Ipswich Town - Forever The Same?

One of the most surprising sides in last season’s Championship was Ipswich Town, who managed to reach the play-offs on a shoestring budget. Although they were eliminated in the semi-finals by local rivals Norwich City, this was a great achievement that highlighted the progress made under Mick McCarthy.

When the experienced manager replaced Paul Jewell in November 2012, Ipswich were bottom of the Championship, but McCarthy successfully guided the club out of the relegation zone to finish in a comfortable 14th place. His first full season ended in a respectable 9th place in 2013/14, before he broke Ipswich’s many years of mid-table finishes by leading them to the play-offs.

Ipswich had a purple period in the late 1970s and early 1980s under Bobby Robson, when they twice finished runners-up in the old Division One, memorably won the FA Cup by defeating Arsenal in 1978 and also triumphed in the UEFA Cup in 1981 by beating AZ ’67 over two legs.

"Right Said Freddie"

However, relegation to the Championship in 2002 and the consequent loss of income contributed to the club going into administration the following year leading to the fire sale of key players. This ultimately paved the way for a takeover in December 2007 by businessman Marcus Evans, who acquired an 87.5% stake in the club.

He took on £32 million of existing debt that was previously owned by Aviva (formerly Norwich Union) and Barclays Bank for a much reduced price and made £12 million of additional investment. The debt had been incurred to finance extensions to Portman Road’s North and South stands and build a new training centre. The investment was split between £8.1 million preference shares (effectively a loan) and £3.9 million new shares.

Former chairman David Sheepshanks explained the decision to sell, “We believe Marcus Evans’ investment provides the best opportunity for the football club to move forward, return to the Premier League and stay there.”

"Who's David?"

Clearly, this has not quite worked out to date, as Ipswich have consistently finished in the middle of the Championship, at least until last season’s excellent efforts. Evans has conceded that he thought that promotion to the Premier League would be more straightforward when he bought the club: “Those people who sold the club did a very good selling job in persuading me that a little bit of extra money and one or two extra players was all that was needed.”

To that end, Evans initially provided his managers with enough funding to be competitive in the transfer market, but this did not achieve the desired objective, as the owner explained: “You would have hoped that money had resulted in better things, but look at Nottingham Forest – they lost £25 million last year and got nowhere. Look at Leicester, they spent 25 to 30 million for a couple of years running, I think, and didn’t manage to get promoted. So there are a lot of clubs out there that spent a lot more than Ipswich did and who ended up in exactly the same situation.”

This led to a change in Evans’ strategy, “I wanted to work with a manager who was going to try to and coach and make our players better, rather than give the manager the opportunity (to simply buy players).” The drive to more sensible cost management was also influenced by the introduction of the Financial Fair Play rules, which essentially force clubs to live within their means.

As a result Ipswich have spent virtually nothing on player purchases in the last three seasons, but paradoxically this approach has delivered better results on the pitch, thus defying the conventional wisdom that high spending equates to success. Whether the reliance on free transfers and bringing through young players will continue to work is debatable, but the recent improvement is there for all to see.

In the three seasons up to 2010, Ipswich averaged annual gross spend of £2.5 million and net spend of £2.2 million in the transfer market, but since then this has been slashed with gross spend averaging just £0.2 million and net sales of £3.5 million. Mick McCarthy explained the policy last year: “We’re not going to be going out and buying anybody or paying money for anyone. It will be Bosmans and loan deals.” For example, Ipswich have currently brought in on loan the young prospects Ainsley Maitland-Niles from Arsenal and Ryan Fraser from Bournemouth.

Of course, everything is relative, but over the last two completed seasons (2013/14 and 2014/15), Ipswich’s net sales of £3.6 million placed them a lowly 20th in the Championship net spend table out of 24 clubs. Although 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, it is evident that Ipswich have been comfortably outspent by their league rivals.

The more prudent policy has been reflected in Ipswich’s financials, e.g. the most recent published accounts for the 2013/14 season showed that the loss before tax was reduced by £2.6 million from £9.8 million to £7.2 million, even though revenue was down £0.3 million, mainly due to lower commercial income, and profits from player sales also fell £0.3 million.

