Celtic - Everything's Gone Green

So Celtic duly won their fourth consecutive Scottish League title in May in their first season under young Norwegian manager Ronny Deila, who had replaced the very successful Neil Lennon the previous summer.

Despite this fine achievement, there was also disappointment, as the famous Glasgow club failed to qualify for the group stages of the Champions League, even though they had two bites at the cherry, having been reprieved after Legia Warsaw fielded an ineligible player, only to crash out against Slovenian champions Maribor.

This was in stark contrast to previous great nights in Europe. As recently as November 2012, Celtic beat Barcelona 2-1 in front of a packed Celtic Park, as they made their way to the last 16 of the Champions League. Many believed that this would be the platform for greater things, but the club has not progressed since then, as they did not make the best use of the European cash windfall. Instead, they sold three key players at the end of that season (Victor Wanyama, Gary Hooper and Kelvin Wilson) and failed to adequately replace them.

Although this might be considered a lack of ambition on behalf of the Celtic board, it also comes down to a simple lack of money. On the face of it, the club’s finances look pretty good, as they are consistently profitable and have little debt, but if you dig a little deeper, then Celtic’s financial challenges become all too apparent. As Deila beautifully put it, “Celtic is unbelievably huge, but the money here is not so huge.”

Nevertheless the most recent published accounts from the 2013/14 season featured a £1.4 million increase in profit from £9.7 million to £11.2 million, despite revenue falling by £11 million (15%) from £76 million to £65 million. The club described these results as “impressive particularly given the difficult economic climate”, but they were largely boosted by profits on the aforementioned player sales, which rose £12 million from £5 million to £17 million.

In addition, the wage bill was cut by £3 million (7%) to £38 million, though an impairment charge of £4 million was booked to reduce the value in the accounts of certain players. There was also an exceptional payment of £0.6 million for contract termination, though this was lower than the previous year’s exceptional items of £1.3 million, which were mainly for an onerous lease provision for certain loss-making retail stores.

Celtic’s 2013/14 £11.2 million profit was easily the best financial result in the Scottish Premiership – even though Hearts reported a £26.8 million profit, this was inflated by a £27.5 million credit for a write-off in respect of the Creditors Voluntary Agreement. Most other clubs reported (small) losses with only Dundee United and St Johnstone recording profits.

Of course, Rangers are no longer in the top division, which is something of a double-edged sword for Celtic. A couple of years ago, chief executive Peter Lawwell insisted that they did not need the presence of Rangers to flourish financially after their rivals’ off-pitch problems meant no definite Old Firm derbies for a few years.

He said, “We look after ourselves. We don’t rely on any other club. We are in a decent position, we’re very strong.” That’s all well and good, but it could be argued that a lack of strong domestic competition may leave Celtic ill prepared for their European campaigns – and that’s where the big money lies.

That said, Celtic have maintained a relatively strong financial position, making profits in six out of the last eight years. Even though these have not been enormous sums, the aggregate profit since 2007 is a tidy £33 million. This is a result of the club’s prudent approach, as outlined by chairman Ian Bankier: “The club, financially, has to adopt a self sustaining model. In plain words, we have to live within our means. We cannot spend money that we don’t have.”

Specifically, the club’s “core business strategy… relies upon: the youth academy; player development; player recruitment; management of the player pool; and sports science and performance analysis; to deliver long term sustainable football success.” In short, the club will stand or fall on how successful it is in buying players (relatively cheaply) and/or developing its youngsters.

Of course, these figures might provoke the question of why the club does not put more of its profits on the pitch, but these surpluses are largely driven by two factors: (a) player sales; and (b) money from competing in Europe, especially the Champions League.

As Lawwell said, “Player transfers have been an increasingly important element of our business for a number of years.” He recently confirmed the value of this activity, “Significant income was brought into the club as a consequence of transfer fees received.”

In fact, if player sales were to be excluded from Celtic’s figures, they would actually report a loss most years, e.g. the 2013/14 profit of £11.2 million would have been a loss of £5.9 million without the £17.1 million profit on player sales.

Similarly, the club would have made a loss in 2011 instead of breaking-even without the £13.2 million profit from the sales of Aidan McGeady, Artur Boruc, Marc-Antoine Fortuné and Stephen McManus. Perhaps most tellingly, Lawwell noted that the club could have eliminated the (£7.4 million) loss in 2012 by selling players – though they were retained as a deliberate policy “in order to achieve strategic objectives”, i.e. progress in Europe.

Since 2007 this player trading activity has generated £61 million of accounting profits. However, these are not the same as cash profits, as the accounts include many non-cash items, such as depreciation, player amortisation, impairment and exceptional provisions.

To get an idea of how the club’s underlying business is doing, we can look at its operating profit. This has steadily declined from £16 million in 2007 to a loss of £3 million in 2012, though the 2013 Champions League run reversed the trend pushing operating profit back up to £13 million, before once again falling in 2014 to £5 million.

The 2014/15 results will again highlight the need to sell players in more difficult seasons. Participation in the Europa League as opposed to the far more lucrative Champions League, will mean a steep reduction in revenue, but this will be partly offset by the sales of Fraser Forster and Tony Watt “for sums well in excess of book value.”

