Monday, February 29, 2016

Arsenal - Brass In Pocket

As Arsenal enter the business end of the season, there is still much to play for, even though they are now likely to be eliminated from the Champions League by the mighty Barcelona. The domestic double is still up for grabs with nobody running away with the league, while the Gunners’ recent record in the FA Cup is second to none. However, many supporters are nervous about the team’s ability to finish the job, as the customary spate of injuries has led to a distinct dip in form.

The club’s wonderfully named chairman, Sir Chips Keswick, is keeping the faith: “This has been an unpredictable Premier League season thus far. What is important is that we are in contention and I am sure that we have the resources and ability within the squad to sustain a strong challenge.”

However, the club has not really strengthened the squad in the last two transfer windows. In the summer, they were the only Premier League club not to buy an outfield player, though the arrival of top-class goalkeeper Petr Cech has been an undoubted success. It was much the same in January when Arsenal only signed Egyptian midfielder Mohamed Elneny from Basel.

The fans’ frustration that the club has not fully utilised its spending power has once again been underlined by the publication of Arsenal’s financial results for the six months up to 30 November 2015, which revealed hefty cash balances of £159 million.

This is in line with the £162 million cash at the same time last year, but is lower than the £228 million reported in the annual accounts as at 30 May 2015. This is nothing to worry about, as this is simply due to the usual phasing of cash inflows and outflows with most of a football club’s income coming in the second half of the season. In particular, most season ticket renewals are paid in April and May, so Arsenal’s cash balance will always be at its highest when the annual accounts are prepared.

That said, the current £159 million cash balance is still one of the highest Arsenal have had in their interim accounts: 2011 £115 million, 2012 £123 million, 2013 £143 million and 2014 £162 million.

Everything else being equal, Arsenal’s cash balance will again be significantly higher when the next set of annual accounts is released. Depending on when transfer fee stage payments come due, it should be around the £225-250 million level.

Unsurprisingly, Arsenal have more cash than any other club in world football. Although not every Premier League club has published its accounts for the 2014/15 season, the North London side is clearly in a class of its own with the closet challengers being Manchester United, though their £156 million was still £72 million lower than their London rivals, followed by Manchester City £75 million.

It’s a similar story with the leading continental clubs, all of whom held significantly lower cash than Arsenal in 2015: Real Madrid £84 million, Bayern Munich £78 million, Barcelona £58 million and Juventus £5 million.

While it is advisable to put some money aside for a rainy day, there would have to be a monsoon of biblical proportions to justify Arsenal’s current cash levels. At the end of the 2013/14 season, they actually held 40% of the entire Premier League cash balances. However, the relative value of this cash is diminishing, as other mid-tier clubs are now benefitting from the influx of TV funds, e.g. Crystal Palace and Stoke City have £29 million and £26 million respectively.

Clearly Arsenal have been spending money. In fact, in the last six months the club had a net cash outflow of £69 million, even though they basically only broke-even on operating activities (after adding back non-cash expenditure on player amortisation and depreciation and adjusting for working capital movements). They then spent a net £39 million on player registrations (purchases £47 million less sales £8 million), largely due to stage payments from previous transfers.

They also invested £10 million in infrastructure improvements, notably substantial redevelopment at the London Colney training centre and Youth Academy at Hale End, plus some Emirates enhancements such as LED floodlights.

A further £14 million went on servicing the outstanding debt (loan repayment £8 million, interest £6 million), which is worth remembering whenever any ill informed amateur starts spouting nonsense about Arsenal’s debt being fully repaid. There was also a £5 million corporation tax payment, being the balance of the tax bill on the 2014/15 profits.

It is worth highlighting that Arsenal generated positive cash inflows of around £65 million in the second half of each of the last two seasons to turn around the outflows of the first half of the season, e.g. 2014/15 had a net outflow of £46 million at the interims, but this was converted into a net inflow of £20 million by the end of the year.

"I still haven't found what I'm looking for"

Of course, the raw figure in the accounts is a bit misleading, as not all of this cash balance is available to spend on transfers. Once more, for the cheap seats: not all of the cash balance represents a transfer fund.

In the face of growing criticism, chief executive Ivan Gazidis has emphasised this point: “It is quite untrue that we are sitting on a huge cash pile for some unspecified reason. The vast majority of that cash is accounted for in various ways.”

In fact, the club is so sensitive on this point that last year’s annual accounts noted that “proper consideration” of the cash balance should make deductions for the debt service reserve and the net amount owed on previous player purchases.

The irritating debt service reserve has been required ever since the 2006 bond agreements, though it does raise the question of whether these arrangements could be renegotiated given Arsenal’s significantly better financial position today, thus freeing up this money (£23 million in these accounts, £35 million for the full year).

"Genius of Love"

Like every other football club, Arsenal have not paid all the cash upfront for transfer fees, but have (sensibly) agreed stage payments, so part of the cash balance has to be reserved to pay sums due on those transfers. This has been reduced by £20 million following settlements of some transfer liabilities, but it still stands at £45 million.

As a good economist, manager Arsene Wenger has explained that the club’s relatively low spending is due more to supply and demand than an unwillingness to spend: “It is not a shortage of money, just a shortage of players”, adding that there was “quantity, not quality” in the transfer market. He has a point; though it is disappointing that Arsenal’s scouting network has failed to identify a few decent (available) players somewhere in world football that could improve the squad.

