Even though Swansea City’s form has not been great, it still
came as something of a surprise when manager Garry Monk was sacked this month,
not least because the customary smooth succession to a capable replacement
seems to have foundered. There have reportedly been talks with former Argentina
and Chile coach Marcelo Bielsa, but coach Alan Curtis remains in charge for the
time being.
With the Swans hovering close to the relegation zone, this
feels like it might be the first genuine setback since the club’s steady
recovery from near insolvency, when their financial difficulties inevitably
spilled onto the pitch and they only avoided demotion to the Conference in 2003
by the skin of their teeth.
Since those trying times Swansea have become somewhat of a
model club, surging up the leagues until they secured promotion to the Premier
League in 2011. They are owned by a consortium of local businessmen and fans
with a 21% share being held by the Supporters’ Trust. Furthermore, they have
moved from the ramshackle, run-down Vetch Field to a spanking new stadium.
"Williams, it was really nothing"
People noted this success and started to talk of the
“Swansea Way”, partly due to the way that the club has been run, but also
referring to an attractive, passing style of play. They have been prudent,
spending their funds wisely, as they are acutely aware of the problems off the
pitch in their recent past.
The approach was summarised by chairman Huw Jenkins thus:
“We don’t have dramatic changes. We make sure managers are comfortable and take
on board our philosophy and stick to it. We run a common sense business and
when clubs change their playing squads to suit a new manager, it seems
completely wrong to us.”
The fruits of their labour have been clear for all to see,
as Swansea won the Capital One Cup in 2012/13, thus qualifying for the Europa
League. There was a series of encouraging mid-table finishes, culminating in
what Jenkins described as “the best season in the club’s history” in 2014/15,
as Swansea registered their highest Premier League finish of 8th (the second
best of all time in the top flight) with their highest ever total of 56 points.
"Don't bet against the Fed"
However, things can quickly change and there has been a
marked dip this season following an indifferent summer recruitment campaign.
Portuguese international Eder has been ineffective, while French defender
Franck Tabanou has been virtually non-existent and the new strike force of
Andre Ayew and Bafetimbi Gomis has mainly flattered to deceive.
This led to Monk’s departure with the club clearly worried
about the implications of dropping down to the Championship. As Jenkins
explained, “With the recent uncertainty surrounding the club, the decision has
been made in the best interests of Swansea City and its supporters.”
The riches available in the Premier League can be seen in
Swansea’s accounts for the 2014/15 season, as the club broke through the £100
million revenue barrier for the first time. Despite this feat, profit after tax
was £0.6 million lower at £1.1 million, though profit before tax actually rose
£0.4 million to £1.7 million, as the latest accounts had a tax charge of £0.6
million, while the previous year benefited from a £0.4 million tax credit.
Importantly, Swansea changed their financial year-end from May
to July in order to be more aligned to the football season, so the 2014/15
accounts cover 14 months. This means that costs are a fair bit higher than a
normal year, as these are incurred over the whole period, while revenue is only
slightly higher, as there is no additional match day or broadcasting income in
June and July.
This helped contribute to wages increasing by £19 million
(31%) to £83 million and other expenses rising £6 million (51%) to £19 million.
Player amortisation and depreciation were also £2 million higher, though player
impairment was reduced by £4 million.
Revenue rose by £5 million (5%), largely due to broadcasting
income increasing by £4.5 million (6%) to £85 million, but there was also
growth in commercial income, up £1.7 million (21%) to £10 million, and player
loans, up £0.5 million to £1 million. On the other hand, match income was down
£1.5 million (16%) to £7.7 million, mainly due to the lack of Europa League
games.
All this meant that Swansea’s operating profit fell £18
million, though this was offset by the £19 million increase in profits from
player sales, mainly due to Wilfried Bony’s transfer to Manchester City.
The expenses growth reflected the cost of playing in “the
best league in the world”, as Swansea’s finance director Don Keefe observed,
“These latest financial results continue to reveal the club’s desire to
maintain investment to improve performance standards and, in particular, to
compete successfully in the Premier League.”
Given the cost impact of a 14-month accounting period,
making any sort of profit is not to be sniffed at, though it has become less of
a rarity in the Premier League these days. In fact, no fewer than 15 of the 20
clubs in the top flight made money in 2013/14 (the last season for which all clubs
have published their accounts).
