Monday, January 16, 2017

Everton - Pressure Drop

Although Everton reached two domestic cup semi-finals in 2015/16 (something the club had not done since 1984), their performances were disappointing in the Premier League, as they finished 11th for the second successive season. As chairman Bill Kenwright observed, “Ultimately, our final league positions over the last two seasons were not good enough.”

This culminated in the decision to sack manager Roberto Martinez, replacing him with former Dutch international Ronald Koeman, who was tempted to leave Southampton for the project at Everton.

This was a clear statement of intent by new majority owner, Farhad Moshiri, an Iranian billionaire, who bought a 49.9% stake in the club for a reported £85 million in February 2016 after selling his Arsenal shareholding to business partner Alisher Usmanov.

Moshiri explained his managerial choice thus, “For our club to compete in the north-west of England, which is the new Hollywood of football with Guardiola, Mourinho, Klopp, we needed a star to stand on the touchline, so I got Koeman.”

The club also brought in a new director of football in the shape of Steve Walsh, who had been responsible for some astute player recruitment at surprise champions Leicester City by scouting the likes of Riyad Mahrez, N’Golo Kanté and Jamie Vardy.

"Rom, if you want to"

Everton had been looking to secure new investment for many years, but Kenwright is convinced that he has found the perfect investor: “I’m more positive now about the future of our great club than I’ve been during my time as Chairman. I have absolutely no doubt that in Farhad Moshiri we have found someone not only with the wherewithal - and we all know how important that is these days - but also with a deep understanding of the game and a growing appreciation of all things Everton.”

This new investment is key to Everton’s future prospects and should represent a substantial change after years of caution and thrift. Certainly, Moshiri is talking a good match: “The way to compete is to build a big stadium, to increase our merchandising and commercial income. That is what we will do.”

He added, “We needed a strong balance sheet, so I paid off the debts. We are now very flexible financially. We have no restrictions to spend.”

Before his departure, the ebullient Martinez said, “financially we can compete against anyone in world football”, which seemed a bit over-the-top, but for the first time in ages Everton do appear to have a solid plan. As part of the new strategy, Moshiri will clearly make funds available to strengthen the squad, which will give the Blues a fighting chance on the pitch.

The need for new investment was highlighted by the publication of Everton’s financial results for the 2015/16 season, which included a hefty loss of £24.3 million, considerably higher than the previous season’s £4.6 million, though the bottom line was adversely impacted by a significant  £11.3 million exceptional payment “to former employees and other costs in relation to the change in coaching staff in the year”.

 This obviously included paying out the remainder of Martinez’s contract. It is not clear whether the reported £5 million compensation paid to Southampton to secure Koeman’s services is also included, but my guess would be that will only be reflected in next year’s figures, given that the Dutchman signed his Everton contract on 14 June, i.e. after the 2015/16 accounts were closed. Furthermore, Martinez’s pay-off was reported in the media to be in the region of £10-12 million.

Revenue fell £4 million (3%) to £121.5 million from a record £125.6 million in 2014/15, when Everton reached the last 16 in the Europa League. This contributed to commercial income decreasing by £4.6 million (18%) to £21.4 million, as the club “missed out on performance bonuses from its partners and commercial revenues from UEFA.”

"Have I told you, Leighton?"

The absence of European football also meant that gate receipts were £0.3 million (2%) lower, though this was largely offset by reaching the semi-finals of the FA Cup and Capital One Cup. Broadcasting income was slightly higher at £82.5 million, due to Everton being shown live one more time.

Costs continued to grow with the wage bill rising £6.5 million (8%) to £84 million and player amortisation up £3.3 million (17%) to £22.4 million. Other expenses also increased by £1.5 million to £30.4 million.

In contrast, profit on player sales rose £4.5 million to £7.8 million, while net interest payable was £2.7 million lower at £3.7 million. It should be noted that the 2014/15 interest was restated following the transition to Financial Reporting Standard 102.

These financials were noting to write home about, as confirmed by chief executive Robert Elstone, “The results reflect a challenging year for the club. Performance on the pitch directly impacted commercial income with key deals reduced as a result of the club’s finishing position.”

Traditionally, football clubs have lost money, but the environment has largely changed in the Premier League these days, thanks to the combination of surging TV money and Financial Fair Play regulations, which has meant that top-flight English clubs have never been richer.

In fact, Everton are one of only two clubs that have so far published 2015/16 accounts that have reported a loss. The other one is Chelsea, and they would also have been profitable without £75 million of exceptional payments (mainly the termination fee for their shirt sponsorship deal).

At the other end of the spectrum, we find the two Manchester clubs with United and City announcing healthy pre-tax profits of £49 million and £20 million respectively. The other Premier League clubs that have released 2015/16 accounts to date were also profitable: Norwich City £13 million, Arsenal £3 million and Stoke City £2 million.

This continues the trend of the 2014/15 season, when only six of the 20 Premier League clubs made losses. This group largely comprised clubs that have been badly run (Aston Villa, Sunderland and QPR), but also included Chelsea, Manchester United and, yes, Everton.

In fairness, one of the drivers for Everton’s poor financial performance has been the lack of profits from player sales. This activity can have a major influence on a football club’s bottom line, as shown in 2014/15 by Liverpool (£56 million) and in 2015/16 by Chelsea (£49 million).

In contrast, Everton only generated £8 million of profit from this activity, mainly due to the transfer of Steven Naismith To Norwich City, though this was higher than the £3 million reported in 2014/15.

Of course, Everton have more often than not lost money, reporting losses in eight of the last 11 years. They were consistently loss-making between 2006 and 2012 (with a cumulative £45 million loss in those seven years), though they did at least restrict their annual losses to manageable levels. There was then some improvement in 2013 and 2014 before a return to losses in 2015 and 2016.

As we have seen, this is partly due to the declining impact of player sales in the last two seasons. Indeed, the £28 million profit in 2014 was almost entirely down to the sale of Marouane Fellaini to Manchester United. It is fair to say that in many years Everton have effectively subsidised their underlying deficit with the sale of a major player, despite Kenwright claiming that Everton are “not a selling club.”

Over the last decade, Everton’s aggregate loss before tax was £33 million, but this would have been significantly worse without £113 million of profits from player sales in the same period.

Next year’s accounts will benefit from the £47.5 million sale of defender John Stones to Manchester City, which will help Everton swing back into the black (along with the additional money from the new TV deal).

The club has noted that the balance sheet “substantially undervalues” players such as Romelu Lukaku and Ross Barkley, especially as no cost is ascribed to home grown players. Of course, Everton would almost certainly want to retain such talent, but they would boost their profits if they were to sell.

To get an idea of underlying profitability and how much cash is generated, football clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation), as this metric strips out player trading and non-cash items.