It might be difficult to find value in the market, especially as the prices quoted to Arsenal and other leading English clubs tend to be higher than those for continental clubs, with sellers clearly being aware of the wealth coming from the Premier League TV deals. This may be a little reminiscent of Harry Enfield’s “I saw you coming” sketch, but that’s the reality of the football market today. Clubs like Arsenal need to blow the other clubs out of the water – or there’s simply no point having more money.

"How was it for you?"

The other problem with hoarding cash was noted by no less a person than Sir Chips Keswick, when he spoke of the forthcoming blockbuster Premier League TV deal: “the increased revenues will also very likely bring with them inflationary pressures in terms of both the wage bill and the transfer market.” Exactly – so why not splash the cash before then?

This is exacerbated by, of all things, Brexit, as the Pound has depreciated by around 10% against the Euro in the last few months, thus reducing the spending capacity of English clubs abroad.

Despite all of these factors, there is still substantial money available to spend. It’s clearly not as much as the figure in the books, but we can say with some conviction that Arsenal should have around £100 million to spend in the summer on improving the squad.

Nonetheless, it should be acknowledged that Arsenal have been spending more in the transfer market in the past few seasons. For example, it might come as a surprise to Arsenal fans that they have the third highest net spend in the Premier League over the past three seasons of £111 million (according to Transfer League), only behind Manchester City £241 million and Manchester United £199 million.

In that period, the club has brought in Mesut Ozil, Alexis Sanchez, Danny Welbeck, Calum Chambers, Gabriel and Mathieu Debuchy, though it is somewhat strange that they have only spent a net £13 million this season on Cech and Elneny.

Arsenal did report a small £3 million loss after tax for the latest interims, compared to a £6 million profit for the same period the previous season. They were actually boosted by a £3 million tax credit, due to the revaluation of deferred tax balances based on the UK’s lower future rates of corporation tax. Before tax, Arsenal suffered a £12 million deterioration, as a £6 million profit swung into a £6 million loss.

By far the biggest reason for this decline was profit on player sales, as the club made hardly any money from this activity, compared to £27 million last season, mainly due to the sales of Thomas Vermaelen to Barcelona and Carlos Vela to Real Sociedad.

As a counterpoint, Arsenal’s underlying profitability actually increased with EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) rising from £23 million to £35 million.

This was because revenue grew by £10 million (6%) from £148 million to £158 million, mainly due to broadcasting, up £7 million (14%) to £60 million, thanks to higher UEFA Champions League distributions. There was also growth in commercial income, up £3 million (5%) to £55 million, and player loans, £1 million higher at £1.5 million. On the other hand, match day revenue was £2 million (4%) lower at £41 million, due to fewer home matches being played.

Expenses (including wages) were £2 million lower, but player amortisation rose £4 million to £29 million.

"Hector was the first of the gang"

There was limited activity in the property business, with the only transaction of note being recognition of the final instalment of the sale of Queensland Road development, though revenue and profit were both £2 million higher.

The accounts also benefited from a £5 million reduction in net finance charges from £12 million to £7 million, thanks to the introduction of Financial Reporting Standard (FRS) 102. Although this had minimal impact on this year’s profit, it has meant a restatement of prior year comparatives.

In particular, the interest rate swap, used to fix the interest rate on the floating rate stadium bonds, has to be included on the balance sheet at fair value with any changes in value reported in the profit and loss of each period. As there was a significant increase in negative fair value last year, with the financial markets anticipating that UK interest rates would remain lower for longer than previously expected, this meant a higher charge.

Of course, Arsenal have been very much the poster child of the Premier League in terms of making money. In fact, you have to go back as far as 2002 to find the last time that they made a loss. They have made total combined profits before tax of £226 million in the eight years since 2008.

The question is whether this year’s loss at the interim stage will mark a change in this positive trend? It seems unlikely, given that Arsenal have been in a similar position twice recently, namely in 2011 and 2014, when they managed to convert a first half loss into a full year profit on both occasions.

Nevertheless, these accounts again show how much influence player sales (and property development) have had at Arsenal. Excluding these items, Arsenal have actually lost money in each of the last five seasons.

More encouragingly, Arsenal’s underlying profitability was actually better in these interims compared to last year, as they would have reported a smaller loss after excluding these once-off factors: £8 million in 2015/16 compared to £21 million in 2014/15.

Actually, stability in the playing squad with no major sales might be considered as “a positive factor for the club”, according to Sir Chips. The good news is that Arsenal no longer need to sell players from a financial perspective.

The only other English club that has published half-year accounts is Manchester United and it is interesting to compare the Red Devils with Arsenal, as this highlights one major difference between the two. United made a £33 million profit before tax, which was £39 million better than Arsenal’s £6 million loss, even though their costs were £48 million higher.

The main reason for United’s superiority is their commercial revenue of £137 million, which is an incredible £82 million more than Arsenal’s £55 million. Match day revenue is also £14 million higher, but that is misleading, as United have played six more home games in the period than Arsenal.

Nevertheless, Arsenal have the seventh highest revenue in the world, based on 2014/15 annual accounts, having overtaken Chelsea last season. This is obviously pretty impressive, but the harsh reality is that they are still a fair way behind the leading elite, e.g. at £331 million they are around £100 million lower than the two Spanish giants, Real Madrid £439 million and Barcelona £427 million.