Swansea’s achievement is even more impressive if you
consider that half of the eight Premier League clubs to have published their
2014/15 results have reported worse figures, namely Everton, Manchester United,
Southampton and West Ham. This is fairly typical in the years when there is not
a new TV deal, as there is relatively little revenue growth, while wages keeps
going up.
Nevertheless, Swansea’s annual profits in the last couple of
years are among the lowest in the Premier League. For example, in the prior
season their profit of £1 million was way behind Tottenham Hotspur £80 million,
Manchester United £41 million, Southampton £29 million and Everton £28 million.
To an extent, this merely highlights the major impact that
once-off player sales can have on a football club’s profitability. To reinforce
this point, in 2014/15 Southampton made £44 million from player sales, mainly
due to the transfers of Adam Lallana and Dejan Lovren to Liverpool plus Calum
Chambers to Arsenal, while the previous season saw Tottenham Hotspur make an
amazing £104 million (largely from the mega sale of Gareth Bale to Real Madrid)
and Chelsea £65 million (David Luiz to Paris Saint-Germain).
In stark contrast, Swansea were the fourth worst in the
Premier League at making money from this activity in 2013/14, generating just
£5k. Fortunately, this significantly improved in 2014/15, when they made £19
million from player sales. Most of this was from Bony’s record move to City,
but there were also gains from the sales of Michel Vorm to Tottenham and Chico
Flores to Lekhwiya in Qatar.
Swansea’s focus on the bottom line is evidenced by them
being consistently profitable over the last four seasons, making a total of £41
million profits before tax since promotion to the Premier League. Most
impressively, Swansea had profits of £17 million and £21 million in 2012 and
2013 respectively. Indeed the latter profit was the highest achieved in the top
tier that particular season.
The last time that Swansea made a loss was £11 million in
2011, which could ironically be considered as the price of success, because
promotion triggered hefty bonus payments to the players and management staff
plus additional transfer fees.
As we have seen, when football clubs make large profits it
is often down to major player sales. This was certainly the case for Swansea in
2013, when the £21 million profit was essentially due to transfers, mainly Joe
Allen to Liverpool, Scott Sinclair to Manchester City and Danny Graham to Sunderland.
Very little will come Swansea’s way from player sales in
2015/16, unless they make sales in the January window, as they have only earned
around half a million to date from Jazz Richards’ transfer to Fulham.
Profits can also be boosted by other exceptional items. In
Swansea’s case, they have made £7 million in compensation fees for management
“transfers” in the last few years: £5 million from Liverpool in 2012 for
Brendan Rodgers and his staff; £2 million from Wigan Athletic for Roberto
Martinez in 2010. In contrast, next year’s books will have to absorb a £3
million severance payment to Monk.
As transfers can have such a major impact on reported
profits, it is worth exploring how football clubs account for these deals. Even
though this is fairly technical, the fundamental point is that when a club
purchases a player the costs are spread over a few years, but any profit made
from selling players is immediately booked to the accounts.
So, when a club buys a player, it does not show the full
transfer fee in the accounts in that year, but writes-down the cost (evenly)
over the length of the player’s contract. Therefore, if Swansea were to spend
£15 million on a new player with a 5-year contract, the annual expense would be
only £3 million (£15 million divided by 5 years) in player amortisation (on top
of wages).
However, when that player is sold, the club will straight
away report the profit, which is basically the sales proceeds less any
remaining value in the accounts. In our example, if the player were to be sold
3 years later for £18 million, the cash profit would be £3 million (£18 million
less £15 million), but the accounting profit would be much higher at £12
million, as the club would have already booked £9 million of amortisation (3
years at £3 million).
Notwithstanding the accounting treatment, essentially the
more that a club spends, the higher its player amortisation. Thus, Swansea’s
player amortisation has shot up from just £1 million in 2011 to an £18 million
peak in 2015, reflecting the years of higher spending in the transfer market
since promotion to the Premier League.
However, Swansea’s financial results have also been
influenced by the £7 million of impairment charges they have booked since 2011,
most notably £4.7 million in 2014. This happens when the directors assess a
player’s achievable sales price as less than the value in the accounts.