In Everton’s case this highlights their operational difficulties in the past two seasons, as their EBITDA has fallen from £25 million in 2013/14 to just £7 million in 2015/16 (excluding exceptional payments). The major improvement in 2014, following many seasons of cash break-even, was largely due to the first year of that Premier League TV deal three-year cycle, so we could anticipate a similar jump in 2016/17 with the new TV deal – at least £9 million based on the operating profit projection at Everton’s AGM.

This is much-needed if we look at EBITDA in the Premier League, which shows that Everton are a long way behind the elite with Manchester United leading the way with an astonishing £192 million, followed by Manchester City £109 million and Arsenal £82 million. In other words, United’s cash profit is an incredible 27 times as much as Everton’s.

The only Premier League clubs with lower EBITDA than Everton were Stoke City, Sunderland, Swansea City and Aston Villa, which is a shocking state of affairs for a club of Everton’s history. No wonder that Moshiri has been welcomed with open arms, as he will definitely grow the club’s revenue.

Everton made great play of the fact that 2015/16 was the “third successive year we posted turnover in excess of £120 million.” That’s one way of looking at it, but another less charitable view would be that revenue has essentially been flat for the last three seasons.

Since 2013 revenue has grown by £35 million (41%), though most of this is down to the increasing TV deal (£27 million), which is thanks to the central Premier League negotiating team, as opposed to the club’s board. In fairness, commercial revenue has grown by £8 million in this period, while gate receipts were unchanged at just under £18 million (though this is a bit misleading, as it does not take into consideration the club’s restatement of the revenue categories in 2014).

At the recent AGM Everton projected revenue of £172.5 million in 2016/17, a year-on-year increase of £51 million, almost all of which is driven by the new Premier League broadcast deal. The club’s challenge has been to differentiate itself from other clubs by growing commercial income. Although they have been unsuccessful in the past, Moshiri will surely change that for the better.

The importance of revenue growth is clear when we compare Everton’s £122 million to the Premier League elite, e.g. Manchester United earned more than half a billion, which is almost £400 million higher than the Blues. That’s an enormous financial advantage – every season.

In fact, the top four clubs all earn well above £300 million: United £515 million, Manchester City £392 million, Arsenal £351 million and Chelsea £329 million, while Liverpool and Tottenham generated £298 million and £196 million respectively in 2014/15. Little wonder that Moshiri referred to “a mini league emerging this year of six clubs”

Although it could be argued that Everton are not doing too badly in revenue terms, as they are the 8th highest in the Premier League, there is a distinct bunching of clubs in the £100-120 million range. In other words, Everton’s financial advantage over the other clubs is nowhere near as much as their disadvantage compared to the top six.

Moshiri acknowledged this when speaking about Koeman’s objectives: “He achieved eighth and seventh with Southampton. He needs to improve on that, but it is a very difficult landscape now.”

One point worth noting is that Everton’s revenue would be around £8 million higher if the gross revenue from the outsourced catering and kit deals were to be added back.

On the bright side, Everton had the 18th highest revenue in the world in 2014/15, which represented the club’s joint highest position in the Deloitte Money League. That’s obviously a fine accomplishment, but it does not really help Everton much domestically, as no fewer than 17 Premier League clubs feature in the top 30 clubs worldwide by revenue.

As Deloitte observed, “This is again testament to the phenomenal broadcast success of the English Premier League and the relative equality of its distributions, giving its non-Champions League clubs particularly a considerable advantage internationally.”

One technical aside: Everton include the commercial elements of TV deals within commercial income, even though most other clubs classify it as broadcasting income, and Deloitte have duly reduced commercial and increased broadcasting (though the total revenue is the same).

All these reclassifications make it difficult to analyse Everton’s revenue mix, but a couple of things are clear. First, match day has become progressively less important with only 15% of total revenue coming from this stream. Second, like so many Premier League clubs, there is huge reliance on TV money, which generates just under 70% of their turnover.

That might sound a little concerning, but it is fairly common business model in the Premier League. For example, in 2014/15 nine clubs actually had a greater reliance on TV money than Everton, with three of them (Burnley, Swansea City and WBA) earning 80-85% from broadcasting. This dependency will further increase with the blockbuster 2016/17 deal.

In 2015/16 Everton’s share of the Premier League TV money rose 3% (£2 million) from £81 million to £83 million, due to being broadcast live on one more occasion (18 vs. 17). The distribution of these funds is based on a fairly equitable methodology with the top club (Arsenal) receiving £101 million, while the bottom club (Aston Villa) got £67 million.

Most of the money is allocated equally to each club, which means 50% of the domestic rights (£21.9 million in 2015/16) and 100% of the overseas rights (£29.4 million). Merit payments (25% of domestic rights) are worth £1.2 million per place in the league table and facility fees (25% of domestic rights) depend on how many times each club is broadcast live.

There was also £4.5 million of commercial revenue awarded to all Premier League clubs, though I suspect that Everton might have reported this within commercial income, even though most other clubs classify it as broadcasting income. This would help explain why Everton’s total broadcasting income in the accounts was only £82.5 million, even though their Premier League distribution was £83.0 million.

"The Liberty of Mason Holgate"

Either way, Elstone was right to draw attention to the new TV deal stating in 2016/17: “We are also benefiting from the increased revenues under the significant new broadcast deal” The AGM projected an increase in broadcasting income to more than £130 million, based on 55% growth in the Premier League deal (70% domestic and 40% overseas). The importance of success on the pitch was also emphasised, as each league place under the new deal would be worth an additional £1.9 million, compared to £1.2 million for the previous deal.

Former Everton manager Roberto Martinez welcomed the new TV deal, as he believed that it would give the middle-tier clubs greater chance of success: “The new television contract has given an opportunity to every club to do something different. They can look at themselves, thinking this is the first time that we have been able to spend a certain amount of money, and suddenly you develop a belief that allows you to be competitive.”

Another way of looking at this is that Everton earned more from broadcasting in 2014/15 than Bayern Munich, Borussia Dortmund, Atletico Madrid, Roma, Milan and Paris Saint-Germain – even before the £45-50 million increase in 2016/17.

Everton have only qualified once for Europe in recent years, earning €7.5 million from the Europa League in 2014/15. This was a lot less than the €20.9 million that Tottenham received for reaching the same stage the following season.

Not only did the new UEFA television deal deliver 38% more money in 2015/16, but a greater proportion was allocated to the Europa League, so that prize money for this competition shot up by 71% (even though the rewards are still much higher in the Champions League).

Regular qualification for Europe would be highly beneficial for Everton, as can be seen by the money earned by English clubs over the last season. Chelsea lead the way with €253 million, largely thanks to their Champions League triumph in 2012, but maybe a better comparative would be Liverpool, who earned €77 million in this period, i.e. €69 million more than Everton.

This only relates to the broadcasting income, but additional revenue would also come from more gate receipts and higher commercial income via success clauses in commercial deals.