Basically Celtic are constrained by their lack of revenue growth. In 2013/14 revenue fell 15% (£11 million) from £76 million to £65 million with all three operating divisions decreasing: football and stadium operations by 14% (£4.4 million) from £32.7 million to £28.3 million; merchandising by 10% (£1.5 million) from £15.0 million to £13.5 million; and multimedia and other commercial activities by 19% (£5.2 million) from £28.2 million to £22.9 million.

In fact, Celtic’s revenue has actually fallen by 14% since 2007 with only multimedia and other commercial activities growing in this period, while the other two divisions each dropped by a hefty 26-27%.

This disappointing revenue performance highlights Celtic’s issues perfectly, as it can be considered from two very different aspects, i.e. domestically and on the international stage.

Even after the fall in revenue, Celtic’s £65 million is still by far the highest revenue in the Scottish Premiership with the nearest challenger being Aberdeen’s £11.2 million, more than £50 million lower. All the other clubs only generate £3-7 million a year. In fact, Celtic earn £10 million more than all the other clubs in Scotland’s top tier combined.

However, while Celtic’s revenue has stagnated, other leading clubs have seen their turnover explode in the last few years. The last time that Celtic featured in the annual Deloitte Money League was 2007 when their £75 million was the 17th highest in the world, but they are now miles behind Europe’s elite.

In the last seven years Celtic’s revenue fell £11 million, while almost all other clubs have benefited from significant growth. As an example, the top four (Real Madrid, Manchester United, Bayern Munich and Barcelona) have all seen their revenue increase by more than £200 million.

As a (slightly) more realistic comparison, Celtic’s revenue was within striking distance of Juventus in 2007, being £23 million below the Italian giants’ £98 million, but the gap has now widened to a vast £169 million (£234 million vs. £65 million).

Much of this is down to the disparity in the television deals, as seen by the rise of English clubs with 14 in the top 30 (and all 20 Premier League clubs in the top 40). If we take Everton as an example, we can see that their revenue was £24 million lower than Celtic’s in 2007, but they have surged past them following three new TV deals (in 2008, 2011 and 2014) and their revenue is now £56 million higher at £121 million.

Multimedia and Other Commercial Activities revenue has risen since 2007, but it’s been a bit of a rollercoaster ride, as it is highly dependent on TV money from European competitions. As the annual report stated, “The trading results emphasise the significant benefit from participating in the group stage of the UEFA Champions League.”

Celtic achieved this objective in the last two seasons, receiving around £35 million in prize money alone in those two seasons (£20 million in 2013 and £15 million in 2014). This is essentially the difference in revenue compared to the previous three seasons, when receipts were restricted by the much smaller amounts distributed by the Europa League. The impact would be even greater if additional match ticket sales and the impact on commercial deals were considered.

The highest payment Celtic received came in 2013 as a result of performing well in the group, which was worth €3.5 million (3 wins at €1 million, 1 draw at €500,000), and reaching the last 16 for another €3.5 million. This was added to the €8.6 million that all teams received for reaching the group stage and €8.1 million from the TV (market) pool. That gave a very nice total of €23.7 million – or £20 million.

It should be noted that the prize money is denominated in Euros, so the exchange rate is also a factor. As Sterling strengthens, the amount booked in Celtic’s accounts will decrease.

What is striking is that if European prize money is excluded, then Celtic’s other income is on an obvious downward trend, e.g. from £65 million in 2007 to £50 million in 2014. Little wonder that a few years ago Lawwell observed, “Clearly, European progression is key in enabling the club to achieve its financial objectives.”

The importance of qualifying for the Champions League has been further underlined with the new deal from the 2015/16 season that will increase the prize money by an estimated 50% with further significant growth in the TV (market) pool. Europe League payments will also rise, but it will still be very much the poor relation.

Celtic’s Achilles heel is obviously the Scottish TV deal, which is worth a paltry £15 million a year – and that is for all Scottish professional clubs. As Lawwell said, “We play in a country of five million people. We’ve got the media values that represent that.” The distribution is determined by reference to the league position, so Celtic have been receiving more money than other clubs, but this was still only worth a feeble £2.4 million in 2014/15.

To place that into context, Queens Park Rangers “earned” £65 million for finishing bottom in the Premier League the same season, while title winners Chelsea received £99 million. Championship clubs that receive parachute payments following relegation from the English top flight received nearly £27 million, while even a normal Championship club gets more than Celtic with £4 million.

This massive inequality is keenly felt by Celtic, as Bankier noted: “The harsh reality is that the total income from broadcasting rights available to the Scottish game is a tiny fraction of what is available to our neighbours in England.” He’s not kidding – the Scottish deal is worth less than 1% of the Premier League deal and that is before the estimated 50% rise in 2016. In fact, broadcasters pay more to show two English games than an entire Scottish season.

The current Scottish TV deal runs to 2017, but it is reported that Sky have an option to extend the contract for a further three years, so there is little that can be done for a while. England may be the colossus when it comes to TV rights, but other smaller countries are also doing better than Scotland: Belgium £40 million, Norway £34 million, Greece £30 million and Austria £15 million. The fact is that broadcasters do not regard Scottish football as an attractive product without the pull of guaranteed Old Firm derbies.

Football and Stadium Operations is the largest business segment at Celtic with £28.3 million in 2014, though this was 14% (£4.4 million) lower than the previous year. This is essentially match day revenue plus money generated by the Celtic Park stadium on other occasions.

