Football governance - learning from the Edwardians

With a Commons Select Committee investigating football's governance and ministers railing against the way the game is run, the latest edition of United fanzine Red News, had an interesting press clipping showing how things were done back in 1909.

Having finished Champions in 1907/08 (see photo), United won the FA Cup in the 1908/09 season and had upset the FA in various ways (including outrageously having a replica of the FA Cup made). This was also the time of the ill-fated player rebellion over their attempt to unionise. United were being bankrolled by local brewer John Henry Davies who put up the £60,000 to build Old Trafford. As you can see from the clipping from the Daily Sketch on 7th December 1909 below (reproduced with kind permission), the FA had suspicions that United were not a "genuine" club under its rules.

Whatever the rights and wrongs of United's actions in 1909, it is worth noting what the FA rules said at the time.

On what made a club "genuine":

"...that is to say, that it was formed by the voluntary effort of a number of people resident in the locality of its headquarters, and that there were many shareholders who, with separate interests, had the right to elect directors."

And on what sort of ownership was permissible:

"The Football Association does not allow the private proprietorship of clubs carried on for the purpose of speculation and profit."

And finally on financial monitoring:

"they [the FA] have been prosecuting inquiries. They demanded the balance-sheet, which is never made public. The share list has been examined [any Qataris on there?]. The increases of capital, the alteration of the articles of association (without permission), and the alleged issue of debentures [bonds] for large sums in connection with the building of the new ground at Old Trafford have been matters for consideration."

None of the stipulations above exist in the current FA rules of course, but wouldn't the game be better off if they did? Why were restrictions on "speculation and profit" removed? Why are individuals allowed to own clubs, rather than diverse groups of supporters? Why is there so little financial scrutiny of debt and accounts? 

When we scratch our heads as to how to improve the governance of football, perhaps we should start with the FA rules of Edwardian England and see how they did it....

LUHG

The Government and football – strong words need to be followed up with action

Sports Minister Hugh Robertson had some harsh words to say about the governance of English football yesterday:

"If you look across sport, it is very clear to me that football is the worst-governed sport in this country, without a shadow of a doubt. The levels of corporate governance that apply to football, a point often addressed by [Labour], lag far behind other sports, and other sports are by no means beacons in this regard."

Not only did Robertson (correctly) identify the problem, he promised action.

"So, action is needed and the Government will take it, but it wants to see the results of [the Department of Culture Media and Sport] select committee first."

That's quite a bold statement, and also very clear. Football supporters need to hold that promise to account. Here is my list of what's wrong with football. Others may agree or disagree and no doubt views on the relative importance of each problem will differ:

Debt and financial mismanagement

How is it that no Bundesliga club has ever gone bust or into administration yet dozens of English clubs have?

Leveraged buyouts

Impossible in most European leagues, banned in the NFL(!). Adding debt to a club for the privilege of having new owners. Nothing added, nothing invested. 

Supporter ownership

Why is there no help (or even preference) for the most natural owners to take a stake in their clubs? Instead we end up with the crooks, carpetbaggers and dodgy dealers who have ruined so many.

Ticket prices

Record income flows into our game and yet prices rise inexorably upwards with supporters priced out. £100 for a non-executive ticket at Arsenal? Laughable.

The FA

Responsible for the debt ridden shambles of "Nu Wembley", the decline of the FA Cup and the shambolic England team and its manager. Not fit for purpose.

Financial inequality in the game – Champions League qualification makes you rich, PL mid-table makes you worry, relegation could send you broke. Lower than that clubs fight for scraps.

Standing

Why hasn't there been a proper debate on this? Visit a German stadium and see how they do it (no doubt they would sell us some of their highly engineered safe standing barriers).

You may have your own issues you would add to the list. Some, such as the level of player wages, seem to me to stem from the no. 1 problem, financial mismanagement.

I believe that if Hugh Robertson is serious about taking action on football "governance", these are the issues and benchmarks against which he and the government must be measured.

Over to you Hugh.

LUHG

Warning, debt can seriously damage your core support

Yesterday, on the same day they announced the signing of Joe Cole (a “good day to bury bad news”?), Liverpool FC slipped out a juicy little press release about ticket prices for members (of which I understand there are around 15,000 available per game). The gist of the statement is that prices for 2010/11 are rising by a blended 10.6% for the Kop and 10.1% for the other three stands and that’s prior to the impact of the “progressive” VAT rise in January.