The improvement in the bottom line was a result of £3.3 million cost savings, including a £1.1 million reduction in the wage bill to £13.9 million, player amortisation being cut by £1.7 million, other expenses down £0.4 million and depreciation being £0.1 million lower.

Although a £7 million loss might not sound  overly impressive, it has to be assessed in the context of England’s second tier, where the harsh reality is that most clubs make hefty losses, largely as a result of their natural desire to reach the lucrative Premier League. In fact, only three of the 24 clubs in the Championship were profitable in 2013/14 (Blackpool, Wigan Athletic and Yeovil Town) – and they have all since been relegated.

Ipswich’s loss placed them firmly in mid-table in the Championship profit league, but this was considerably better than the losses made by the likes of Blackburn Rovers £42 million, Nottingham Forest £23 million, Leicester City £21 million, Middlesbrough £20 million and Leeds United £20 million. As Evans lamented, “Wouldn’t it be nice if… you could turn a profit in the Championship, but I’m afraid that’s not the case.”

The last time that Ipswich reported a (small) profit was back in 2007, but they have consistently lost money since then with the £16 million loss in 2012 being the third worst in the Championship that year. This was explained by finance director Mark Andrews, “We brought in some experienced players in the 2011/12 season, Paul Jewell’s first season in charge, which kept the playing squad costs high.”

This was a common theme in the first few years following Evans’ acquisition, as “the investment in the first team squad” produced  worsening losses up until the wake-up call in 2012. After that losses have been reduced for the last three years (2012 – £16 million, 2013 – £10 million and 2014 – £7 million) and are expected to fall again in the next of accounts.

Ipswich’s best results in recent times have been boosted by large profits on player sales, most notably in 2011/12 when this contributed £10.8 million, largely due to the transfers of Connor Wickham to Sunderland for £8 million and Jon Walters to Stoke City for £2.75 million. Without these sales, Ipswich would have registered another hefty loss of £14 million. Similarly, the £0.1 million profit in 2007 was heavily influenced by the £3.5 million of player sales, mainly the sell-on fee for former Ipswich striker Darren Bent’s move from Charlton Athletic to Tottenham Hotspur.

In much the same way, the 2012 loss would have been even higher without the exceptional sale of the land at the training ground to Marcus Evans for £1.3 million, producing a £0.5 million profit after the costs were deducted. The other side of that particular coin is the club now has to pay the owner £40,000 annual rent.

Profits from player sales amounted to a grand total of just £1.5 million in the last three years, including £0.5 million in 2013/14, which was only the 16th highest in the Championship that season. In fairness few clubs in this division make big money from this activity with only two generating more than £5 million: Wigan Athletic £13.4 million and Bournemouth £6.9 million.

Without high player sales, Ipswich lose money, so the good news (from a financial perspective) is that the next two years’ accounts will both benefit from this revenue stream: (a) 2014/15 will include the sale of Aaron Cresswell to West Ham for £3.75 million plus add-ons; (b) 2015/16 has Tyrone Mings’ move to Premier League new boys Bournemouth for £8 million.

Revenue was essentially flat in 2013/14, falling by 2% (£0.3 million) to £13.6 million, mainly due to commercial income decreasing by 6% (£0.3 million) to £3.9 million and gate receipts dropping 2% (£0.1 million) to £5.0 million. This was partially offset by a 2% (£0.1 million) increase in broadcasting, thanks to a rise in the Football League distribution.

That said, revenue has slumped by 21% (£3.7 million) from the £17.2 million recent peak in 2011, which was boosted by reaching the Carling Cup the semi-final and a profitable FA Cup match at Chelsea. All revenue streams have fallen since then, especially gate receipts, which are 25% (£1.7 million) lower, in line with a reduction in average attendances. The 24% (£1.2 million) decline in commercial income is partly ascribed to the poor economic situation affecting customer spending. The £15% (£0.8 million) decrease in broadcasting is largely linked to the cup runs in 2011.

