Tuesday, May 26, 2015

Queens Park Rangers - Do You Believe In The Westworld?

In August 2011 it looked like a new dawn was breaking at Queens Park Rangers, who had just been promoted to England’s top flight for the first time in 15 years. Moreover the Malaysian entrepreneur Tony Fernandes had bought a majority 66% shareholding in the West London club from the previous shareholders, who included the Formula One supremo Bernie Ecclestone and team principal Flavio Briatore.

Compared to his flamboyant predecessors, the affable founder of Air Asia seemed far more level-headed and was certainly much more communicative with the fans. Furthermore the remaining 33% of the club was owned by the family of Lakshmi Mittal, one of the wealthiest men in Britain, whose son-in-law, Amit Bhatia, is on the board.

However, despite the new chairman’s best intentions, it has pretty much been a case of “out of the frying pan, into the fire” since those heady days. QPR have just been relegated to the Championship for the second time in three seasons after a string of insipid, embarrassing performances. It is true that QPR secured promotion at the first attempt in 2013/14, but even this was slightly fortuitous after Bobby Zamora’s last minute goal deprived a superior Derby County team in the Championship play-off final.

The poor performances have resulted in many managerial changes with Neil Warnock, Mark Hughes and Harry Redknapp leaving after poor starts to their respective Premier League campaigns. All of them were given substantial backing in the transfer market, but pretty much wasted the club’s money on a series of awful players, who largely fitted the same profile: past their prime, bad injury record, seemingly unmotivated and bang average.

"That's Zamora"

Clearly Tony Fernandes inherited numerous problems with the recruitment of over-paid, mediocre players seemingly endemic in the club’s culture, but his original promises of financial prudence and sustainability are now little more than a distant memory. On his arrival he boomed, “Football needs to change. There are clubs who are spending money that if they were in a real business they could not afford.”

Since then the strategy has changed to one of getting to the Premier League at all costs – in order to benefit from the lucrative Premier League TV deals. As Fernandes put it, “A critical driver of any club’s value is its presence in the Premier League. The financial results reflect the club’s focus on trying to achieve on-pitch success.”

He added, “Anyone who says we are gambling, then of course we are, but we are sensible with what we are doing.” Given the hefty losses and significant increase in debt, that is fairly debatable, though it is true that QPR did require major funding after years of under-investment if they were to have a realistic chance of establishing themselves as a Premier League club.

It might be that the strategy itself was not totally flawed, but there’s surely no argument that the execution has been fairly disastrous. So much so that the club has not only massively under-performed on the pitch, but is also being threatened with a substantial fine being imposed by the Football League if they are found guilty of breaking Financial Fair Play (FFP) rules in the most recent Championship promotion season.

Although the 2013/14 reported loss was only £9.8 million, which represented a £55.6 million improvement on the previous year’s £65.4 million loss, this was largely due to the inclusion of a £60 million exceptional item for the write-off of some of the shareholder debt.

Revenue fell £22 million (36%) from £61 million to £39 million following relegation with reductions across the board: broadcasting was down £15 million from £43 million to £28 million, while commercial and gate receipts were also lower in the second tier, by £5 million and £3 million respectively.

This was offset by a £22 million reduction in expenditure, which was described by the club as being “mainly driven by player costs”. This seems strange, as the wage bill was only cut by £3 million to £75 million, while player amortisation fell by just £0.5 million. In fact, the main reason for the reduction was other expenses, which decreased by £19 million (65%). This sizeable movement is not explained, though one reason is likely to be Mark Hughes’ severance payment in 2012/13, which was reported at £4.5 million.

The other main year-on-year movement came from player sales, which were not only £5 million lower, but actually generated a loss of £4 million.

QPR’s reported loss of £10 million was the 9th worst in the Championship in 2013/14, but would have been comfortably the highest without the £60 million debt write-off. Excluding that exceptional item, the underlying loss was a barely credible £70 million.

Of course, the vast majority of clubs in the Championship lose money with only three of the 24 contenders making money in 2013/14 and nine losing more than £10 million. Strikingly, all three profitable clubs (Blackpool, Wigan Athletic and Yeovil Town) have since been relegated to League One. This loss-making approach is partly a result of low TV money in England’s second tier, but also due to many clubs over-spending in order to reach the promised land of the Premier League.

QPR obviously managed to clear this hurdle, but their “real” £70 million loss was by far the biggest in the Championship, much higher than the nearest challengers (Blackburn Rovers £42 million, Nottingham Forest £23 million). As a comparison, Leicester City and Burnley were also promoted, but made much smaller losses, £21 million and £8 million respectively.

This has resulted in an unwelcome double for QPR, as they also made the largest losses in the Premier League in 2012/13 with their £65 million deficit being worse than Aston Villa, Manchester City, Chelsea and Liverpool (all around £50 million). In fact, QPR’s loss that season has only ever been surpassed in English football by Manchester City and Chelsea, which underlines just how large it really was.