Going back to our example, if the player’s value were
assessed as £4 million after 3 years instead of the £6 million in the accounts,
then they would book an impairment charge of £2 million. Impairment could thus
be considered as accelerated player amortisation. It also has the effect of
reducing the annual player amortisation going forward.
In any case, Swansea’s player amortisation is still one of
the lowest in the Premier League and is obviously miles behind the really big
spenders like Manchester United (£100 million), Chelsea (£72 million) and
Manchester City (£70 million).
Despite the use of impairment charges, the higher spending
means that player values on the balance sheet have increased from just £3
million in 2011 to £50 million in 2015. Moreover, this accounting treatment
actually understates the value of Swansea’s squad, as it does not fully reflect
the real market value of its players.
Given all the accounting complexities arising from player
trading, clubs often looks at EBITDA (Earnings Before Interest, Taxation,
Depreciation and Amortisation). Admittedly, this is a horrible acronym, but it
simply shows how profitable a club is from its core business.
On the face of it, the steep decline in Swansea’s EBITDA
from £23 million to £3 million in 2015 should be a little concerning, but this
is partly due to the 14 month accounting period last year, which includes more
costs. In reality, EBITDA has been solidly positive at Swansea since promotion
with last year’s increase driven by the new TV deal in 2014.
That said, this also outlines the challenge for clubs like
Swansea, as the EBITDA is significantly higher at the leading clubs, even though
they have much larger wage bills: Manchester United £120 million, Manchester
City £83 million, Arsenal £64 million, Liverpool £53 million and Chelsea £51
million.
Swansea’s massive revenue growth from £12 million in 2011 to
£103 million in 2015 has been very largely due to the club’s elevation to the
top flight, which the accounts noted, “amply demonstrates the rewards of
gaining promotion.”
In effect, there have been two revenue uplifts: first, from
£12 million to £65 million in 2012, which highlights the enormous disparity in
TV money between England’s top two leagues; second, the increase from £67
million to £99 million in 2014, thanks to the new TV deal commencing that
season.
In fact, virtually all of the £39 million revenue growth
since the first season back in the top flight is from TV (£36 million), even
though commercial income has nearly doubled from £5.2 million to £10.0 million
and match income is up a third from £5.8 million to £7.7 million.
Swansea’s achievement in finishing 8th in the Premier League
is really put into perspective when you compare their revenue to other clubs:
in 2013/14 their revenue of £99 million was only the 13th highest in the top
tier.
It should be a similar story in 2014/15, as their revenue
growth of £5 million is in line with many of the clubs that have reported to
date (Southampton £8 million, West Ham £6 million, Manchester City £5 million
and Everton £5 million), though Arsenal’s new commercial deals resulted in a
hefty £31 million increase.
Either way, the fact remains that their revenue of £103
million is overshadowed by the elite clubs. At the top of the pile, Manchester
United’s revenue of £395 million (reduced in 2014/15, due to not qualifying for
Europe) is around four times as much as Swansea, while significant sums are
also generated by Manchester City £352 million, Arsenal £329 million and
Chelsea £320 million.
More encouragingly, Swansea now have the 29th highest
revenue in the world, according to the Deloitte Money League, which allows them
to pay higher wages than famous clubs such as Ajax and Lazio. They are within
striking distance of European thoroughbreds such as Hamburg £101 million,
Benfica £105 million, Roma £107 million and Marseille £109 million.
The problem is that these additional riches do not help
Swansea much domestically, as there are no fewer than 14 Premier League clubs
in the world’s top 30 clubs by revenue (and all of them are in the top 40).
What is striking is that no club in that top 30 has a higher
reliance on TV money than Swansea, where a staggering 82% of their total
revenue comes from broadcasting. That leaves only 11% from commercial
activities and just 7% from match day income.
Unsurprisingly, only Crystal Palace (also 82%) are more dependent on TV for their revenue, but in fairness the majority of Premier League clubs are also heavily reliant on this revenue stream. In fact, all but the top six clubs get at least 60% of their income from broadcasting.
In 2014/15 Swansea’s share of the Premier League TV money
rose 9% from £74 million to £81 million. The distribution of these funds is
based on a fairly equitable methodology with the top club (Chelsea) receiving
£99 million, while the bottom club (QPR) got £65 million.