The reduction in income was mainly due to less match tickets income, including corporate and premium sales, following the £100 reward to adult season ticket holders “for their continued support”, as well as lack of progression to the Champions League knockout stages and failure to make the latter stages of both domestic cup competitions.

This revenue stream has been reducing for some time, partly due to a smaller number of home matches, especially the money-spinning European ties, but also in line with lower average attendances. These have fallen from over 58,000 in 2005/06, when Celtic enjoyed the third highest crowds in the UK, to under 44,000 in 2014/15.

There is little doubt that the Celtic supporters are extremely important to the club, as former chairman John Reid noted: “They do not show up on a balance sheet. But they are an invaluable asset, the very lifeblood of a club like Celtic.” It must therefore be of concern to the club’s hierarchy that attendances are not what they once were – even with over 40,000 season ticket holders

The lack of matches against Rangers has surely had an impact on these figures, as Lawwell explained, “If you have more meaningful games, then you have more people turning up and that means more cash at the gate, more sponsorship interest and more TV interest.”

Furthermore, Celtic’s attendance is still the highest in Scotland with their 2013/14 average of 46,000 being more than 30,000 higher than Hearts in the Premiership, though Rangers attracted a notable 43,000 in League One.

Interestingly, Celtic have just announced that they have been granted permission to introduce safe standing for up to 2,600 supporters, using the rail seating system which can be found in stadiums in Germany.

Merchandising revenue dropped 10% (£1.5 million) from £15.0 million to £13.5 million in 2014, a long way below the peak of £18.4 million in 2007. This revenue stream is heavily dependent on the relative popularity of kit launches, though the slight rebound in 2013 was driven by Champions League success and 125th Anniversary products.

Lawwell said that the club is “committed to the development of the Celtic brand, including the improvement of the match day experience for our supporters at Celtic Park”, such as the opening of Celtic Way. This was showcased in the opening ceremony of the Glasgow 2014 Commonwealth Games. The chief executive added, “I think our story is unique, I think it is rich, it’s the best and we have a potential fan base of Scots and Irish around the world that would support that.”

"Jackie Wilson Said (I'm In Heaven When You Smile)"

That said, the club did note that “the sponsorship landscape remains extremely challenging” and the “business environment and economic difficulties continue to impact upon companies’ advertising and marketing budgets.”

It must have therefore been very pleasing for Celtic to sign a three-year shirt sponsorship deal with Magners in 2013/14 for a higher sum than the £1.5 million paid by the previous sponsors Tennent’s. That brought to an end to the joint sponsorship arrangement with Ranger, so the two sides had different shirt sponsors for the first time in 13 years.

Moreover, Celtic have recently announced a new kit supplier deal with New Balance that will start from the 2015/16 season, which is worth a sum “significantly higher” than the long-standing agreement with Nike. The club has not divulged any financial details, but the annual payment is reportedly increasing from £5 million to £5.8 million.

The wage bill was cut by 7% (£3.0 million) from £40.7 million to £37.8 million, due to “the change in player personnel” and lower bonus payments based on Champions League progress. In fact, wages have hardly grown at all in recent years, only rising by 4% (£1.3 million) since 2007.

Following the revenue decrease, the wages to turnover ratio rose from 54% to 58%, which is among the lowest in the Scottish Premiership, though a fair bit higher than Hearts’ 44%. This is in line with the majority of Premier League clubs in England, where the average has come down to 59% as a result of the higher TV money.

Given the differences in revenue, it is no surprise that Celtic’s wage bill of £38 million is by some distance the highest in Scotland’s top tier, more than six times as much as Aberdeen’s £6 million. In fact, their wage bill is more than the other 11 clubs combined.

However, this would be the lowest wage bill in the Premier League behind luminaries like Hull City £43 million, Crystal Palace £46 million, Norwich City £50 million and Cardiff City £53 million. Obviously, Manchester United are quite literally in a different league with a wage bill of £215 million, but it is also worth noting that Celtic were only just ahead of some clubs in the Championship, e.g. Leicester City £36 million, Reading £35 million and Blackburn Rovers £34 million.

As the 2014 accounts drily noted, “Player wages are subject to market forces with wage levels in some countries, particularly in those leagues with lucrative broadcasting contracts, significantly exceeding those available in others.” You can say that again.

Actually, Lawwell had said much the same thing in even starker terms a couple of years earlier: “Wage and transfer fee inflation over a number of years means that the gap between Scotland and the major European footballing nations is impossible to bridge, thus the relative cost and challenge of attracting quality players gets no easier.” Deila also now fully understands the problem: “You have to see the big picture. It is not about the (transfer) fee, it is about the salaries.”

To reinforce this point, it is worth again comparing Celtic with Everton. Their wage bills were almost exactly the same back in 2007, but Everton’s has risen by 80% to £69 million, while Celtic’s growth was only 4% to £38 million.

There is one Celtic employee that seems immune to wage restraint, namely the chief executive, who trousered just under £1 million for the second year in a row. This included a £400,000 bonus payment, even though his contractual maximum bonus payment should be 60% of his salary of £525,000, i.e. £315,000. Happily for Mr. Lawwell, the Remuneration Committee decided to make an additional bonus award on an ex gratia basis. While he is no doubt very good at his job, this does seem a bit steep, when the rest of the wage bill is under so much pressure.