On the same theme, QPR’s reported £25 million loss in the previous promotion season in 2010/11 was also the highest in the Championship. In other words, in three of the last four seasons QPR have produced the highest losses in their division. That takes some doing, given how badly run many football clubs are.

In the last six seasons QPR have reported aggregate losses of £156 million, but this rises to £218 million if exceptional debt write-offs of £62 million are taken into consideration. Financially this is a real tale of woe, but it’s the last two years that have really set the cat among the pigeons with the club making total losses of £135 million in that period alone (excluding the fancy footwork in the accounts).

In 2010 the club promised to “look to reduced costs across all areas of the business in order to improve its loss making position”, but the considerable investment in the playing squad has thwarted that objective.

Many clubs that run at an operating loss try to reduce the shortfall through player sales, but QPR have made virtually no money from this activity: just £4 million in the past nine years. Year after the year the accounts include a lengthy list of players that have been released for no money, either retiring, leaving by mutual consent or departing when their contracts expired.

This is a pretty good sign that the club has made some terrible purchases. As an example, the following players left in this way in 2014: Ji-Sung Park, Esteban Granero, Julio Cesar, Andrew Johnson, Aaron Hughes, Jermaine Jenas, Gary O’Neil, Stephan Mbia and Luke Young.

In fact, QPR actually made a loss on player sales (i.e. sales receipts less than the players’ value in the books) of £4.2 million in 2013/14. In fairness, few clubs in the Championship make decent money from player sales with the highest last season being Wigan Athletic £13 million and Bournemouth £7 million. However, only three contrived to actually lose money, the others being Blackburn Rovers and Leeds United.

It might be different this summer, as quite a few players could leave following relegation. In particular, Charlie Austin would probably generate at least £10 million, while reasonable money could also be asked for the likes of Leroy Fer, Steve Caulker and Matt Phillips. QPR might also benefit if Liverpool sell Raheem Sterling, as they are apparently due 20% of any transfer fee under the terms agreed when the Reds signed him from Rangers’ academy in 2010. If his fee were as high as £50 million, QPR would receive a cool £10 million.

While QPR’s revenue grew £7 million in the Ecclestone/Briatore era, mainly thanks to new commercial deals, the real growth came after promotion in 2011/12, when revenue surged nearly 300% from £16 million to £64 million. In the same way, relegation back to the Championship in 2013/14 reduced revenue by 36% to £39 million, though the pain was mitigated by parachute payments of £24 million.

As the club put it, “The impact of relegation and promotion inevitably has a material impact on the short-term financial results of clubs.” This is largely due to the disparity between the different TV deals in England’s top two leagues. In fact, £27 million of QPR’s £29 million revenue growth between 2006 and 2014 came from television, where the club admitted that they did “not have any influence on the outcome of the relevant contract negotiations.”

Of course, the 2014/15 accounts will reflect the year back in the Premier League with revenue at a record level of around £75-80 million, reflecting the higher TV money from the three-year deal that commenced in 2013/14 and growth in gate receipts and commercial income.

However, relegation from the Premier League will then once again adversely affect the 2015/16 numbers. As head coach Chris Ramsey observed, “The implications of going out of the division are huge.” Even with a parachute payment of £25 million, revenue will probably drop by around £40 million.

Despite the decrease in 2013/14, QPR still had the highest revenue in the Championship with their £39 million just ahead of Reading £38 million and Wigan Athletic £37 million. Money often talks in football, so it is no surprise that two of the four clubs with the highest revenue were promoted that season, namely QPR and Leicester City, though Burnley also achieved the same feat with the 11th largest revenue of £20 million.

The three clubs with the highest revenue all benefited from £24 million of parachute payments after relegation from the Premier League. If these were to be excluded, a slightly different picture emerges with Leicester City on top of the pile with £31 million, followed by Leeds United £25 million, Brighton £24 million and Derby County £20 million, though QPR would have still been in a very respectable 5th place with £17 million (£39 million less £24 million parachute payment plus £2 million solidarity payment).

In the Premier League broadcasting had accounted for 70% of QPR’s total revenue, but this actually increased to 72% in the Championship, partly due to the parachute payments, but also because the other revenue streams fell considerably in the second tier.

In 2013/14 QPR’s broadcasting revenue fell £14.7 million (34%) from £42.7 million to £28.1 million, including £24.1 million of parachute payments, though this was still the second highest in the Championship. Normally in that division clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to just £4 million of central distributions: £1.7 million from the Football League pool and a £2.3 million solidarity payment from the Premier League.

It should be noted that those clubs receiving parachute payments like QPR do not also receive solidarity payments. Other money is dependent on whether a team reaches the play-offs, cup runs and the number of times a club is broadcast live.

Looking at the Premier League television distributions, the massive financial inequality between England’s top two leagues becomes evident with Premier League clubs receiving between £62 million and £98 million in 2013/14, compared to the paltry £4 million in the Championship.

The value of the new Premier League television deal in 2013/14 can be seen by QPR “only” earning £40 million for finishing 20th (last) in 2012/13, which was £22 million less than the £62 million Cardiff City received when they claimed this dubious honour the following season.