If we compare Arsenal’s revenue with the other clubs in the Deloitte Money League top ten, it is immediately apparent where their biggest problem lies, namely commercial income. Arsenal’s £103 million might not seem so bad, but it is only higher than Juventus, and is lower than every other club at this level.

Granted, the £123 million shortfall against PSG (£103 million vs. £226 million) is largely due to the French club’s “friendly” agreement with the Qatar Tourist Authority, but there are still major gaps to the other clubs in commercial terms: Bayern Munich £108 million, Manchester United £97 million, Real Madrid £85 million, Barcelona £82 million and Manchester City £71 million.

On the plus side, Arsenal enjoy the highest match day income in the world, while they are also competitive on broadcasting revenue, only really losing out compared to the individual deals negotiated by Real Madrid and Barcelona.

Arsenal’s commercial revenue passed £100 million for the first time in 2014/15, as it shot up £26 million (34%) from £77 million to £103 million, largely due to the new PUMA kit deal, which started in July 2014.

Looking at previous years, we can see that usually the full year commercial revenue is more or less double the first half. On that basis, we could estimate Arsenal’s 2015/16 revenue as £110 million (i.e. twice £55 million).

Although the chairman described the interim increase of £2.8 million (5%) as “robust growth”, his comments last year seemed more appropriate: “Inevitably, this growth rate will now slow as we have our key partnerships with Emirates and PUMA in place for the medium term.”

Even though Arsenal had the highest percentage growth since 2012 of the leading six English clubs, the reality is that they are still a long way below the Manchester clubs: United’s 2014/15 revenue was up to £197 million (nearly twice as much), while City’s revenue was £173 million. That might be to be expected, but less understandable is that Arsenal are also behind Liverpool £116 million and Chelsea £108 million.

Despite an increase in the number of worldwide partnerships to 33, the concern is that Arsenal’s commercial performance will continue to place them at a competitive disadvantage relative to other leading clubs. Further substantial increases are only likely to come as a result of success on the pitch, which again makes you wonder why the available cash has not been spent on strengthening the squad.

Although match day income fell in the interims, this was because Arsenal played two less home games (9 compared to 11) this season, so it should be made up in the rest of the year. Match day revenue is always weighted towards the second half, so my expectation is that Arsenal will again top £100 million by the end of the season. The actual amount will depend on the number of home games, i.e. progress in the cup competitions.

Incidentally, Arsenal have confirmed that there will be no general increase in ticket prices next season.

Similarly, broadcasting income is always higher in the second half of the year, though the actual amount received will depend on Arsenal’s final Premier League position and how far they progress in the knockout competitions.

Each place in the Premier League is worth an additional £1.2 million, while the amount received also depends on the number of Arsenal games broadcast live, though the vast majority of the payment is based on an equal distribution among the 20 clubs: half the domestic payment, 100% of the overseas payment and commercial income.

However, Arsenal will earn more from the Champions League, as the prize money has increased in the first year of a new three-year UEFA revenue cycle, e.g. €12 million for group participation (compared to €8.6 million), €1.5 million for a group stage win (€1 million), €5.5 million for reaching the last 16 (€3.5 million).

The market pool is also significantly higher, thanks to BT Sports paying more than Sky/ITV for live games. Arsenal’s 2015/16 payment will partly depend on how far they progress in this season’s Champions League, but also how well the other English clubs do, so if City and Chelsea get past the last 16, Arsenal will receive a smaller share for this element than 2014/15.

However, the other half of the market pool is based on where they finished in the previous season’s Premier League (3rd in 2014/15, compared to 4th the year before), which means that their share here will increase from 10% to 20%.

Unfortunately, Arsenal do not disclose their wage bill in the interim accounts, but they do include some comments that suggest that it was around the same level as the previous year. On the one hand, there was no Champions League qualification bonus in this year’s figures, as the 2014/15 accounts included the players’ bonus earned as a result of finishing in third place. On the other hand, the chairman stated, “This has been offset by increases in the underlying wage bill arising from certain contract extensions within the squad”, (e.g. Santi Cazorla and Theo Walcott).

What is interesting is how the wage bills at the top clubs have been converging around the £200 million level. Arsenal’s £192 million is still the 4th highest, but the gap has been closing. Chelsea once again have the highest wage bill in the top flight at £216 million, which is the first time since 2010, ahead of Manchester United £203 million and Manchester City £194 million.

Both Manchester clubs actually saw a reduction in wages in 2014/15. United’s decrease was due to their lack of success on the pitch, as bonuses fell, while City’s is partly due to a group restructure, where some staff are now paid by group companies, which then charge the club for services provided.

Continued investment in the playing squad has seen a further increase in player amortisation to £29 million, up £4 million (14%). On a full year basis, this has risen from just £22 million in 2011 to £54 million in 2015, and is likely to be higher still in 2016.

As a reminder, player amortisation is the way in which player purchases are reflected in the profit and loss account. To illustrate how this works, if Arsenal paid £25 million for a new player with a five-year contract, the annual expense would only be £5 million (£25 million divided by 5 years) in player amortisation (on top of wages).

As might be expected, those clubs who have traditionally spent big in the transfer market have the highest player amortisation: Manchester United £100 million, Manchester City £70 million and Chelsea £69 million.

There is no mention of whether the interims include another payment to the company of majority owner Stan Kroenke. This has amounted to £3 million in each of the last two years for a “wide range of services”, albeit with precious little transparency about exactly what these services comprised.