Everton’s gate receipts fell by £0.3 million (2%) from £17.9 million to £17.6 million in 2015/16, largely due to the absence of European competition, though the impact of this lost revenue was reduced by increased revenue form reaching the semi-final of both domestic cup competitions compared to third round exits in 2014/15.

The average attendance fell slightly to 38,132, though this was only the second time in 20 years that consecutive seasons posted averages above 38,000. Moreover, this season attendances have rebounded above 39,000, which would be the highest attendance since 2003/04.

Elstone commented, “We’re delighted to be projecting an average gate in excess of 39,000. We look set to be full for every game in 2016/17. Of course, the reason we’re full is almost 32,000 season ticket holders.”

This is partly due to Everton’s admirable commitment to affordable pricing. The club froze ticket prices in 2015/16, while they actually reduced all season ticket prices by 5% for the 2016/17 season, representing a free game compared to the previous season.

They have continued this trend by announcing that all season ticket prices will be reduced or frozen for the 2017/18 season and have introduced a 12-month payment option. The maximum season ticket price is £565, ensuring that no adult will pay more than £30 a game. There is also a new £380 season ticket for 22-24 year olds, so youngsters will only pay £20 a game.

Elstone explained the club’s philosophy: “We feel confident that our current pricing structure represents great value for money and holds up well when compared to our rivals. Most importantly, it makes football at Goodison affordable for young fans.”

As a result of these pricing initiatives, Everton’s match day revenue of £18 million will continue to lag behind the top six clubs: Manchester United £107 million, Arsenal £100 million, Chelsea £70 million, Liverpool £59 million, Manchester City £53 million and Tottenham £41 million.

Elstone confirmed the impact on the financials, “The outcome of this affordable pricing strategy is a significant drop in what we generate from each seat for each game”. However, he added, “We were conscious of the substantial uplift in the value of our media rights next season.”

"Working for the Yannick Dollar"

Of course, a new stadium would be a game changer for Everton. It would be a wrench to leave Goodison Park, one of the most atmospheric grounds in England, but it is simply not fit-for-purpose in the modern era with its limited capacity and inadequate facilities.

As Moshiri said, the club needs a new stadium that “rewards the loyalty and passion of our fans.” He continued, “We need a big stadium, no question about it. We have done the hard bit, because the club was restricted to move or expand Goodison by banking covenants, but I have paid the debts, so we are free to do what we want and we have the finances to do it.”

There have been a few false dawns with three other proposed stadium moves coming to nothing: first King’s Dock in 2003, then “Destination Kirkby” in 2009, most recently Walton Hall. However, it now feels like it could really happen.

"Enola Gueye"

There are two potential sites: Bramley Moore Dock and Stonebridge Cross in Croxteth. The dock site is clearly the club’s preferred option, as confirmed by Mayor Joe Anderson at Everton’s AGM, “Everybody in this room wants the waterfront site. This is the most exciting opportunity this club has had in decades.”

Elstone also favoured this site, though he did sound a note of caution: “The opportunities are much greater at that site, but so are the costs. We have to find answers to some of the uncertainties and risks, because it is the biggest decision the club will ever make.”

He continued, “(There has been) solid progress on many fronts, most encouragingly in our partnership with Liverpool City Council and its desire to support our efforts to find the money to make the stadium viable. We are optimistic about the new stadium prospects. It’s an optimism tempered by some significant issues that need to be resolved before we can move forward.”

The final word (for now) on the new stadium goes to Moshiri, which is fair enough, as he may well end up funding most of the required £350 million plus: “In our mind, we know where we want to go. We are committed.”

Everton’s reported commercial income dropped 18% (£4.6 million) from £26.0 million to £21.4 million in 2015/16, comprising £9.3 million for sponsorship, advertising and merchandising plus £12.1 million for other commercial activities. The fall was due to the absence of commercial revenue from the Europa League.

As we saw earlier, it is not completely clear what the club has included within commercial income and the Deloitte like-for-like figure for 2014/15 was adjusted downwards to £20.1 million, as they excluded the “commercial” element of broadcasting income. This meant that Everton had the lowest commercial revenue of any club in the Money League Top 20.

That said, the comparisons are a bit misleading, as Everton have outsourced their catering and kit deals. If they were to report these revenues gross (like most other clubs), their commercial income would rise by £8 million.

"Don't cry for me, Argentina"

Whatever it consists of, Everton’s commercial income of £21 million pales into insignificance compared to heavyweights such as Manchester United, who generate an amazing £268 million from this activity. That comparison might be a little unfair, but it is worth noting that Tottenham earned £60 million (in the 2014/15 season).

It is clear that Everton need to address their commercial shortcomings, as Elstone acknowledged, “We will continue to look for growth in all areas, in particular, as we approach the mid-point of the final year of the current Chang partnership, with a clear focus on our main sponsor opportunity.”

It is therefore very encouraging (“great news” per Elstone) that the club has “signed up £75 million in new revenues” in the past few weeks. The chief executive noted that the two deals already finalised will run over a five-year period, implying £15 million a year.

Elstone spoke of “a 300% increase in the value of our shirt sponsors”, which would suggest that the new deal would be worth £21.2 million a year, given that the current deal with Thai beer producer Chang is worth £5.3 million a year (£16 million over three years).

That would represent a notable increase, but there have been some suggestions that Elstone’s comments could have been misconstrued, e.g. if the 300% increase referred to the total value of the deal, that would imply £64 million over five years, meaning an annual value of £12.8 million. My guess is that the increase refers to the combined value of the front of shirt and additional sleeve sponsorship, but we should soon know.

Either way, it’s solid progress on the commercial front with talk of Kenyan online sports betting firm SportPesa being the new shirt sponsor. One possibility for a more lucrative deal would be to give the new partner first refusal on stadium naming rights.

Encouraging stuff, but to place this into perspective, the leading clubs have secured much higher shirt deals: Manchester United (Chevrolet) £56 million, Chelsea (Yokahama) £40 million, Arsenal (Emirates) £30 million, Liverpool (Standard Chartered) £25 million.

The club has also announced a significant new sponsorship deal for the Finch Farm training ground and academy. This is with USM Holdings, the holding company of Alisher Usmanov, Moshiri’s business partner. The fact that Usmanov is helping out his mate has raised some eyebrows, as the Russian remains an Arsenal shareholder, and it is likely that the deal would be reviewed for “fair value” by UEFA (assuming it is deemed a “related party” transaction) if Everton qualify for Europe.

Everton’s kit supplier deal with Umbro was described as a club record and is reportedly worth £6 million a season, which would be twice as much as the previous Nike contract, though the accounts suggest that it might not be so high in reality.

This is again a long way behind the deals at other clubs, e.g. Manchester United (Adidas) £75 million, Chelsea (Nike) £60 million, Arsenal (Puma) £30 million, Liverpool (New Balance) £28 million.

