Friday, 4 February 2011

Chelsea 2009/10 results: spin and red ink


Chelsea FC do not want the public to know much about their finances. On 31st January they put out a 326 word press release entitled "Chelsea Becomes Cash Positive" which went on to laud the club's financial achievements in the last financial year. Including the statement:
"Operating Loss for the financial year reduced from £72.3m to £68.6m"
Today (at the same time Torres was doing his first press conference at the club) Chelsea FC plc's accounts became available at Companies House. They paint a very different picture from that set out in the press release.


Revenue
Chelsea do not give a proper income split in their accounts (unlike United, Arsenal, Spurs, City, Liverpool, Villa, Bolton etc, etc). Instead they divide revenue between "Football activities" and four other tiny categories including Car parking and Hotel/Catering. Overall, turnover from "Football activities" (90% of turnover) only rose 0.1% despite the far better Champions League TV deal that came in last season. This was also the season that Chelsea won the domestic double. Total turnover rose 1.2%, roughly in-line with Arsenal (-1% ex-property) but behind United (+3%) and Spurs (+6%). All major English clubs are struggling to grow the top-line.

The JV with Sky (Chelsea Digital Media) saw decent turnover growth of 19%.

Costs
Football has a problem with cost inflation, especially wages, and Chelsea is no different. In 2008/09 Chelsea paid £12.6m in termination payments to Felipe Scolari and his backroom team. Stripping out this exceptional item, Chelsea's total staff costs rose an eye watering 12.8% in 2009/10 (see table).


No doubt there were bonuses payable following the league and FA Cup wins, but it is an unpleasant upward spike given that staff costs had fallen the previous year. Staff costs are 84% of revenue vs. 46% at United and 47% at Arsenal (and a bonkers 107% at City). Other costs (excluding depreciation and player contract amortisation) rose 8.0%.



EBITDA
With (pre-exceptional) costs up 11.5% and revenue up only 1.2%, EBITDA losses rose sharply to £23.8m from £2.5m. EBITDA (earnings before interest, tax, depreciation and amortisation) is effectively cash profit before transfers and interest. This number shows CFC running a long way behind break-even even before considering transfer spend and in a pretty good season.

Player sales and amortisation
Most large clubs make a book profit on selling players (because their value is written down over their contracts). In 2008/09, Chelsea made £28.6m from selling Bridge, Ben Haim and Sidwell. In 2009/10 by contrast, the sales of Pizzaro and Shevchenko netted a loss of £1m.

Shifting players off the books and little transfer spending caused a big fall in the amortisation charge for player contracts. This is an important number as UEFA will include it in "costs" when assessing clubs for Financial Fair Play. Amortisation was over £57m in 2007/8, fell to £49.0m in 2008/9 and only £37.6m last year. By contrast City's amortisation last year was £71m.

Operating profits
Adding amortisation and depreciation and the £1.5m profit from the TV joint-venture gives an operating loss of £68.6m. This is the number Chelsea were so keen to quote in their press release. They compared it to the £72.3m loss the previous year, but this number includes the £12.6m paid to Scolari and his boys. Excluding that exceptional, the loss actually increased by £9m. Nice spin.

Cash flow
The other area the press release was keen to focus on was cash flow. The club was cash positive in the year (by £3.8m before financing), but only because net cash transfer spending was an in-flow of £18.2m. Before transfers, there was a cash outflow of £14.4m. Obviously this year, Chelsea have gone on an enormous spending spree, incurring c. £87m of net transfer spending.

Financial Fair Play
There is a lot more to be written about Chelsea and FFP, but for the moment, this is my estimate of the "break-even result" for Chelsea for 2009/10. I have excluded the one-off exemption for player contracts signed before June 2010 in the first monitoring period. This will help the club materially but only in looking at the 2011/12 year.


On these estimates, Chelsea have a £50m+ deficit on the UEFA calculation and that is before Torres, Luiz etc (offset by losing Ballack, Cole, Deco etc). "Challenging" would be the word that comes to mind when wondering whether Chelsea can comply with FFP.

Thoughts
Chelsea have a major structural problem, they have the highest wage bill in English football (see chart) but a small ground and already very high ticket prices.