Most of the money is allocated equally to each club, which
means 50% of the domestic rights (£22.0 million in 2014/15), 100% of the
overseas rights (£27.8 million) and 100% of the commercial revenue (£4.4
million). However, merit payments (25% of domestic rights) are worth £1.2
million per place in the league table and facility fees (25% of domestic
rights) depend on how many times each club is broadcast live.
In this way, Swansea were helped by their attractive style
of football, as they were broadcast live 12 times, which was more than, say,
Stoke City (9 times) and so was worth an additional £1.5 million (£10.3 million
less £8.8 million). Each place in the league table is worth around £1.2
million, so Swansea’s 8th place merited £16.2 million, compared to receiving
£11.1 million the previous season for coming 12th.
The blockbuster new TV deal starting in 2016/17 only
reinforces the need to stay in the Premier League. My estimates suggest that
Swansea would receive an additional £37 million under the new contract for
finishing in the same position as 2014/15, increasing the total received to an
incredible £117 million.
This is based on the contracted 70% increase in the domestic
deal and an assumed 30% increase in the overseas deals (though this looks to be
on the conservative side, given some of the deals announced to date). Of
course, if they were to finish lower in the league table, they would earn a bit
less.
Given the figures, it is obvious why Swansea are so scared
of relegation and why they felt they had to sacrifice Monk. If they were to
drop down, they would get around £38 million in the Championship, including a
£35 million parachute payment and £2 million distribution from the Football
League, compared to at least £92 million in the Premier League.
Of course, this would be considerably higher than those
Championship clubs without parachute payments, who receive only £5 million, but
it’s still a considerable reduction in revenue that would require major cuts in
the wage bill, i.e. selling the club’s better players.
As the club’s accounts stated, “The major risk continues to
be relegation from The Barclays Premier League and the adverse effect it would
have on liquidity, operational activity and our ability to realise future
plans.”
Swansea’s 2013/14 figures had been boosted by their Europa
League adventures, but only to the tune of €4 million, even though they got out
of their group, memorably defeating Valencia in the Mestalla Stadium, before
being eliminated by Napoli in the last 32.
Match day revenue fell 16% (£1.5 million) from £9.2 million
to £7.7 million, due to the lack of Europa League competition (six home games)
in 2014/15. This revenue stream peaked at £9.9 million in the 2012/13 season,
largely thanks to progress in the domestic cups, including three home matches
in the run to Wembley for the Capital One Cup triumph against Bradford City.
Swansea’s match day income is significantly lower than many
other Premier League clubs. At the other end of the spectrum, Manchester United
and Arsenal earn around £100 million match day income or more than ten times as
much as Swansea. Put another way, they earn more in three matches than Swansea
do in an entire season.
In fairness, Swansea should be commended for their ticket
pricing strategy, as they have not raised prices in the five years they have
been in the Premier League. In fact, they cut season ticket prices by £10 for
the 2015/16 season and have announced a price freeze for the 2016/17 season.
According to the BBC’s Price of Football survey, Swansea have the second
cheapest “most expensive” season tickets in the Premier League.
Vice-chairman Leigh Dineen explained the thinking: “We will
continue to work hard on reducing the price of football for our supporters
wherever and whenever we can. Our supporters will always remain the lifeblood
of this club and the Board of Directors believe these season ticket prices
remain exceptional value for money to watch quality football at the Liberty
Stadium.”
Furthermore, the club also agreed to subsidise the price of
tickets purchased through the Jack Army membership scheme for away fixtures, so
that no adult would pay more than £22 for a game.
Swansea’s advancement through the leagues has been matched
with increases in attendances, facilitated by the move to the Liberty Stadium
in the summer of 2005. Last season’s average attendance of 20,555, slightly
higher than the previous year, is more than 12,000 higher than the last season
at the old Vetch.
However, this was still one of the lowest attendance in the
Premier League, only ahead of Burnley and QPR in 2014/15. The problem is that
the Liberty Stadium is too small to satisfy demand with around 98% of the
capacity being sold and a lengthy waiting list for season tickets.
Therefore, the club has started negotiations with the local
council to buy the Liberty, as it would not want to invest in a facility where
it is only a tenant. It currently shares the stadium with rugby union side Ospreys on a 50-year lease.
Although planning permission has been granted for a stadium
expansion to increase the capacity from just under 21,000 to 33,000, there is
still much to agree with the local council before any development.
