Tuesday, July 21, 2015

Hull City - What's My Name?

Hull City started the 2014/15 season with much optimism after the previous year’s exploits, when they had comfortably retained their Premier League status and reached the FA Cup final for the first time in their history, only losing 3-2 to Arsenal after extra time in a thrilling match. It was therefore particularly disappointing the way things turned out, as their Europa League adventure ended almost before it had started and, most painfully, they were relegated on the last day of the season.

Manager Steve Bruce pointed to the lack of goals: “Nearly 50% of the games we’ve played, we’ve not managed to score. That’s given us too much to do. It’s a pretty damning statistic.” Indeed it is, but in fairness Hull were badly affected by an appalling run of injuries, as they lost Robert Snodgrass in the opening league game and Nikica Jelavic and Mohamed Diamé for long periods.

Nor were they helped by some off-pitch issues with midfielder Jake Livermore testing positive for cocaine and the temperamental Hatem Ben Arfa unexpectedly doing a runner in December.

Steve Bruce has admitted that relegation took him by surprise: “When the transfer window closed at the end of August, I looked at our squad and was quite happy.” Little wonder, as owner Assem Allam had sanctioned a huge outlay on the transfer budget.

In the summer, Hull purchased Abel Hernandez, Snodgrass, Diamé, Livermore, Michael Dawson, Andy Robertson and Harry Maguire, while also  recruiting Ben Arfa and Gaston Ramirez on loan. They later brought the total spend to more than £40 million when they also bought Dame N’Doye in the January transfer window.

This continued the trend of big spending following promotion in 2013. In fact, Hull have splashed a hefty £66 million in the last two seasons with a net spend of a cool £50 million. That works out to an average gross spend of £33 million in the last two seasons, which is a massive increase over the £5 million average in the previous seven seasons. Over the same periods, Hull’s average spend on a net basis has shot up from £3 million to £25 million.

It may be a surprise to some, but Hull’s total net spend of £50 million for the last two seasons was actually the 8th highest in the Premier League. They were obviously still behind the usual suspects (Manchester United, Manchester City, Arsenal, Chelsea and Liverpool), but around the same level as Crystal Palace and West Ham who both outperformed the Tigers.

Given the substantial investment in the team, Hull really should not have struggled so badly last season. The experienced Michael Dawson summed it up best: “The players that the owners and manager have brought in – they spent a lot of money – and we haven’t performed. We should have done better and should be in the Premier League.”

Maybe they were distracted by all the shenanigans over Allam’s campaign to rebrand the club as Hull Tigers, which has caused widespread anger among City fans. The owner’s belief is that a name change would mean that Hull would be better known globally, allowing the club to better tap into Far Eastern markets. Commercial revenue growth is an understandable objective, but it is by no means guaranteed that simply changing the name would result in additional riches. In any case, the Football Association has recently rejected Allam’s application to change the name for a second time.

"There ain't nothing like a Dame"

Furthermore, the way that the owner has justified the change has been a PR disaster, describing the Hull City name as “irrelevant, common and a lousy identity”. Fans that opposed his “textbook marketing” idea of shortening the name were labeled “hooligans and a militant minority”. As if that weren’t enough, he then suggested that those fans "can die as soon as they want, as long as they leave the club for the majority who just want to watch good football.”

That’s a wonderful way to alienate the fan base, which is a great shame, as the owner, who has lived in Hull for over 40 years since arriving from Egypt, has done a lot of good things for Hull City since acquiring the club in December 2010.

The previous regime had brought the club to the brink of insolvency with the auditors stating that there was “significant doubt over the company’s ability to continue as a going concern.” Allam effectively saved the club by staving off a winding-up petition and repaying the debts that Hull had built up under property investor Russell Bartlett. He has since been true to his word to invest in the club by providing substantial funding of around £70 million and bringing a degree of financial stability.

This is reflected in the 2013/14 accounts, the most recent figures published, which show that Hull converted a £25.6 million loss the previous season to a £9.4 million profit, representing a £35 million improvement following promotion to the Premier League.

Revenue grew by £67.5 million (around 400%) from £17.0 million to £84.5 million, largely thanks to the much higher television deal in the top flight, which contributed £60 million of the increase. Match day was also up £6.1 million, including £3.9 million from the FA Cup run, while commercial income was £1.4 million higher. However, the higher costs of competing in the Premier League saw wages rise by £17.4 million (67%) to £43.3 million, while player amortisation was £7.6 million higher.