Following this slight reduction, Ipswich’s revenue of £13.6 million was only the 16th highest in the Championship in the 2013/14 season, a long way behind the top three clubs: QPR £39 million, Reading £38 million and Wigan Athletic £37 million. In fact, six clubs earned more than £30 million that year.

Of course, to a large extent, this only demonstrates the importance of parachute payments for those clubs relegated from the Premier League. As David Sheepshanks once said, “the gap has grown greater than ever between most Championship clubs and those which have parachute payments.”

If these were to be excluded, Ipswich would move up to 12th place in the Championship revenue league, but even so their £14 million would still a long way behind Leicester City £31 million, Leeds United £25 million, Brighton £24 million and Derby County £20 million. Given these stats, Ipswich’s traditional mid-table performance is perhaps less surprising.

Ipswich’s revenue is fairly evenly split between match day 36%, broadcasting 35% and commercial 29%, which is broadly similar to the previous season, though broadcasting has gone up from 33%.

In 2013/14 Ipswich’s broadcasting revenue was £4.7 million, which was in line with the majority of Championship clubs, who receive the same annual sum for TV, regardless of where they finish in the league. This amounts 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.

Other television money is dependent on whether a team reaches the play-offs, cup runs and the number of times a club is broadcast live, so Ipswich should see their TV revenue rise in 2014/15, having qualified for the play-offs. However, the major impact 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.

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 £65 million and £99 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.

If Ipswich had managed to battle their way through the play-offs last season, the financial prize for returning to the Premier League would have been immense. Even if a team finishes last in their first season and go straight back down, their TV revenue would increase by £61 million (£65 million less £4 million) and they would also receive a further £65-75 million in parachute payments, giving additional funds of around £130 million.

It could be even more, depending on where the club finishes in the league (with each place worth an additional £1.2 million) and how many times they are televised live (where each club is paid facility fees, with a contractual minimum of 10 games). All this is before the recent blockbuster Premier League deal that starts in 2016/17, which I estimate will be worth at least another £30 million a season.

This might feel a little bit like Jim Bowen on “Bullseye” saying to the losing contestants, “come and have a look at what you could have won”, but it is worth highlighting the size of the prize for promotion – especially as it undoubtedly drives the behaviour of many Championship clubs.

As we have seen, parachute payments make a significant difference to a club’s revenue and therefore its spending power in the Championship. Up to now, these have been worth £65 million over four years: year 1 £25 million, year 2 £20 million and £10 million in each of years 3 and 4.

However, the Premier League has recently announced changes to this structure, whereby from 2016/17 clubs will only receive parachute payments for three seasons after relegation, although the amounts will be higher (my estimate is £75 million, based on the advised percentages of the equal share paid to Premier League clubs: year 1 55%, year 2 45% and year 3 20%).

Of course, any promoted team would also have to spend more to improve their playing squad, but the net impact on the club’s finances is undoubtedly positive, as can be seen by the clubs that were promoted in 2012/13 (Cardiff City, Hull City and Crystal Palace). On average, their expenses increased by £38 million, particularly the wage bills, but their operating profits substantially improved by £32 million, due to the huge revenue growth of £70 million.

It is worth noting that if Ipswich were to be promoted, then they are contractually bound to make additional payments to players, coaches, staff, players’ former clubs, season ticket holders and certain convertible loan note holders. This is not quantified in the latest accounts, but was given as £8.2 million in 2013, down from a high of £12.6 million in 2011.

Gate receipts dropped 2% (£0.5 million) from £5.1 million to £5.0 million in 2013/14 following a fall in the average attendance of 400. Nevertheless, Ipswich’s mach day revenue is the 10th highest in the Championship. To put this into perspective only three clubs generate more than £7 million (Brighton £10.4 million, Leeds United £8.6 million and Nottingham Forest £7.2 million).

Ipswich’s average attendance of 17,111 was actually the 8th best in last season’s Championship, but a fair way behind clubs like Brighton (27,283), Leeds United (25,088), Derby County (24,933) and Leicester City (24,916).

