Is Manchester City's Strategy Fair Play?

Another summer, another spending spree by Manchester City. Having already splashed out over £60 million on David Silva, Yaya Toure and Jerome Boateng, it is almost certain that they will complete more big money deals before the new season kicks-off. The press has linked them with virtually all the major transfer targets, most notably the Bosnian striker Edin Dzeko, the exciting but wayward Italian teenager Mario Balotelli, Aston Villa’s willing but limited midfielder James Milner and Lazio’s Serbian left-back Aleksandar Kolarov. Many other names have been mentioned in dispatches, so it is quite possible that the final bill will be even higher than the £118 million shelled out this time last year, with some estimates as high as £175 million.

This would be crazy money for almost any football club, but that’s the point: Manchester City is not just any old football club. Ever since Sheikh Mansour’s Abu Dhabi United Group completed a takeover in September 2008, after buying out former Thailand Prime Minister Thaksin Shinawatra for £210 million, City has been described with much justification as the world’s richest football club. The owners clearly have plans to transform City into a major global force with substantial funds being poured into the playing squad.

A further demonstration of financial strength and commitment to the club came last December, when the owner converted his support, which had previously been in the form or shareholder loans, into £305 million of equity. At the same time, he purchased another £90 million of shares, taking his total investment in the club to around £400 million.

In spite of all this ostentatious flashing of the cash, City are keen to emphasise that this is part of a carefully considered project. Garry Cook, Manchester City’s chief executive, is the man with a plan, which is apparently “to build a successful, sustainable football club for the future.” After an initial period of admittedly significant investment, the intention is that City will become financially self-sufficient.

That’s obviously future music, but how close are City to achieving this ambition right now? Miles away, according to their last set of accounts (up to 31 May 2009), which covered the first season with the Abu Dhabi United Group at the helm. The enormous loss before tax of £93 million was incorrectly reported in some quarters as the largest ever loss made by an English football club, but it has only been surpassed by Chelsea’s world record loss of £140 million in 2004/05, when Roman Abramovich was really pushing the boat out.

To be fair to the new owners, Manchester City have rarely been profitable and have consistently reported losses. In fact, if we look at the financials for the last five years, the only season they made a profit was 2005/06, which was almost entirely due to player sales, ironically largely because of Shaun Wright-Phillips’ transfer to Chelsea. Although revenue has grown by £26 million in this period to £87 million, expenses have ballooned by £92 million to a staggering £161 million. Moreover, nearly the entire rise in revenue is attributable to improvements in the Premier League television deal, while the other revenue streams have hardly grown at all.

The main reason for the cost growth is very clear. As the accounts drily noted, the increase is “primarily driven by increased playing staff remuneration.” Over the last five years, wages have increased by almost 120% from £38 million to £83 million. In the same period, revenue has only grown by 43%, leading to a huge rise in the important wages to turnover ratio to a perilous 95%, way above UEFA’s recommended maximum level of 70%. Only Birmingham have a worse wages to turnover ratio in the Premier League (99%), while Manchester United and Arsenal lead the way with 44% and 46% respectively.

The increase in salaries arises from a combination of City paying top dollar to their stars plus a large increase in headcount. City had six players in the latest list of the top 50 highest football salaries published by Portuguese agency Futebol Finance, which is the same number as Real Madrid and only behind Barcelona and Chelsea. Robinho’s contract is apparently worth £160,000 a week, but that pales into relative insignificance compared to the £221,000 reportedly agreed with Yaya Toure (if you can believe that). The club has also been on a recruitment drive, as staff numbers have grown by nearly 50% from 204 (100 football, 104 admin) in 2005 to 302 (156 football, 146 admin) last year.

So, the wage bill has been growing exponentially (49% in 2008, 52% in 2009), but there’s no end in sight, as the latest figures did not include the eight star signings made last summer (Carlos Tevez, Emmanuel Adebayor, Gareth Barry, Kolo Toure, Joleon Lescott, Roque Santa Cruz, Patrick Vieira and Sylvinho). Some of those players have been given contracts of £160,000 a week, but it’s unlikely that they are all earning that much, so let’s assume an average of £100,000, which is huge money by most standards, but probably not unreasonable for City. That would mean annual wages of £5.2 million, which would imply an increase of around £40 million in the wage bill.

"Get your Yaya's out"

Similarly, the 2008/09 accounts do not include a full year’s salary for those players bought that season, especially those that arrived in the January transfer window (Wayne Bridge, Craig Bellamy, Nigel De Jong and Shay Given). Assuming that these players are on lower salaries with an average of, say, £70,000 a week, that would mean an additional £8 million (seven months of annual salary of £3.6 million for 4 players).

Furthermore, this year’s salaries will almost certainly include a severance payment to former manager Mark Hughes plus the cost of hiring Roberto Mancini as his replacement. Let’s call that another £3 million.

Clearly, some players have also left the club’s payroll in this time (Elano, Gelson Fernandes, Richard Dunne, Daniel Sturridge), but their wages would have been nowhere near as high as the new recruits, so will not have had that dramatic an impact.

So, we can anticipate a wage bill next year of over £130 million, which would take the club above Manchester United and Arsenal, only just behind Chelsea. And that figure does not include any of the players bought in 2010. As the annual report said, “the financial impact of these latest acquisitions will be seen in next year’s financial statements.” You can say that again.