On Deloitte's estimates (Chelsea don't give "matchday" revenue numbers) CFC earn around £74.5m from Stanford Bridge or £2.7m per game. Arsenal and United earn around £1m more per match than that due to their far bigger grounds. Add in Chelsea's failure to grow commercial income (around the same as City's unbelievably and half Barcelona's) and this wage bill cannot be sustained without Abramovich's money. To hit FFP rules in the medium term, something has to give.....

LUHG

23 comments:

Mr Parker's Dogbite said...

Excellent blog and exactly as I suspected following the highly selective press release. The club needs to move forward with its plans for a bigger ground very quickly (and thereby be able to divert some of the expenditure via the stadium project) or the whole thing will implode once the FFP rules are in place. Suggesting all will be well if Stamford Bridge is renamed the Samsung Superdome is pure delusion.

Anonymous said...

They look seriously fucked with regards to the FFP.

Anonymous said...

@Anders. Thanks v much for this analysis. Surely Chelsea will fail the FFPs after the events of the past week.
Can you point me in the direction of the FFP analysis for United ... I can't find it anywhere.

Nigel said...

Quite surprised to see an almost flat top line - guess the domestic success has been offset by poorer CL performance (reaching semis in 2008/09 vs knocked out at round of 16 in 2009/10). BTW this is nigelforlan on twitter.

Swarbs said...

A good analysis, but I think your conclusions on their ticket prices are not entirely accurate. Prior to last season they held their ticket prices steady for about four years, with Abramovich basically subsidising them. So whilst they were expensive for the EPL as a whole, they were much lower than the prices for other top London clubs such as Arsenal and Spurs.

Last year, when they boosted their ticket prices by 10%, their CEO claimed that even after this increase the prices had fallen 'in real terms' by 15%, and stated that they were looking to increase revenue by any 'justifiable' means. To my mind, that implies another series of 10% increases over the next three or four years, 'justified' by the prices having been frozen for four years. This would bring their ticket prices in line with Arsenal, and probably net them another £25 million in cash over the next few seasons. After all, with all the glory hunting fans they have gained over the past few years, even if the core fans refuse to pay the higher prices, they should have plenty of others who are willing to.

andersred said...

Hi Swarbs,

Thanks for the comment. It's very hard to make generalised statements about ticket prices between clubs (as I have). You're right about the bald headlight numbers for Stamford Bridge vs. other London clubs:

Price range
Arsenal "tier A": £47-92
Arsenal "tier B": £33-65
Spurs: £27-73
Chelsea: £40-65

The problem with these numbers is that they only tell half the story on matchday revenue. The structure of the stadium is crucially important too, especially the balance between expensive and cheap seats (and the proportion of hospitality sections).

One way of looking at it that I find useful is looking at the "yield per seat", i.e. how much revenue each seat brings in per home game. The caclulation is simply matchday revenue divided by no. of home games divided by average attendance:

Chelsea: £64.91
United: £48.84
Arsenal: £58.21
Spurs: £30.81

You can see that Chelsea bring in far more per seat than any of their main rivals. The most expensive "normal" seats may be cheaper than their London rivals, but they have a higher proportion of more expensive seats than Arsenal etc. They "have to" do this because Stamford Bridge is small.

anders

Anonymous said...

@Anders. As you seem reluctant to provide FFP analysis for United, I did a quick one for 2010.

I get a break-even PROFIT of 13m.

Start at EBIT of 98m. Add player disposals of 12m.
Less depreciation of 8m, player amortisation of 40m, interest of 45m and tax of 3m.

I haven't even taken into account youth development so we shouldn't have the same problems as chelsea and city.

andersred said...

Sorry Anonymous at 12.09,

I never did reply to your previous question did I?

Depreciation is excluded actually, so United's break-even result is better than that. I get this for 2009/10:

Football turnover: £286.4m
Plus
Profit on player sales: £12.7m
Finance income: £1.3m
= "Relevant Income": £300.8m

compared to "Relevant Expenses" comprising:

Employee costs: £131.7m
Other op costs (ex-depcn, amort): £53.9m
Player amortisation: £40.1m
Finance costs: £44.0m
Less
Youth development (est): £10m
Community development (est): £1m
= "Relevant Expenses": £258.7m

Therefore break-even result of £42.1m (or £29.4m ex-player sales).

In 09/10 there were loads of non-cash exceptionals and the swap loss. My understanding is that those would be excluded from the calculation.

anders

Anonymous said...