Celtic have been consistent spenders in the transfer market over the years, but not that much - and net expenditure has reduced in recent times. If we divide the last 12 seasons into three periods of four years, the difference is striking: 2002-06 £14 million; 2006-10 £18 million; and 2010-14 just £1 million.

There has also been a subtle change in the chairman’s statements. In the 2012 accounts he said, “We continue to make sizeable investment in new players, so as to strengthen the squad with a view to achieve our primary objective”, which was described as to win the Scottish title and to reach the group stages of the Champions League. However, in 2014 this had been toned down to: “We do the utmost to acquire the best players we can with our financial constraints.”

According to Lawwell, the strategy has been to “scour the world for talent to develop”, which means building a world-class scouting network that can look at undervalued markets in Scandinavia, Latin America, Africa and Asia. There is nothing wrong with this plan, given Celtic’s financial challenges, and it looked to be working well for a while.

However, it is debatable whether the club has spent its money wisely in recent times, though in fairness it has been hard to find value-for-money purchases, when so many clubs are trying to do exactly the same thing. In addition, it must be difficult to attract players to what is effectively a one-team league when the wages on offer are nothing special, so Celtic often have to take a punt on comparative unknowns.

Hence, they have started to make extensive use of the loan market, bringing in the likes of John Guidetti and Jason Denayer from Manchester City and Aleksander Tonev from Aston Villa on season-long loans last year.

Celtic have gross debt of £11.0 million, which means that they have net funds of £3.7 million after taking £14.7 million of cash balances into consideration. The gross debt comprises £10.2 million of bank loans, a £0.7 million overdraft and other loans of £0.1 million. This is obviously a pretty healthy position, especially as gross debt was as high as £19.7 million in 2005, though Lawwell noted that the club has “fluctuating cash requirements” during the year, so they had a net debt position of £6.5 million during 2013/14.

There has been some confusion over Celtic’s reported debt figures, as the accounts refer to a debt facility with the Co-operative Bank of £32.4 million, made up of £20.4 million long-term loans and a £12 million overdraft.

The loan agreement is further split between a revolving credit facility of £6.0 million (base rate + 1%) and long-term loans of £14.4 million (LIBOR + 1.125%). These are repayable in equal quarterly instalments form October 209 to April 2019 with any balance repayable in July 2019, though there is an option to repay the loans early without penalty. These loans are secured on Celtic Park and the land adjoining the stadium and at Westhorn and Lennoxtown.

"Pass the Dutchie"

The important point is that this is a loan facility, as opposed to loans actually taken out. In fact, the accounts clearly state that £22.2 million of the available bank facilities of £32.4 million remained undrawn at the balance sheet date, which reconciles perfectly with the bank debt of £10.2 million.

In addition, the balance sheet includes £4.3 million for the debt element of Convertible Cumulative Preference Shares. These carry the right to a 6% dividend (around £0.5 million a year), which has been paid since 1997.

There are also contingent liabilities, i.e. transfer payments dependent on criteria like number of appearances, of £3.6 million, with contingent assets of £2.3 million. The accounts note that £5.0 million has been committed on player purchases and loans since the accounts closed, though there have also been sales proceeds of £8.1 million.

The board has been accused of hoarding cash, but that is not really the case if we look at the cash flow statement. Over the last eight years Celtic have generated a total of £62 million from operating activities, but have then spent a net £19 million on players and £21 million on infrastructure, such as improvements in the stadium and the Lennoxtown training facility.

They have then spent a further £4 million on debt repayment, £2 million on interest and £4 million on dividends, leaving a net £11 million increase in cash balances. Lawwell has promised that “the board will re-invest every penny received back into the club for the longer-term.” Given the fluctuations in cash levels during the year, the club is more or less living up to that promise. Whether they should be more ambitious and extend their debt is another question, though Rangers’ demise is a powerful warning against over-extravagant behaviour.

"Fanfare for the Commons man"

One approach Celtic has taken to address its issues with salary and transfer costs is investment in youth development, so that a greater number of players can be “internally generated”. A key element of that strategy is the partnership with St Ninian’s High School in Kirkintilloch, which is now in its seventh year.

Lawwell said that the club “decided to take significant funds from our first team in 2006/07 and to reinvest it in building a state-of-the-art training campus and developing a youth academy.” He added, “It is all about building a sustainable, long-term economic model which will buttress us from the effects of any sudden downturns. It is designed to ensure that we remain competitive in elite European competition.”

And that’s the key point: Celtic need to be successful in Europe (i.e. reach the Champions League group stages) to generate decent revenue. In order to give themselves the best chance of achieving that objective, they need to spend a reasonable amount of money to compete with wealthier clubs. However, they need to do that within their limited budget.

"A Forrest"

As Lawwell stated, “The funding of that success must recognise the financial constraints applicable to the organization, particularly as Celtic continues to play in the Scottish football environment and the challenges that presents.”

So, it’s a case of damned if they do, damned if they don’t.

After a mixed first season, Ronny Deila now needs to demonstrate his worth and take the club forward. As we have seen, in the modern era that’s easier said than done, given Celtic’s diminished resources, but when Celtic Park is in full voice on a European night, anything seems possible.