"I could be happy"
As finance director explained: “Any plans for an expansion
of the East Stand at the Liberty Stadium cannot go ahead until we have
negotiated a fair and equitable deal with the City and County of Swansea which
is in the best interests of the club and not to the detriment of our available
resources.”
The potential purchase price has been reported as £20-25
million, but the club would want a long-term payment schedule (over 15-20
years) to reduce their risk, especially if they were to be relegated.
Jenkins emphasised that any stadium expansion should not
damage the playing squad, “so the club is not held back financially when it
comes to the No. 1 priority of putting a team on the pitch and making sure we
remain competitive in the Premier League.”
Commercial income was up an encouraging 21% (1.7 million)
from £8.3 million to £10.0 million, but this was still one of the lowest in the
Premier League, only above Crystal Palace and Hull City in 2013/14. To place
this into context, the top five earners here are Manchester United £196
million, Manchester City £173 million, Chelsea £109 million, Liverpool £104
million and Arsenal £103 million. No wonder that Jenkins has admitted that the
club is “miles behind” rivals commercially.
However, there are some signs of improvement, as the shirt
sponsorship with Chinese financial services firm Goldenway (with their GWFX
brand adorning the shirt) doubled from £2 million to £4 million a season when
it was extended by two years until the end of the 2015/16 season – “the largest
agreement in the club’s proud 102-year history”.
Similarly, the kit supplier deal originally signed with
adidas in 2011 was extended in 2014. No financial details were divulged, but it
is estimated to be worth £1.5 million per season.
The reported wage bill shot up 31% (£19 million) from £63
million to £83 million, thus increasing the wages to turnover ratio from 64% to
79%, but this is misleading, as the figures include 14 months of wages, while
revenue is effectively only 12 months (match day and broadcasting are
unchanged).
If we were to pro-rate the wage bill for 12 months, then it
would be a more respectable £71 million with a wages to turnover ratio of 69%.
That would still represent a 12% (£8 million) increase in wages, but that would
be altogether more reasonable.
Even so, this would still be one of the highest wages to
turnover ratios in the Premier League with only West Brom, Fulham and
Sunderland reporting worse ratios (in the previous season). In fairness,
Swansea have significantly improved from a horrific 149% in 2011 (though the
wage bill was inflated that season by bonus payments linked to promotion).
Interestingly, the wages in Swansea’s first season back in
the big time were amazingly low at £35 million – unsurprisingly the smallest
wage bill in the Premier League in 2011/12.
Swansea’s wages, heavily based on performance-related
contracts, are among the lowest in the top tier, though they have been steadily
increasing, so in 2013/14 they had the 13th highest wage bill. This is partly
due to the increase in staff numbers, e.g. football headcount rose from 167 to
222 in 2014/15.
Clearly, they still managed to over-achieve by finishing 8th
last season, but Jenkins does not like to use that argument as an excuse:
“We’ve never accepted that because of the money, we should be grateful and
happy where we are. There is always the challenge to compete and you’ve got to
find ways of doing that.”
That is more important than ever when you see how the wage
bills of the mid-term clubs are converging around the £70 million level, e.g.
West Ham £73 million, Southampton £72 million, Swansea £71 million, Stoke City
£67 million.
It is only recently that Swansea’s directors started
receiving payment for their efforts, but it is worth noting that the highest
paid director (presumably Jenkins) earned £517k in 2014/15, down from £550k in
2013/14, though that included a £275k bonus for retention of Premier League
status. Both payments are significantly up from the £250k earned in 2012/13.
The promotion effect can also be seen in the club’s
activities in the transfer market. In the six seasons before promotion to the
Premier League, there was hardly any gross spend, but this has now increased to
average annual expenditure of around £16 million, including the signings of
Wilfried Bony, Federico Fernandez, Ki Sung-Yeung, Pablo, Kyle Naughton, Jonjo
Shelvey, Eder and Jefferson Montero.
However, even with this increase, Swansea are hardly
recklessly extravagant, as big money sales have produced a very low net spend.
Their approach was summarised in the accounts thus: “we will continue year on
year to improve our playing squad, but in a sensible and cost effective
manner.” It should therefore be no surprise that Swansea are among the lowest
spenders in the Premier League.