Gross debt has reduced by £2 million from £234 million to £232 million with net debt virtually unchanged at £72 million, due to a similar decrease in cash from £161 million to £159 million.

Arsenal’s debt comprises long-term bonds that represent the “mortgage” on the stadium (£194 million), debentures held by supporters (£14 million) and derivative financial instruments (£24 million). The club has no short-term debt to worry about.

Prior year debt figures have also been restated following the implementation of FRS 102, so the debt as at 31 May increased from £234 million to £239 million.

Although Arsenal’s debt has come down significantly from the £411 million peak in 2008, it is still a heavy burden, requiring an annual payment of around £19 million, covering interest and repayment of the principal. The interest payable of £13 million is a lot more than any other Premier League club (£5-6 million at Manchester City, Everton, West Ham and Liverpool) with the exception of Manchester United, who leapt to £35 million in 2014/15.

Although the net debt stands at only £72 million, thanks to those large cash balances, the gross debt of £232 million remains the second highest in the Premier League, only behind Manchester United, who still have £444 million of debt even after all the Glazers’ various re-financings.

Overall, it feels a little like Groundhog Day at Arsenal. To paraphrase the late, very great David Bowie, “The film is a saddening bore, for we’ve lived it ten times or more.”

While Arsenal might not be at the very pinnacle of football clubs financially, they are still better placed than most, so it is difficult to understand why the club has not used all of its resources to give itself the best chance of success. Very few fans want the club to throw caution to the winds, but they could surely invest more than they have done.

By most standards, Arsenal have a fine squad that is certainly capable of challenging for major honours, but in recent years there has always been something lacking. The latest financial figures continue to demonstrate that there is enough money to be competitive in the market.

Who knows whether a couple of world class recruits would make the difference and take the club to the next level, but surely it would be better for the club to spend what it can, so that its wealth can be seen on the pitch rather than gather dust in the accounts. 

Tuesday, February 9, 2016

Crystal Palace - Mind Over Money

Despite a fair degree of managerial upheaval, the 2014/15 season turned out just fine for Crystal Palace, as they finished in 10th place in the Premier League, an improvement from 11th the previous year.

Tony Pulis unexpectedly resigned just two days before the first game and was replaced by Neil Warnock who returned to the club for a second spell as manager. This didn’t work out very well, so in early January the Eagles brought in former Palace player Alan Pardew, who guided the club to the upper half of the table.

Not only did this ensure a third consecutive season in the Premier League, a feat that they have only managed twice before, but this was their best finish in England’s top flight since 1991/92, when they also finished 10th. In fact, that was the equal-second highest position the Eagles have ever finished in the football pyramid, having placed third in 1990/91. They also recorded 48 points and scored 47 goals, the most achieved in a 38 game Premier League season.

This is a far cry from 2010 when the South London club was in administration and prospects looked fairly grim before they were rescued by a consortium of wealthy businessmen, known as CPFC 2010 and fronted by Steve Parish.

"Mr. Bolasie"

Since then, Palace have enjoyed a splendid renaissance, as chief executive Phil Alexander observed, “We have made some very, very good decisions for the future of this club. It is in a very healthy place right now, but we’ve got to build on this and keep pushing forward.”

This explains the decision to allow US investors Josh Harris and David Blitzer to take a 36% stake in the club in December. There will be an initial £50 million injection of capital with more cash to follow. Harris and Blitzer will join chairman Steve Parish in a general partnership structure, with each of them having an 18% share, while the other members of the CPFC 2010 consortium (Stephen Browett, Jeremy Hosking and Martin Long) will also retain a “substantial” shareholding.

The club said that the deal “offers the best opportunity to build on the enormous progress made over the last five years”, adding, “while overseas investors are joining us, the heart and soul of the club remains in South London.”

The deal is further evidence of Palace’s steady, long-term strategy, as the money is intended for development of the stadium and the academy, as opposed to a short-term boost to the playing squad.

"McArthur Park"

Given some of the issues experienced with overseas investors at other clubs, some supporters will surely be concerned about Palace’s future direction, but the new arrivals are certainly saying all the right things: “We were drawn to the club’s rich history, exciting brand of football, strong leadership and, above all, its passionate fans.”

That said, Palace’s solid financial position probably did not hurt, as they have a very low cost base and no external debt (actually they have relatively high cash balances) with the massive new Premier League TV deal just around the corner. In fairness, the new investors are clearly passionate about sport, owning franchises in the NBA Philadelphia 76ers and NHL New Jersey Devils.

Furthermore, Parish emphasised that the success of their investment was dependent on Palace continuing to progress: “These guys aren’t interested in taking money out, they’re interested in the club increasing in value, which it will only do if we do the right things. So, the fans’ interests, their interests and my interests are completely aligned. They see an amazing opportunity – 900,000 people living in Bromley and Croydon, 2.4m in southeast London and no other professional (Premier League?) clubs until you get to Southampton.”

Palace’s development can be seen in their financials, as the club recorded a second successive year of profits in 2014/15, though profit before tax fell by £15 million from £23 million to £8 million. A lower tax charge meant a smaller reduction of £12 million in profit after tax from £18 million to £6 million.

Revenue rose by £12 million (13%) from £90 million to a record level of £102 million with increases in every revenue stream. Broadcasting income was £5.5 million (7%) higher at £79.7 million, partly due to the higher Premier League finish, but the most impressive growth came in commercial income, up £5.6 million (82%) to £12.5 million. Gate receipts also rose by £0.9 million (10%) to £10.2 million.