It will also be interesting to see if Moshiri reviews the 10-year Kitbag deal, which provides a guaranteed £3 million a year plus royalties for running the retail operation. Elstone has described this as a good arrangement that “de-risks Everton in a notoriously difficult business sector”, but it does betray a lack of ambition.

Everton’s wage bill rose 8% (£6.5 million) to £84 million, following continued investment in the squad, with the additions of Tom Cleverley, Aaron Lennon, Ramiro Funes Mori, Gerard Deulofeu and Mason Holgate. In addition, new contracts were awarded to James McCarthy, Kevin Mirallas, Mo Besic, Brendan Galloway and Bryan Oviedo.

Furthermore, the average number of employees increased from 274 to 315, including playing, training and management up from 98 to 108, youth academy up from 38 to 47, marketing and media up from 32 to 41 and management and administration up from 71 to 81.

The wage growth increased the wages to turnover ratio from 62% to 69%. Elstone said that this was still “below the Premier League average”, which does not seem to be the case based on reported figures, though it is accurate if we add back the outsourced commercial revenue, which reduces Everton’s ratio to 65%.

Following last season’s growth Everton’s wage bill is essentially “best of the rest”, i.e. the highest of those clubs outside the top six. However, it is still dwarfed by the elite clubs: Manchester United £232 million, Chelsea £222 million, Manchester City £198 million and Arsenal £195 million.

This disparity was noted by Koeman: “We have a lot of ambition and we like to do the best that is possible. But you have to look to the big clubs with the possibilities and the players they have. Nobody expected Leicester to win last season, but that will not happen again.”

Clearly, Moshiri will try to increase the wage bill to better compete. Indeed, Elstone has already advised, “Projected wages are set to increase significantly in the current season, reflecting a further commitment to player recruitment and new contracts for existing players.” The AGM forecast a wage bill of £111 million for 2016/17, an increase of £27 million.

However, Everton will need to consider the Premier League’s Short Term Cost controls, which restrict the annual player wage cost increases to £7 million a year for the three years up to 2018/19 – except if funded by increases in revenue from sources other than Premier League broadcasting contracts, e.g. gate receipts, commercial income and profits on player sales.

One thing that is quite striking in Everton’s accounts is the growth in other operating costs, rising from £22 million to £30 million in the last three years without any substantial explanation.

This seems quite high for a club of Everton’s size, especially as the retail and catering businesses have been outsourced, which means that other operating costs should be lower than other clubs (as net profits are reported in revenue).

Another cost that can have a major impact on the profit and loss account is player amortisation, which reflects investment in transfers. Basically the more that a club spends, the higher its player amortisation. In this way, Everton’s player amortisation has doubled from just £11 million in 2013 to a £22 million peak in 2016, reflecting increased spending in the transfer market.

The accounting for player trading is fairly technical, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the transfer fee is not fully expensed in the year of purchase, but the cost is written-off evenly over the length of the player’s contract, e.g. Romelu Lukaku was bought for a reported £28 million on a five-year deal, so the annual amortisation in the accounts for him is £5.6 million.

Nevertheless, Everton’s player amortisation of £22 million is not that high for the Premier League and is obviously miles behind the really big spenders like Manchester City (£94 million), Manchester United (£88 million) and Chelsea (£71 million), though it should further increase next year following this summer’s acquisitions.

For the period between 2009 and 2014, despite Kenwright’s protestations, Everton were a selling club, averaging annual net sales of £7 million. However, the last three seasons have seen a return to spending, with average net spend of £21 million, including the club’s record purchase of Lukaku from Chelsea.

Last summer Everton splashed out £45 million to bring in Yannick Bolasie, Ashley Williams, Idrissa Gueye and Maarten Stekelenburg, though they recouped the outlay in one fell swoop by selling John Stones to Manchester City. As Kenwright put it, “While we may not have finally done the amount of business in the summer transfer window we would have liked, we still added considerable strength and experience to our squad.”

Despite the higher spending over the last three seasons, Everton’s net spend is still mid-table in the Premier League, a long way below the two Manchester clubs (City £299 million and United £275 million), though it was higher than Liverpool £55 million.

However, Everton have been one of the most active clubs in the January transfer window, already purchasing midfielder Morgan Schneiderlin from Manchester United for a fee rising to £24 million and 19-year-old forward Ademola Lookman from Charlton for £11 million. They have also reportedly made offers for Standard Liege forward Ishak Belfodil and Atalanta midfielder Franck Kessié.

Everton’s net debt rose by £23.5 million from £31.3 million to £54.8 million with gross debt increasing by £17.6 million from £40.0 million to £57.6 million and cash falling by £5.9 million from £8.7 million to £2.8 million.

At the time of the accounts, the debt comprised three elements: (a) 25-year loan of £20 million with Prudential, which bears a high interest rate of 7.79%, leading to annual payments of £2.8 million; (b) a short-term loan of £35 million with Rights and Media Funds Limited (formerly JG Funding), securitised on Premier League TV money, at a 5.2% interest rate; (c) overdraft with Barclays of £2.7 million.

This is all irrelevant now, as Moshiri provided an interest-free loan of £80 million with no agreed repayment data after the account were published. This was used to repay all of the external loans and to pay the exceptional items.

Hopefully, this will bring to an end Everton’s use of opaque loans taken out with mysterious offshore corporations that started with Vibrac, who are based in the British Virgin Islands, though the accounts did note that the club had secured similar funding via a facility repayable on 14 July 2017.

Everton’s debt is by no means one of the highest in the Premier League with four clubs having debt above £100 million, namely Manchester United £490 million, Arsenal £233 million, Sunderland £141 million and Newcastle United £129 million.

Everton also have contingent liabilities of £35 million (£18 million dependent on future appearances and £17 million loyalty bonuses if certain players are still with the club on specific dates), up from £20 million the previous season.

The high interest rate on Everton’s loans has meant that their financing costs have been among the largest in the Premier League. Although nowhere near as much as the interest paid by the likes of Manchester United and Arsenal, this has certainly not helped the club’s finances. The good news is that Moshiri’s interest-free loan should save them around £5 million a season.

This unwelcome burden is emphasised even more when reviewing the cash flow over the last eight years. In that period, Everton generated £84 million of cash, mainly from operating activities £56 million, though this was supplemented by additional loans (net) £18 million and the sale of the old training ground £9 million.

Around 40% of this cash (£34 million) was required for interest payments, which was only £7 million lower than the £41 million (net) spent on players, leaving only £10 million on infrastructure investment.

Looking ahead, there is a sense of optimism around Everton’s future following Moshiri’s investment. Obviously money is no guarantee of success, but it does make it more likely.

There are still some issues with Moshiri pointing out that the club will be somewhat restricted by FFP: “It is not the same as when Chelsea and Manchester City began their projects, which was before Financial Fair Play.” It’s also still not clear whether the Iranian will ultimately become the outright owner of the club.

