example. Bolton bought Fabrice Muamba for around £6 million on a four-year contract, so the annual amortisation is £1.5 million. After two years his net book value in the accounts would be £3 million (the original cost of £6 million less two years amortisation at £1.5 million per annum).

Whatever the accounting treatment, what is indisputable is that Bolton have somehow transformed themselves into a buying club in recent times. Whether this cavalier approach makes sense, only time will tell. Gartside told supporters, “We have spent more money on players than we have in the past in the last three or four years” and the figures endorse this view. Up until 2003, Bolton made good money from their activities in the transfer market, generating a net surplus of £25 million in the preceding five years, but in the subsequent eight years they have incurred a net spend of £37 million. Apart from 2007/08 when the club’s purchases were funded by the sale of Nicolas Anelka to Chelsea for a club record fee, every year in that period has seen outgoings.

Of course, none of this would have been possible without their benefactor providing the cash, which was explicitly acknowledged in the 2007 annual report, “Once again the ongoing support of Edwin Davies and parties connected to him has enabled this investment in the playing squad.”

As the club understands that future “investment levels must be managed within the overall capacity of the business”, they have committed themselves to a new philosophy whereby “young, promising players will be acquired as rough diamonds to be polished and cut. Some will be kept to secure the backbone of the team, but others will be sold to finance further investments.” This youth strategy will benefit from the “Bolton Wanderers Eddie Davies Football Academy” in Lostock, which became operational at the start of the 2008/09 season and features a number of high quality grass pitches and an all weather training facility.

Whether this bold new vision is pursued is a matter of conjecture, because the very same report also states, “ongoing investment in the playing squad will remain a priority.” In a way, this is perfectly understandable, as this is their best chance of fulfilling their primary objective, which is “simply to retain the club’s Premier League status” – pretty much at all costs. Gartside has talked of a “fear factor beginning to emerge amongst top clubs outside the top few” surrounding relegation, due to the financial gap between the Premier League and the Championship, which tempts clubs to over-spend in order to keep their seat at the top table.

"Keep your eye on the ball, Kev"

Granted, the parachute payments paid to clubs dropping out of the Premier League have been increased to £48 million (£16 million in each of the first two years, £8 million in each of years three and four), but this would still represent a drastic reduction for Bolton. They can expect around £45 million revenue from the Premier League next season, so they would have to somehow cope with a £29 million reduction in their total revenue. Unless Davies provided even more funding, the club would be unable to meet their payroll, so would have to offload players in a fire sale, making it more difficult to be promoted back into the top division – a vicious circle.

This has lead to Gartside, also a Football Association board member, making a series of proposals for a two-tier Premier League with 18 teams in each. Although this theoretically might have some merit (winter break, fewer matches), you don’t have to be the world’s biggest cynic to detect a healthy degree of self-interest in the plan, as one of the primary objectives is clearly to give clubs relegated from the Premier League a softer financial landing.

His initial plan included the awful idea of doing away with promotion and relegation, though this has since been watered down to allow limited scope for teams moving up and down via some sort of “size and finance threshold”. In other words, replacing a meritocracy with a franchise system. Maybe he’s forgotten that this would have prevented his own beloved Bolton from climbing from the old Fourth Division in 1988 to the Premier League in 1995. Fortunately, these proposals have so far been rejected, but you get the feeling that won’t stop Gartside from knocking at the door again.

The extent of the chairman’s nervousness is all too easy to appreciate when you read the going concern warning in the latest accounts, where the club advises that it has a shortfall in its cash flow projections and is “in discussion with lenders regarding potential further borrowings in order to provide the company with adequate working capital facilities.” There was a similar warning in last year’s accounts, the only difference being that it spoke of “the potential securitisation of future guaranteed broadcast revenues”, i.e. borrowing against the Sky TV money. It is evident from the cash flow statement that the business has only been maintained through financing, either with bank borrowing or loans from the owner, which has amounted to £64 million in the last four years.

This benefactor model works fine while Davies is there to provide support, even though some might accuse the club of benefiting from a form of financial doping, but it does beg the question of how strong his commitment is. Although he was born in Bolton and grew up in the town, Davies, who made his fortune from the manufacture of thermostatic controls for kettles, moved away in his early twenties. When he bought the club in 2004, a former director, Brian Scowcroft, expressed the fans’ concerns, “Now we’re owned by an Isle of Man tax exile via his Bermudan trust. It leaves us feeling very vulnerable and with many unanswered questions.”

"Tonight, Matthew, I'm going to be..."

That said, nearly seven years later Davies is still at the club and has continually made funds available. Gartside, for one, has no doubts over the owner’s dedication to the cause, “We have no indications from Eddie whatsoever that he wants to exit the club. He still enjoys the games and is a massive supporter of the club.” However, there must always be some misgivings when a club is so reliant on one individual. He might get bored, suffer ill health or run into financial difficulties. Such a scenario may be unlikely, but it has afflicted a number of clubs, e.g. Portsmouth, Rangers. Even if the spirit is willing, the bank account might be weak. According to the 2009 Sunday Times Rich List, Davies’ net worth is £65 million, which might be more than enough for you and me, but does not leave him much more to invest in the football club.

Although the club claims that it is trying to wean itself away from relying on financing from Davies, we have seen that this is easier said than done. Nor would it be a straightforward task to find a new investor. Indeed, Gartside admitted, “I’ve been chairman for 12 years and on the board for 21. We’ve never had an approach to buy it in all that time.”

The club might own its ground and other assets (including the hotel), but it still has net liabilities of £56 million, though much of this shortfall would be made up by putting a real world value on the players (intangible assets). These are reported in the books at £24 million, but the directors estimate the market value to be approximately £64 million. This provides some under-pinning of the debt, but does not help to release cash to make loan repayments - unless players are sold. This is the state of affairs facing the club (and Owen Coyle) right now.

"Owen Coyle - plenty to think about"

So Bolton may not be the most compelling investment, either from a yield or growth perspective, but there could be some light at the end of the financial tunnel via a couple of developments in football governance. Firstly, the introduction of Premier League squad limits should reduce the numbers required for the playing squad. Then, the advent of the UEFA Financial Fair Play Regulations should theoretically reduce the inflationary wage pressure from the top clubs. Of course, the latter is a double-edged sword for Bolton, as they are a long way from break-even and have less revenue potential than the larger clubs. It would be a horrible irony if Bolton did manage to qualify for Europe again, but found themselves excluded for financial reasons.

Maybe we should just enjoy the moment. Bolton have made enormous progress on the pitch since they were voted the seventh most hated club in English football in 2008. They are now playing some delightful football, eradicating the memory of the dismal fare served up by the teams sent out by Megson and Allardyce, and few neutrals would begrudge them their lofty position in the Premier League. If they maintain this level in spite of their financial constraints, it will be a simply stunning achievement. The odds are against it, but stranger things have happened.