Hi Anders,

In relation to your post at 12:25:

That's a pretty decent break-even surplus. It would suggest that the club doesn't need for senior squad members to retire before replacements are drafted in- a notion that seems to have surfaced recently in the ever expanding sea of excuses used to exonerate the Glazers' penny-pinching.
Tax is excluded from the break-even calculation; clubs making taxable profits shouldn't be punished. The previous poster includes tax as a relevant expense.

Cash in bank gives finance income
but the impact on FFP is modest (currently). I don't think the FFP Regs sets any limits regarding how much money a club can have in the bank or other cash equivalents. Maybe there is scope there for clubs like Chelsea to improve their FFP position (via finance income).
The creation of Red Football LLC in Delaware would suggest that the Glazers are gearing up to take dividends (to pay a loan either secured on the llc or a loanco member with a preferred interest (preferred 'units') in the llc).
In any event, dividends paid to a parent company will be treated as a relevant expense under FFP.

Using some or all of the 95m carveouts (after June 30th 2011) to deal with a loan in Delaware would impact our FPP position. But what about using the carveouts\cash in bank to reduce the bond debt? I don't think a bond reduction would constitute a FFP expense.
One final question and apologies for going off track: Is a loan of say 10-12% in delaware much cheaper than a loan at 14.25\16.25%in the UK group? A loan at 16.25% in the uk would cost the club around 11.5% net of tax but a dividend to pay a loan in Delaware will have tax already deducted in the UK.

Anonymous said...

UEFA FPP would be a failure because of so many loop holes in it.

What UEFA would do, if
Abramovich, say he bought himself 10million of Torres jersey from Chelsea club shop,

say each jersey CFC makes profit 10 pounds,
thats 80 million pound of profit contribute to the overall balance sheet.

Easy right?

Ben said...

I'm largely ignorant of financial matters so I'm very grateful for this blog - and equally unsure how Chelsea are going to meet their FFP obligations.


What I find interesting is the observation that clubs are struggling t increase their income. If we accept that *in general* richer clubs tend to do better, and if we accept that there's only so much you can increase a club's commercial income, then the FFP era will be dominated by clubs with large stadiums.

In 20 years time we might look back on Arsenal's frugal/stadium building period as having laid the foundations for a sustained period of vying with MUFC for dominance.

Anonymous said...

Definitely an intersting read, Thanks very much.

What seems apparent to me is that Chelsea aren't too bothered about the upcoming FFP rules. I haven't examined them myself but I'm sure Abramovich has had his particularly expensive legal team look at them in great detail. As we all know, Abramavich is a professional business man of the highest integrity and would never want to break any laws...

And, even after all that, this is FIFA, people! No way are they going to screw over any of the G12 (or whatever the richest clubs in the world call themselves).

Anonymous said...

Great article, any chance of liverpool figures for comparison now we're free from debt?

Nigel said...

Andersred, would you know that for United, when the FFP rule comes to play, exactly which entity's consolidated accounts would be used as the barometer? What I mean is if they just go at MU Ltd. level you won't even have an interest expense, but then when you go up to Red Football, or even Red Football Shareholder Ltd, or worse still, this new Delaware company, this is going to be an entirely different picture (please see this as a genuine question from me).

Anonymous said...

@Nigel. You would have the interest expense. The bonds are at the MU Finance level which is a sub of MU ltd.

@Anon14:12. Jog on. The FFP's only apply to contenders for European spots. Nothing to worry your tiny little brain about.

Nigel said...

Whoops u're right Andersred. I should be referring to MUFC Ltd instead. That's where all the real football business is booked at, including all the player contracts, revenue and operating expenses.

This is where I'm unsure about which entity's account would be relevant under the FFP. Say if it is MU Ltd., then my question would be why not RF / RFS or even RF LLC - given all entities from MU Ltd. all the way up to the layers of holdcos do not have real operations themselves.

There must be some rules on this - or else it is the most obvious loophole.

andersred said...

Thanks for the comments.

Anon @12.28
The FFP rules has specific ways of dealing with owners' transactions with their clubs. All "related party transactions" will be adjusted to a "fair value" to specifically deal with examples like the one you give. Remember these regulations were drafted by Swiss lawyers....