In the last four years, Manchester City’s net transfer expenditure has been well over £300 million, which represents a tremendous change from the previous three years, when they were clearly a selling club (net receipts of £28 million). After last summer’s heavy buying, City let is be known that they would not spend so freely next time, but it now looks as if they have returned to the transfer market for a third bite of the cherry.

In fact, the accounts suggest that the cost last year was even higher than the reported transfer figures, as they said that the net expenditure on last summer’s transactions was £117 million, while the analysis above is only £99.5 million (and that includes £7 million for Adam Johnson’s purchase in January). The figures also exclude very large contingent liabilities of £23m, which is “payable upon the achievement of certain conditions contained within player and transfer contracts”, e.g. number of appearances, international caps, etc.

On the other hand, City would expect to recoup a good portion of their transfer expenditure this summer. Valeri Bojinov’s sale to Parma has already secured £5 million, but the club would hope to raise at least £50 million from other sales. Possible departures include Robinho, Craig Bellamy, Jo, Stephen Ireland, Nedum Onuoha, Javier Garrido and Felipe Caicedo. This would be a double whammy, as it would also restrain the burgeoning payroll. However, during all this wheeler dealing, they will have to bear in mind the new regulations on squad sizes (limited to 25 players) and home-grown players (minimum of eight in the first-team squad).

"Adebayor - say no more"

Unfortunately we now need to get a little technical in order to understand the concept of amortisation, which is how accountants reduce the value of assets over time. In this case, we mean footballers. At the end of a player’s contract, accountants consider that a player has no value, as he is allowed to leave the club on a free transfer. It’s probably easier to comprehend with an example. City signed Yaya Toure for £30 million on a five-year deal, so the annual amortisation is £6 million.

In Manchester City’s accounts, amortisation expenses have significantly increased over the last three years from £6 million in 2007 to £39 million in 2009, reflecting the continued investment in the club’s playing squad. It is difficult to know how much this will be going forward, as we do not know which players will leave, but my guess is that it will be at least £20 million higher, which would take it up to £59 million next year. To place that into context, that would be the highest amortisation figure in the Premier League, way above Chelsea at £49 million.

"Robinho - time to go?"

And guess what’s happened to the administrative expenses? Got it in one: they’ve also massively increased, doubling over the last five years from £20 million to £39 million. This reflects the significant investment made to improve the club’s training facilities (new gymnasium and improved pitches), offices and other infrastructure, which were in need of a major overhaul.

Manchester City’s financials provoke a sense of déjà vu, as they almost exactly mirror what happened at Chelsea, which will inevitably mean several years of large losses. Actually, you don’t have to be a genius to work that out, as the club kindly spells it out in the annual report, “It is therefore to be expected that there will be further significant operating losses reported in future financial periods as we accelerate the timeframe for generating success.” Chelsea kept telling us that they were on course to break-even, but they are still nowhere near self-sufficiency. Although they have been reducing their losses year after year, in 2009 they still came in at a loss well over £40 million. In fact, as we have seen, Manchester City’s losses are still on an upward trend and next year they could well establish a new record loss of around £150 million, as huge increases in wages (£50 million) and player amortisation (£20 million) are offset by improved TV revenue (£10 million) and commercial revenue (£10 million). We shall see.

Longer-term, there is no doubt that Manchester City have a lot of potential. Despite their years in the doldrums, they are already the sixth highest English club in terms of revenue and are rich in tradition, having won the old Football League twice, the FA Cup four times and the European Cup Winners’ Cup once. As the marketing men would say, they have a great brand (the “people’s club” in Manchester) with a solid fan base, which even stayed loyal when the club was relegated to the third tier of English football in 1998, and now they’re playing in a spanking new stadium in the most lucrative league in the world.

Of course, the main driver for revenue growth at English football clubs these days is television and City are no exception with broadcasting income of £48 million representing 55% of their turnover. It increased by 11% in 2009, largely due to the money earned from reaching the UEFA Cup quarter-final, but by far the largest component was the central distribution of £40 million from the Premier League. This was the reason for the substantial £19 million increase in 2008, as a new three-year Premier League deal commenced. We already know that City will receive £50 million from the Premier League this year, the £10 million improvement derived from higher merit payments (after finishing fifth) and more matches shown live on television. Next season, they should receive a further £10 million increase, as the new Premier League 2010-13 deal kicks in, following the much higher sale of overseas rights.

However, City’s broadcasting revenue is still a long way behind the so-called Big Four, as they also benefit from the riches of the Champions League. In 2008/09, this was worth between £20 million and £33 million, but last season’s pot increased by almost 30%, so qualification is now worth at least £25 million, assuming a team gets out of the group stage. In fact, reaching the Champions League would increase revenue across all three streams, including higher gate receipts and better deals with sponsors.

"The Bank of Abu Dhabi"

Commercial revenue actually fell £2 million in 2009 to £23 million, because City decided to stop hosting other events like summer music concerts and the Ricky Hatton fight. The better news is that City have signed new marketing deals with Etihad and Umbro, replacing Thomas Cook and Le Coq Sportif as shirt sponsor and supplier. These contracts are reportedly for much more money, so Etihad’s deal is worth £25 million over the next three seasons, compared to Thomas Cook’s £2.3 million annual payment, while Umbro have entered into a ten-year strategic partnership for more than £50 million.

The owners plan to maximise the commercial potential for the City brand, so you would expect them to boost this revenue, especially in the Middle East. There is certainly room for improvement, when you look at how much Manchester United’s marketing machine earns – over £50 million more than City. Their continental counterparts like Bayern Munich and Barcelona earn even more from their commercial operations, so there is definitely a great opportunity here.

