Monday, March 30, 2015

Sunderland - Distant Sun

These are tough times for Sunderland. Last season was also difficult, but finished on a high with an appearance in the Capital One cup final and the “great escape” as a run of late victories avoided relegation.

However, the club is currently just outside the relegation zone, leading to the sacking of Gus Poyet. As chairman Ellis Short explained, “Sadly, we have not made the progress that any of us had hoped for this season and we find ourselves battling, once again, at the wrong end of the table. We have therefore made the difficult decision that a change is needed.”

It remains to be seen whether former Dutch national team manager Dick Advocaat is the right man for the job, but it is clear that the club is completely focused on retaining its Premier League status, especially with the blockbuster new television deal on the horizon.

Sunderland’s financials for the 2013/14 season emphasise how important the club’s top flight status is to its future, as their loss widened from £13 million to £17 million. Although revenue rose by £29 million (38%) to a record high of £104 million, this was more than offset by a £26 million increase in expenses and £6 million lower profit on player sales.

The revenue growth was very largely driven by an additional £28 million from the new Premier League television deal plus £3 million higher gate receipts, while the expenses growth came from increases in the wage bill (£12 million) and transfer costs (£10 million) via player amortisation and impairment. Profit from player sales fell £6 million from £11 million to £5 million.

Sunderland’s £17 million loss is the second worst announced to date in the Premier League for 2013/14, only behind big spending Manchester City’s £23 million. In fact, of the 17 clubs that have so far published their accounts, only four of them have reported losses with the other 13 making profits, largely due to more revenue being distributed from the central Premier League TV deal. Sunderland are the only loss-making club whose results actually worsened in 2013/14.

Of course, this is nothing new for Sunderland, as the last time that the club made a profit was way back in 2006. Since then they have accumulated total losses before tax of £145 million, averaging £18 million a season.

In fairness, the deficits have improved over the last two seasons compared to the £32 million loss reported in 2012, though this was largely due to higher profits from player sales (£11 million in 2013 and £5 million in 2014). This also explains why the loss was “only” £10 million in 2011, as the figures were boosted by £26 million from selling players with Jordan Henderson moving to Liverpool, Darren Bent to Aston Villa and Kenwyne Jones to Stoke City.

There has been a clear improvement in money made from this activity (£38 million in the last four years compared to £11 million in the previous four years), though this is not a strategic objective according to chief executive Margaret Byrne, who outlined the club’s thinking a couple of years ago: “We’ll be reporting another big loss this year. We don’t want to do that, but we’ve taken a decision not to sell our best players. We had lots of offers in the summer that would certainly have put us in a much better position, but Ellis said that we’re not selling them. Of course you could be a profitable club and sell your best players, but it’s a relegation model. We want to keep our assets and not sell them.”

The other aspect of player trading that has had a disproportionate impact on Sunderland’s bottom line is player amortisation, which is the method that football clubs use to account for transfer fees. Indeed, the club accounts actually note that “the amortisation of transfer fees increased the loss.”

This is a little technical, but transfer fees are not fully expensed in the year a player is purchased, as the cost is written-off evenly over the length of the player’s contract – even if all the fee is paid upfront. As an example, Steven Fletcher was bought for £12 million on a four-year deal, so the annual amortisation in the accounts for him s £3 million for four years.

Essentially high player amortisation is the result of high spending on player recruitment. Sunderland have spent a fair bit of money bringing players into the club, which has been reflected in player amortisation rising from just £2 million in 2006 to £30 million in 2014 (including £3 million of impairment costs).

Not only is this a sizeable part (24%) of Sunderland’s total expenses of £124 million, but it is also one of the highest in the Premier League, only surpassed by the really big spenders: Chelsea, Manchester City, Manchester United, Liverpool and Arsenal (and probably Tottenham when they publish their accounts).

In fact, if we were to exclude non-cash expenses such as player amortisation and depreciation, then Sunderland’s financials would look a lot better. This can be tracked by looking at EBITDA – or Earnings Before Interest, Tax, Depreciation and Amortisation. On this metric, the club has been basically breaking even in the last few seasons with EBITDA surging to £13 million in 2014.

So everything is hunky dory then? Not so fast, big boy. As the famous investor Warren Buffett once memorably cautioned: “References to EBITDA make us shudder. It makes sense only if you think that capital expenditure is funded by the tooth fairy.” And that’s the point, as money still needs to be found for player purchases and investment in other assets (like stadium and training ground improvements).

Sunderland’s cash flow statement highlights this very clearly. Although the club’s hefty operating losses are brought into line once non-cash items like player amortisation and depreciation are added back, that still does not provide any surplus funds for capital expenditure.