Ben
You're right, big stadiums will be key. It's worth remembering that FFP allows unlimited spending by owners on stadiums. It seems logical to me that clubs with more paying customers have more spending power....

Anonymous @ 13.32
We'll see whether Platini and UEFA have the stomach for a fight. It won't be UEFA vs all the big clubs, it'll be UEFA vs. City and Chelsea. Fining them would obviously be laughable, so will they have the balls to ban them if they don't comply? Platini's credibility is on the line....

Anonymous @ 14.12
Sorry, can't do a calculation for Liverpool, the accounts for 2009/10 aren't out yet. LFC aren't out of the woods, I can't stress how important Champions League football is. It is virtually impossible to run a £100m+ wage bill without CL money and still meet the FFP rules.

Nigel,
Having spoken to UEFA, United's "reporting perimeter" will be the UK group of companies. The PIKs and any new debt were/would not be a legal liability on the club. Any dividends paid out of the group would be included in costs.

anders

Anonymous said...

@Anders. You say fining city/chelsea would be laughable but how about a similar measure - hold back say 50% of their champions league revenue until they break-even.

It would still be considered earned revenue for break-even purposes and would provide a great incentive to get their houses in order.

pavget said...

If a bunch of players leave this summer and next summer or have their contracts extended, I think Chelsea will actually meet the rules. They have players in their 30s on massive wages. There are already rumors that Drogba may be leaving this summer. If you look at the contracts of some players and their contract end dates:
Drogba 2012
Cole 2013
Ivanovic 2012
Lampard 2013
Anelka 2012
Malouda 2012
Kalou 2012
Alex 2013
Bosingwa 2011
Many of these contracts are on massive wages and are responsible for the majority of the wage amortization. If the contracts are extended or not, the wage amortization of Chelsea will go down significantly. For example, Bosingwa is responsible for 4.5 mil/year of the wage amortization. If he renegotiates a contract sometime before his contract ends this summer, that will essentially be zero. Some of the decrease in amortization will be offset by Luiz and Torres though.

They could also offer lower salaries. No one outside of Barca, Man City, and Real offer salaries like Chelsea does (except for their top paid player like Rooney). These older players will have nowhere else to go for higher salaries. Man City, Real, Chelsea, and Barca have been driving up wages (especially Man City) but they are not going to be able to do that anymore. Inter and AC Milan might be in trouble as they have massive losses. They have to cut their wage/amortization bills significantly (there may be some bargains this summer due to this as well).

Chelsea will also probably get an extra 8-10 mil extra per year due to the new TV rights deal. The CL payouts will also be higher this year and in future years than last year.

I think Chelsea will be fine if they get CL and I think that was the major motivation for getting Torres and Luiz. If they don't get CL, they may be in trouble. Same with Man City.

IMO the only clubs affected will be AC Milan and Inter.

And anon 15:08 - Liverpool will probably be in CL contention when the rules take effect. They don't have CL revenue right now, but their commercial revenue is huge and will offset some of the CL loss (as will EL to some effect).

Anonymous said...

@pavget. I think there is some confusion over wages and amortisation. They are two separate items - there is no such thing as wage amortisation.

Wages (172m) represents what one would expect. Amortisation (37m) results from the fees Chelsea pays to other clubs for players (e.g. ladyboy for 50m). Its contract is for 5 yrs so will be a cost of 10m a year.
Thus getting rid of amortisation alone will not get your 50m required.

If your point is that wages decrease on the non-renewal of contracts then yes you "may" break-even but your risk is that their replacements are not good enough and you don't qualify for the CL.
Chicken before the egg stuff.

Darren said...

The only way that Chelsea can drive down amortisation of player registrations in the short term is to sell players who they've bought within the last 5 years. And that only works if the amortisation charge of the player they replace them with is less than the profit they make on the disposal. It's very difficult for a club like Chelsea, or United, to drive down wages and player charges...and remain succesful on the pitch. You always need to replace players like-for-like quality wise, just to stand still. So unless you can pick up Bosmans or players nearing the end of their contracts, I don't see how those costs can be reduced.

andersred said...

Correct Darren,

The "Catch 22" of FFP (when it becomes fully enforced with low limits on losses) is that there probably isn't enough income out there to sustain six or more clubs with wage bills over £100m.

Only CL participation gives the revenue required to consistently break even and by definition only four clubs can qualify each season.

anders

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