Despite a small increase in 2009, match day revenue is also relatively low. The Deloittes Money League gives a figure of £21 million, having re-classified some revenue from commercial, which is around half that achieved by Spurs, even though City’s average attendance is nearly 8,000 higher. In fact, crowds have been on the rise at Eastlands over the last three seasons, increasing from 40,000 to 43,700, though this is still only utilising 92% of the stadium’s 47,700 capacity, which does not look great when you see that Manchester United fill 99% of the far larger Old Trafford (76,200 capacity). At the moment, City’s gate receipts barely cover Yaya Toure’s salary, something that City fans might like to consider when shouting “we pay your wages” to the team. The club has increased its ticket prices by an average 5% for next season, but they are still a lot lower than many other clubs.

"Don't look back in anger"

However, the club is restricted in its ability to greatly increase its match day revenue by the fact that it does not own the City of Manchester Stadium, which is rented from the council on a 250-year lease. On the plus side, City only had to pay £30 million to convert the stadium into a football ground after the 2002 Commonwealth Games, but this arrangement is a double-edged sword. First, City had to hand over Maine Road to the council; second, the rental payments are based on a formula that allows the club to retain receipts up to the 34,000 capacity of their old ground. This effectively means that City do not get the benefit of higher attendances, as it just means more rent paid to the council. The club plans to expand the capacity to 60,000, including more corporate hospitality facilities, but they would probably prefer to buy the stadium, so they could remove the rent expenses, increase revenue and sell naming rights.

That would help contribute towards a brighter future for City, but there is a cloud on the horizon, namely UEFA’s Financial Fair Play initiative, which will ultimately exclude from European competitions those clubs that fail to live within their means. Although City claim that they are “engaging fully with the FA, the Premier League and UEFA” on this matter, it is highly unlikely that they will break-even in the near future. Indeed, UEFA President, Michel Platini, specifically mentioned them, when he announced the new measures, “Manchester City can spend £300 million if they want to, but if they are not breaking-even in three years, they cannot play in European competition.”

But does it really matter if City spend so much? Defenders of the beautiful game have bemoaned the reduced emphasis on traditional methods such as good coaching, intelligent tactics, developing players, hard work and team spirit; all of which can apparently be replaced by whipping out the cheque book and buying your way to success. The argument goes that this policy inflates the market for everyone else, both in terms of transfer fees and wages. It is obvious that clubs apply a premium when City call, no doubt whistling “Santa Claus is coming to town”, as they hear Garry Cook approaching.

"Father Christmas"

This could be particularly tough on the youth players at Manchester City. The club is rightly proud of their performance in developing young players. Indeed, the annual report notes, “Vladimir Weiss became the 27th player since 1998 to graduate from the academy to first team football – an almost unprecedented record of success.” However, does anyone seriously believe that this will continue, now that the club can go out and buy a ready-made international? Although Mancini has spoken of the club’s commitment to the academy, it would be no surprise if the focus lessened with few, if any, players progressing to the first team. As a meaningful comparison, Chelsea’s youngsters have hardly set the world on fire since Abramovich started pumping money into the club (though, in fairness, they did win the FA Youth Cup last season).

After the spectacular collapses at the likes of Portsmouth and Crystal Palace, there is also some concern about the benefactor model, which works just fine until the money runs out. Even when the owner appears to be incredibly well funded, there is always the possibility that his financial status might change (e.g. market crash in Dubai), he loses interest or gets arrested. Indeed, City should be well aware of these dangers after their experience with Thaksin Shinawatra, who faced corruption charges in Thailand, which lead to his money being blocked. This meant that the club could not pay the players and had to ask the former chairman for a loan.

On the face of it, the men from Abu Dhabi are cut from a very different cloth with a long-term strategy, based on diversifying their economic operations and presenting an appealing image to the world. In a message to fans, the new chairman, Khaldoon Al Mubarak, said, “We are genuine people and we want to develop this club in a sustainable manner.” All very reassuring until you realise that in the same conversation, he also stated, “Mark (Hughes) is as good as they get and we are backing him all the way”. That’s the same Mark Hughes, who was unceremoniously sacked a few months later.

"Time's up"

There is also a worry that they’re not really City fans. When they bought the club, Sulaiman Al Fahim claimed that there was nothing special about City, acknowledging that his backers were simply “attracted to the Premier League itself.” To be fair to Sheikh Mansour, he soon cut short Al Fahim’s “loadsamoney” impression, when he realised that this was upsetting a lot of people, e.g. when the club launched its “name your price” offer for Milan’s Kaka.

Maybe this is why some City fans feel uncomfortable with their new wealth, as it looks like they’re trying to emulate the business model followed for so long by their dreaded neighbours: spend big, build a global franchise and attract worldwide support (from Surrey to South Korea).

On the other hand, although this might not be the club they knew and loved, most City fans surely think that if anyone deserved this good fortune, it has to be them, following all their years of being the underdog. After all, they would not be the first club to benefit from a sugar daddy or buy their way to success. Is what they’re doing really that different from Manchester United when they paid huge money for the likes of Rio Ferdinand, Juan Sebastian Veron, Wayne Rooney and Dimitar Berbatov?

In any other business (and football is now surely a business), there would be no problem with investors using vast amounts of their personal wealth to fund ventures. Would anyone have said anything if the owners had spent £1 billion+ to acquire United? The investment in City, which has largely been spent on buying new players, may actually end up costing less than purchasing a ready made club.