"Williams, it was really nothing"

However, at least the club now has stronger backing, whereas for the past few years Everton have struggled to compete due to a lack of financial resources. In the shape of Moshiri, they evidently have a man with a plan, including reduction of external debt, increased commercial income and, of course, a new stadium.

Let’s leave the last word to him: “Bill and previous managers kept the club close to the elite for many years, but now we need to look at a sustainable base to be among the elite. It takes time, but we are committed, that’s why we’re here.”

He added, “It’s not enough to say you are a special club – we don’t want to be a museum. We need to be competitive and to win.”

Monday, December 12, 2016

Brighton and Hove Albion - Knockin' On Heaven's Door

It was another case of “so near, yet so far” for Brighton and Hove Albion last season, as the Seagulls missed out on automatic promotion to the Premier League only on goal difference, while a spate of untimely injuries led to defeat in the play-off semi-finals by Sheffield Wednesday, who had finished a full 15 points behind them in the league table.

Chairman Tony Bloom captured the feelings of the Albion fans: “The 2015/16 season was one of the most remarkable and exciting in my 40 years as a Brighton and Hove Albion supporter. The team, under Chris Hughton’s astute leadership, gave us a season to savour – and although we twice missed out on taking that final step to the Premier League, it has laid the foundation for our current season.”

This is the third time in the last four seasons that Brighton have reached the Championship play-offs, only to fall in the semis. This consistency on the pitch is all the more impressive, as it has been achieved under different managers: Guy Poyet in 2013; Oscar Garcia in 2014; and Hughton last year. The only blip came in 2015, when the club slipped back under the far-from-flying Finn Sami Hyypia.

"Many Happy Returns"

Of course, for those with longer memories it is great news that Brighton are still around to mount a challenge, given that they only avoided dropping out of the Football League to the Conference by the skin of their teeth in 1997 with a final day 1-1 draw at Hereford United.

There then followed years of struggle, exacerbated by the problems of finding a suitable ground after the Goldstone was sold to property developers, leading to exile in Kent and a ground share with Gillingham. The club returned to Brighton two years later to the Withdean, an old council-owned athletics stadium where the facilities were far from ideal.

It took 12 years, but finally Brighton moved to the magnificent new Amex stadium in 2011, coinciding with promotion to the Championship. The major investment required to build the stadium (and indeed a superb new training centre) was funded by Bloom, a lifelong fan who became chairman.

He has continued to finance the club, as can be seen by the 2015/16 accounts, which revealed a massive £25.9 million loss, £15.4 million worse than the previous season’s £10.4 million loss. To put that into perspective, that means that Brighton lost more than £2 million a month or around £500,000 every week.

The club said that this underlined Bloom’s commitment and in particular the ambition to reach the Premier League, while the chairman himself explained the strategy: “Our increased losses result directly from an ongoing and growing investment in our playing squad.”

This explains the main reasons for the higher loss, as wages shot up £6.7 million (33%) from £20.6 million to £27.4 million, while player amortisation (the annual cost of transfer fees) also rose £1.4 million (60%) from £2.4 million to £3.8 million. Moreover, the desire to retain players meant that profit from player sales fell £7.5 million from £8.7 million to just £1.2 million.

In addition, other expenses also increased by £1.1 million (7%) from £15.0 million to £16.0 million, largely due to higher costs associated with running the stadium.

The sizeable cost growth more than offset the £1.0 million (4%) increase in revenue from £23.7 million to £24.6 million, mainly due to broadcasting income rising £0.9 million (18%) to £5.9 million, though commercial income was also up £0.5 million (8%) to £9.4 million, driven by catering and events. On the other hand, gate receipts fell £0.4 million (4%) to £9.4 million, primarily due to no home cup ties.

Other operating income was up £0.4 million, thanks to other grants received.

In fairness to Brighton, almost all clubs in the Championship lose money and are reliant on owners’ funding. In 2014/15, the last season where all clubs have published their accounts, losses were reported by 18 of the 24 clubs – in stark contrast to the Premier League where the new TV deal, allied with wage controls, has led to a surge in profitability.

The club that made most money in the Championship that season were Blackpool – and their model is not one to be recommended, as it culminated in relegation to League One. As Bloom noted, “Any Championship club without parachute payments wishing to compete for promotion will inevitably make significant losses.”

That said, Brighton’s loss of £26 million in 2015/16 is likely to be one of the highest in the division. Only two clubs reported higher deficits in 2014/15: Bournemouth £39 million, though their loss was inflated by £9 million promotion payments and an £8 million fine for failing Financial Fair Play (FFP); and Fulham £27 million, but this was impacted by £11 million of exceptional impairment charges.

Brighton could have reduced their loss by accepting some of the lucrative offers received for their top talents, but Bloom noted that the club made a conscious decision “to retain our key players” and “not to cash in on our key assets”.

Consequently, there were no significant player disposals in the 2015/16 season, leading to only £1.2 million profits, probably driven by additional clauses from earlier player sales, as the contingent receivables on transfers have fallen from £2.1 million to £0.8 million in the latest accounts. In comparison, £8.7 million was booked in the previous season, mainly from the sales of Leo Ulloa to Leicester City and Will Buckley to Sunderland.

Although Championship clubs rarely sell players for big bucks, at least compared to the Premier League, this was a useful money-spinner for Brighton in 2014/15 with only four clubs generating more money from this activity. In contrast, the 2015/16 profit of just over £1 million is likely to be one of the smallest in the division.

Of course, losses are nothing new for Brighton. In fact, the last time that they made a profit was back in 2007/08 – and that was less than £1 million and only arose because of a £3.6 million exceptional credit, due to a change in the accounting for the Falmer stadium expenses. Since then, the club has made cumulative losses of £88 million.

Moreover, the losses have been growing. Since promotion to the Championship, Brighton’s total losses have amounted to £71 million, averaging £14 million a season. As finance and operations director David Jones confirmed, “We’ve lost money every year we’ve been (at the Amex).”

Jones added, “While we’re getting a competitive team on the pitch, we’re going to continue to lose money with the revenue streams that we’ve got.” The difference with the top flight is colossal. Jones again, “If we were in the Premier League, we would be able to be a sustainable business that makes an annual profit.”

If they are not promoted, it will be interesting to see what the board decides regarding player sales. Traditionally Brighton have made very little from the transfer market , though there was a change in stance in 2013/14 when the club sold Liam Bridcutt to Sunderland and Ashley Barnes to Burnley, followed by the even more profitable sales in 2014/15.

This summer Brighton could have made a lot of money if they had accepted all the offers they received, e.g. Dale Stephens (Burnley), Lewis Dunk (Fulham) and Anthony Knockaert (Newcastle United). That could have brought in £15-20 million, though obviously would have damaged Brighton’s prospects of promotion.

