Wednesday, December 31, 2014

Everton - Blue Sky Mining

In his first season as Everton’s manager, Roberto Martinez delivered an excellent performance with his side finishing fifth in 2013/14 and therefore qualifying for the Europa League. The club fared no less well off the pitch, as Everton registered a record profit of £28 million on a record turnover of £121 million, which enabled them to significantly reduce their net debt from £45 million to £28 million.

Profit increased by £26 million from £2 million to £28 million, mainly driven by more money from the new Premier League TV deal £33m and profit on player sales being up £13 million (Marouane Fellaini to Manchester United, Victor Anichebe to WBA and Nikica Jelavic to Hull). This was partly offset by growth in wages of £6 million, player amortisation £8 million and other expenses £5 million.

Even though Everton managed to make a small profit in 2012/13, this was largely due to profit from player sales, so they still recorded an operating loss of £10 million that year. However, what is particularly impressive about this season’s figures is that they have succeeded in turning that around, making an operating profit of £5 million even before player sales.

The £28 million profit would have been even better without £5 million of interest payable (up from £4 million the previous year) that was required to service the securitized debt and the bank overdraft. Although nowhere near as much as the interest paid by the likes of Manchester United and Arsenal, this certainly does not help the club’s finances.

However, it is fair to say that Everton’s financial performance has been improving. Up until the last two years’ profits, Everton had been consistently loss-making. In fact, they only managed to record a meaningful profit once in the previous eight years – and that was only due to Wayne Rooney’s big money transfer to Manchester United in 2004/05. Since the sacrifice of their youthful prodigy, the club suffered £45 million of cumulative losses between 2006 and 2012 before they found a solution to their financial woes – or, perhaps more accurately, Sky/BT signed a new television deal.

Since 2009 Everton’s revenue has grown by 51% (£41 million) from £80 million to £121 million. Not bad, but virtually all of this is due to the Premier League TV deal (£40 million). Commercial revenue has only risen by £4 million in the same period, while gate receipts have actually fallen £3 million.

That said, Everton’s  revenue was up 39% (£34.1 million) in the last season from £86.4m in 2013 to £120.5m in 2014. Broadcasting rose 59% (£32.8 million) from £55.7 million to £88.5 million, while gate receipts grew 11% (£1.9 million) from £17.5 million to £19.3 million. Commercial income fell 4% (£0.5 million) from £13.2 million to £12.7 million.

Everton’s revenue mix shows their reliance on Premier League TV money: broadcasting 73% (up from 65% in 2013), gate receipts 16% and commercial 11%. This is by no means unusual in England’s top division, but it does highlight the strategic areas of focus for the Everton Board.

Despite significant growth, Everton’s 2014 revenue of £121 million is still a lot lower than the Champions League elite, e.g. it is less than a third of Manchester United’s £433 million. On the other hand, Everton did have the 9th highest revenue in the Premier League in 2012/13, which is pretty good, particularly if you consider that they have consistently outperformed their revenue level, e.g. finishing two places above United last season despite all their rival’s riches.

All Premier League clubs will obviously benefit from the new TV deal last season, but we already know that Everton have overtaken West Ham in 2013/14 after the Hammers announced their results, largely due to Everton’s TV money increasing at a faster rate.

In this way, Everton’s Premier League TV distribution increased by £33 million from £52 million to £85 million in 2013/14, while West Ham’s share only increased by £25 million (£49 million to £74 million). As well as the new deal, Everton’s share was boosted by a higher finish (5th place compared to 6th the previous season) and more live televised matches (16 compared to 14).

Everton’s 2014 gate receipts were up £1.8m from £17.5m to £19.3m with average league attendances rising from 36,356 to 37,732. Encouragingly, the number of season ticket holders increased by 1,000 to 25,000 (following a 2,000 rise the previous season). This was partly due the club’s laudable initiative of low price (£95) season tickets for junior school children.