There was also a £6.3 million provision made against amounts due from the group company Superstadium Management Company Limited (SMC), which operates the stadium and holds the leasehold of the stadium, as granted by the local council.

"I see you, baby, Robert Snodgrass"

As a technical aside, Hull City also show parachute payments under Exceptional Items, but I have included these in revenue to be consistent with other football clubs.

It should also be noted that Hull shortened their reporting period to 11 months by moving the accounting close to 30 June to be in line with the football season. This meant that the 2013/14 figures excluded July’s costs of £6.1 million, so the profit would have been reduced to £3.3. million for the full 12 months.

In addition, the club’s sister company, SMC, reported losses of £5 million, including write-offs to the stadium mortgage inherited from the previous ownership. As Ehab Allam, Assem’s son and fellow director, said, “It’s obviously very disappointing to be almost four years into the ownership and still paying off the debts of the previous regime. We would have wanted to reinvest those sums back into the squad.”

Therefore, the combined loss for Hull City Tigers Limited and SMC would be £1.7 million, but this still represents huge progress considering the 2012/13 accounts showed a loss of nearly £26 million.

That said, most Premier League clubs posted profits in 2013/14, thanks to the increase in TV money allied with the financial fair play regulations that restricted wages growth, so Hull’s £9 million surplus is not really that special an achievement. In fact, only five of the 20 clubs reported losses, a major improvement on previous seasons.

It is also true that clubs promoted to the Premier League always receive a significant boost to their finances. In this way, the other teams promoted with Hull, namely Crystal Palace and Cardiff City, also improved their bottom line by £21 million and £18 million respectively. Cardiff still made a loss in the top flight, but that was largely due to their decision to book £12 million of impairment charges.

After buying the club, the Allams predicted “future trading profitability”, but they had to absorb £55 million of losses before reaching the Premier League: £20 million in 2010/11, £9 million in 2011/12 and £26 million in 2012/13. In fairness, most clubs lose money in the Championship and Hull were no exception.

The chunky loss in 2012/13 was part of deliberate strategy: “The directors made the ambitious decision to go for promotion and to this end invested heavily in the club.” This objective was achieved, which actually increased the loss, as it resulted in bonuses being paid out to the players, management and staff.

Even though Hull’s accounts back in 2008 described profit/loss resulting from player sales as “a significant figure in our accounts”, that is not really the case with a meagre profit of just £1.2 million being made in the last nine years, partly due to the £8.3 million loss reported in 2011.

While Hull only made £1.7 million from player sales in 2013/14, other clubs generated sizeable profits from this activity: Tottenham £104 million (largely Gareth Bale to Real Madrid), Chelsea £65 million (David Luiz to PSG), Southampton £32 million (Adam Lallana to Liverpool) and Everton £28 million (Marouane Fellaini to Manchester United).

Hull’s profit from player sales will be boosted in 2014/15 by the sales of Shane Long to Southampton and George Boyd to Burnley, though many out-of-contract players have simply been released for no fee.

The recent big spending in the transfer market has been reflected in Hull’s P&L account via player amortisation, which surged from £2 million to £10 million in 2013/14, much in the same way that it increased the last time Hull were in the top flight.

However, this is still one of the smallest in the Premier League, only ahead of Crystal Palace £6 million and WBA £5 million, though it will surely rise again in the 2014/15 accounts. As a rule, low amortisation is normally the result of low spending on player recruitment, while those clubs that are regarded as big spenders logically have the highest amortisation charges, e.g. Manchester City £76 million, Chelsea £72 million and Manchester United £55 million.

To clarify this point, transfer fees are not fully expensed in the year a player is purchased, with the cost being written-off evenly over the length of the player’s contract – even if the entire fee is paid upfront. As an example, Robert Snodgrass was reportedly bought for £6 million on a three-year deal, so the annual amortisation in the accounts for him is £2 million.

As a result of these accounting complications, clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation) for a better idea of underlying profitability. Hull themselves have described EBITDA as “a relevant measure, as it is a closer approximation to cash generation than straightforward profit and loss.” On that basis, Hull’s EBITDA has invariably been negative, though it improved considerably in 2013/14 from minus £21 million to £27 million.

That’s not too bad at all, leaving them sandwiched between Newcastle United £27 million and Everton £25 million. Most Premier League clubs are in a fairly narrow range of £20-30 million EBITDA, though the big boys are in a class of their own: Manchester United (an incredible) £130 million, Manchester City £75 million, Arsenal £632 million, Liverpool £53 million and Chelsea £51 million.