Celtic – If You Know The History

Another nail was hammered into the coffin of Scottish football last week when all three of their remaining entrants failed to qualify for the Europa League, leaving only Rangers to fly the flag. Nowhere was the disappointment more keenly felt than among Celtic supporters, who saw their beloved Hoops unceremoniously dumped out 4-0 by mid-ranking Dutch side Utrecht, after squandering a 2-0 lead from the home leg. This followed Celtic’s elimination from the qualifying stages of the Champions League by Portuguese side Braga, and meant that another European adventure was cut short almost before it had started. Manager Neil Lennon probably spoke for all fans when he complained, “I’m fed up with coming back from Europe with my backside being smacked.”

How the mighty have fallen, for these are very much the History Bhoys. Not only have Celtic won 42 Scottish league titles, including nine in a row between 1966 and 1974, but they were memorably the first British team to win the European Cup in 1967, when they beat Inter Milan 2-1. Under the leadership of the incomparable Jock Stein, the Lisbon Lions achieved this feat with a team of players all born within 30 miles of Glasgow. No wonder that Bill Shankly, who knew a thing or two about great managers, told his friend, “John, you’re immortal now.” Stein’s magnificent team almost repeated the feat in 1970, narrowly losing the final 2-1 to Feyenoord.

"A genuine legend"

More recently, Gordon Strachan recalled those glory days, when he became the first Celtic manager since Stein to guide his team to winning three league titles in a row in the 2007/08 season. While not quite attaining the same heights in Europe, at least Celtic twice reached the last 16 of the Champions League during his tenure, only falling to the giants of AC Milan and Barcelona. Despite losing every time they travelled away, they compensated by winning all their home games at fortress Parkhead, understandably nicknamed “Paradise” by Celtic fans.

That was then, but this is now. And these days it’s not just about the prestige on the pitch. No, progress in the Champions League is also critical to Celtic’s success off the pitch. For example, last year’s failure to reach the group stages was the major factor in the club’s turnover slumping by 15% to £62 million, the lowest it has been since their last absence from the tournament in 2005/06, following the disastrous elimination by Artmedia Bratislava.

Indeed, if we look at Celtic’s revenue over the last seven years, we can see just how important Champions League money is to their financials, as their revenue is virtually flat without it. The impact can be clearly shown in 2007, when total revenue increased by an astonishing 31% from £57 million to £75 million, almost entirely off the back of the solid European campaign.

The other side of the coin came in 2010, when Celtic earned just £1.6 million from the Europa League. In the same period, their great rivals Rangers earned £14.3 million from the Champions League, even though they finished bottom of their group, thus highlighting the vast gap in prize money between the two competitions. This difference was exacerbated by Rangers being Scotland’s sole representative in the Champions League, as Scotland’s share of the TV revenue is distributed equally to all clubs that qualify, meaning that Rangers received the full amount, instead of having to divide it with Celtic.

The Champions League revenue distribution depends upon a number of factors, but based on last year’s figures it is worth around £14 million – even if you lose all six group games. Each team is guaranteed £6 million for participation plus around £8 million from the TV (market) pool. There are also bonuses of £0.7 million for each win and £0.3 million for each draw in the group stage plus other performance bonuses for each further stage reached. This is serious money for a team like Celtic – and it does not include the additional gate receipts.

"Reid all about it"

Celtic chairman, John Reid, has attempted to downplay the significance of missing out on the Champions League, “It’s not as bad as some people make out. The differential is roughly equivalent to £7 million.” However, his predecessor, Brian Quinn had estimated the net contribution to profit as being “of the order of £11-12 million” after taking into consideration additional costs such as bonus payments.

Chief executive, Peter Lawwell, went one better as he managed to contradict himself when talking about the Champions League, initially claiming, “It’s a fantastic revenue stream, but we don’t have to necessarily depend on it. We’ve got a structure in place that allows us to operate comfortably without it.” Great stuff, but recently he modified his stance, “Clearly European progress remains key in enabling the club to achieve its financial objectives.”

That much is abundantly clear if you look at the profit trend over the last five years, which features profits between 2007 and 2009, but losses in 2006 and 2010. Guess which years Celtic did not qualify for the Champions League. Well done.

The reality is that from a financial perspective qualification for the Champions League is an imperative for Celtic, as it is for all teams from “smaller” leagues, i.e. those outside England, Spain, Germany, Italy and France.

Actually, the 2010 loss of £2.1 million is pretty good in the circumstances, coming in a season when Celtic competed in the Europa League rather than the Champions League, did not win a trophy and did not even reach a cup final.

In fairness, it was their first loss after three years of profits, though the club did report consistent losses for a number of years before that. The relatively small deficit was down to careful stewardship of their finances, which allowed them to largely absorb these financial blows, including a substantial payout to former manager Tony Mowbray and his coaching team. In fact, much of the blame for the poor results (both on and off the pitch) was attributed to the unfortunate Mowbray, who was sacked after only nine months.

The figures were also greatly helped by the £6 million profit from player sales, including five players snapped up by former manager Strachan at Middlesbrough. This is another key driver for Celtic’s financials, as was evidenced in 2007 when Celtic reported a record profit of £15 million, which was enormously influenced by the £9 million profit made from player trading, mainly due to the sales of Stilian Petrov and Shaun Maloney to Aston Villa.