QPR will have received a similar sum in 2014/15, but are now back to a life of parachute payments. These are currently worth £65 million over four seasons: £25 million in year 1; £20 million in year 2; and £10 million in each of years 3 and 4.

These will very likely increase in 2016/17 when the recent blockbuster Premier League TV deal comes into play, but so will the distributions in the top flight. My estimate is that the bottom club’s share will rise by £30 million to £92 million, while the year 1 parachute will only increase by £11 million to £36 million. This means that the gap to the Premier League would further increase: from £35 million (£62 million minus £27 million) to an amazing £54 million (£92 million minus £38 million).

This huge difference in revenue doesn’t quite excuse QPR’s profligacy, but it does explain it to a certain extent.

QPR’s match day revenue fell by £2.7 million (32%) from £8.3 million to £5.6 million in 2013/14 as ticket pricing was reduced “to reflect that we were playing in the Championship”. This was the 8th highest in that division, but this is not a great money spinner for any of the clubs playing at this level, e.g. only three earned more than £7 million: Brighton £10.4 million, Leeds United £8.6 million and Nottingham Forest £7.2 million.

Revenue was also impacted by QPR’s attendance dropping by around 1,100 from 17,779 to 16,656 (including more than 10,000 season ticket holders), which was the 9th highest in the Championship, way behind Brighton 27, 283 and Leeds United, Derby County and Leicester City (all around 25,000).

As might be expected, QPR’s attendances are higher when they compete in the Premier League, so have increased to 17,809 in 2014/15, but this is still the smallest in the top flight. To place this into context, it’s around 1,300 lower than Burnley, their fellow relegated team, despite the club’s claim that they are “confident that our pricing structure will help to encourage fans to attend.”

Part of the problem is the very low 18,489 capacity at Loftus Road, which is far from ideal for a club with aspirations of competing at the top level. It is therefore no surprise that the club has been looking to move to a new 40,000 seat stadium with the Old Oak Common site in north-west London being identified.

However, there is strong opposition from the site owner, Car Giant, coincidentally a former QPR sponsor, who stated that they had no plans for a football stadium in their development, so this would appear to be a non-starter. There is also the small matter of how the club would finance a new stadium. Interestingly, the accounts include £4 million spent on Rangers Developments Limited in the note on Related Party Transactions, though this is not explained.

QPR’s commercial income slumped badly following relegation, almost halving from £9.6 million to £5.0 million. This is maybe not that big a surprise, given that the club had previously stated that it “believes that its Premier League status will help it to significantly increase its commercial revenue.”

In fairness, £5 million is not too shabby in the Championship and is actually the 7th highest. It may be a long way behind Leicester City £19 million (boosted by a major marketing deal with Trestellar Limited) and Leeds United £12 million, but no other clubs manages to earn more than £8 million. Only the elite English clubs can earn vast sums commercially, but it must be galling to QPR that their near neighbours Fulham have managed to earn more than twice as much as them with £12 million.

QPR are currently in the third year of a shirt sponsorship deal with AirAsia, extended for the 2014/15 season, which was reportedly worth £2.5 million in the Premier League. If that figure is correct, then it compares favourably with clubs like West Ham and Stoke City, though it is obviously miles behind the deals for Manchester United, Arsenal, Liverpool, Manchester City and Chelsea. Nike are QPR’s kit supplier in a five-year deal running to May 2019.

What has really destroyed QPR’s finances is their unbelievable wage bill. Whichever way you look at this, it is fairly appalling. After promotion in 2012 it nearly doubled from £30 million to £58 million and then rose again the following season to £78 million. In the last four seasons the headcount has exploded from 104 to 169, including a 43 increase in the number of players, managers and coaches from 69 to 112.

Despite relegation the wage bill was only trimmed by £2.6 million (3%) from £78 million to £75.4 million, increasing the wages to turnover ratio from 129% to an almost unimaginable 195%. In other words, QPR spent twice as much on wages as their income – and then had to fund all their other expenditure.

Almost every club in the Championship has a dreadful wages to turnover ratio with 10 of them being more than 100%, but QPR’s is in a class of its own with the only clubs approaching a similar ratio being Bournemouth 172%, Nottingham Forest 165% and Millwall 132%.

In fact, QPR’s wage bill of £75 million was not only the highest in the Championship, but more than twice as much as the closest challengers, Leicester City, who managed to win the league on a wage bill of £32 million. The other promoted club, Burnley, somehow got by with wages of £15 million.

QPR stated that they operate “in a highly competitive market for talent and the market rates for transfers and wages is, to a varying degree, dictated by competitors.” There’s some truth in that, but let0s be honest: QPR’s wage bill is out of all proportion to their market (and indeed their performances on the pitch). Admittedly, the 2013/14 wages would have included promotion bonuses, but these are unlikely to be more than £5 million (based on the £4.6 million Crystal Palace paid the previous season).

To further emphasise the ridiculous nature of QPR’s wage bill, only seven clubs in the Premier League paid more than them in 2013/14. The good news is that the club appears to have learnt its lesson from the last time they went down, so most players’ contracts now include relegation clauses.