The current strategy is to “speculate to accumulate”, but as Bloom has admitted, “It would be ridiculous for me or any owner to say that a player is never for sale. There’s always a price for any player.”

Brighton’s strategy is more clearly seen by the club’s alternative presentation of the profit and loss account, which highlights the 29% (£7 million) increase in the football budget in 2015/16.

Chief executive Paul Barber, who has overseen a “pretty radical and dramatic programme of reducing our costs” explained the approach as follows “It gives us more opportunity to put more into the football budget, which should improve our chances of promotion.”

In this way, administrative and operational costs have been cut by 22% since 2012, which has meant that Brighton’s different managers have benefited from a significant increase in the football budget over this period of around 134%, as it has grown from £13 million to £31 million.

Bloom praised his team for “ensuring we remain operationally efficient”, but the reality is that Brighton’s underlying profitability has still been getting worse, as seen by the reduction in EBITDA (Earnings Before Interest, Depreciation and Amortisation).

This metric is considered to be an indicator of financial health, as it strips out once-off profits from player trading and non-cash items. It has been consistently negative at Brighton, but has declined in the last eight years from minus £3 million in 2008 to minus £18 million in 2016.

Unsurprisingly, a negative EBITDA is far from uncommon in the Championship with 21 clubs generating cash losses, though only Nottingham Forest have worse underlying figures than Brighton. In stark contrast, in the Premier League only one club reported a negative EBITDA, which is again testament to the earning power in the top flight.

Brighton’s revenue surged from £7.5 million in 2011 to £24.6 million in 2016 following promotion from League One to the Championship, exacerbated by what can be described as the "Amex effect" with gate receipts being more than four  times as much as Withdean, increasing from £2.3 million to £9.4 million.

In addition, the new stadium has brought more commercial opportunities, leading to income climbing from £3.1 million to £9.4 million. The club could negotiate better deals with sponsors in the higher division (up from £0.8 million to £5.5 million), increase retail sales, e.g. from the stadium megastore (up from £0.5 million to £1.3 million) and make more from catering, i.e. pies and the famous Harveys beer (up from £35k to £1.3 million).

However, the growth since the first season back in the Championship in 2012 is less impressive, amounting to just 11% (£2.5 million) in four years. The fact is that it is difficult to substantially grow revenue streams without another promotion to the top flight.

Brighton’s revenue of £25 million places them around 7th highest in the Championship, but the clubs with the three highest revenues in 2014/15 (Norwich City, Fulham and Cardiff City ) were more than 60% higher with £40-52 million.

Bloom is acutely aware of the challenge this poses: “Our player budget is the highest it has ever been, so we have certainly invested, but we absolutely can't compete financially with relegated clubs like QPR, Burnley and Hull with their parachute payments.”

He’s not wrong, as two of the three clubs he named were promoted back to the Premier League last season, once again proving that money talks in football. Jones reiterated his chairman’s message, noting that this factor “presents difficulties when trying to assemble a playing staff that can compete with clubs coming down from the Premier League, whose TV parachute payments can inflate their revenue to around £40 million.”

Excluding the impact of the parachute payments made to those clubs relegated from the Premier League (£26 million in first year after relegation) Brighton’s revenue would be one of the highest in the Championship. This season the disparity between “the haves and the have nots” will be even larger, as the relegated clubs include Newcastle United and Aston Villa.

Even Chris Hughton has commented on this hurdle, when discussing Newcastle: “They’ve come down with parachute payments, they are a massive club and they are doing their very best to make sure they go straight back up again.”

The majority of Brighton’s revenue comes from the stadium with gate receipts contributing 38%, up from 30% at Withdean, though this is only just ahead of commercial income 38%, following the relatively higher growth rate in the last few seasons. Broadcasting is up to 24%, though this is much lower than the Premier League, where TV money accounts for 70-85% of total revenue at half the clubs.

Clearly, Brighton are more reliant on match day income than most. In fact, in 2014/15 only two clubs were more dependent on this revenue stream: Nottingham Forest and Charlton Athletic.

Despite improved results on the pitch, gate receipts fell for a second consecutive season, decreasing 4% (£0.4 million) from £9.8 million to £9.4 million, largely due to a lack of home cup ties.

Nevertheless, this is still likely to be the highest match day revenue in the Championship in 2015/16, as the only team ahead of them in 2014/15 was Norwich City, who were promoted to the Premier League last season. It will be another story this year, due to the arrival in the second tier of Newcastle and Villa with their large crowds.

Average attendance slipped slightly from 25,640 to 25,583, partly due to the knock-on impact of the disappointing 2014/15 season, but this was still the second highest in the Championship, only surpassed by Derby County 29,663, though ahead of all three promoted clubs: Middlesbrough 24,627, Hull City 17,199 and Burnley 16,709.

Since the move to the Amex, attendances had been steadily rising from the 7,352 at Withdean, as the new stadium finally met latent local demand for tickets. Brighton’s potential has been highlighted this season by three games selling out (Norwich, Villa and Fulham). In fact, the club has in excess of 22,000 season ticket holders and 1901 Club members.

Ticket prices are among the highest in the Championship. According to the BBC’s Price of Football survey, Brighton has the second highest cheapest season ticket (only below Norwich) and the third highest most expensive season ticket (behind Ipswich and Fulham). However, the survey did note that tickets include a travel subsidy to and from the ground for fans by public transport or use of the park-and-ride option, valued at £4 per game for adults.

It is also worth mentioning that Brighton supporters are happier with their match day experience than any others according to a Football League study, partly due to the magnificent facilities that are second to none, including free wi-fi and VIP padded seats. The club is also good to away fans, lighting the concourse in their colours and having their local beer on tap. The only fly in the ointment is the appalling “service” from the dreaded Southern Rail.

The good news is that the club froze most ticket prices in 2015/16 and have restricted price rises in 2016/17 to no more than a couple of pounds per match. Barber said this was to reward fans for “the ongoing loyalty and support they’ve shown to the club.”

Brighton’s broadcasting revenue rose 19% (£0.9 million) from £4.9 million to £5.9 million in 2015/16, which was attributed to an increase in the Football League basic distribution plus the club being shown more times on live TV.

In the Championship most clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to around £4 million of central distributions: £2.1 million from the Football League pool and a £2.3 million solidarity payment from the Premier League. There are also payments for each live TV game: £100,000 home; £10,000 away.

This might not sound much, but Barber argued, “TV income is extremely important for all clubs, including ours”, adding, “without revenue from Sky TV, ticket prices would go up.”

However, the clear importance of parachute payments is once again highlighted in this revenue stream, greatly influencing the top nine earners in 2014/15. Nevertheless, it should be noted that these payments are not necessarily a panacea, e.g. Middlesbrough secured promotion last season, even though their broadcasting income of £6 million was less than half the size of those clubs boosted by parachutes.