"You are my Larsson"

One reason why Champions League revenue is so crucial is the incredibly small amount of television money received for the Scottish Premier League rights, which works out at around £2 million a year for Celtic. In fact, the entire annual payment to all SPL clubs is only £13 million. To place that into context, it is less than a third of the £40 million that the team finishing bottom of the English Premier League can expect to receive this season. An even more amazing statistic is that the total SPL payment is worth just 1% of the EPL rights. Peter Lawwell summed up the problem, “The fact of the matter is that in a Scottish nation of five million people, the media values are very low.” Actually the real problem is that this makes it almost impossible for clubs like Celtic to compete.

The situation was not helped by the collapse of Setanta last year. The upstart Irish channel was replaced by a combination of Sky and ESPN, but there was a harsh price to pay, as the new deal was worth only £65 million over five years, compared to the previous £125 million over four years. Celtic had been against the Setanta deal, and (with some justification) John Reid did not hesitate to put the boot in, “No-one should under-estimate the blow that has been inflicted on this club and Scottish football by the way in which the whole affair has been handled. Today the SPL accepted a bid that is less than half the value of that offered by Sky last year. To Celtic it means a potential loss of up to £12 million over four years.”

This is why Celtic and Rangers showed interest in securing the Scottish TV rights package themselves, as they could hardly have done worse than the SPL. The Old Firm believe that they could significantly increase their broadcasting revenue by negotiating and selling their own TV rights, but SPL head honcho, Neil Doncaster, has firmly rejected this idea.

Many top European clubs are over-reliant on TV revenue, but that cannot be said for Celtic, as broadcasting accounts for only 17% of their turnover, which is lower than any of the top 20 clubs in the Deloitte Money League – much lower in most cases. Celtic have featured on this list in the past, but have slipped out in recent years, as the TV revenue has multiplied in other countries. As an example of its significance (the power of the media, if you will), Celtic’s revenue would be well over £100 million if they received the same TV revenue as clubs in the Premier League, which would comfortably get them back into the higher echelons.

In stark contrast, Celtic’s match day revenue is a much higher proportion of total revenue than other leading clubs at 58%. The 2009 accounts stated, “These results have been achieved … in reliance upon the tremendous contribution of the Celtic support.” You can say that again. Celtic have consistently enjoyed average attendances of around 57,000, which is higher than all but two clubs in the Premier League (Manchester United and Arsenal). Welcome to the Jungle, indeed.

It is clear that Celtic have a huge supporter base, but even here there are some warning signs, as the average attendance fell by more than 10% last year with the number of season tickets sold falling from 54,000 to 48,000, though in fairness the previous year had been a record. Whether the decrease is due to the economic recession or the poor displays on the field is open to conjecture, but Celtic have already reacted by freezing prices and offering other cheap concessions. Reid cautioned that season ticket sales might fall again, which would place Celtic’s business model under even more strain.

"Another Greek tragedy?"

Just as well that Celtic’s “sponsor programme remains one of the most successful in British football”, at least according to John Reid, who knows a little about spin from his time in Tony Blair’s government. It’s not entirely straightforward to see what Celtic’s commercial revenue is worth, as only merchandising (£15.5 million) is separated with the rest bundled in with multimedia, but in total it must be around £22 million. So, in reality, Celtic’s commercial revenue is comparable to a team like Newcastle United (£19 million), but way behind the Big Four in England, e.g. Manchester United £70 million.

Merchandising is by far the largest element, but this is dependent on the timing and number of kit launches. The “bumble bee” away kit may be hideous, but apparently this is one of Celtic’s best selling strips ever. A new shirt sponsor was announced earlier this year with Tennent’s replacing Carling (notice a theme here?) in a three-year deal that Lawwell said would generate “important revenue” for the club. However, it is believed to be worth only £1.5m a season, compared to the £20 million that Liverpool get from Standard Chartered. Incidentally, Tennent’s sponsor both Celtic and Rangers, as they cannot risk alienating supporters of the other Glasgow club. A new five-year deal was also signed with kit supplier Nike, extending the partnership to ten years, with annual royalties expected to be around £5 million.

Celtic’s response to their limited revenue has been the old-fashioned idea to control their costs. Not only has there been no cost growth, but costs have actually been reduced by nearly 10% since 2004. A good example of Celtic’s ability to manage a budget came last year when operating expenses were cut by £4 million in order to mitigate the £11 million revenue reduction. Not enough to break-even, but you get the idea. Avoiding any temptation to refer to national stereotypes, there’s clearly a thrifty side to Celtic’s style. Although this is a breath of fresh air compared to the profligacy of most other clubs, it has not helped their ambitions on the football side.

The key to Celtic’s cost containment is their ability to keep wages down. Unlike most football clubs, the wage bill has essentially remained flat over the last few years. In point of fact, it’s dropped slightly from £37.4 million in 2004 to £36.5 million in 2010. The wages to turnover ratio has been held in a pretty good range between 50-60%. Although it rose from 53% to 59% last season, this was entirely due to the decline in revenue, as wages actually fell.