"Not provocative in the slightest"

It’s also difficult to see how else they could realistically break the monopoly of the big four without investing substantial sums. It might be unfair to the likes of Everton and Aston Villa, but this could be what it takes in England to break into the Champions League. This is the thrust of Khaldoon’s argument against the UEFA Fair Play rules, “This suggests that the big clubs, which make the most money, must remain the big clubs and that the status quo must remain.”

In fairness, UEFA have given clubs every opportunity to meet the new guidelines. First, there will be a phased implementation with the first monitoring period being season 2013/14, though this does cover the preceding two reporting periods, 2011/12 and 2012/13. For each successive monitoring period, three reporting periods will be taken into consideration.

UEFA have also stretched the definition of break-even to include an “acceptable deviation”. Billionaire owners will be allowed to absorb aggregate losses of €45 million over three years for the first two monitoring periods, so long as they are willing to cover the club’s losses by making equity contributions. The maximum permitted loss then falls to €30 million from 2015/16 and will be further reduced from 2018/19 (to an unspecified amount). This means that in the transition (weaning-off) period, owners can pump in an average per season of €15 million up to 2015 and then €10 million up to 2018.

"I'm coming for you"

In addition, clubs will still be permitted to borrow for “good” projects like improving the stadium, training facilities, youth and community development. Any costs associated with this investment, like interest on loans to fund the construction or depreciation on the resultant fixed assets, are excluded from the break-even calculation. In other words, an excess of expenses over income may still be allowed if it is solely related to costs that are for the long-term benefit of the club.

At this stage, we should probably clear up a few misconceptions about the Fair Play regulations. Many seem to believe that if a club has no debt, it should be OK, but that is not the issue for UEFA. They are less concerned about clubs taking on debt, but more their ability to service that debt, i.e. pay the interest charges. Some thought that this was the reason that Sheikh Mansour converted his loans into equity, but in reality this makes no difference to UEFA. Obviously, it’s beneficial to the club, as it would be able to start with a clean slate financially if the owner walked away – though it would still have to finance a massive wage bill – and it will also reduce City’s annual interest payment, which is currently £17 million.

It should also be noted that City are not quite debt-free yet, as they still have £49 million of loan notes and bank loans, including £30 million repayable over 25 years at 7.27% and £14 million over 15 years at 7.57%. The debt also includes £43 million provided for future stadium rent, giving gross debt of £92 million. If cash balances of £19 million are taken into consideration, net debt is £73 million. On top of that, the accounts also reveal that City owe other football clubs an amazing £77 million.

"Sheikh - your money maker"

Others are under the assumption that if the owners were to inject £1 billion into the club, that would somehow enable the club to meet the UEFA regulations. Obviously, this would strengthen the balance sheet, but it would not help the profit and loss account. Assuming the funds were used to strengthen the squad, all that would happen is that expenses would increase following a rise in salaries and player amortisation, which would make it more difficult to meet the break-even target.

Another potential loophole often mentioned is for a wealthy owner to pay a ridiculous sum, say £200 million, for sponsorship or use of an executive box. Here, UEFA have said they will test such deals for “fair value”, and if an owner has over-paid for services, the income will be adjusted down to market value. Of course, this is open to interpretation and there are plenty of high-paying deals that could be used as a comparative. It would also be difficult to argue against a club securing many deals at, say £5 million, which could add up to a tidy sum.

However, here’s the thing: Manchester City do not have to worry about any of that, as there is a section in the new guidelines that may well allow them to pass UEFA’s break-even test with flying colours.

As a rule, revenue from non-football operations is excluded from the break-even calculation, but clause B. (k) in Annex X allows you to included revenue from “Operations based at, or in close proximity to, a club’s stadium and training facilities such as a hotel, restaurant, conference centre, business premises (for rental), health-care centre, other sports teams.”

"Cooking up a story"

That sounds almost exactly like the £1 billion development that City are planning for the area around Eastlands stadium. Described as a world class sports and leisure complex, it will include a training facility, luxury hotel and restaurant and should provide a very healthy revenue stream. Bingo! Job done.

Of course, I may be a touch over-cynical here. An alternative scenario would have Manchester City cutting back on their investment after they reach the Champions League, replacing expensive imports with cheaper players developed by their academy, and reaching break-even that way.

This all makes sense if you believe Khaldoon, when he explained that the owners had two reasons for investing in Manchester City, “There is a pure football, emotional side to it and a big business side too. Sheikh Mansour is a huge football fan, but we can also create a franchise, a business which will create value over the years and reap a long term return.”

At the moment, the normal rules of business do not apply to City, but strange as it seems, they just might pass UEFA’s Financial Fair Play rules.

Fortune's Always Hiding At West Ham

While the World Cup continues to thrill all and sundry (with the notable exception of the lugubrious TV pundits), the new club football season looms on the horizon, which means much transfer activity and even more speculation. One thing that has caught my eye is the goings on at West Ham. They have already signed midfielder Thomas Hitzlsperger, appropriately nicknamed “the hammer”, on a free transfer, indicating that the German would be “the first of many signings this summer.” Last week, they apparently made a £12 million bid for Brazilian “wonder kid” Neymar, while they have also been linked with the likes of Yakubu, Joe Cole and those ageing superstars, Thierry Henry and David Beckham.