Another cost that has hurt QPR’s numbers is player amortisation, which has risen from £3 million in 2011 to £17 million in 2014, reflecting higher expenditure on player purchases. This represents the annual cost of expensing player purchases, as transfer fees are not fully expensed in the year a player is purchased. Instead, the cost is written-off evenly over the length of the player’s contract – even if the entire fee is paid upfront. As an example, Charlie Austin was bought from Burnley for a reported £4 million on a three-year deal, so the annual amortisation in the accounts for him is £1.333 million.

This might not sound much compared to some of the other large numbers in QPR’s accounts, but (stop me if you’ve heard this one before) it was still the highest in the Championship in 2013/14, around £10 million more than Blackburn Rovers £7 million.

There has been significant investment in the transfer market since Tony Fernandes arrived in 2011. In the last four years, QPR had a net spend of £68 million, which compared to just £14 million in the previous nine years. In the last accounts, Fernandes observed, “We have worked to put together a squad of players that we believe have the skill and ability to secure QPR’s place in the Premier League beyond this season.”

Although it has not exactly worked out as well as the club would have hoped, there is no doubt that the board has provided substantial financial backing to its various managers – though that was maybe not the best idea, especially when one of those is a certain Harry Redknapp, whose track record in helping to balance a club’s books leave a lot to be desired.

In fact, QPR have been one of the biggest spenders in the Premier League with only six clubs outspending them over the last four years, basically the usual suspects (Manchester United, Manchester City, Chelsea, Liverpool and Arsenal) plus West Ham.

The hope is that QPR will now do it differently with Fernandes claiming, “Our recruitment policy is changing. This is a new strategy for us. We want to develop a philosophy of buying young, hungry players who can go on to forge decent careers with us.”

All of this spending has been built on a mountain of debt, which has risen from £14 million in 2006 to £185 million in 2014, which is pretty shocking given that the club has spent two years in the Premier League since then. It’s not as if QPR has built a winning team or invested the money on improving infrastructure like a new stadium.

Incredibly, the figure would have been even higher at £250 million if the shareholders had not written-off £60 million and converted £5 million into equity (the maximum permitted by FFP rules) in 2014. Just pause for a moment and consider that: a quarter of a billion debt.

Most of the debt (£158 million) is owed to the club’s owners and is non-interest bearing, comprising £115 million to Tune QPR Sdn Bhd (a company controlled by Fernandes), £33 million to Sea Dream Limited (a company owned by the Mittal family) and £10 million to Amulaya Property Limited (a company entirely owned by Tune QPR and Sea Dream). However, in the last two years, the club has also taken on £27 million of bank loans, secured on the Loftus Road Stadium, which may be a cause for concern.

Another interesting point is that Sea Dream Limited only waived £6.6 million of the £60 million debt write-off, leaving the vast majority (£53.4 million) to Tune QPR Sdn Bhd, which is nowhere near the ownership proportions of Sea Dream 30% and Tune QPR 69%. It’s pure conjecture, but it would appear that Mittal was not overly keen to pay for Fernandes’ errors.

In the Championship only one club, Bolton Wanderers, had a higher debt than QPR at £195 million, with the next highest being Brighton £131 million and Ipswich Town £86 million. To further underline the magnitude of QPR’s debt, only two Premier League clubs had a higher balance: Manchester United £342 million (following the Glazers’ leveraged buy-out) and Arsenal £240 million (after building the Emirates Stadium).

In the last four years QPR had a cash outflow of £134 million from operating activities, but still spent £67 million (net) on player purchases. This was funded by an additional £191 million of shareholder loans, including £57 million in 2014 and £73 million in 2013, plus £27 million of new bank loans. The question is how much longer will the shareholders be prepared to put in such large sums with so little return (both on and off the pitch)?

It is also worth noting the feeble investment in long-term infrastructure with less than £7 million being spent on capital expenditure in the same period, despite all the fine talk of a new stadium and a new training complex at Warren Farm in Hanwell.

To add insult to injury, QPR are now facing the threat of a hefty Financial Fair Play fine from the Football League, who have queried the “treatment of certain items in their accounts”, namely the £60 million debt write-off. The FFP regulations would appear to rule out treating such a transaction as income, though QPR might argue that this particular write-off can be booked in this way, as the debt was not converted into equity (as is often the case).

Under the existing rules, clubs are only allowed a maximum annual loss of £8 million (assuming that any losses in excess of £3 million are covered by injecting equity). Any clubs that exceed those losses are subject to a fine (if promoted) or a transfer embargo (if they remain in the Championship). There is a sliding scale for the next £10 million of losses amounting to a £6.7 million fine, but beyond £18 million the fine is imposed on a pound-for-pound basis.

"Everything's Gone Green"

If the £60 million debt write-off is not allowed, that would imply an enormous fine of £58 million, though it has been suggested that deducting allowable expenditure like youth development and promotion bonuses would reduce that to £43 million. Either way it’s a huge amount of money that would set back QPR’s plans to bounce back to the Premier League at the first attempt. If they refused to pay, they could theoretically even be banished to the Conference.