If we compare this trend with Premier League clubs, we see a big difference. Back in 2004, Blackburn (£31 million) and Fulham (£34 million) both had lower wage bills than Celtic (£37 million), but while the Scots have cut their salaries, both English clubs now spend much more at around £46 million. Peter Lawwell drily noted, “The affluence of other major leagues – particularly the English Premier League – is an inflationary factor, pushing up wages throughout Europe.” Given that Celtic’s wage bill has stayed at the same level, the logical conclusion is that the quality of their players must have become worse.

However, there is always an exception to the rule and directors’ pay has been steadily rising at Celtic, especially the chief executive, Peter Lawwell, whose total remuneration has increased from under £300,000 four years ago to a staggering £739,000 last year. His salary is fixed at £455,000 until 2011, but he also has a 60% bonus plus hefty pension contributions and benefits in kind. Oh, and let’s not forget the loyalty bonus payable in 2011, which is partly dependent on the company’s earnings per share. Not bad, considering the feeble on-field performances in the last couple of seasons and the declining share price (down 15% in five years). All I can say is that Mr. Lawwell must be an amazingly good negotiator, especially as he was once quoted as saying, “"I'm just doing my job. I'm only part of an all-round team effort.”

"Blame it all on Mowbray"

The 2009/10 accounts also include exceptional items of £3.1 million, but these are effectively also staff costs, as they “mainly relate to costs associated with the early termination of certain employment contracts” (Mowbray’s management team), though they also cover some impairment in player values. These costs are relatively immaterial, but Reid was keen to tell people that “if it weren’t for these costs, we would have equalled last year’s figures.” However, that’s a little misleading, as last year also included £2.8 million of exceptional items. In fact, we see such costs booked every year, so they’re arguably just a normal part of Celtic’s modus operandi.

Reid is also the man who told fans, “Tony has the right to expect our loyalty and moral support while he faces this huge challenge”, only to fire him a few weeks later, directly causing the “exceptional” item. Following the recent results, Reid warned, “the performance of our football management team and players will be placed under even more scrutiny than normal.” Given that Neil Lennon only has a one-year contract, he probably shouldn’t spend too long choosing new decorations for his office.

The club’s net debt increased in 2010 for the first time in five years, but it is still only £6 million, a level that the club believes is “sustainable” and “not out of control”. That seems fair enough, as the debt has come down a great deal from around £30 million ten years ago with a sizeable decrease in 2006 following a £15 million share issue. Current debt represents a £12 million loan from the Co-operative Bank, which bears interest at LIBOR plus 1.125% (floating rate), less £6 million of cash, though these figures exclude the £4 million debt element of the Convertible Preferred Ordinary Shares.

Reid said that the debt had gone up, because the club had “pushed the boat out last summer” with a “hefty investment” of £13.6 million in football personnel, but the big question is whether the club should further increase debt in order to strengthen the squad. Reid commented, “there has been a myth that the board are against borrowing”, but “we are prepared to spend money and get into debt if it doesn’t put the club into danger.” That sounds promising, but the bottom line for many fans is whether the board will make enough cash available to bring in some top quality players.

In years gone by, the club managed to find enough money to buy players of the calibre of Henrik Larsson, John Hartson and Chris Sutton – maybe not world-beaters (with the exception of "Henke"), but a class above the present crop. Reid boasted, “We can still invest in the team more than any club in Scotland”, noting that “Last year we signed or took on loan 13 new players. Already, under our new management in the new financial year, we have brought in seven new faces.” The problem is that very few of those acquisitions are likely to make a massive difference – Daryl Murphy from Sunderland and Gary Hooper from Scunthorpe are not exactly going to set the world alight.

The problem is that Celtic have to do their shopping in the bargain basement, which was effectively admitted by Reid, “We will continue to scour Europe for players at big clubs who cannot command a first-team place there, but who may prosper with us in Scotland.” That has lead to some opportunistic signings like Thomas Gravesen, Craig Bellamy and Robbie Keane (the latter two on loan). The Keane deal was actually a rare example of the club extending itself in a gamble to win the SPL and secure Champions League riches, as they had to pay around £1.3 million in wages during the loan period.

"It went this far wide"

As the song goes, it’s a grand old team to play for, but this summer the likes of Sol Campbell, David James, Jimmy Bullard and that man Bellamy have all rebuffed Celtic’s advances, presumably because of the low wages on offer. That explains why Lennon had to admit, “There are players out there, if you shop around, at reasonable fees and wages.”

Peter Lawwell has also explained that spreading the Celtic brand worldwide has become a major concern in the club’s transfer policy, leading to the purchase of players from countries like Japan and Poland. He said, “Obviously they must be able to play, but to find players in the markets where we think there is growth is also important.” Unbelievable. Here’s an idea: buy some good players, start winning things and the bloody brand will take care of itself.

Every cloud has a silver lining and the flip side of the other leagues’ booming TV earnings is that clubs like Celtic can make good money by selling players into those markets. Indeed, Celtic have already raised over £15 million this summer, mainly from the sales of Aiden McGeady to Spartak Moscow and Marc-Antoine Fortune to West Brom. The board has pledged to reinvest the proceeds into the squad, but this might actually be a pointer to Celtic’s future as a selling club. Although it would be unappealing to supporters, it could be a good financial strategy to make use of the new Lennoxtown football academy to develop young players that could be sold later for healthy gains.