According to the club, “the main reason for the reduction in profitability was that further investment was required to acquire and strengthen the squad to remain competitive as well as continued investment in the infrastructure.” This translated to significant increases in the wage bill, up £22 million (49%) from £46 million to £68 million, and player amortisation, up £5 million (88%) from £6 million to £11 million.

Other non-cash expenses, player impairment and depreciation, also increased by £1 million, though other expenses were cut by £1 million from £14 million to £13 million. This presumably includes the £1 million write-back of impairment on the investment in CPFC Limited, due to that company’s improved trading position and profitability.

Despite the reduction in profits, Palace’s figures still look pretty good and are the fifth best of the 11 Premier League clubs that have so far published their 2014/15 accounts, only surpassed by Arsenal £25 million, Southampton £15 million, Hull City £12 million and Manchester City £10 million. Palace’s financial acumen had already been demonstrated in 2013/14, when they produced the fifth highest profit before tax in the top tier, which is a fine achievement for a club of their size.

Moreover, it is far from unusual for Premier League clubs to report lower profits in the second year of the television deal’s three-year cycle, as there are limited possibilities for revenue growth, while wage bills continue to grow apace.

The only teams that have significantly grown profits in 2014/15 were both boosted by once-off events: Manchester City had higher profit on player sales and exceptional charges (FFP fine) the previous season; Arsenal also had higher profit on player sales and reported more profit from property development.

The influence of player sales on a football club’s figures is clear, as the four Premier League clubs that have reported higher overall profits than Palace in 2014/15 were all helped by healthy profits from player sales: Arsenal £29 million (Vermaelen to Barcelona, Vela to Real Sociedad), Southampton an amazing £44 million (Lallana and Lovren to Liverpool, Chambers to Arsenal), Hull City £9 million and Manchester City £14 million

In contrast, Palace’s profits have been achieved without the benefit of meaningful profits from player sales, which were worth less than half a million in 2014/15, the lowest of all the clubs that have published accounts for last season. This was actually higher than 2013/14 when they only made £92,000 from this activity.

Since CPFC 2010 came into existence, Palace’s finances have been on an upward trend. Losses reduced in the first two years (2011 – £9 million, 2012 – £2 million), followed by rising profits in the next two years (2013 – £2 million, 2014 – £23 million), before 2015’s fall to £8 million.

Nevertheless, in the two years since promotion to the Premier League, Palace have delivered combined profits before tax of £31 million, which is (to date) only beaten by Manchester United and Southampton.

As we have seen, many clubs have effectively been subsidising their underlying business with profitable player sales, but this has not been the case at Palace, as they have only made £17 million from player disposals in the last five years.

Indeed, Palace have only exceeded £2 million once in that period, namely 2012/13 when they made £14 million profit from player sales, mainly Wilfred Zaha to Manchester United and Nathaniel Clyne to Southampton, which the club rightly described as “a great testament to our continued investment in the Academy.”

Of course, this is somewhat of a double-edged sword, as the lack of profitable player sales might have an adverse impact on the bottom line, but it could also be considered as a sign that the club has done well to keep its squad together.

Palace’s figures have sometimes been influenced by exceptional items in the past few years. For example, the 2011 figures were restated to reflect the full impairment of goodwill (excess of the purchase price compared with the fair value of net assets acquired) following the acquisition of the club. The price of success was then seen in the 2013 accounts, which included a £5 million once-off payment arising from promotion.

It is not clear where the compensation package agreed with Newcastle United to take manager Alan Pardew away from the Geordies has been booked in these accounts, though this has been reported as £2-3 million.

It is worth exploring how football clubs account for transfers, as it can have such a major impact on reported profits. 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 Palace 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 reports straight away the profit on player sales, which is essentially equals to 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).

This is all horribly technical, but it does help explain how some clubs can spend big in the transfer market with relatively little immediate impact on their reported profits.

Notwithstanding the accounting treatment, basically the more that a club spends, the higher its player amortisation. Thus, Palace’s player amortisation has shot up from less than £1 million in 2013 to an £11 million peak in 2015, reflecting renewed activity in the transfer market.

Palace have also booked £2 million of impairment charges in the last two seasons. This happens when the directors assess a player’s achievable sales price as less than the value in the accounts.

In 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, despite nearly doubling in 2015, Palace’s player amortisation of £11 million is still one of the lowest in the Premier League. It is obviously miles behind the really big spenders like Manchester United (£100 million), Manchester City (£70 million) and Chelsea (£69 million), but it is also below the likes of Swansea City (£18 million) and Stoke City (£12 million).

The other side of the player trading coin is that player values have also surged since promotion, rising from £1.4 million in 2013 to £31.9 million in 2015. Parish also noted that “the depth of squad is bigger than in the Championship.”

As player trading (and particularly profits from player sales) have had a limited impact on Palace’s figures, the improvement in their bottom line is very largely due to the profitability of their core operations.

This can be seen by looking at the club’s EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which can be considered as a proxy for the club’s profits excluding player trading – even though the famous investor Warren Buffett once memorably cautioned, “References to EBITDA make us shudder. It makes sense only if you think that capital expenditure is funded by the tooth fairy.”

Palace’s EBITDA was slightly declining (and negative) in the Championship, but has shot up in the Premier League, reaching £30 million in 2013/14, before falling back to £21 million in 2014/15.