However, QPR have challenged the legality of these rules. Their defence might include a number of factors, especially the fact that the Football League has already modified the rules that were applicable in 2013/14, while UEFA have also recently relaxed their version of FFP. Furthermore, it’s not as if QPR have tried to be particularly subtle about their accounting, unlike other clubs who have employed more “legitimate” means such as booking large impairment charges before relegation.

As always, Fernandes is expecting a favourable outcome: “I’ve always been very confident that a positive resolution will come out of the FFP case that is fair to everyone.” Even though those Championship clubs that have strived to stay within the rules might be unhappy, it would not be that big a shock if some form of compromise settlement on a lower sum would be agreed.

In many ways, QPR are fortunate to have Fernandes, who cannot be accused of under-funding the “project”, but to date he has given the impression of being one of those successful businessmen that seem to forget the strategies that have worked so well in their day job once they enter the world of football.

"Was it something that I said?"

Damned if you do, damned if you don’t, it could be argued, but it must be possible to spend so much money better than this. QPR’s owners are among the wealthiest in the world, but it may just be that the football club is way down their list of priorities. Despite the best of intentions, it is arguable that the club have not really made any progress since Fernandes turned up in 2011.

They are once again back in the Championship, though the chairman argued, “This time we go down in a much stronger position, with a better structure in place and better solutions to pursue what we want to do in the long term.” Certainly, there is the opportunity to rebuild with nine senior players out of contract at the end of the season and four loanees returning to their parent clubs, while a new, experienced chief executive, Lee Hoos, has been recruited from Burnley.

Of all people, Chris Ramsey the new head coach spoke sensibly about what needs to be done: “Everybody would want to bounce straight back into the Premier League and I am sure that’s what we’re going to try and do, but we have to be realistic. It’s important that everybody around the club realises that we have to get some stability and foundations in place to make sure that the future looks bright for Queens Park Rangers.”

That might not be particularly exciting, but some stability and a healthy dose of realism might be exactly what QPR need.

Tuesday, May 19, 2015

Middlesbrough - Take Me To The River

Having stormed past Brentford in the Championship play-off semi-finals, Middlesbrough are tantalisingly close to a return to the Premier League. If they manage to overcome Norwich City in the final, they will be back in the top flight after six long years, which would be a fine reward for owner Steve Gibson, who has been supporting the club (in both senses of the word) for so long.

Boro spent eleven consecutive seasons in the top division before relegation in 2009, winning the League Cup and reaching the UEFA Cup Final during this period, but promotion has to date proved elusive. They just missed out on the play-offs in 2012/13 when they finished 7th under Tony Mowbray, but a poor start to the 2013/14 campaign led to “Mogga” being replaced by Aitor Karanka, a former Spanish defender and assistant coach at Real Madrid.

This marked something of a departure for Boro, who had previously invested in a long line of British managers including Bryan Robson, Steve McClaren, Gordon Strachan and Mowbray. Although Boro only finished 12th in Karanka’s initial year, they have done much better in the Spaniard’s first full season.

Of course, for those with longer memories it is great news that Boro are still around to mount a challenge, given that they were minutes away from permanently folding in 1986, when they experienced severe financial difficulties, so much so that the gates to Ayresome Park were padlocked and they had to call in the provisional liquidator. The club was saved by a consortium led by then board member and current chairman Steve Gibson, who has continued to finance the club through good times and bad.

This can be seen in the 2013/14 accounts, where Boro reported a £20.4 million loss before tax (£15.6 million after tax once a tax credit of £4.9 million is taken into consideration), which was £2 million worse than the previous season’s loss of £18.5 million.

The higher loss was largely driven by a £3.1 million reduction in profit from player sales, but turnover also decreased 10% (£1.4 million) from £14.2 million to £12.8 million. Gate receipts were £0.8 million lower, in line with a reduction in the average attendance; income from cup competitions fell £0.4 million, as Boro were beaten at the first opportunity in both the FA Cup (to Hull City) and the Capital One Cup (to Accrington Stanley); and money from sponsorship and commercial deals also fell by £0.3 million.

This was offset by a 22% (£4.5 million) cut in the wage bill to £16.3 million and a net £0.8 million reduction in player trading costs (player amortisation £1.2 million lower, impairment in player values £0.4 million higher), though other expenses were £2.8 million higher.

It is worth noting that the operating loss, i.e. excluding player sales, improved by £1.2 million, though it was still pretty large at £21.1 million.

To be fair, almost all clubs in the Championship lose money and are reliant on owners’ funding. In 2013/14 losses were reported by 21 of the 24 clubs – in stark contrast to the Premier League where the new TV deal, allied with wage controls, has led to a surge in profitability. The only clubs to make money in the Championship were Blackpool (and their model is not one to be recommended), Wigan Athletic and Yeovil Town.

That said, Middlesbrough’s pre-tax loss of £20 million was one of the highest in the league, only surpassed by three clubs: Blackburn Rovers £42 million, Nottingham Forest £23 million and Leicester City £21 million.