Since 2007 Sunderland have made net cash payments of £144 million on players, invested £10 million in new assets and made £21 million of interest payments on loans. This has been largely funded by £132 million of borrowings either from the owner or a bank loan guaranteed by the owner. As Margaret Byrne put it: “Because we’re not producing profits, every time we buy a player, Ellis (Short) is virtually buying that player for the club himself. We’re really lucky to have his backing and support.”

One of Sunderland’s underlying problems is a lack of revenue growth – except for the centrally negotiated Premier League television deals. Since the club’s first season back in the Premier League in 2007/08, revenue has increased by £41 million (64%), but almost all of that (£36 million) has come from new TV deals, hence the rises in 2011 and 2014. Commercial income and gate receipts have each only grown by around £2 million (16-17%) in the same period.

Before the new TV deal in 2013/14, Sunderland’s revenue had actually declined in the last two seasons from £79.4 million in 2011 to £78.0 million in 2012 and £75.5 million in 2013.

Of course, Sunderland’s revenue did rise by an impressive £29 million to £104 million in 2013/14, but as that man Buffett said, “A rising tide floats all boats” and all Premier League clubs have seen similar increases thanks to the new TV deal. In fact, Sunderland have been overtaken by Southampton in 2013/14, which should leave the Black Cats in 12th place in terms of Premier League revenue.

Breaking the £100 million barrier is a fine achievement, but it still leaves Sunderland a long way behind the “big boys”. Five Premier League clubs generate more than a quarter of a billion of revenue: Manchester United £433 million, Manchester City £347 million, Chelsea £320 million, Arsenal £299 million and Liverpool £256 million. In other words, Manchester United earn more than four times as much as Sunderland.

Nevertheless, it might come as a surprise that Sunderland’s revenue is the 27th highest in the world, according to the Deloitte Money League, with the club only just behind the legendary Benfica. Domestically, this does not cut much ice, as the huge TV money has propelled 14 Premier League clubs into the top 30 (with all 20 in the top 40).

The higher Premier League TV deal means that broadcasting now accounts for 69% of Sunderland’s total revenue, up from 59% the previous season. Commercial income’s share has fallen from 24% to 16%, while match day has similarly dropped from 17% to 15%. Put another way, broadcasting revenue of £72 million is 4.6 times as much as match day income of £16 million.

Broadcasting revenue rose 60% (£27 million) from £45 million to £72 million, almost entirely down to the Premier League distribution. Most of this is shared evenly between the 20 clubs, namely 50% of the domestic deal and 100% of the overseas deals. However, 50% of the domestic deal depends on other factors: (a) merit payments – 25% depends on where a club finishes in the league with each place worth around £1.2 million; (b) facility fees – 25% is based on how many times a club is broadcast live.

So Sunderland have enjoyed the benefit of the 2013/14 increase, but there will be even more money available when the next three-year Premier League cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimate is that a club that finishes 15th in the distribution table (as Sunderland did last season) would receive around £108 million a season, which would represent an additional £36 million.

Clearly, Sunderland’s big fear is that they will be relegated and therefore miss out on this amazing prize. As Ellis Short noted in the accounts: “The directors consider the major risk of the business to be a significant period of absence from the Premier League.”

Even though Sunderland would be protected to some extent by the parachute payment of £24 million that is added to the £1.9 million given to all Championship clubs from the Football League’s own TV deal, they would still have to contend with a £46 million cut in TV money. That’s a significant reduction to absorb, even if their players have a 40% wage reduction clause in their contracts, as has been widely reported. This disparity will become absolutely colossal once the new 2016/17 TV deal kicks in, e.g. around £71 million, even with an increase in the parachute payment.

Gate receipts were up a healthy 25% (£3.1 million) from £12.6 million to £15.8 million, largely due to good cup runs in both domestic competitions with Sunderland reaching the final of the Capital One Cup and the quarter-finals of the FA Cup. This was despite freezing or even cutting season ticket prices for the 2013/14 season.

This still places Sunderland in the lower half of the Premier League table when it comes to match day income and importantly is significantly less than the elite clubs, e.g. both Manchester United and Arsenal earn over £100 million here (or nearly seven times as much as Sunderland). Realistically, this is always going to be the case, as Sunderland’s ability to charge higher ticket prices and earn from corporate hospitality is far lower than major clubs. As Byrne said, “You have to look at the area. A restaurant in London is more expensive than a restaurant in Sunderland.”

No blame can be attached to Sunderland’s supporters, as their average attendance of just over 41,000 was the 7th highest in the Premier League, only behind the usual suspects. Byrne again: “Our attendances have been steady, we’re still averaging 40,000 a game. We’re way up on other clubs.”