That’s still pretty good and is only really outpaced by clubs that have higher revenue generating capacity. Obviously Palace are a long way behind those clubs that Sam Allardyce sometimes refers to as the “big boys” (Manchester United £120 million, Manchester City £83 million and Arsenal £63 million), but they are actually ahead of major clubs like Chelsea and Everton.

Since promotion Palace’s revenue has grown by more than 600% from £14.5 million to £102.4 million with all revenue streams benefitting from the elevation: broadcasting income is 20 times as much (£4 million to £80 million), while commercial is three times as high (£4.4 million to £12.5 million) and gate receipts are two-thirds higher (£6.2 million to £10.2 million).

Although probably not a financial reference, no wonder part-owner Steve Browett said that promotion to the Premier League “was never the plan, it was the dream.” That said, the club is acutely aware of the risk of going in the opposite direction: “Relegation would have significant implications for the group’s core revenue.”

The main reason for the increase in the Championship in 2012 was a successful Carling Cup run where Palace reached the semi-finals, beating Manchester United on the way.

Even after this revenue growth, Palace’s 2015 revenue of £102 million is still one of the lowest in the Premier League. All clubs are yet to report, but it looks like Palace had the 14th highest revenue last season.

It should be noted that this ranking is based on the revenue figure in the club’s accounts, which is £2 million more than the £100 million used by Deloitte in their annual Money League, which places Palace 16th in England. Either way, they have consistently outperformed their revenue, e.g. finishing 11th last season.

There is now a bunching of a few clubs at the £100 million level along with Palace: Leicester City, Swansea City, Sunderland, Stoke City and West Bromwich Albion.

The increase in revenue, fuelled by the TV deals, has led to the rise of the middle class clubs. As Parish observed, “The gap’s closing. The top clubs can only have squads of 25. They can’t buy every good player though they still turn over £500 million. I turn over £100 million. Our job is to bridge that gap, but over a long period you’re only ever going to be an Atletico Madrid. You can’t be a Real Madrid.”

Of course, Palace’s revenue is still miles below the English elite, e.g. Manchester United’s £395 million is around four times as much, while four other clubs earn £300 million or more: Manchester City £352 million, Arsenal £329 million, Chelsea £314 million and Liverpool £298 million.

Palace made their debut in the Money League last season in 27th place, along with Leicester City and West Brom. As Deloitte observed, “This is again testament to the phenomenal broadcast success of the English Premier League and the relative equality of its distributions, giving its non-Champions League clubs particularly a considerable advantage internationally.”

That’s obviously a fine accomplishment, but it does not really help Palace domestically, as no fewer than 17 Premier League clubs feature in the top 30 clubs worldwide by revenue. Parish has underlined this point, “This is the richest league in the sporting world by miles, but we have to be careful, as we are competing with each other.”

Even so, Palace now generate more revenue than famous clubs like (deep breath) Napoli, Valencia, Seville, Hamburg, Stuttgart, Lazio, Fiorentina, Marseille, Lyon, Ajax, PSV Eindhoven, Porto, Benfica and Celtic.

Parish gave an example of the new footballing landscape: “We had an Italian club visit us when we got promoted. A club I remember, as a kid, winning UEFA Cups. The meeting was basically, ‘Which of our players do you want to buy?’ And then you look at turnover and think, ‘Wow, we have twice theirs.’”

Clearly, TV money is the main driver behind Palace’s new standing on the world stage, contributing an incredible 78% of the club’s total revenue, though this has actually reduced from the previous season’s 82%, as commercial income has risen from 8% to 12%. Gate receipts remain at 10%.

This might sound very worrying, but this is fairly common in the Premier League. For example, in 2013/14 half the clubs in the top flight were dependent on TV for more than 70% of their revenue, with four clubs earning 80% of their revenue from broadcasting, namely Palace (“leading the way”), Swansea City, Hull City and West Brom.

Nevertheless, Parish is well aware of the need for growth in the other revenue streams: “We’re about £12 million away from the next step up: Everton, Villa, West Ham, Newcastle. We’re clicking at £22 million non-TV income. They’re at £35-£39 million. That’s the only dial we can move: bigger, nicer stadium.”

In 2014/15 Palace’s share of the Premier League TV money rose 6% from £73 million to £77 million, due to finishing one place higher in the league and being shown live on one more occasion. The distribution of these funds  is based on a highly equitable methodology, described as a “masterstroke” by Parish, with the top club (Chelsea) receiving £99 million and the bottom club (QPR) getting £65 million, a ratio of around 1.5.

Most of the money is allocated equally to each club, which means 50% of the domestic rights, 100% of the overseas rights and 100% of the commercial revenue. 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.

Given the importance of TV money to Palace’s business model, it is unsurprising that Parish has a good understanding of the mechanics: “The league is infinitely more financially valuable than any cup. Moving up just two places is worth as much as winning the cup (i.e. £2.5 million).”

In this way, Palace’s climb up the league table has really helped boost their revenue. For example, if they had only just escaped relegation (by finishing 17th), their merit payment would have only been £5 million, compared to the £13.7 million they actually received. Palace’s finances would also be helped if they were shown live more often, e.g. they received £9.5 million for being broadcast 11 times, compared to, say, Tottenham’s £14.8 million for being shown live 18 times.