Nevertheless, match day revenue is still very low at Everton compared to the leading clubs with Manchester United and Arsenal both generating more than £100 million a season. No wonder that chief executive Robert Elstone has stated that a new stadium “remains a big priority”.

In fact, Everton have confirmed that they are looking at a new 50,000 stadium in Walton Hall Park, though supporters will be cautious, given how the “Destination Kirkby” project collapsed in 2009. It is also believed that the club would require support from the local council in the same way that Manchester City’s move to the Etihad Stadium was facilitated.

Although Everton announced that sponsorship, advertising & merchandising revenue was up £0.8 million to £8.4 million, total commercial revenue was actually down £0.5 million from £13.2m to £12.7m. This is mainly due to other commercial activities that were down £1.1 million from £4.4 million  to £3.3 million, because 2013 included a UEFA payment for players who participated in 2012 Euros.

Although Everton have improved their commercial operations in the last few years, the revenue remains on the low side at £13 million. To place that into perspective, this is less than a third of Tottenham’s £45 million. Although the club complained that it was difficult to compete commercially with clubs “regarded as having a greater international profile”, such as Manchester United, Liverpool and Arsenal, Everton are surely at least as attractive a proposition as clubs like Spurs and Villa.

To be fair, the club outsourced its merchandising and catering operations in 2006 and its retail business to Kitbag in 2009, which means that their reported income is much lower than it would be if these activities were still in-house (estimated at around £7 million) and there are signs of improvement on the commercial side.

In March 2014 Everton extended their shirt sponsorship with Chang (for the fourth time) for three years. The deal is worth £16 million, so produces £5.3 million a year (compared to £4 million from the previous deal).

A month earlier, Everton announced a new kit supplier deal with Umbro, replacing Nike from June 2014. The previous Nike deal was worth £3 million a season, while Umbro’s is understood to be a club record for such a deal. Although the figures have not been divulged, some reports suggest that it might even have doubled to £6 million, though this will not become clear until this season’s results are announced.

Everton’s wage bill was up 10% (£6 million) to £69 million (2013 £63 million), but the wages to turnover ratio fell from 73% to a respectable 58% following the high revenue growth. The ratio would be even lower if the club had not outsourced its retail and catering business.

Everton’s ability to outperform their financial resources is further emphasised by their relatively low wage bill, which was only the 10th highest in the Premier League in 2012/13, even behind QPR and Fulham. To place it into context, it is less than a third of the two Manchester clubs and less than half of Arsenal, Chelsea and (probably) Liverpool.

For the last few seasons Everton have been a selling club, basically having to sell one big name every season: Andy Johnson £10.5 million 2008/09, Joleon Lescott £22 million 2009/10, Mikel Arteta £10 million 2011/12, Jack Rodwell £15 million 2012/13 and Marouane Fellaini £27.5 million 2013/14. In this way the club recorded net sales of £35 million in the five seasons until 2013/14.

However, that certainly changed this summer with the big money (£28 million) acquisition of Romelu Lukaku from Chelsea, which nearly doubled Everton’s previous record purchase (Fellaini at £15 million), plus Muhamed Besic for £4 million and Gareth Barry for £2 million. Bizarrely, it has not (yet) lead to an upsurge in the club’s fortunes on the pitch. As they say, it’s difficult for a leopard to change its spots.

The recent change in approach in the transfer market has been reflected in player amortisation (the annual cost of writing-off transfer fees), which rose by 75% (£8 million) from £11 million to £19 million in 2013/14. And this is before the Lukaku purchase, which will only be included in the 2014/15 figures.

Everton’s 2014 net debt was down £17 million to £28 million (2013 £45 million), but this is largely due to cash balances of £21 million, which were up £18 million. In fact, gross debt of £49 million was actually up £1 million, so those interest payments will continue to haunt the club for a while.