Ipswich’s attendances had been on a declining trend for a number of years, falling by a worrying 18% (3,800) from 20,900 in 2008/09, but the charge to the play-offs resulted in a 2,500 upswing in 2014/15 to 19,603. That’s not bad at all, but it still leaves a lot of gaps at Portman Road, which has a capacity of just over 30,000 seats. An example of what might be achieved in the Premier League was seen in the play-off semi-final against Norwich, which attracted a bumper crowd of 29,166.

Ticket prices are among the most expensive in the second tier, but had been frozen for many years until an increase in 2014/15 (upper tier 6%, lower tier 3%), which was followed by a further 3% rise for the 2015/16 season.

Even though commercial income fell by 6% (£0.3 million) from £4.2 million to £3.9 million, the club was at pains to advise that “sales improved in the second half of the season showing signs of recovery.” Once again, this is somewhat of a mid-table performance, being the 12th 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 only three other clubs manage to earn more than £5.2 million.

The shirt sponsorship is with the Marcus Evans Group, who originally signed a five-year deal in 2008 worth a reported £4 million in total, which has been subsequently extended each season. In a return to their glory days, Ipswich replaced Mitre as their kit supplier with Adidas in a four-year deal starting in 2014/15, which has reportedly already increased retail sales.

Evans understands that commercial success is linked to the team’s displays, even if his views are tinged with a lot of corporate speak: “We work very hard maximising revenues for the club on a commercial basis, but ultimately our product is about what the team delivers on the pitch. And, like any business, if your product is of good quality, you’ll make more money and sell more of your product.”

The wage bill was reduced by 7% (£1.1 million) from £15.0 million to £13.9 million, lowering/improving the wages to turnover ratio from 108% to 103%. Wages have been cut by nearly a quarter from the £18.0 million peak in 2012, when the wages to turnover ratio was as high as 119%.

Given the reduction in revenue in recent years, this is not exactly unexpected, especially as former Ipswich chief executive Simon Clegg marked the supporters’ cards back in 2012: “We have made cost savings and we will need to make more cost savings. Reducing the wage bill is certainly what we’re looking at.”

Ironically, Clegg’s own departure has assisted this process, as the remuneration for the highest paid director fell from £153,000 to £58,000 in 2014.

Clearly, the business model is still not ideal if revenue is not sufficient to cover the wage bill, let alone any other expenses, but almost every club in the Championship has a dreadful wages to turnover ratio with 10 of them being more than 100%. Even so, Ipswich’s 103% is the 9th highest in the division, though significantly better than clubs like QPR 195%, Bournemouth 172%, Nottingham Forest 165% and Millwall 132%.

The £14 million wage bill was also only the 15th highest in the league, underlining how much of an outperformance Ipswich’s feat in finishing 6th last season represented. In particular, it was significantly lower than the likes of Leicester City, Reading, Blackburn Rovers and Wigan Athletic, whose wages were all above £30 million. QPR were even higher at £75 million, but that was simply ridiculous in the second tier.

The recent lack of spending in the transfer market has been reflected in Ipswich’s profit and loss account via player amortisation, which has fallen from £5.1 million in 2009/10 to £1.0 million in 2013/14.

To explain this point, transfer fees are not fully expensed in the year a player is purchased, but 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, when Grant Leadbitter was bought for £2.65 million on a three-year deal, the annual amortisation in the accounts for him was £0.88 million.

In the same way, the lack of big money buys from other clubs has impacted the balance sheet with the value of player (intangible) assets decreasing from £6.4 million in 2010 to just £0.7 million in 2014.

Of more concern is the growth in debt, which rose by £3.7 million from £82.5 million to £86.2 million in 2014. This means that the debt has increased by more than 140% from the £35.7 million in the last accounts before Evans’ takeover in 2007. The club stated that this was down to “ongoing funding and player investment”.

When Evans bought Ipswich Town, former chairman David Sheepshanks said, “He's committing serious resources. Marcus is taking all the risk in our pursuit of Premiership football and increasing success”, and that has indeed been the case, as almost all the debt is owed to various Marcus Evans’ companies.