In fact, as at the end of March 2015, the attendances are actually up 4.5% to nearly 43,000 this season, which is an incredible statistic considering the quality of football on display.

Commercial revenue fell by 7% (£1.2 million) from £18.0 million to £16.8 million, comprising £8.4 million sponsorship & royalties, £7.5m conference, banqueting & catering and £0.9m other. Even more disappointing is the fact that Sunderland have now been overtaken by rivals Newcastle United, whose commercial income rose from £17.1 million to £25.6 million. Clearly, it is also significantly lower than the top six clubs. For example, Manchester United’s commercial revenue is up to £189 million, more than 11 times as much as Villa, followed by Manchester City £166 million, Chelsea £109 million, Liverpool £104 million, Arsenal £77 million and Tottenham £45 million.

 The disparity is most evident when comparing the shirt sponsorship deals. Sunderland have a deal with Bidvest, one of the largest food services companies in the world, which is worth £5 million a year and runs until the end of the 2014/15 season. This looks very low compared to the major clubs, who continue to increase their deals, e.g. Manchester United and Chelsea have both announced huge new deals recently, United for £47 million with Chevrolet and Chelsea for a reported £38-40 million with Yokohama Rubber.

It’s a similar story with Sunderland’s kit supplier, Adidas. Although this deal is a long-term partnership, extended until the summer of 2020, it’s unlikely to be worth more than £1-2 million a season, compared to, say, Manchester United’s Adidas deal, which will be worth an astonishing £75 million a year from the 2015/16 season.

In fairness, most clubs outside of the absolute elite have struggled to secure such massive deals and Sunderland would have to enjoy a sustained run of success to substantially improve their commercial deals.

After a significant decrease the previous season, the wage bill rose 20% (£11.7 million) from £57.9 million to £69.5 million on the back of a substantial rise in headcount from 991 to 1,102 (administration/operations +71, football +22, match day staff +18). The increase reflected the large number of players recruited by Paolo Di Canio in his six-month reign, though it is possible that the wages will come back down in the 2014/15 figures, following numerous departures in the summer.

It is unclear how much has been included for the pay-outs to Di Canio (or indeed to Martin O’Neill in the previous season’s accounts, but this factor has presumably also inflated the reported wage bill.

Despite the higher wage bill, the important wages to turnover ratio was actually reduced from 77% to 67%, which is the lowest it has been at Sunderland for some time. Nevertheless, this is still the second worst in the Premier League (of those clubs that have published their accounts), so there is still work to do here.

This will be a tough challenge, though it should be noted that the 2013/14 increase has taken the wage bill above both Everton and Stoke City. Clearly, Sunderland’s wages are significantly lower than the likes of Manchester United £215 million, Manchester City £205 million and Chelsea £193 million, but it should be enough for them to be in a comfortable mid-table position, as opposed to being involved in a relegation battle.

Since they returned to the Premier League in 2007, it feels like there have been three distinct phases in Sunderland’s transfer activity: first there was significant net spend of £73 million in the first 3 seasons in order to strengthen the squad; then the taps were partly turned off with £9 million of net sales in the next two seasons; finally a lot of money was needed to fund the plans of O’Neill and Di Canio with net spend of £38 million in the last three seasons.

This recent spending is described by the club as “significant investment” in the accounts and it does not look too bad compared to other Premier League clubs in the same period. Obviously, it is far below the money shelled out by the elite clubs, but it is in the same ball park as Southampton (£44 million), who have flourished this season.

No, Sunderland’s basic problem is they have bought badly with a vast quantity of bang average players arriving for inflated fees (Jack Rodwell, Ricky Alvarez, Jozy Altidore, etc). Former football agent, Robert De Fanti, had a fairly disastrous record in player recruitment, but this has been an issue at the Stadium of Light for many years. Current Sporting Director Lee Congerton will hope to do better than his predecessors, but only time will tell whether this year’s model will succeed where others have failed.

Debt has risen by £15 million from £79 million to £94 million following a similar increase in the owner loans to £28 million. The majority of the debt is external with an overdraft of £39 million (under-written by Ellis Short) and a bank loan of £28 million (secured on the stadium, interest at LIBOR plus 3%). The bank loan was repayable on August 2014 and has since been refinanced.

Debt has almost doubled from £48 million in 2009 and this is a sizeable burden for a football club of Sunderland’s size, so it is likely that much of the extra TV money will be used to reduce this to a more manageable level. This was more or less confirmed by Byrne: “This TV deal gives the club a chance to get our books in order.”

More encouragingly, the net amount owed on transfer fees to other football clubs has significantly reduced from £20.6 million to £8.1 million, as have the contingent liabilities (potential payments that depend on number of appearances, surviving in Premier League, etc) from £10.1 million to £8.1 million – and the club states that “some of these are extremely remote”.