In fairness, the club has managed to hold the gross debt at the £48-49 million level for the last five years after it more than doubled from £20 million in 2005, when Elstone explained, “our pursuit of success has stretched our finances.” The result of this strategy is clear to see, as the club is burdened with a 25-year loan from Bear Sterns (now at £22 million), which has the advantage of being long-term, but carries a high interest-rate of 7.79%, leading to annual payments of £2.8 million. Other loans include a £21 million loan securitized on Premier League TV money at 8.8%. This is renewable in August 2015, but is probably not a concern, given that it has been renewed for a number of years.

Everton’s chief executive, Robert Elstone, commented, “Our financial results highlight growing revenues, costs remaining under control and debt reducing, and when we combine that solid financial base with a playing squad that continues to improve and increase in value, we have every right to be confident and positive on future prospects.”

That’s fair enough, though it is somewhat ironic that Everton’s stronger performance off the pitch has not been mirrored (to date) in the Premier League this season, though injuries have clearly played a part in that. There is also the nagging concern that young talent, such as Ross Barkley and John Stones, will still be sold off at some stage. Maybe. In any case, Everton can at last begin to see some blue skies, at least from the financial perspective.

Tuesday, December 30, 2014

Manchester United - The Magnificent Seventh

For Manchester United supporters the 2013/14 season is one best forgotten, as the transition from the legendary Sir Alex Ferguson to David Moyes proved to be every bit as difficult as many of them had feared. The team dropped to a relatively low 7th place in the Premier League, which was not only the first time United had finished outside the top two positions since 2005, but also meant that they failed to qualify for Europe – almost unthinkable for a club of this stature.

However, this did not stop United reporting a fantastic set of financial results with revenues up 19% (£70 million) to a record high of £433 million and EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) up 20% (£22 million) to £130 million. Mainly as a result of this impressive growth and vastly reduced interest payments, which were down 61% (£43 million), last season’s loss before tax of £9 million improved to a healthy profit of £41 million.

Profit after tax did fall from £146 million to £24 million, as 2012/13 benefited from a £155 million credit, largely due to the recognition of US deferred tax assets, which was a special once-off case.

Exceptional Items were £5m, almost entirely due to the compensation paid to Moyes and his coaching staff when they were shown the door. The previous year’s £6 million also included £2 million for coaching staff leaving as a result of Ferguson’s retirement plus £4 million professional advisory fees in connection with the IPO (Initial Public Offering).

The 2014 profit of £41 million represents a remarkable turnaround compared to 2009/10 when the club registered a loss of around the same amount (£44 million) and follows two seasons of small losses: £5 million in 2012 and £9 million in 2013.

Of course, the profits would have been substantially higher if the club did not have to bear the financing costs of the Glazers’ leveraged buy-out. In fact, over the last six years United have made total operating profits of £426 million, which has been almost totally wiped out by net financing costs of £425 million.

The good news for the club is that these costs have fallen from £117 million in 2009 to “only” £27 million in 2014. This season alone these costs were cut by £43 million from £70 million, primarily due to a £32 million reduction in premium paid as a result of the repurchases of senior secured notes and £13 million reduction in interest payable following another refinancing in 2013.

Revenue rose 19% (£70 million) from £363 million to £433 million, mainly due to commercial revenue, which grew 24% (£37 million) from £152 million to £189 million, and broadcasting revenue, up 34% (£34 million) from £102 million to £136 million. Match day revenue dipped slightly from £109 million to £108 million.

The 49% growth in sponsorship revenue (£45 million) to £136 million was particularly striking, due to several new sponsorships, higher renewals and a significant increase from the pre-season tour and promotional games (which brought in £11 million in 2014).

Retail, merchandising and product licensing revenue decreased £1 million to £38 million, primarily due to lower money from the Nike agreement, while mobile and content revenue dropped by £7 million to £16 million, due to the expiration of a few mobile partnerships.

Unsurprisingly, United’s revenue of £433 million is by far the highest in England, around £86 million more than their neighbours Manchester City, followed by Chelsea £320 million and Arsenal £299 million. However, their growth rate is lower than the others at 19% (albeit from a higher base) with City growing by 28%, and Chelsea and Arsenal both by 23%.