In the last two years Swansea actually had net sales of £3
million, one of only two clubs with a surplus in the transfer market (Southampton
being the other one). As might be expected, the spending league table is lead
by Manchester City and Manchester United, but Swansea have also been
comfortably outspent by the likes of Crystal Palace, Leicester City,
Sunderland, Bournemouth and Watford.
Swansea have made their strategy very clear: “The secret is
to balance spending to maintain and improve performance on the pitch so we
remain in the Premier League, and spending on new projects considered important
to the wellbeing of the club going forward.” It’s a tricky balance that has
worked well for the club, though they might come to regret the lack of quality
recruitment this summer if they don’t avoid the dreaded drop.
After three years of enjoying net funds (cash higher than
debt), Swansea returned to a net debt position of £22 million in 2014/15,
comprising gross debt of £25 million less £3 million cash. Gross debt comprised
a £15 million overdraft, £8 million of other loans, £1 million owed to group
undertakings plus £0.6 million of hire purchase contracts.
It should be noted that total creditors have been rising and
increased £37 million in 2014/15 alone to a hefty £73 million. In addition,
Swansea have contingent liabilities of £6 million (up from £3 million) for
potential future transfer payments, dependent on player appearances and club
success, and a possible £19 million of additional signing-on fees
(significantly up from £2 million).
Although Swansea’s debt is still one of the smallest in the
Premier League (with five clubs having debt above £100 million), this situation
is one that will need careful monitoring following last season’s increase and
potential future commitments.
To be fair, Swansea have been investing in the club
infrastructure, specifically on new training bases at Fairwood (first team) and
Landore (academy), including £3 million in 2014/15 and £6.9 million in 2013/14.
This will be of long-term benefit to the club, but cash is tight, as noted by
the finance director: “we recognise that we need further injection of funds before
we can commit to any more significant capital investment programmes.”
This is highlighted by last season’s cash flow statement.
Although Swansea generated £6 million from operating activities, further
boosted by a new £8 million loan, they spent £24 million on players, £3 million
capital expenditure and £1 million on dividends, thus requiring a £15 million
overdraft.
Since promotion, Swansea have had £76 million of available
funds, largely driven by £57 million cash from operating activities, supplemented
by a £13 million increase in the overdraft plus a net £6 million increase in
net loans. They have spent £53 million (70%) on bringing in new players and
invested £18 million on infrastructure plus £4 million in dividends.
Interestingly, the player investment in the cash flow
statement is a lot higher than the net spend reported in the press, which could
be due to a number of reasons, such as the timing of stage/conditional payments
for player sales or high agent and signing-on fees (not included in transfer
figures).
There has been some noise about the dividends paid to
Swansea’s directors, but most fans seem to think that this is fair reward for
all their efforts in first saving and then running the club so well.
Swansea’s unique ownership structure, with 21% held by the
Supporters Trust and a fan elected on the board, has been described by the
Premier League’s chief executive, Richard Scudamore as “ideal”, but the need
for outside investment is clear, especially when you compare their cash balance
with their Premier League rivals: Swansea have less than £3 million, while 11
clubs have more than £20 million.
Indeed, last season they held discussions with American
businessmen John Jay Moores and Charles Noell, the former owners of Major
League baseball team the San Diego Padres, who were reportedly seeking to
acquire an initial 30% stake (rising to 66% in a few years), but these came to
nothing and they seem to have moved their interest to Everton.
"You're gonna hear me roar"
The club is keen to focus on developing its academy and is
hopeful that its investments will help secure the Category One status. The good
news is that the Premier League has already promoted Swansea’s U21 and U18
teams to the higher level this season, pending an audit of its facilities. As
academy manager Nigel Rees said, “It means the boys will be competing against
some of the very best players and teams at their age level. It’s all part of
their development by creating a clear pathway towards the first team.”
Swansea’s recovery from near disaster at the turn of the
Millennium is a fabulous story (“Jack to a King”), as a fading, provincial club
climbed back up the leagues, all the time playing entertaining football and
running the club in the right way.
However, football can be a harsh mistress, so no club can
afford to rest on its laurels. To continue their impressive progress, Swansea
will need to appoint the right man to manage the team in order to retain their
Premier League status. There will be many hoping that they can do it.