The blockbuster new TV deal starting in 2016/17 only reinforces the need to stay in the Premier League. My estimates suggest that Palace would receive an additional £34 million under the new contract, increasing the total received to an incredible £112 million, though even that might be conservative, given the size of the overseas deals announced. As Parish surmised, “To think we might have more TV revenue than Barcelona. Higher wage bill than Atletico Madrid. It’s insane.”

Gate receipts rose by 10% (£0.9 million) from £9.3 million to £10.2 million, for a number of reasons: (a) average attendance slightly increased from 24,114 to 24,421; (b) there were two more home games staged at Selhurst Park; (c) many 2013/14 season tickets were pre-sold at Championship prices.

In fact, last season had the highest number of season ticket holders in Palace’s history with the stadium full for nearly every game (apart from the odd away section). Even though Palace’s attendance is one of the smallest in the top flight, only ahead of Hull City, Swansea City, Burnley and QPR, their fans do provide great support. As Pardew said, “It has the best atmosphere in the Premier League – bar none.”

Although season ticket prices went up by an average of 21% following promotion, they are still among the cheapest in the division and have since been frozen for two seasons. Attendances have grown from below 15,000 six years ago to just under 25,000 this season.

A combination of these factors mean that Palace’s match day revenue is one of the lowest in the Premier League. To place their £10 million into context, Arsenal generates over £100 million a year from this revenue stream, which means that they earn more from three matches than Palace do in an entire season.

As mentioned, one of the main drivers of accepting external investment was to provide funds to develop the stadium, expanding Selhurst Park to a 40,000 capacity arena, including 2,000 lucrative, corporate seats.

The plan is to build a new main stand on top of the current one, retaining the existing ordinary seating, but adding a new premium deck. The thinking was outlined by Parish: “The direction of travel for clubs has to be as much corporate as you can get, then keep the price of general admission low.”

Palace have done well to grow their commercial income by 82% (£5.6 million) from £6.9 million to £12.5 million in 2014/15, comprising sponsorship and advertising £3.6 million, other commercial activities £4.8 million and other income £4.1 million. This has taken Palace above Southampton, West Brom and Swansea City, though the leading clubs are practically out of sight: Manchester United £197 million, Manchester City £173 million, Liverpool £116 million, Chelsea £108 million and Arsenal £103 million.

Progress has been made on the principal sponsorship deals following promotion. According to club sources, the shirt sponsorship has gone up from £500k in the Championship (GAC) to £2 million last season with Neteller (a service from online payments provider, Optimal Payments) to the current deal with online gaming company Mansion House worth around £3 million a season.

This is still a long way below the leading clubs, e.g. Manchester United’s Chevrolet deal is worth £47 million, while Chelsea’s new agreement with Yokohama Rubber is for £40 million, but it does better reflect Palace’s profile. The club also signed a new two-year kit supplier deal with Macron from 2014/15, replacing Avec, a subsidiary of Nike, as a sign of their more elevated status.

Given Parish’s marketing background, it is no surprise that the chairman is keen to “create a brand position for the club” that could be the source of future sponsorship income, based around qualities like its South London identity, a magnificent crowd atmosphere and player development.

For the first time last year Palace featured in the Brand Finance list of the 50 most valuable brands in world football, “Crystal Palace have returned emphatically to the Premier League, which has strengthened the brand and given it a great platform and exposure to big global audiences.”

As a sign of growing commercial focus, Parish has talked of expansion in America, facilitated by its new owners: “The US represents a particular area of interest for us. We have quite a US centric brand. I’ve always said that if somebody from America bought a football club and wanted to rename it, they might call it something like Crystal Palace. Red and blue. An eagle as its mascot emblem.”

The wage bill rose by 49% (£22 million) from £46 million to £68 million, which means that it has increased by £49 million since promotion. The important wages to turnover ratio has also worsened from 51% to 66%, though in fairness it is much better than the 129% reported in the last Championship season (though this included £4.6 million of promotion bonus payments).

The reasons for the growth include better players signed to strengthen the squad, contracts extended on higher wages, bonus payments for Premier League survival (last year contingent liabilities included £5 million for this eventuality) and an increase in headcount from 142 to 187 (players, managers and coaches up from 88 to 102, administration and commercial up from 54 to 85).

Palace’s wage bill will continue to rise, as evidenced by the purchase of Yohan Cabaye, which Pardew confirmed has broken the club’s wage structure. Parish added, “Nothing about the Cabaye deal is a bargain: we paid full whack to the club, full whack to the player. But sometimes you just have to pay to take you to another level.”

Palace’s 16% increase in the wages to turnover ratio to 66% is by far the highest reported to date in 2014/15, but basically only brings them into line with most Premier League clubs, e.g. Swansea City 69%, Chelsea 69%, Stoke City 67%, Southampton 63%, Everton 62% and West Ham 60%.

Palace’s £68 million wage bill is still firmly at the lower end of the wages league, which is one of the main reasons for their high operating profits. To place this into context, the top four clubs all have wage bills around the £200 million level: Chelsea £216 million, Manchester United £203 million, Manchester City £194 million and Arsenal £192 million.

What is interesting is the convergence of many mid-tier clubs at around the £70 million level: West Ham £73 million, Southampton £72 million, Swansea City £71 million, Sunderland £70 million (2013/14 figures), Aston Villa £69 million (2013/14), Palace £68 million, Stoke City £67 million and West Brom £65 million (2013/14).