United’s revenue mix is probably the envy of many other clubs, as it is a relatively even split, compared to those who have an unhealthy reliance on TV money. That said, commercial is now up to 44%, while broadcasting is also higher at 31%, leaving match day at 25%.

In 2012/13, the last season where all clubs have reported, United had the 4th highest revenue in the world with £363 million, but were a long way off top spot, being £82 million behind Real Madrid's £445 million.

However, their growth this season plus a more favourable exchange rate means that they are likely to be only just below Madrid in the next Deloitte Money League. In 2012/13 Deloitte used the 30 June 2013 rate of 1.1668, so they will almost certainly use the 30 June 2014 rate of 1.25 for the next edition. This means that United’s revenue of £433 million will be €542 million, very nearly the same as Madrid’s €550 million (excluding player sales), and overtaking Bayern Munich €488 million and Barcelona €485 million.

One of the main drivers for the English clubs’ high revenue growth is the new Premier League TV deal, which commenced in the 2013/14 season. In United’s case, their share of the Premier League pie increased 47% (£28 million) from £61 million to £89 million.

The other main element of broadcasting revenue is the Champions League, which increased £8 million from £31 million (€36 million) to £39 million (€45 million), due to progressing to the quarter-final stage compared to the last 16 in the prior year and receiving a larger share of the UK market pool due to better 2014 Champions League progress and finishing 1st in the Premier League in the 2012/13 season compared to 2nd in 2011/12. United will obviously lose this revenue in 2014/15 season following their failure to qualify for Europe’s flagship competition.

Despite United’s significant commercial growth, their 2014 commercial revenue of £189 million is still behind Bayern Munich, whose revenue also rose to £233 million. PSG’s 2013 commercial revenue of £218 million was inflated by a €200 million partnership with the Qatar Tourism Authority.

However, United are re-establishing their dominance of the commercial scene in England, as they are increasing the gap to their nearest challengers, Manchester City, who are £23 million lower at £166 million. Both Manchester clubs are miles ahead of the other English clubs with the next highest Liverpool at £98 million (though in fairness this is the 2012/13 figure). And remember, this is before United’s new deals with Chevrolet and Adidas kick in.

United’s ability to extract value from their shirt sponsorship is almost unprecedented. Aon have been paying an average of £20 million in the last four years, but this will rise to an incredible £46 million a year when Chevrolet take over the sponsorship from the 2014/15 season. The new deal runs to the end of the 2020/21 season and is worth $70 million in the first season, rising by an additional 2.1% each season afterwards. Amazingly, Chevrolet also paid United $18.6 million in each of the 2012/13 and 2013/14 seasons for “pre-sponsorship support and exposure”.

Aon have not completely exited the scene though, as they will pay for the privilege of being United’s training kit partner until 2020/21 including renaming the training facilities at Carrington as the Aon Training Complex.

On top of that, United continue to announce new sponsorships. In 2013/14 alone this included 3 global sponsors, 9 regional sponsors and 8 financial services and telecom partnerships.

Furthermore, United have also signed the “largest kit manufacture sponsorship deal in sport” with Adidas, which is worth £750 million over 10 years or an average of £75 million a year from the 2015/16 season. This is, deep breath, £50 million higher than the current Nike deal – every year. It is true that success clauses are built into this contract, e.g. if United fail to participate in the Champions League for two or more consecutive seasons starting with the 2015/16 season, then the payment for that year would reduce up to 30%, but it is still an astonishing deal.

In addition, retail, e-commerce and licensing will revert to United from August 2015, as opposed to the current deal whereby any profits generated from these activities is shared equally between the club and Nike.