Hull’s revenue is largely a story of whether they are playing in the Championship or the Premier League with promotions in 2009 and 2014 increasing revenue by £40 million and £67 million respectively. The larger increase in 2014 is due to the higher centrally negotiated Premier League TV deal.

Hull’s revenue reduced each year in the Championship following relegation in 2011 from £27 million to £24 million then £17 million, purely because the parachute payments from the Premier League fell from £16 million to £13 million then £6 million.

After the 2013/14 accounts were published, Ehab Allam spoke about his plans to expand Hull’s income, “We’re not where we want to be, but we’re heading in the right direction.” Not any more, as relegation will take a large bite out of these numbers.

Despite the sharp revenue growth in 2013/14, Hull’s £84 million was actually the second lowest in the Premier League, only ahead of Cardiff City £83 million. As Ehab Allam said, “The key is where our income is compared to our competitors. We can’t be complacent, because, as we stand, a lot of our rivals have an advantage over us. This club needs a long-term sustainability and we can’t do that by having the income of a side in the bottom three.”

Like every other Premier League club, Hull were in the top 40 revenue earners worldwide, according to the Deloitte Money League, which sounds very impressive, if it were not for the fact that this does not help at all domestically. For example, five English clubs earn more than £250 million a season with Manchester United leading the way at £433 million – or more than five times as much as Hull. This really highlights the magnitude of the challenge for the smaller clubs in the Premier League.

An incredible 81% of Hull’s revenue in the Premier League came from television with just 14% from match day and 5% from commercial income. This was very different to the more balanced revenue mix in the Championship: broadcasting 48%, match day 34% and commercial 18%.

As Ehab Allam explained, “If you look at our income beyond the Premier League money, I still don’t think we’re too clever. The other income we get, commercial activity, gate receipts, is probably less than most clubs in the division.”

Amazingly two Premier League clubs had an even higher reliance on TV money than Hull with  Crystal Palace and Swansea City both earning around 82% of their revenue from broadcasting, but this dependency is clearly not healthy.

Hull’s share of the Premier League television money was £67 million in 2013/14. Most of the money is allocated equally, which means each club receives 50% of the domestic rights (£21.6 million in 2013/14), 100% of the overseas rights (£26.3 million) and 100% of the commercial revenue (£4.3 million). However, merit payments (25% of domestic rights) are worth £1.2 million per place in the league and facility fees (25% of domestic rights) depend on how many times each club is broadcast live.

As a result, Hull’s merit payment for finishing 16th was worth £6.2 million, while the Tigers’ distributions were also restricted by being broadcast live just 9 times, though they were actually paid on the basis of 10 times, which is the contractual minimum. This meant that they only got £8.6 million, compared to, say, Aston Villa’s £13.1 million for being shown live 16 times.

The sensational Premier League TV money is something of a double-edged sword. On the one hand, the £62 million that Cardiff received for being relegated was a lot higher than some major clubs received for winning their respective leagues, e.g. Bayern Munich (£30 million), Atletico Madrid (£34 million) and Paris Saint-Germain (£36 million). On the other hand, as Ehab Allam pointed out, “It might be £67 million we’re getting, but if every club gets that, how do you become competitive? Everything is relative.”

Of course, in 2015/16 Hull will receive a lot less TV money in the Championship, amounting to around £28 million. This will comprise a parachute payment of £25 million and a Football League distribution of £1.7 million plus some money for cup runs, live matches, etc. That will mean a painful reduction in TV money of £40 million year-on-year.

That might sound horrific, but most clubs in the second tier receive just £4 million from television, regardless of where they finish in the league, comprising the £1.7 million from the Football League pool and a £2.3 million solidarity payment from the Premier League. Note: clubs receiving parachute payments do not also receive solidarity payments.

Parachute payments 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) and have a big influence on a club’s finances in the Championship.

Clearly, being in the Championship will have a major adverse impact on Hull’s revenue. On top of the estimated £40 million fall in broadcasting, there will also be reductions in match day and commercial. I would expect match day to fall back by £4-5 million, assuming no lengthy cup runs and lower average attendances; while commercial income is likely to drop by £1-2 million to 2012/13 levels, depending on whether sponsorship deals have relegation clauses.

That would produce a total reduction in revenue of £46 million from £84 million to £38 million, though this is still likely to be one of the highest in the Championship next season. To place this into context, in the Championship in 2013/14 QPR boasted the highest revenue with £39 million, followed by Reading £38 million and Wigan Athletic £37 million.