"To Russia with Love"

Celtic’s challenge is magnified by the generic problems facing Scottish football as a whole. Indeed, PricewaterhouseCoopers’ “Financial Review of Scottish Premier League Football” said that action was required to remedy the poor financial state of the SPL or Scottish football would fall into a “downward spiral”, concluding, “In a nutshell, the SPL cannot compete financially.” John Reid went further, warning that much of Scottish football was “edging the narrow line of insolvency.” It al looked very different ten years ago, when Celtic were managed by Martin O’Neill and Rangers had Dick Advocaat, with both clubs spending big money for the times.

The Old Firm can now be considered as big fish in a small pond or an “unattractive league in comparison to Europe’s major championships” according to Lawwell. Their dominance is such that no other team has won the SPL since its formation in 1998 and there has only been one season when both clubs failed to occupy first and second positions. So, Celtic have a great chance of winning trophies and securing regular access to European competitions, but the gulf in quality in the SPL means that they are ill-prepared to compete in the Champions League.

Even the formality of Champions League qualification is now endangered, due to the recent lack of success. Scotland’s two places depend on the country’s ranking in UEFA’s table of coefficients. At the moment, they sit in 15th position, but if they drop just one more spot, they will lose a valuable Champions League place. As the coefficients are based on the previous five years, there could well be trouble ahead when the successful 2006/07 and 2007/08 seasons fall out of the calculation. Celtic reached the last 16 of the Champions League both those seasons, while Rangers were finalists in the 2008 UEFA Cup, but nothing comparable has been achieved since then.

"Against the odds"

Although Celtic and Rangers attract crowds around the 50,000 mark, the club with the next highest attendance in Scotland averages less than 15,000. It may be time for (yet) another change in the SPL structure, expanding the league to 14 teams to add more variety and adding play-offs to ensure that Sky could still show four Old Firm derbies every season. That last point might seem ridiculous, but money talks and Sky are the “only show in town” at the moment.

All of this is why Celtic (and Rangers) have cast their eyes elsewhere. They would clearly love to join the Premier League, viewing this as an escape route from their financial difficulties. In fact, they are so keen to make the move that Peter Lawwell was apparently even prepared for Celtic start at the bottom, i.e. the second tier of a revamped Premier League. However, although this idea has been discussed for many years, it looks like it won’t fly, as the English Premier League firmly rejected the proposal last November. The official statement was unambiguous: “The clubs were of the opinion that bringing Celtic and Rangers into any form of Premier League set-up was not desirable or viable.” As if that weren’t plain enough, Premier League chief executive Richard Scudamore made it crystal clear, “No means never.”

At first glance, Celtic and Rangers would bring some financial gains, but the Premier League sees its future earnings expansion mainly coming from overseas TV rights and sponsorship, to which it was felt the Scottish clubs would not greatly contribute. Some have also mentioned safety as being a cause for concern with the Glaswegians’ vast away support, but the main issue is probably the lesser English clubs worrying that they would be risking their own place in the lucrative Premier League. After all, turkeys very rarely vote for Christmas.

"Do the huddle"

However, things can change and we probably shouldn’t definitively rule this idea out. If the TV money ever shows signs of drying up, the plan might be re-visited, though not in the near future. Having said that, at that stage football might be run along franchise lines in any case (like the NFL). Glasgow Bravehearts vs. London Cockneys, anyone?

There has also been talk of an Atlantic League, comprising teams from less important countries (in financial terms) like Scotland, Portugal and Holland, but that initiative is again unlikely to get past first base. It would resemble a poor man’s Champions League and TV companies would almost certainly not pay much for such limited fare. Given that the only rationale for doing this would be financial, there would seem to be little point in going ahead, as it would be like jumping out of the frying pan into the fire.

"Hail, hail, the Celts are here"

Where does this leave Celtic? Unfortunately, they find themselves in a vicious circle. If they can’t get the money to buy better players, they will struggle to reach the group stages of the Champions League, but if they don’t qualify for the Champions League, then it’s difficult to see where they will get the money to buy those players.

The Celtic board are clearly aware of this dilemma, as they say in the latest accounts, “Revenues generated by progress in European competitions remain of major significance and provide greater flexibility when considering player investment.” More pithily, the old bruiser, John Reid, explained that “football and commercial success go hand in hand.”

So they’re going to start investing in better players then? Unlikely, if you listen to Reid, “If you start getting into a position where you are running up debts that you cannot afford, spending money you don’t have, it is the road not to success, but to ruin.” Celtic’s chairman had already taken aim at Rangers and their strategy of “borrowing endless amounts of money”, but that does beg a rather uncomfortable thought for Celtic fans: if Rangers can dominate Scottish football when their finances are so shaky, what will happen if they sort themselves out?

"Derby day"

As we have seen, there is no easy answer. Celtic are clearly not broke, but they do not have the financial resources to get to the next level. In theory, their ambition should be scaled back in line with their relatively modest income, but the fans are hungry for success. Anyone that has experienced European nights at Celtic Park will understand that this is a special club and would surely want them to be part of the Champions League experience.

It is difficult to criticise a club for adopting a “careful and business-like approach”, but the challenge for the board is to deliver success on the pitch as well as financial sustainability. Bhoys don’t cry, but they must have been just as upset as Reid, when he described last season as “simply not good enough.” You said it, big man. The question is: what can he do about it?