This is nothing new for Boro, as they have consistently operated at a loss with the last few years being a sea of, well, red. In the last four reporting periods alone, they have made aggregate pre-tax losses of £71 million. As the accounts drily observed, “The Company operates in a challenging business environment and market sector where revenue streams can fluctuate significantly depending upon team performance on the pitch and costs can be unrelated to income generated.”

As a technical aside, Boro changed their accounting date in 2011, moving from a December year-end to a June close in line with other football clubs. This meant that the 2011 figures covered 18 months (the second half of season 2009/10 and the full 2010/11 season), while there were no accounts published for 2010.

The smallest loss registered by Boro recently was £0.3 million in 2009, which was not only the last time Boro were in the Premier League, but was also due to high profits on player sales of £17 million, largely from the transfers of Stewart Downing, Robert Huth and Tuncay Sanli.

This was a fairly profitable activity for Boro while they were in the top tier with the club earning £44 million between 2008 and 2011, also making good money from the sales of Jonathan Woodgate, Luke Young, Lee Cattermole, George Boateng, Adam Johnson, Brad Jones and David Wheater in this period.

However, since relegation there has been a steep reduction in profits from player sales. In fact, the club specifically noted that the widening of the 2013/14 loss was largely because they did not make as much money from player sales.

Again this is hardly unusual in the Championship with only two clubs (Wigan Athletic and Bournemouth) making more than £5 million from player sales in 2013/14. Actually only seven clubs made more than £2 million. That said, Middlesbrough’s £684,000 was among the lowest in the division.

Boro’s revenue has declined dramatically since relegation to the Championship, falling by 78% (£45 million) from the £58 million peak in 2008 to £13 million in 2013/14. Most of this decrease (£34 million) is due to the far lower TV deal in the Championship, but there have also been sharp reductions in commercial income (£6 million) and gate receipts (£5 million).

The near 60% decrease in gate revenue from £8.8 million to £3.8 million was described by Boro as “the financial effect of the team’s performance”, which was fair comment after languishing in mid-table in the Championship for a number of seasons.

The 2008 reporting period included half of the 2007/08 Premier League central TV distribution of £35 million and half of the 2008/09 distribution of £31 million. Boro’s revenue was subsequently enhanced by parachute payments from the Premier League (£12 million in 2009/10, £15 million in 2010/11 and £4 million in 2011/12), but, as the club said, it “failed to benefit from the on-field investment” enabled by those payments.

It is also worth noting the impact that a good cup run can have, most notably in 2006, which included the impressive achievement of reaching the UEFA Cup final, the FA Cup semi-final and Carling Cup quarter-final.

Boro’s progress this season is all the more striking when their relatively low revenue is considered. In 2013/14 their £13 million was only the 17th highest in the Championship, being around one-third of the top three clubs: QPR £39 million, Reading £38 million and Wigan Athletic £37 million.

Money often talks in football, so it is no surprise that two of the four clubs with the highest revenue were promoted that season: QPR and Leicester City. The exception to the rule was Burnley, who had the 11th largest revenue, but even they generated £7 million more than Boro with £20 million.

Of course, those total revenue figures are heavily influenced by the parachute payments received when clubs are relegated from the Premier League. If these were to be excluded, a slightly different picture emerges with Leicester City on top of the pile with £31 million, followed by Leeds United £25 million, Brighton £24 million and Derby County £20 million.

Boro’s revenue is fairly evenly split between the three main revenue streams: commercial 36%, broadcasting 34% and match day 30%. If Boro do secure promotion, then the mix would significantly change with a much greater share being contributed by broadcasting.

In 2013/14 Boro’s broadcasting revenue fell from £4.7 million to £4.4 million, including cup competitions. In the Championship most clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to just £4 million of central distributions: £1.7 million from the Football League pool and a £2.3 million solidarity payment from the Premier League.

However, the clear importance of parachute payments is once again highlighted in this revenue stream, greatly influencing the top eight earners, though it should be noted that clubs receiving parachute payments do not also receive solidarity payments. Other money is dependent on whether a team reaches the play-offs, cup runs and the number of times a club is broadcast live.

Looking at the Premier League television distributions, the massive financial disparity between England’s top two leagues becomes evident with Premier League clubs receiving between £62 million and £98 million, compared to the £4 million in the Championship. In other words, it would take a Championship club more than 15 years to earn the same amount as the bottom placed club in the Premier League.

Obviously there is never a good time to be relegated, but Middlesbrough’s timing was really bad, given that the Premier League distributions have significantly increased since their time away via two new three-year contracts, which have basically doubled the revenue, e.g. last place has gone up from £31 million to £62 million – and that’s before the recent blockbuster deal commences in 2016.

The financial prize for returning to the Premier League would be immense for Boro. Even if they were to finish last in their first season and go straight back down, their TV revenue would increase by £58 million (£62 million less £4 million) and they would then receive a further £63 million in parachute payments, giving a total increase of £121 million. If gate receipts and commercial income were to rise to previous Premier League levels, that would be worth another £11 million, giving a grand total of £132 million. That’s an awful lot to be effectively riding on one match, i.e. the Championship play-off final.