If Sunderland do manage to stay up, then they will benefit from the Premier League’s new Financial Fair Play legislation, which ensures that the majority of the increased money from the new TV deal remains within the club and does not simply go to higher player wages (and agents’ fees), as has invariably been the case with previous increases. Ellis Short was apparently one of the prime movers behind the rule that states that clubs whose player wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years.

"You gotta fight for your right to party"

However, this restriction only applies to the income from TV money, so any additional money from the higher gate receipts, new sponsorship deals or profits from player sales can still be spent on wages, which does place more pressure on the club’s commercial arm to deliver the goods.

Something needs to be done to reduce the club’s reliance on Ellis Short, who has owned the club outright since May 2009, since when he has injected nearly £130 million of free funding into Sunderland. The accounts show that he has capitalised around £100 million of loans (£48.5 million in 2009, £19.0 million in 2010 and £33.4 million in 2013) and provided a further £27.7 million of unsecured, interest free loans with no set repayment date.

This will be largely linked to whether Sunderland achieve the immediate objective of avoiding relegation. If they do, then the new Premier League TV money should allow them to reduce their debts, but it will be up to the club to show that they have learnt from their previous mistakes, in terms of both player recruitment, which has hit them hard both on and off the pitch, and managerial upheaval. As a wise person once said, “Just because everything is different doesn’t mean anything has changed.”


  1. Thank you for this, it really is interesting to understand the disparity between the likes of my team Sunderland and the 'elite' as you put it, in terms of revenue. I know that this principle has been the same before the introduction of massive tv deals but the widening of the gap does make me wonder what will become of it all.

  2. Great article, still a sleeping giant even in the Premier League.

    I always wonder what would have happened if the Irish had stayed. It feels like it would have been better run, although you can't criticise the money spent by Short. The overall approach has been quite American.

    1. the Irish ran out of money and said they could not afford to take us any further. so had they stayed we would be most likely in the championship. the money Ellis ploughs in season on season is unreal and our fans need to realise this and stop thinking like them up the road

  3. As always very good, interesting analysis. Will you be looking at the case of Tottenham anytime in the near future? I'm sure it would make for fascinating reading given recent events and forthcoming plans (less lavish transfer spending, focus on youth development, stadium plans etc.) - not forgetting how this club with seeming CL ambitions has only qualified for it once.

  4. Pete from herringtonAugust 27, 2015 at 7:53 PM

    Any fool can pump money into a loss making enterprise. Sunderland has been run like a failing corner shop,bad managers ,bad players ,bad player recruitment policy,the club has no future under Ellis short his ownership has been a total failure.he may be good venture capitalist but if his career had been running average uk small businesses he would be on the dole long ago.

  5. Ellis Short has simply presided over the same situation as went before him. FAILURE!! When he took over, with his Billions--he should have remembered a very good adage---Speculate to accumulate. Yes, he may have been badly advised, by people who don't know as much about player capability as they would have people think. Lee Comgerton only carried on that failure. Why is Sunderland's Commercial income so poor? Simple--another job occupied by a drain on resources, who hasn't a clue about Income / Advertising generation! You could say--with hindsight-- Sunderland's problems really started after Brian Clough's career ending injury, in 1962--yes that far back! Reason then--as now--no-one ( in the person of Syd Colling) wanted to take a risk on Cloughie who had no managerial experience--but he knew football and had a football brain--the rest as they say--is history!
    Sunderland must have wasted more money than any other top flight club---poor and expensive players in, wanting high wages--underselling players (who always seem to return and bite you in the bum)The financial killer of Clubs--the Agent, taking too much money out of football, and too many managerial pay-offs--caused by poor choice in the first place!
    The answer--sell the club to someone who REALLY wants to put the Club back on the football map.
    Ellis Short may have put nearly 150 million--peanuts for him-- into the club in various ways, BUT, the club is nothing more than a "bauble" for his ego! He should realise he has failed--if he was ever really serious--to bring desperately needed success.
    If he could change his philosophy, and buy the type of players we REALLY need---not players past their best--too old etc---and stop taking players on loan (no loyalty, if relegated, return to parent club--) We will not survive on his present policy. No change in that policy? GO!! As for a new manager after Dick Advocaat went--we should have gone for Lucien Favre, a Swiss national, who had just left Borussia Moenchen-Gladbach in Germany. He had been very successful there. He also had mediocre players to start with--but took them to the Champion's League!! Still available I think--and would surely like a crack at our game!! Sam will not improve us--he might save us--and I think he's going to have to win the Derby game again, as that match may well decide which of the two NE Clubs goes down.
    Over to you, Mr Short !!


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