There is also the opportunity cost of relegation, as there will be even more money available in the Premier League when the next three-year 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 16th in the distribution table (as Hull did in 2013/14) would receive around £101 million a season, which would represent an increase of £34 million.

Match day income rose £6.1 million (104%) from £5.8 million to £11.9 million, but this is a little misleading, as it includes £3.9 million from the historic run to the FA Cup Final. Without this “bonus”, Hull’s match day revenue would have been around £8 million, which would have been one of the lowest in the Premier League.

Attendances have been higher in the top flight (around the 24,000 level) compared to the Championship, though this is still lower than almost every other Premier League club, only ahead of Swansea City in 2013/14.

This is partly due to the 25,500 capacity of the KC Stadium, but plans to expand this to above 30,000 were abandoned after the council refused to sell the stadium freehold to the club. Allam understandably protested that “nobody would build an extension on a house if they didn’t own it”, but in fairness to the council they had built the ground with £43.5 million of public money.

This was part of the justification used for the 30% increase in ticket prices for the 2014/15 season: “Due to stadium capacity, our home attendances are the second lowest in the Premier League and with no plans to increase the capacity of the KC, a price rise is the only viable option in terms of increasing revenue from ticketing.” There will be a further price rise of 6% in 2015/16, which seems a bit steep following relegation to the Championship.

Commercial revenue rose £1.4 million (48%) to £4.5 million, but this was still the lowest in the Premier League, behind Crystal Palace £6.9 million and Swansea City £8.3 million. It is easy to see why Allam is so keen on growing this revenue stream. Maybe it’s not a fair comparison, but the big boys are in another league commercially with Manchester United leading the way with a seriously impressive £189 million.

The club recently announced Flamingo Land, a North Yorkshire based resort, as the new shirt sponsor for the 2015/16 season, replacing 12BET, whose deal had been described by the club as the most lucrative in its history. The two-year agreement was originally intended to run until the end of the 2015/16 season, but there was presumably a relegation escape clause. There was also a new kit supplier with Umbro replacing Adidas in the 2014/15 season in a four-year partnership.

Hull’s wage bill rose £17 million (67%) from £26 million to £43 million, but the revenue growth meant that the wages to turnover ratio significantly improved from a typical 153% in the Championship (no doubt inflated by promotion bonus payments) to 51% in the Premier League. As well as higher salaries in the top tier, there was an increase of 35 in the number of players and coaches in 2014.

Despite this growth, Hull’s wage bill of £43 million was still the lowest in the Premier League in 2013/14, behind Crystal Palace £46 million, Norwich City £50 million and Cardiff City £53 million. There then comes a whole bunch of clubs in the £60-70 million range before we get to the elite clubs.

There is a strong correlation between wage bill and sporting success, so it is perhaps not a surprise that Hull have struggled, though it is likely that their wage bill will have been higher in 2014/15 following the major recruitment last summer (though bonuses for staying up will be lower).

Similarly, Hull’s wages to turnover ratio of 51% is also one of the lowest/best in the Premier League, about the same as one of the other clubs promoted in 2013, Crystal Palace. However, the other club promoted that season, Cardiff City, had a much worse ratio of 64% and went straight back down, so spending is not always a guarantee of success.

The Allams are paid via management charges from their company Allamhouse Limited. Although these charges went up from £112,000 to £165,000 in 2013/14, this is still a relatively low sum compared to many other clubs.

The wage bill will be substantially lower in the Championship due to relegation clauses, as outlined by Steve Bruce: “Everybody concerned takes a huge reduction in salary. The club has had a really stringent policy, so that if we do get relegated, it does not fall into drastic times which a lot of clubs do. Most players take a 40-50% reduction in their salary.” Of course, the quid pro quo is that these players also have a reasonable buy-out clause in their contracts, so it is easier for them to leave.

Net debt was cut by £7.4 million from £72.2 million to £64.8 million, as gross debt was reduced by £5.6 million from £72.9 million to £67.3 million, while cash balances rose £1.8 million from £0.7 million to £2.5 million. The debt is entirely owed to Allam’s company with no external bank loans or overdrafts outstanding. The club’s financial problems required an immediate £41 million loan from the owners in 2010/11 and the debt to the owner has risen by £26 million since then.

In addition, Hull owe £13.5 million of transfer fees to other clubs and have £3.4 million of contingent liabilities to players depending on number of appearances and results.

Hull are mid-table in terms of debt in the Premier League, but this has almost certainly increased in the 2014/15 season with the club noting that “new signings costing in excess of £47 million have been made” after the accounts closed. Some have speculated that the debt could be as high as £100 million now, but this will only be revealed once the 2014/15 accounts are published. As long as Allam is happy, this should not be a problem, but it is a worrying amount of debt to take into the Championship.