The parachute payments are linked to the size of the TV deal, specifically to the equal shares received by Premier League clubs for both the domestic and overseas deals: 55% in year 1 (£24.1 million), 45% in year 2 (£19.3 million) and 25% in each of years 3 and 4 (£9.7 million).

These payments will surely increase as part of the new 2016/17 deal, so the potential upside following promotion would be even higher – especially if Boro could survive in the top flight for more than one season. Little wonder that Steve Gibson said, “We want promotion as quickly as realistically possible.” The size of the prize explains why so many Championship clubs push the boat out in an attempt to reach the highly lucrative Premier League.

Of course, Boro would also have to spend more to improve their playing squad, but the net impact on the club’s finances would undoubtedly be positive, as can be seen by the clubs that were promoted in 2012/13 (Cardiff City, Hull City and Crystal Palace). All three of them significantly increased their expenses, particularly the wage bills, but still substantially improved their operating profits due to the huge revenue growth.

Crystal Palace are probably the closest to Boro in terms of finances and they turned a £12 million operating loss into a £23 million operating profit, as revenue rose from £15 million to £90 million, while wages went up from £19 million to £46 million.

Obviously promotion is by no means a fait accompli, but the club apparently has a financial “plan B” if this does not happen. The accounts of Gibson’s holding company stated, “(Boro) are hoping to mount a serious challenge for promotion to the Premier League with all the attendant benefits, but with a clear cost management plan in place in the event of the club continuing to perform in the Championship.”

Gate receipts dropped 18% (£0.8 million) from £4.6 million to £3.8 million in 2013/14 following a 1,000 fall in the average attendance. This is a concern, as chief executive Neil Bausor explained, In the absence of Premier League TV money, the main income stream for Championship clubs is gate receipts.”

Boro’s £3.8 million is the 14th highest in the Championship, but to put this in perspective only three clubs generate more than £7 million (Brighton £10.4 million, Leeds United £8.6 million and Nottingham Forest £7.2 million).

Boro’s average attendance of 15,800 was mid-table in last season’s Championship, a fair way behind clubs like Brighton (27,283), Leeds United (25,088), Derby County (24,933) and Leicester City (24,916).

Clearly Boro’s attendances have fallen significantly in the Championship, exacerbated by the tough economic climate in the North East. The 2013/14 attendance was down 44% on the 28,400 achieved in the last Premier League season in 2008/09 and even more from the 2004/05 high of 32,000, though this season’s resurgence has brought some of the crowd back with the average rising to 19,562. Not bad, but that still leaves a lot of gaps at the Riverside, which has a capacity of just under 35,000 seats.

It is to Boro’s credit that they did not increase the prices for season cards for nine consecutive seasons (while also introducing an offer of a free drink at each home game), though there was a £2 rise in the match day rates for the 2013/14 season. As Bausor noted, “We recognise that the support of the people of Teesside is of paramount importance if we are to achieve our ambitions.”

However, the club has just announced that they will raise prices for the 2015/16 season by 6-7% (though it will be higher for over-65s and under-18s). Although such moves are never going to be universally popular, it is understandable that the club needs to somehow generate more money if Boro are to compete at a higher level and their prices would still be among the lowest in the Premier League.

Commercial revenue decreased by 5% (£0.2 million) from £4.9 million to £4.7 million. This comprises sponsorship and commercial income £3.4 million and merchandising £1.25 million. That’s not too bad and is actually the 9th highest in the Championship. It may be a long way behind Leicester City £19 million (boosted by a major marketing deal with Trestellar Limited) and Leeds United £12 million, but no other clubs manages to earn more than £8 million.

Boro have a five-year shirt sponsorship deal with Ramsdens, the UK’s largest independent pawnbrokers, running until the end of the 2017/18 season. The financial terms have not been divulged, but it is reportedly worth “seven figures”. Since 2009 the kit supplier has been Adidas, who replaced the previous deal with Errea, which ran for 15 seasons.

The wage bill was slashed by 22% (£4.5 million) from £20.7 million to £16.3 million, reflecting the club’s attempts to cut costs. This reduced the wages to turnover ratio from 146% to 127%, which is still unsustainably high. The last time that this ratio was at a reasonable level was in the Premier League (59% in 2008 and 75% in 2009). Even though the club has focused on cost reduction since relegation with “player wages reducing season on season following transfer sales of players on expensive Premier League contracts”, it has not proved possible to cut wages at the same rate as the revenue decline.

Almost every club in the Championship has a dreadful wages to turnover ratio with 10 of them being more than 100%, meaning that the revenue is not enough to cover the wage bill, let alone any other costs. Even so, Boro’s 127% is the 5th highest in the division with the only clubs “boasting” a worse ratio being QPR 195%, Bournemouth 172%, Nottingham Forest 165% and Millwall 132%.