United’s match day revenue fell slightly to £108 million, due to hosting some games for the London Olympics the prior year, though this may well still be the highest in world football, as it was in 2012/13. United emphasise premium seating and hospitality facilities in order to maximise match day revenue, as can be seen by Old Trafford having 154 luxury boxes, approximately 8,000 executive club seats, 15 restaurants and 4 sports bars. In fact, the 2014 revenue included £54 million from gate receipts and £33 million from hospitality. However, the match day revenue stream will also fall in 2014/15, as no European games will be hosted at Old Trafford.

In line with revenue, United’s wage bill rose 19% (£34 million) to £215 million, due to player purchases and renegotiated player contracts, which maintained the wages to turnover ratio at the 50% level it has been for the last three seasons.

In 2014 United once again had the highest wage bill in English football, as Manchester City reduced theirs to £205 million. United were around £50 million higher than Arsenal, while Chelsea are still to report 2013/14 wages.

Interestingly, United now also have the highest wage bill in Europe with €269 million, having overtaken Real Madrid €250 million and Barcelona €248 million. Much of this is due to the exchange rate used (this calculation is based on the 1.25 rate that Deloitte are likely to use in their 2014 Money League) and it also depends on how clubs account for things like image rights, but it does give you pause for thought.

United’s cash machine has really swung into action in the last few seasons in the transfer market. Their net spend for the 10 years up to 2011/12 was only £114 million (obviously deflated due to Ronaldo’s £80 million sale to Real Madrid), but they have spent a net £231 million in the last three seasons, as Moyes and then van Gaal have recruited (expensive) new blood, including Juan Mata, Marouane Fellaini, Angel Di Maria, Ander Herrera, Luke Shaw, Marcos Rojo and Daley Blind.

As a result of this higher transfer activity, player amortisation (the annual cost of writing-off transfer fees) was up by nearly a third in 2014, increasing from £42 million to £55 million.

Their net spend of £231 million in the last three years is much higher than any other Premier League club, including previously big spending Chelsea £137 million and Manchester City £128 million, both of whom have been somewhat held back by FFP restrictions.

United’s net debt was again reduced by £20 million from £295 million to £275 million. Actually, gross debt was down £47 million from £389 million to £342 million, but cash also fell by £28 million from £94 million to £66 million.

In September 2012 the net proceeds from the IPO were used to reduce the club’s indebtedness by repurchasing £63 million of the US Dollar senior secured notes, while a further £209 million of borrowings were refinanced (senior secured notes retired and replaced by a new secured term loan).

Overall, as good a performance off the pitch last season as it was bad on it for Manchester United. It is true that revenue will fall in 2014/15 as a result of no Champions League, with the club itself forecasting £385-395 million compared to £433 million this year, but if van Gaal can manage to lead United back into Europe, then the following year’s financials will look stellar with the new Chevrolet and Adidas deals both fully on board.

Monday, December 29, 2014

Announcement - Crushed By The Wheels Of Industry

As some of you might have noticed, I have been taking an extended break from blogging, only managing to post one article in 2014. Trust me, this is not because of any lack of interest, but the cold, hard realities of a highly demanding job (plus a demanding young family) have impacted my ability to write anything this year. As you might imagine, my type of analysis requires a lot of research and frankly I have not had the time to review football clubs' finances in any sort of detail, so I decided that it was not worth continuing.

I have occasionally managed to post a summary of a club’s financial performance on Twitter, but it’s not really the same thing. Gratifyingly, quite a few people have emailed me to ask for a return of the blog in some form or other, even suggesting that the Twitter summaries on the blog would be better than nothing.

I have given this a lot of thought and, like an ageing heavyweight getting back into the ring, I have decided to return to the blogging scene, though I will have to amend my style to reflect the limited amount of time available – either that or somehow work out how to survive on a couple of hours sleep a night.

Therefore, Swiss Ramble 2.0 will not feature the exhaustive analysis of days gone by, but I will try to pick out some key points that I think might be of interest to a club’s fans.

To be honest, I’m not sure whether this will work, but let’s give it a go.

In the next few days, you can expect to see pieces on Manchester United, Everton, Manchester City, Norwich City, Stoke City and Bayern Munich. After that, who knows?
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