Although this may seem foolhardy, it is certainly a clear statement of intent from West Ham’s new owners, David Sullivan and David Gold, who acquired 50% of the club in January for £52.5 million, shrewdly paying a little over half of what they received when they sold Birmingham City to Hong Kong businessman Carson Yeung. Although the Icelandic group CB Holdings retain 50%, it is clear that the dynamic duo have taken operational and commercial control of the club. Indeed, it was evident that their takeover was tacitly approved by the club’s bankers, as their covenants would have included the power to veto any change of ownership. The deal included an option to purchase the remaining 50% and Sullivan and Gold have already increased their stake in the club to 60% in May at a cost of £8 million with £4m going to CB Holdings and £4m to the club to help bridge the gap in the club’s finances.

This injection of new funds was much needed, in fact, it was more or less essential for the club’s survival. Although the auditors did not go so far as to question the club’s ability to continue as a going concern (like Hull City and Liverpool), the Finance Director himself described West Ham’s business strategy as “fundamentally flawed”. On the delayed release of the club’s latest accounts (up to 31 May 2009), Sullivan stated, “These results testify to the amount of work that has to be done to restore this club to a position of financial strength.”

"You can put your shirt on them"

While Sullivan demonstrated commendable restraint in that instance, he had pulled no punches on his arrival in the East End, “We wouldn’t buy this club at all, if we weren’t West Ham fans. It makes no commercial sense for anyone to buy this club. It is a serious mess.” His co-owner, David Gold, also did not hesitate to put the boot in, “It’s madness what we have paid. The place was a car crash. Every page we turned in every document revealed yet another problem. It was the worst set of figures I have seen.”

The involvement of the Icelandic investors is a cautionary tale. Billionaire Bjorgolfur Gudmundsson took over the club in November 2006 with much fanfare, promising to challenge the top four, and proceeded to splash the cash on huge transfers and inflated salaries. However, when his fortune was wiped out in the Icelandic financial collapse, West Ham also faced bankruptcy. Administration was only prevented when Hansa, the club’s holding company, was sold to CB (Claret & Blue) Holdings, a consortium of four Iceland banks led by Straumur, which is itself insolvent and is now owned by the Iceland government. This sale was extremely important for West Ham, as it protected the club against the threat that any one of Gudmundsson’s creditors could request a forced liquidation of Hansa’s assets – the largest of which happened to be West Ham.

The club was also fortunate when the District Court in Reykjavik froze Straumur’s debt repayments until September 2010, which allowed them the breathing space to secure a reasonable offer for the club, hence the £50+ million bid from Sullivan and Gold, which was certainly higher than the sum they originally intended to pay. However, what was in the new owners’ favour was that it was obvious that CB Holdings had zero interest in owning a football club. Their only objective was to get back the money they were owed by Gudmundsson, so they were more than willing to do a deal, especially as the value of the assets would have dramatically decreased if West Ham had been relegated (a distinct possibility in January).

"I am the eggman"

However, there’s no doubt that Sullivan and Gold have inherited a club with countless problems, most obviously a lot of debt. The accounts list net debt of £44.9 million, arising from gross debt of £47.8 million less cash balances of £2.9 million. This comprises a bank loan of £31.5 million, revolving credit of £14.7 million and HP loans of £1.6 million. Interest is charged at 2.5% over LIBOR, leading to £4m expenses in 2009. Obviously, £45 million of debt is low compared to many Premier League clubs (notably Manchester United over £700 million, Liverpool £350 million), but then again these clubs do generate considerably more revenue.

Nick Igoe, West Ham’s Finance Director, confirmed that the debt was a major concern, “At 60% of turnover, the bank debt can hardly be considered excessive. The reason why the level of debt is challenging is that it is relatively short-term in nature, expiring as it does in August 2011, and has to be viewed alongside other liabilities.” In fact, the bank loan is technically repayable on demand, as the club breached its debt covenants. Only the goodwill of the group’s bankers agreeing to waive those breaches allowed a new schedule to be established with the majority of the repayment back-ended to 2011.

The debt would have been even higher if former owner Gudmundsson had not invested a further £30.5 million of equity in 2008 and CB Holdings agreed to a £10 million loan being converted into equity in November 2009.

That’s bad enough, but Sullivan has spoken of a far higher figure, “When we took over in January, the club was £110m in debt, though we have cut it down to just over £90 million. In simplistic terms, £50 million is owed to banks, £40 million to other clubs and the club’s settlement to Alan Curbishley.”

Not that I don’t trust Sullivan, but I have analysed this in the table above to see where he’s coming from. On top of the £48m bank loans (gross), the accounts tell us that other clubs are owed £25m for transfers: £14 million of net creditors, £2 million of contingent liabilities dependent on number of appearances and £9 million of transfers registered after the balance sheet date. In addition, I reckon that the club still owes Sheffield United £16 million for the Carlos Tevez affair – the 2009 settlement of £21 million is to be paid over four years, so presumably a quarter (£5 million) was paid last year. In addition, the notes to the accounts include £8 million owed to the tax authorities, £1 million to purchase the freehold interest of the training ground and £4 million outstanding legal claims. I have also included an estimated £5 million in respect of severance payments to former managers.