Looking at the television distributions in the top flight, the massive financial chasm between England’s top two leagues becomes evident with Premier League clubs receiving between £67 million and £101 million in 2015/16, compared to the £4 million in the Championship. In other words, it would take a Championship club more than 15 years to earn the same amount as the bottom placed club in the Premier League.

The size of the prize goes a long way towards explaining the loss-making behaviour of many Championship clubs. This is even more the case with the new TV deal that started in 2016/17, which Barber described as “astonishing”. This will be worth an additional £35-60 million a year to each club depending on where they finish in the table.

Even if a club were to finish last in their first season in the top flight and go straight back down, their TV revenue would increase by an amazing £95 million. They would also receive a further £71 million in parachute payments, giving additional funds of around £166 million. If they survived another season, you could throw in another £120 million.

Of course, if they did go up, Brighton would also have to spend more to strengthen their playing squad, but the net impact on the club’s finances would undoubtedly be positive, as evidenced by the improvement in the bottom line for those clubs promoted in the past few seasons.

As we have seen, parachute payments make a significant difference to a club’s revenue and therefore its spending power in the Championship. From this season, these will be even higher, though clubs will only receive parachute payments for three seasons after relegation. My estimate is £83 million, based on the percentages advised by the Premier League: year 1 – 55%, year 2 – 45% and year 3 – 20%.

The other point worth emphasising is that if a club is relegated after only one season in the Premier League, it will only benefit from parachute payments for two years.

There are some arguments in favour of these payments, namely that it encourages clubs promoted to the Premier League to invest to compete, safe in the knowledge that if the worst happens and they do end up relegated at the end of the season, then there is a safety net. However, they do undoubtedly create a significant revenue disadvantage in the Championship for clubs like Brighton.

Commercial income grew by 5% (£0.5 million) from £8.9 million to £9.4 million, comprising commercial sponsorship and advertising £5.5 million, catering and events £1.3 million, retail £1.3 million, academy grant £0.9 million, other income £0.3 million and women and girls £0.1 million. The main driver for the growth was a £0.4 million increase in catering and events, primarily as a result of the Rugby World Cup matches hosted at the Amex.

In the new world of FFP, Bloom has said that the club “had to adapt and move quickly to establish a sharper commercial focus. We had to focus on the inherent value of our brand.” The club’s success in this area is reflected by Brighton having one of the highest commercial revenues in the Championship, only behind Norwich City and Leeds United in 2014/15.

This is despite the fact that Brighton now only report the net catering commission in revenue, whereas in previous seasons all the gross revenue was included in revenue with the expenses shown in costs.

"Back on the Shane gang"

What has been particularly impressive in recent years is the increase in sponsorship, though it remained static in 2015/16, largely due to the contractual cycles. American Express are not only shirt sponsors, but also naming rights partner for the stadium and the training ground. This multi-year agreement, signed in March 2013, was described by Barber as “the biggest in the club’s history.”

Similarly, Barber said that the 2014/15 Nike deal, replacing Errea after 15 years as the club’s kit supplier, represented “a significant increase on our existing commercial arrangement.”

Interestingly, the club has applied for planning permission for a 150 room hotel alongside the stadium, though the City Council has to date rejected the application. Barber said that this “would have been a valuable addition to our non-matchday revenue.” They remain “hopeful of a successful outcome”, which is just as well as they have to date spent over £2 million on this development.

Brighton’s wage bill shot up by 33% (£6.7 million) from £20.6 million to £27.4 million in 2015/16, “in order to be as competitive possible and give ourselves the best possible chance of success on the pitch.” This would have included high wages for the returning Bobby Zamora, even though he arrived on a free transfer.

It is worth noting that since 2012, the first year back in the Championship, the wage bill has grown by £12.7 million (87%), while revenue has only increased by £2.5 million (11%).

This is all seen on the pitch, given the significant reduction in administrative and operational expenses. For example, in 2015/16 the number of players rose from 61 to 73, while other staff were flat at 197.

Despite this growth, Brighton’s £27 million wage bill is still only the eighth highest in the Championship, so promotion would indeed be a fine achievement. As a comparative, the top three in the Championship in 2014/15 were Norwich City £51 million, Cardiff City £42 million and Fulham £37 million.

Barber understands this challenge: “We haven’t got anywhere near the biggest budget in the division. We’re probably 10th or 11th. So we’ve had to spend wisely, and eke out every ounce of value from every deal.”

That said, it would be no surprise if Brighton’s wage bill further rose this season, as they have been extending contracts for a number of important individuals, including Hughton, Beram Kayel, Solly March and Conor Goldson, though this will ensure a decent price if they are sold.

The remuneration for the highest paid director, who is not named, but is surely Paul Barber, has increased from £558k to £578k. This is a lot of money, but  Barber is really a Premier League level chief executive, who has been pretty successful in cutting operational expenses and renegotiating many of the sponsorships.

Brighton’s wages to turnover ratio increased (worsened) from 87% to 111%, the highest since 2009 when the club was in League One. This is not exactly great, but it is by no means one of the highest in the Championship. In 2014/15 no fewer than 11 clubs “boasted” a wages to turnover ratio above 100% with the worst offenders being Bournemouth 237%, Brentford 178% and Nottingham Forest 170%.

The (relatively) prudent approach is evidently the one that Brighton want to follow, especially in a FFP world, as noted by Bloom: “While we do want to play at the highest level, we cannot simply open our cheque book and start spending without care or attention.”

Other expenses rose by 7% (£1.1 million) from £15.0 million to £16.0 million, which is by far the highest in the Championship, ahead of Fulham £13.4 million and Leeds United £12.6 million.

This is the other side of the coin of moving to the Amex, as this year’s increase was largely due to stadium expenses: maintenance, running costs and security. There are also some costs that are exclusive to Brighton, as Barber note, “The contribution that the club makes to the cost of travel has grown, meaning that we have a large seven-figure transport bill that other clubs don’t have.”

Non-cash expenses have also been on the rise with depreciation and player amortisation increasing from just £237k in 2009 to £8.7 million in 2016, reflecting the club’s investment in infrastructure and the playing squad.

In 2015/16 depreciation was unchanged at £4.9 million, which is more than twice as much as any other club in the Championship, the next highest being Derby County £2.1 million. This represents the annual charge of writing-off the cost of the stadium and the training ground. These are depreciated over 50 years, i.e. 2% of cost per annum.

Player amortisation was 60% (£1.4 million) higher at £3.8 million, following the strengthening of the squad, but this not out of the norm in the Championship. The highest player amortisation in 2014/15 was found at clubs recently relegated from the Premier League, namely Norwich £13 million, Cardiff £11 million and Fulham £11 million.

However, to place this into perspective, even these clubs are miles behind the really big spenders in the top tier like Manchester City (£94 million) and Manchester United (£88 million). This is partly because there is no amortisation required for those players who have been developed at the Academy, e.g. Dunk and March in Albion’s case.