Parish is of the opinion that simply increasing spending is no guarantee of success, “One of the great myths in the Premier League is that the more money you spend the better you do.” He can point to Leicester City’s rise and the increasingly competitive nature of the Premier League as evidence for his theory, but it is still a real challenge for clubs like Palace to consistently compete with the financial might of the leading clubs.

The chairman has made another good point about player salaries: “The wages in the Premier League are crazy. They’re mad compared to any other league and the problem we are giving ourselves is, if we want to sell a player, there are no other leagues in the world that can afford them.”

After many years of net sales, including some forced player selling as a result of administration, Palace have averaged net transfer expenditure of £22 million annually in the last three years (per the Transfer League website).

Last summer saw the arrivals of Cabaye, Connor Wickham and Alex McCarthy, which Parish described as “investing heavily… to continue to bring this club up to the standard required to be a force within this division.”

Over the last three seasons, Palace actually have the 8th highest net spend in the Premier League, around the same level as Newcastle United, Everton and Chelsea. However, in many ways this is simply the logical result of promotion, as the club explained, “We had to assemble a team to compete in the Premiership in a reasonably short window.”

They have struggled a little in the recent window, as shown by the short-term deal with Emmanuel Adebayor, a striker that often flatters to deceive. Parish explained the club’s predicament thus: “We are trying to improve on where we are. If you want to go up from 10th or 11th in the Premier League, you are dealing with players towards the top of the pyramid. The quality narrows and the prices go up and it makes them more difficult to get. It is good news we're in that market, but it's a much tougher market to deal in.”

Many supporters have hoped that the American investment would finance the purchase of new players, but Parish has emphasised that this money is earmarked for infrastructure investment: “I should stress, this isn’t for new players. We can manage that out of our own resources.” Nevertheless, there should still be a little more money available, as the money currently spent on the stadium and academy can be diverted to the playing squad, but we are not talking huge sums.

However, as Pardew noted, “The most important factor is we are under no pressure financially. So when a club does come to talk to us about one of our star performers, they will have to drive a very hard bargain and really twist our wrist.” This gives the chance a better chance of hanging on to key players like Yannick Bolasie.

Palace are in the fortunate position of having no external bank debt. The only debt that the club has is £10.7 million of interest-free shareholder loans, split between the four owners: £3.0 million from each of Steve Parish, Stephen Browett and Jeremy Hosking plus £1.7 million from Martin Long. In fact, once £28.7 million of cash is considered, the club actually has net funds of £18.0 million.

In addition, £8.9 million is owed to other football clubs for transfer stage payments (up from £2.7 million), though Palace’s contingent liabilities, dependent on things like number of appearances, are now only £0.3 million. After year-end Palace spent £21.5 million on new players, but recouped £7.4 million in sales proceeds.

Palace’s £11 million gross debt is also one of the lowest in the Premier League, which must have been attractive to their new investors. In fact, there are actually five clubs with debt above £100 million, namely Manchester United £411 million, Arsenal £234 million, Newcastle United £129 million, Liverpool £127 million and Aston Villa £104 million.

Palace’s prudent approach is evident from looking at the cash flow statement. In the two years after the club exited administration, the owners provided £14.7 million of financing, split between the £10.7 million of debt and £4.0 million of new share capital, but the club has not needed any additional funding since 2012.

The impact of promotion to the Premier League is particularly striking, as Palace have generated an impressive £78 million from operating activities in the last two years. They have spent around half of that (£40 million) on player purchases (net), £9 million on capital expenditure, £4 million on tax, while they have put £25 million into the bank account – another tick in the box for the Americans.

The capex was used in many areas, including the purchase of the training ground in Beckenham for £2.3 million in 2013, new bar and restaurant facilities in the stadium, improvements to the retail catering areas and a new pitch with undersoil heating.

Palace’s cash balance of £29 million is actually the 6th highest in the Premier League, only behind Arsenal £228 million, Manchester United £156 million, Manchester City £75 million, Tottenham Hotspur £39 million and Newcastle United £34 million.

One challenge that Palace will have to confront is the Premier League’s new Financial Fair Play rules, or more accurately its Short Term Cost Control regulations. Given their return to profitability, they will have no problems meeting the loss targets (no more than £105 million aggregated over a three-season period between 2013 and 2016), but they might well have issues with the wage bill targets.

Specifically, clubs whose player service costs are more than £52 million will only be allowed to increase their wages by £4 million per season for the three years from 2013/14. However this restriction only applies to the income from TV money, so any additional money from higher gate receipts, new sponsorship deals or profits from player sales can still be spent on wages.

Parish is aware of this problem: “There are regulations, cost control measures and targets we have to hit. And we were close with ‘issues’ in that respect.” My guess is that they have just about managed to stay within this de facto salary cap in 2014/15, though this could be a real headache in future years – unless the rules are amended in light of the new TV deal.

"Dann! Dann! Dann!"

For the time being, Crystal Palace are a great story. The Eagles survived administration and have managed to establish themselves in the Premier League, one of the most competitive divisions around.

It will clearly be difficult to maintain their upward momentum, as the air becomes even more rarified at the highest levels, but the sensible approach adopted by Palace’s owners should be applauded.

While some supporters might prefer a “pedal to the metal” strategy, Palace are likely to continue to follow their course, which Parish has described as “evolution rather than revolution” – even with the additional funds injected by their American investors. Given the club’s previous flirtation with financial disaster, that seems fair enough.
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