As we can see, many of West Ham’s financial problems have been of their own making, the result of poor executive decisions and downright incompetence. Incredibly, the club has wasted £47 million over the last three years on “exceptional items”, primarily the cost of a number of very damaging legal actions. The daddy of them all has to be when the Premier League found the club guilty of acting improperly and withholding documentation over the transfers of Carlos Tevez and Javier Mascherano. Although the club was given a record £5.5 million fine, many fans believe that the club got off lightly and should have received a points deduction, which would have been enough to send them to the Championship. The team that was relegated, Sheffield United, sued West Ham, settling out of court for £21 million. Adding in the legal fees of £5 million, this whole sorry saga cost the Hammers nearly £32 million.

"It's nothing to do with me"

The club has also had to pay over £5 million in redundancy charges over the last three years, as various appointments have not worked out. This does not include the £2m pay-off to former manager Alan Curbishley, who claimed for constructive dismissal following the sale of Anton Ferdinand and George McCartney without his approval. On the face of it, “Curbs” did not have much of a case, until we discovered that some fool at the club had included a clause in his contract that he had the final say over which players would be sold.

That’s bad enough, but what sort of prize would you award to the half-wit that decided to award the notoriously injury-prone striker Dean Ashton a five-year contract? When Ashton was forced to retire less than a year later, the club was liable for £5.8 million compensation. Although West Ham have made an insurance claim, the chances of success seem low, as evidenced by the accounts not recognising any potential recovery.

Just for good measure, the club managed to lose over £1 million on foreign currency translation. Not bad, when virtually all of your business is conducted in Sterling.

"£2m? Let me think about it"

David Sullivan has also bitterly complained about the wage bill, “The crazy wages the Icelandics were paying brought the club to its knees. I can’t believe the contracts I’ve inherited. Every position is over-paid, whether in administration or on the playing side. All are earning more than they would at other clubs.” When you look at the figures, his arguments carry a lot of weight. Although salaries were cut by £3 million last year, they are still twice as much as they were in 2006 £31 million. In the last five years, revenue has grown by an impressive 140%, but salaries have grown by even more, 200%. This has meant an increase in the crucial wages to turnover ratio to nearly 80%, which the club itself described as “unsustainable”.

This generosity was epitomised by the salaries of the management team. In his first job as manager, Gianfranco Zola was paid £1.9 million a year, while his assistant, Steve Clarke, earned £1.2 million, more than double his equivalent at Manchester United (and he did not have to handle interviews from the BBC, as Mike Phelan does).

The cost growth is not just due to the munificent wages, but also a significant increase in playing staff – from 77 in 2006 to 107 in 2009. It was a similar story off the pitch with “an army of people supporting the first team”, according to Sullivan, though last year there were obviously strenuous efforts to make cuts here, as administrative staff fell from 156 to 110 and part-time employees were slashed from 1,122 to 728.

With such high wages, you would have expected the club to have performed a great deal better than they actually did. In an astonishingly candid admission, the annual report stated, “Clubs with fewer resources and lower levels of expenditure on their squad have achieved a greater level of league and cup success.” Last season, West Ham’s wages were the seventh highest in the Premier League, but they only finished seventeenth. The only other club with a comparable differences between wages and league position was Portsmouth.

Therefore, the club has embarked on a programme of player sales and consequent wage savings, which will mean a reduction in the size of the squad and the replacing of highly remunerated players with less costly replacements. This is reflected in the table above, where we can see that the club had net proceeds of £10.8 million last year, after selling Craig Bellamy, Anton Ferdinand, Bobby Zamora and Matthew Etherington. However, that’s less than 25% of the net expenditure incurred in the previous two seasons. You can clearly see the impact of the Icelandic takeover in late 2006 on the transfer policy.

Their extreme activity once again provoked “open kimono” time in the accounts, which describe many of the group’s investment decisions in this period as “ill judged”. In particular, they note that Calum Davenport and Nigel Quashie, signed in January 2007, only started a combined total of 15 games in three years at a cost of £12 million over the term of their contracts. If you think that’s bad, get a load of the business done the following summer: Freddie Ljungberg and Kieron Dyer have only started 32 games between them and will cost a jaw-dropping £34 million in total.

"Kieron Dyer - no wonder he's smiling"

The club was at pains to avoid a fire sale, as this would have weakened the squad and increased the chances of relegation, but Sullivan told the fans that without his takeover, “£8 million worth of players would have been sold in January and in the summer the club would have needed to sell £16 million worth of players to carry on surviving.”

As you would expect, player amortisation has grown in line with salaries. When a player is bought, the cost is capitalised as an intangible fixed asset and written-off over the length of his contract, as the assumption is that the player would have no value after his contract expires, since he could then leave on a “free”. As an example, Dyer was bought for £6 million on a four-year contract, so £1.5 million costs would be booked to the accounts in each of the next four years. Although costs of buying a player are not fully reflected in the accounts in the year of purchase, over time the amortisation costs can have a real impact, which is what has happened at West Ham with these costs rising from £5 million in 2006 to £20 million in 2009. That’s a lot in the context of the £16 million loss West Ham reported last year, though still much less than a really big spending club like Chelsea (£49 million).

The 2009 loss was nothing new, as the club has only reported a profit once in the last five years, back in 2006, when the results were boosted by promotion to the Premiership and the associated increase in TV money. As Sullivan put it, “This club lost £20m, £40m and £20m in the last three years and there are another £20m losses this year.” Matters financial clearly took a turn for the worse after Gudmundsson appointed Eggert Magnusson as chairman and allowed him to indulge in a form of supermarket sweep.