The debt includes £8.1 million of preference shares, which pay a fixed cumulative dividend of 7% (provided there are profits available for distribution) and are redeemable after five consecutive seasons in the Premier League.

Of course, many clubs in the Championship have built up substantial debt, but Ipswich’s £86 million is only surpassed by three other clubs: Bolton Wanderers £195 million, QPR £185 million and Brighton £131 million.

The club has emphasised that it is not in debt to any financial institution, as explained by finance director Mark Andrews, “''Most Championship clubs are carrying debt but the majority of debt carried at Ipswich Town is not external, it is owed to the Marcus Evans Group.” This is indeed true, but there is still a degree of risk associated with such an arrangement, as the annual accounts noted: “the club remains dependent upon ongoing financial support from its principal shareholder.”

From a cash perspective Ipswich basically balance the books, but only because Evans increases his loan each year, as the cash flow from operating activities remains stubbornly  negative. The lack of investment over the last eight years is striking with the net player purchases (in cash terms) adding up to only £2.4 million and the spend on infrastructure improvements just £0.2 million. In that period, Evans has provided £32 million of additional loans, while £13.5 million has come from increases in share capital.

Simon Clegg explained Ipswich’s dependency on the owner a couple of years ago: “We only survive because Marcus Evans can afford to put in £4 million or £5 million of his own money every year to keep the club afloat.”

This is worth remembering when people talk about the slowdown in transfer spending, as Evans himself pointed out: “I certainly didn’t stop, in my mind, investing in the club, because I was still spending four to five million pounds a year in wages and whatever limited transfer fees we might have been involved with. Just because we weren’t spending on transfer fees, it did not mean that we weren’t spending in other areas.”

"Tommy Gun"

Evans can certainly afford this level of support, as his wealth rose £65 million last year to £765 million, according to the Sunday Times Rich List, but the accounts note that “there can be no certainty that this support will continue indefinitely.”

However, Evans has spoken of the emotional pull of Ipswich Town, even though he is a self-confessed Chelsea fan: “When you get so tied up in a club, you get completely entwined very quickly with that new club.” Indeed, he claims that he has had opportunities to sell, but he has no interest in doing so.

On top of that, he has good financial reasons for hanging in there, as Sheepshanks explained after the takeover: “Marcus Evans was attracted because Ipswich is a community club and he supports the club's values, but clearly it is a business. He does stand to make a huge profit, but the good news for our supporters is that his interests are aligned with the club. He will not make that profit until the club can pay it, and that means making it to the Premier League.”

"With a rebel yell"

The lack of transparency has been an issue, e.g. the club’s ownership was transferred from Marcus Evans Investments Limited to Marcus Evans Worldwide Holdings (IOM) Limited without explanation in October 2014, but Evans has at least recently given a wide-ranging interview to the East Anglian Daily Times.

In any case, Evans cannot simply buy success, as Ipswich now need to comply with the Financial Fair Play (FFP) regulations, which means reducing ongoing losses.

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). 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.

"Ainsley Maitland-Niles (Conservative)"

The 2013/14 accounts note that Evans waived £1.6 million of loans in November 2014, which implies that this was the amount that was required to be in line with FFP (as this is considered to be equivalent to injecting equity).

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. This is not necessarily good news for Ipswich, as the more relaxed rules should theoretically benefit the relegated clubs that enjoy substantial parachute payments.

"Cool Hand Luke"

When Mick McCarthy was appointed manager in 2012, he said: “The long-term ambition is to take the club back into the Premier League”, which seemed very optimistic at the time. However, after many years of, frankly, mid-table mediocrity, this no longer appears to be such a pipedream. As Evans said, “It definitely feels as though we’re going in the right direction.”

Furthermore, the owner has confirmed that the money received from the Tyrone Mings transfer will be re-invested into the first team, though it is not clear whether this relates to a transfer budget or the wage bill.

Either way, Ipswich should be applauded for their efforts in building a competitive team, while spending so little. If they can go a little further this season and actually secure promotion from the ultra-competitive Championship in spite of their economic disadvantages, it would be a minor miracle of our times, but, as somebody once said, football’s a funny game.