However, that does not mean that Boro have one of the highest wage bills, but is more a reflection of their relatively low revenue. In fact, their 2013/14 wages of £16 million were actually only the 13th highest in the Championship. Obviously QPR’s £75 million was a ridiculous sum for England’s second tier, but Leicester’s £36 million was more than twice as much as Boro. Perhaps it is not surprising that these two clubs ended up gaining promotion, but the fact that Burnley achieved the same on a budget of £15 million should give some encouragement to less wealthy clubs.

It is likely that Boro’s wage bill will have risen in 2014/15 following the arrival of players like Kike, Adam Clayton and Emilio Nsue, not to mention three season long loan signings for Patrick Bamford, Jelle Vossen and Ryan Fredericks.

Although Boro have not gone overboard in terms of spending, it is clear that Gibson has sanctioned some significant investment in the playing squad in their latest bid to escape the Championship. During their stay in the Premier League the club had frequently spent big, though not always wisely (the heavyweight purchases of Alfonso Alves and Mido come to mind), but it had to turn the taps off after relegation, leading to £30 million of net sales in the four years between 2009 and 2013.

However, in the last two seasons Boro have had a net spend of £8.9 million. That might not sound much, but it is in fact the 5th highest in the Championship in this period, only behind Fulham, Cardiff City, Norwich City and Nottingham Forest.

To be fair, this comparison has to be treated with some caution, as the figures are distorted by clubs that were in the Premier League the previous season, either because of high spend when they were in the top flight or large sales following their relegation. Furthermore, many deals are “undisclosed” in the Championship, so might have no reported value. That said, it is clear that Middlesbrough have had one of the highest net spends in the Championship and have “gone for it” this season.

Boro’s gross debt increased slightly to £77 million, though this is entirely owed to Steve Gibson’s company. It is repayable on demand, but is unsecured and interest-free. In 2012 all the bank debt was repaid and replaced by inter-company loans to the owner. This has saved Boro a lot of money in terms of interest payments, e.g. interest payable was £4.0 million in 2011 and £5.1 million in 2009.

Furthermore, Gibson has effectively written-off £55 million in the last three years by converting this amount from loans to equity capital. This was split between £50 million in 2012 and £5 million in 2014 (the maximum permitted under Financial Fair Play regulations). As chief executive Neil Bausor put it: “The club continues to hold the enviable position of being without any external debt and with a very stable ownership.”

Of course, many clubs in the Championship have built up substantial debt with Boro’s £77 million only the 6th highest behind Bolton Wanderers £195 million, QPR £185 million, Brighton £131 million, Ipswich Town £86 million and Blackburn Rovers £80 million.

The accounts emphasise the owner’s financial commitment to sustain the club’s ambition to return to the Premier League: “The going concern basis of the company depends on funds from The Gibson O’Neill Company Limited, the ultimate parent undertaking, who will continue to provide financial support for the company for the foreseeable future.”

Without Gibson it is difficult to imagine how Boro could possibly compete in the Championship, as he essentially puts around £1 million into the club every month to cover its losses. He could potentially sell up at some stage, but realistically Boro would not be the most attractive option to overseas investors – though that might change if they do indeed reach the promised land of the Premier League with its fabulous TV money.

Nonetheless, Gibson cannot simply buy success, as Boro now need to comply with the Financial Fair Play (FFP) regulations. As the chairman explained: “Balancing the books for FFP is challenging, but we continue to provide the maximum level of funding for the first team squad that we are able to.”

"Don't push me, cause I'm close to the Edge"

Under the existing rules, clubs are only allowed a maximum annual loss of £8 million (assuming that any losses in excess of £3 million are covered by injecting equity). Boro confirmed that the 2013/14 “losses were compliant with the Football League FFP requirements, as a significant proportion of them were allowable as Exceptional Items under those rules.”

It should be noted that FFP losses are not the same as the published accounts, as clubs are permitted to exclude some costs, such as youth development, community schemes, promotion-related bonuses and depreciation on fixed assets.

The current rules will continue to apply for the 2014/15 and 2015/16 seasons (though the maximum allowed loss is increased to £13 million from the second season), but will change from the 2016/17 season to be more aligned with the Premier League’s regulations, e.g. the losses will be calculated over a three-year period up to a maximum of £39 million.

FFP encourages clubs to invest in youth development, which is an area of focus for Boro, whose academy under Dave Parnaby is regarded as being one of the most productive in England. Gibson is rightly proud of its achievements, including the awarding of the important Category One status.

"Spanish Bombs"

This has been a trying time for Boro supporters. As Gibson said: “The last few years have been challenging for all of us. When we dropped out of the Premier League we wanted to bounce straight back up and that hasn't yet happened.”

Karanka sounded the battle cry at the beginning of this season: “I know where we deserve to be – in the Premier League. It's my job to make sure that happens, and step by step we are building a new future for our club. The club is ready, the players are ready and the supporters are ready.”

There are no guarantees in football and Boro could yet fall at the final hurdle, but they are now very close to achieving that dream. After all the financial struggles and the many frustrating years, when Gibson’s support has been so vital, that would really be something.
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