In fact, the 2009 loss of £16m was less than half of the previous year’s £37 million, a veritable annus horribilis. At the level of the holding company, the loss was even higher at £72 million, mainly due to amortising the goodwill arising from the Icelandic take-over. The losses in the last two years would have been worse still without significant profit on player sales (£16 million in 2008 and £22 million in 2009). On the other hand, exceptional items have severely impacted the bottom line, so that the 2009 loss would have been only £5.7 million in 2009, if these were excluded.

Total revenue last year was £76 million, which was £5 million less than the year before, though in fairness there had been a massive increase in 2008 from £57 to £81 million, largely due to the new three-year Premier League television deal coming into effect. Actually, West Ham’s 2009 revenue is still pretty good – it’s the tenth highest of all English clubs, only just behind Aston Villa and Everton.

The main reason for the drop in 2009 revenue came on the commercial side, where revenue was £8 million lower, following the loss of the XL sponsorship (£4 million) after the holiday company was placed into administration and outsourcing the group’s catering and hospitality operation (£4 million). Although the club did manage to secure SBOBET, a Far Eastern betting firm, as a replacement sponsor at short notice on what was described as “favourable terms”, it is understood that the revenue is much less than the previous deal. The club has also changed kit supplier from Umbro to the Italian firm Macron from the 2010 season. Former chief executive, Scott Duxbury, said that, “Commercially, the club is going from strength to strength”, but this boast does not stand up to scrutiny, if you consider that Spurs earn twice as much commercial revenue as West Ham.

Like almost every other club, television has been the driving force behind West Ham’s revenue growth, rising from £8 million in 2005 (when they were in the Championship) to £44 million in 2009, though this has little to do with the club, being down to the collective Sky Premier League agreement. West Ham now have a huge dependency on television with nearly 60% of their total revenue coming from this stream. West Ham’s share of the Premier League distribution in 2008/09 was £40.4 million, but this will be nearly £6 million less for the season just gone, as they finished eight places lower, so receive a smaller merit payment.

Match day income has been fairly constant at around £18 million a season, but it’s very low compared to other clubs, largely due to the limited capacity of the Boleyn Ground (35,300). Revenue fell £0.7 million in 2009, mainly because the team did not repeat its Carling Cup run from the previous year. However, it was discouraging that the average attendance dropped from 34,500 to 33,250, while season ticket sales also declined from last year’s record of 25,600 to 23,100. To place this revenue into context, Manchester United and Arsenal both earn more than £100 million from match day income, while even Spurs, whose ground is not much larger than West Ham’s, managed to gather £40 million.

"Time to move?"

This explains why Sullivan and Gold are so keen to move the club to the new Olympic Stadium in Stratford with its larger capacity and potential to generate far higher revenue: “Leaving the Boleyn Ground would be a wrench, but the Olympic Stadium is an amazing, once-in-a-lifetime opportunity in a financial and football sense. To move forward, we have to move.” Although the club has made a joint bid with Newham Council, there are many barriers to this project. Three years ago the government rejected this vision, but the former Olympics Minister, Tessa Jowell, has since opened the door to a revised bid, though making it clear that there could be no deal without “money on the table”.

It is unclear who would pay the bill for converting the stadium, reducing the capacity from 80,000 to 50,000, but the costs would be enormous, estimates ranging from £140 million to £200 million. Parallels have been drawn with Manchester City’s conversion of the Eastlands Stadium after the 2002 Commonwealth Games, but this was a planned part of the design, unlike the Olympics Stadium.

The London Organising Committee for the Olympics has also insisted that the running track must remain, which would leave fans far from the pitch. However, David Gold argued, “As an athletics stadium, you’ll get 5,000 people there on three weekends a year. It doesn’t make any economic sense. To claim you’re leaving that as a legacy is like saying we’ll leave it to rot.” He’s got a point and Baroness Ford, Chair of the Legacy Company, conceded that it could be a multi-purpose venue with football and athletics co-existing in the stadium.

"If the hat fits, wear it"

Of course, the other benefit to West Ham’s owners of moving to Stratford would be that they could realise the profit on the club’s major asset by selling Upton Park. In the accounts, this has a net book value of £28 million, but independent surveyors have estimated the value in the real world to be £73 million, which would imply a potential gain of £45 million. As the property market recovers, the profit to Sullivan and Gold could be even higher. If they could persuade the government to foot most of the bill for converting the Olympic Stadium, this would be a “nice little earner”.

In fact, there is much method in the owners’ apparent madness, as West Ham is a club with a lot of potential: it’s well supported, loved by the media and has a recognisable East End brand. The last accounts recognised this, albeit in the driest possible terms, “Forecasts indicate that the group is capable of returning to a position of generating operating profits in forthcoming periods.”

The most obvious step is to cut costs and the club has already embarked on a number of cost saving initiatives. Once again, Sullivan did not mince his words, “There has to be some savings here. This is a club haemorrhaging money.” To that end, the club made the whole squad, with the exception of Scott Parker, available for sale and has already released a trio of mediocre forwards (Mido, Ilan and Guillermo Franco). The belt-tightening also impacted the executive team with chief executive Scott Duxbury and technical director Gianluca Nani being asked to pack their bags. And, of course, Sullivan also sacked the manager, even though he had said immediately after the takeover, “Zola is absolutely staying. I can say that categorically. We believe in our managers and give them the time and support they need.”