The accounting for player trading is fairly technical, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the transfer fee is not fully expensed in the year of purchase, but the cost is written-off evenly over the length of the player’s contract, e.g. Irish international defender Shane Duffy was bought from Blackburn Rovers for a reported £4 million on a four-year deal, so the annual amortisation in the accounts for him is £1 million.

Over the years, Brighton have not been a big player in the transfer market, often registering net sales, though they have increased their gross spend recently, averaging £5.6 million in the last two seasons, compared to just £0.9 million over the previous nine seasons.

It is striking that there have been no meaningful sales in this period, as Barber explained, “Our key objective this summer was to retain our best players which, despite a lot interest and a number of offers for different players in our squad, we have managed to do.”

They also wanted to strengthen the squad in key areas this summer, so recruited Shane Duffy and Oliver Norwood, who made a good impression at the Euros with the Republic of Ireland and Northern Ireland, and the returning Steve Sidwell. They have also made good use of the loan market, bringing in prolific goal scorer Glenn Murray from Bournemouth and full-back Sebastien Pocognoli from West Brom.

"A French Kiss in the Chaos"

Last season they also bought well with Anthony Knockaert, Tomer Hemed, Jiri Skalak, Conor Goldson, Liam Rosenior, Jamie Murphy, Gaetan Bong and Uwe Hünemeier all making decent contributions.

However, it is apparent that Brighton have not gone overboard in terms of spending, especially compared to some of their principal rivals who are really “going for it”. To illustrate this, in the last two seasons Brighton had net spend of 11 million, while they were comfortably outspent by Derby County £26 million, Norwich City £23 million and Sheffield Wednesday £21 million.

Not to mention Aston Villa and Newcastle United who have somehow found themselves in the Championship despite substantial net spend of £47 million and £43 million respectively. As Hughton said, “There are big spenders in this division. We can’t compete with what Newcastle and Aston Villa are doing. What we have done has been sensible.”

Therefore, Brighton have to box clever, as Bloom explained: “There are other clubs in the division who have spent significantly more than us. So we just have to make sure we recruit smarter and that the team dynamic overcomes the financial disadvantage we've got against certain other clubs.”

Although holding onto players was clearly the strategy for this season, Bloom recently indicated at a fans’ forum that things might be different next season, so this may well be Brighton’s best opportunity to get promotion.

Brighton’s net debt rose by £25.6 million from £140.5 million to £166.1 million with the £23.0 million increase in gross debt to £170.6 million compounded by cash falling by £2.6 million to £4.5 million.

Debt has been rising over the past few years, so much so that Brighton now have the largest debt in the Championship, substantially more than other clubs, e.g. Cardiff City £116 million, Blackburn Rovers £104 million and Ipswich Town £88 million. However, it is entirely owed to Bloom, is interest-free and can be regarded as the friendliest of debt.

The cash flow statement reveals that Bloom has also converted £22 million of loans into share capital, including £11 million in 2015/16, which means that Bloom actually stumped up £34 million last season. Furthermore, since the accounts were published, he converted an additional £8 million of loans into shares, i.e. a running total of £30 million.

Adding the £80 million that Bloom has funded via share capital (including the debt conversions) to the £171 million of debt means that Bloom has put in a total of £251 million – that’s a cool quarter of a billion.

Just pause to let that sink in for a moment. One. Quarter. Of. A. Billion. Pounds.

As David Jones commented, “That’s a massive amount of money for an owner to have to subsidise a club for. And when you consider we’ve got one of the highest two or three attendances in the Championship, some of the best sponsorship deals, we’re still needing the owner to help us with that kind of subsidy. It’s substantial.”

Looking at how Brighton have used these funds since Bloom took charge, the majority (£155 million) has gone on investment into infrastructure (including £103 million on the stadium and £32 million on the training centre), while £83 million has been used to bankroll operating losses. Hardly any money was spent on new players in this period with a net outlay of less than £5 million.

There were a couple of interesting corporate actions after the accounts closed. Authorised share capital was doubled from £100 million to £200 million – potentially paving the way for a significant debt conversion? In addition, the club created £40 million of Convertible Unsecured Loan Notes.

Being so dependent on one individual can be a concern, but Bloom comes from a family of Brighton supporters: “I have absolutely no intention of selling. I think I will be here for many years to come.”

"Hands Held High"

He continued: “Our ambition remains for the club’s teams, both men and women, to play at the highest level possible – and as chairman (and a lifelong supporter of the club) I will do everything I possibly can to achieve that and I remain fully committed to that goal.”

Bloom is seriously wealthy from his property and investment portfolio (plus money earned from poker and other forms of gambling), but Brighton are very fortunate to have such a generous benefactor.

As Jones said, “If you’re an ambitious Championship club and you don’t have the benefit of parachute payments, then you’re going to need an owner that’s prepared to subsidise you substantially.”

"Sound Czech"

However, Bloom would not be able to simply buy success, even if he wanted to, as Brighton need to follow the Football League’s FFP regulations. Under the new rules, losses will be calculated over a rolling three-year period up to a maximum of £39 million, i.e. an annual average of £13 million, assuming that any losses in excess of £5 million are covered by owners injecting equity (hence the £8 million debt conversion in July 2016).

These limits are much higher than the previous £6 million a season, so are likely to encourage clubs to spend even more, making the division even more competitive.

Brighton have confirmed that they will comply with these rules in 2015/16 (“as we have done each season”), which might seem strange, given that the reported £26 million loss was twice the £13 million limit.

"Another Dale in my heart"

This is because FFP losses are not the same as the published accounts, as clubs are permitted to exclude some costs, such as depreciation, youth development, community schemes and any promotion-related bonuses.

Brighton’s depreciation was £5 million, which implies that they have spent £8 million on their academy and the community in order that the FFP loss was lower than the £13 million limit in 2015/16. Even though these activities represent a major investment for the Albion, it seems unlikely that the expenditure would be that high, but it is difficult to see how else the club could have complied.

Going forward, the assessment is calculated over a three-year period, which means that a higher loss one year can be compensated in later years, e.g. via player sales, or might even become irrelevant (if the club is promoted).

Either way, Bloom was right when he said it is “a delicate balancing act for the board, as we strive to achieve our ultimate aim.”

"Spanish Steps"

The last time Brighton were in the top flight was way back in 1983, but this club is clearly ready for the Premier League. As Bloom said, “That’s what we built the stadium for, that’s what we built our magnificent training ground for.”

Bloom appears just as happy with the situation on the pitch: “To compete at the top end of the Championship, it’s important to have a manager who knows how to win at this level and to possess a strong group of quality players. We have both, and while this doe not guarantee promotion, it gives us an excellent chance.”

Given what happened last season, nobody at the Amex is taking anything for granted. Barber spoke for everyone: “We’ve made a really strong start. But we also know that this is the toughest division in the world and that nothing has been achieved at this point.”
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