Unlike many other football club owners, Allam charges around 5% on his loans, which has amounted to around £3 million interest paid in each of the last two years. This is by no means the highest in the Premier League, as Manchester United pay £27 million following the Glazers’ leveraged buy-out and Arsenal pay £13 million for the Emirates Stadium financing, but it is a relatively large burden for a club of Hull’s size.

The cash flow statement highlights the changes in Hull’s approach and the issues that the club now faces after relegation. As a rule, Hull have negative cash flow from operating activities – unless they are in the Premier League. These shortfalls plus any expenditure on player purchases have been covered by loans from the Allams, which got as high as £72 million in 2013.

This is not a problem, so long as Allam does not turn the taps off. When asked about this possibility, his answer was interesting, “It is a lot of money I have put in. So far I am comfortable with it, as long as we are achieving results.” Relegation must therefore be a cause for concern, as that is by definition not achieving results.

It is also a little strange that the Allams were so quick to reduce their commitment once the money started to flow from the Premier League. Ehab noted, “Whatever we’ve made has been put back into the squad. As you can see, we’re not here to make money for ourselves.” That may well be true, but their debt was reduced by £4.7 million in 2013/14.

Just to add to Hull’s challenges, they have been fined €200,000 by UEFA for not being compliant with Financial Fair Play (FFP) regulations. They will have to pay an additional €400,000 if their accounts are not in order for the 2015/16 season. In fairness, this is harsh on Hull, as they were only investigated after qualifying for the Europa League and had little chance to compensate for the large losses in the Championship.

"The drugs don't work"

One minor success story is the academy, which has achieved the appropriate standard to be awarded Category Two status, but even this is not without controversy, as this was helped by building an indoor 3G pitch in the Airco Arena for the academy’s exclusive use, which meant that a number of community sports groups that had been using the facility were told to leave.

The big question now is whether Allam will still want to continue as chairman and owner. From a purely financial perspective, this will be increasingly difficult, as the man himself outlined: “I cannot keep throwing money into it. There must be a limit. Our target is for the club to be self-finance, relying on its own resources.” This will be easier said than done in the Championship.

He may well also walk away now that the FA has again blocked his proposal for a name change. He actually did put the club up for sale in April 2014 the first time that his request was denied, but has not found the right investor yet: “not the quality buyers I would sell to.” Of course, after relegation the club is a less attractive prospect, so the price would have to come down accordingly.

"Ground Control to Major Tom"

In many ways, Allam is a good owner for Hull City, as he explained: “I am a Yorkshireman, I came here more than 40 years ago, yet they still call me a foreign owner. I have never used the football club to make money for myself, I don’t need it. If you go to the stadium, there is not a single mention of me or my company. I saved this club from administration, because I believe that was the best thing I could do for this city. Football is vital to the community. I wanted to give something back. Businessmen should look after their community.”

If only he could resist the temptation to change the club’s name and avoid putting his foot in his mouth when engaging with the fans, he would almost be the perfect owner. He’s a mixture of good and bad, but nothing is ever completely black and white (or should that be amber?) in the world of football.

In the meantime, Allam has effectively paid nearly £70 million for the club to stand still. His son Ehab admitted, “We’re financially strong as long as you make the assumption we stay in the Premier League”, and that has obviously not happened.

"Don't bring me down, Bruce"

Steve Bruce said that the objective was “to compete at the top end of the Championship and bounce straight back into the top flight”, but this will be a severe challenge in one of the most competitive leagues around.

He has already lost a number of key squad players, including Stephen Quinn, Tom Ince, Paul McShane, Liam Rosenior, Maynor Figueroa, Steve Harper and Yannick Sagbo, while others are surely in the departure lounge, including Nikica Jelavic, Dame N’Doye, Mo Diamé and Robbie Brady.

Bruce will certainly need to recruit to have any chance of promotion. Either way, it is difficult to disagree with Michael Dawson’s view that “it is going to be a slog in the Championship.”


  1. You sir, are a legend. I was looking exactly for this. Appreciate all the good work you've been doing over the years.

  2. This comment has been removed by the author.

  3. An excellent article. Thank you for posting it.
    Under the Allams' ownership, unlike the last regime, I do have confidence that our relegation from the Premier League is being properly managed. This should allow us, pending the on pitch activities, to return to the Premier League within the window in which we receive parachute payments.

  4. A really concise easy to understand and well researched article.


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