"Wake me up, before you go go"

However, there are only so many costs you can cut, so at some stage the club will need to look for revenue growth. They’re unlikely to get much in the near future on the commercial side, as they’ve signed agreements with their current sponsors until 2013. Nor will they be able to greatly increase match day revenue, as it would be difficult to raise ticket prices in the current economic climate. Moving to the Olympic Stadium is the big hope, but even that would not take place (if it is approved) until 2015. More encouragingly, they will benefit from the new Premier League television deal, which kicks-off next season. As a minimum, they will receive £10 million more, due to the significant increase in overseas rights. Furthermore, each additional place in the league is worth around £800,000, so if they finished up in the top ten, which is not beyond the realms of possibility, then they would earn another £6 million.

On the other hand, if the club were to be relegated, this would severely dent their prospects. When asked about this possibility, Sullivan’s response was telling, “It would be absolutely horrendous – like Armageddon.”

The new owners have made great play on being West Ham fans: Gold was born across the road from Upton Park and actually played for the youth team, while Sullivan was born nearby in Hornchurch. However, their constant mentions of their roots brings to mind the classic quote from former Crystal Palace chairman, Simon Jordan, “If I see another David Gold interview on the poor East End Jewish boy done good, I'll impale myself on one of his dildos” – a reference to Gold’s main business (a retailer of, ahem, adult goods).

"Simon Jordan - a cross between Spandau Ballet and a clay court"

At times, the owners do indeed speak just like other fans, “I apologise to every supporter for that pathetic showing”, said Sullivan after an embarrassing home defeat. Gold claimed they would “push the boat out” and dip into their own pockets to buy quality players, while Sullivan was of the same opinion, “One year, we’ll chase it, knowing we’ll run up a £30-40 million loss.”

They maintain that they have bought the club on a mercy mission, but it’s intriguing that Sullivan predicted two years ago that he would be able to take advantage of the Icelandic owners, “They might want to say to me, ‘Come and buy half the club and make it work for us’, because they have done some appalling things at West Ham.” Their ambition was highlighted in January, when they announced a “seven-year plan to get them into the Champions League.”

However, Birmingham City fans might remember a similar promise of a five-year plan to take their club up from the Championship into the Premier League. Instead, 18 months later, they were relegated to League One. To be fair, Sullivan and Gold ultimately did steer the club into the Premier League, where they are now solidly established, profitable and virtually debt-free. Most commentators acknowledge that they did a good job at the Midlands club, including developing the stadium, though some fans have bemoaned the higher ticket prices and the club’s lack of ambition. What is without doubt is that Birmingham City was an extremely good investment for Sullivan and Gold. They bought the club 16 years ago for £1, transformed it and sold it last year for a cool £82 million.

This time round, they might need a little help, so the club has appointed Shore Capital to raise £20-40 million in fresh investment, presumably in order to pay back the £35 million of loans which are due for repayment in just a year’s time (August 2011). We cannot know for sure, as the fundraising is being handled via a private placement, so the club can keep financial disclosure to a minimum. Sullivan has revealed that their preferred option is to find other investors who want a 5% or 10% stake. He has already invited Tony Fernandes, owner of Air Asia and one of the rival bidders for the club, to come on board and has even flown to Dubai to hold talks with potential Middle East investors.

"Do you want to know a secret?"

The reality is that West Ham’s business model is “unsustainable” – not my word, but their own Finance Director’s - as it is dependent on continued financial support from the owners or increased bank borrowings. The last three years have seen a combined net cash outflow of £50 million, which has only been compensated by equivalent financing, either via the issue of shares or more loans.

This must be why West Ham’s owners are so eager to pronounce on football’s economic problems. Gold gave us his views on debt, “Controlling debt is one of the fundamentals that the Premier League should be addressing. We almost need to be saved from ourselves. Because we're in such an extraordinary business we are subject to building debt because we're under pressure from fans, other board members, the manager, the players.” Sullivan then took aim at players’ wages, “Maybe the ultimate solution would be a salary cap. Other than that I just don't see an end to it – of wages out of all proportion to the turnover of the clubs. Somehow there should be some sort of control.”

All very admirable, but there are some obvious contradictions with West Ham’s own actions. Just after asking everyone at the club to take a 25% cut in their salaries, Sullivan was willing to offer the prolific Ruud van Nistelrooy £100,000 a week, even though his best days are clearly behind him. While understandably complaining about the excessive spending of the previous regime, he simultaneously handed the unfit Benni McCarthy a £50,000 a week contract that will see him through to his 35th birthday (the same player who was rejected by South Africa for being overweight).

On the one hand, Sullivan is against the benefactor model, but they are personally paying for vice chairman Karren Brady, who worked for them at Birmingham, out of their own pocket. Similarly, the owners are not taking a salary themselves, as part of their cost containment campaign.

"The Brady Bunch"

To be fair, Sullivan and Gold do seem to be focused on taking care of the club’s finances, rather than themselves, unlike many other owners we could mention. Although they possibly got the club on the cheap, they are making all the right noises. Gold said, “Our job is to reduce the debt and at the same time to improve the squad. If that means we have to put some money in, then that’s what we’ll do. WE will do that. We will not go and borrow it, knowing that if we fail, the football club will be landed with the debt.”

Their confidence in their own abilities provides some comfort, with Sullivan painting a bright future, “We are taking over an incredibly bad situation. However, we will sort it out, because we are good at it.” Whether the happy couple live up to that pledge or are just a couple of Cockney chancers, only time will tell. For the sake of West Ham fans, who have had to put up with more than their fair share of broken promises, let’s hope that they can deliver and it’s not just another set of dreams that fade and die.