Having previously operated on a “Category A” and “Category B” system, LFC have now added “Category C” on the following basis:

Category A games for the 2010-11 season include: Arsenal, Chelsea, Everton, Manchester City, Manchester United and Tottenham Hotspur

Category B games for the 2010-11 season include: Aston Villa, Blackburn, Bolton Wanderers, Newcastle United and West Ham United

Category C games for the 2010-11 season include: Birmingham City, Blackpool, Fulham, Stoke City, Sunderland, West Bromwich Albion, Wigan Athletic and Wolverhampton Wanderers

Although the price rises vary by category, the message is clear, Liverpool are joining United in the debt driven game of pricing out their core working class support. The Kop now has the dubious privilege of being more expensive than the Stretford End which, when you consider the relative quality of football, is a true injustice.

LFC are in real financial trouble, something it actually gives me no pleasure in writing. In the last accounts (2008/09), the club reported EBITDA of £35m and interest of £40m. The dream of a new stadium was screwed the moment the credit crunch hit, leaving the business enormously overleveraged. Despite a valuable new shirt deal with Standard Chartered, the loss of Champions League income will inevitably impact the top line this season. That leaves Chelsea supporting Chairman Martin Broughton scrabbling around for other ways to boost revenues.

In 2008/09 LFC generated £42.5m of matchday revenue from 27 home games at an average attendance of 42,728. That’s £28.74 per occupied seat. The equivalent figure for Old Trafford is £39.58 per seat and for Chelsea £52.72. With the club up for sale and in dire need of new equity investment, yesterday’s announcement (plus the previously announced 4.6% increases in season ticket prices) look like being just the start....

So now we have the spectacle of both of England’s most famous and successful clubs screwing their core support to pay the debts of unwanted speculators. All the while the Premier League and Football Association stand around being “ownership neutral”. Is this truly the “Best League in the World”?

LUHG

The gilded stable doors of the Premier League – the new rules that won’t stop the next Portsmouth

The Administrator’s “Report to Creditors” of Portsmouth City Football Club Ltd which was published yesterday is at its heart an idiots’ guide on how to bust a football club in a very short space of time.

Lesson 1:

“Live the dream” and increase your wage bill by 163% in three seasons whilst your turnover only rises 66% (thanks Harry).

Lesson 2:

Spend money on planning for a new ground, fail to finance it and fail to build it (the so-called “scouse gambit”).

Lesson 3:

Let every other cost go through the roof, doubling in only two years.

Lesson 4:

Open and then close a pointless chain of shops, invest in a radio station and start a ticket financing business in order to “diversify your income”.

Lesson 4:

Borrow, borrow and borrow to fund lessons 1, 2, 3 and 4…..

I’m not going to dwell on the detail of Portsmouth’s situation, thankfully there has been a sea-change in the amount and quality of investigative journalism about the financial crisis in football in recent months, but instead I want to show how inadequate the Premier League’s (self) vaunted new rules which aim at avoiding repeats of the Pompey debacle really are.  The Premier League of course accept no responsibility for Portsmouth's problems (or anything else that goes wrong to be honest).  But just to be safe, the league introduced tough new financial rules last September.  Richard "under wraps during the election" Scudamore said at the time: “It's absolutely crucial that these clubs are run as ongoing viable concerns. These financial rules apply immediately.”

The new rules

Rather than reprint all of rules 71 to 82 of the Premier League rule book, here is a very good summary published by the BBC on 18^th February (with my emphasis and explanations):

-   Clubs must submit independently audited accounts to the Premier League by 1 March each year, with requirements to note any material qualifications or issues raised by auditors.

-   Requirement for clubs to submit future financial information [i.e. financial projections] to the Premier League by 31 March each year. This will act as an improved early warning system should any club take undue financial risks which may have consequences for future financial stability.

-   An annual requirement to demonstrate to the Premier League board that a club does not have outstanding [i.e. overdue amounts] debts to other clubs.

-   An annual requirement to demonstrate to the Premier League board that a club is not in debt with regard to income tax or National Insurance and payroll taxes [i.e. overdue amounts].

-   These rules are to ensure that Premier League football clubs can meet their obligations throughout a season including being able to fulfil all fixtures, fulfil contractual obligations to the Premier League and demonstrate that they can meet all payments due during a season.

-   Any qualification raised in accounts or risk seen by the Premier League board could result in action to help prevent a club from exposing itself to financial difficulties that may be deemed unsustainable or put at risk the future financial sustainability of a club.

-   Clubs that fall into such financial difficulty could be subject to financial controls relating to transfer activity and/or player salaries.

There are some sensible things in here, especially the requirement to demonstrate that clubs aren't using Her Majesty’s Customs and Revenue as a piggy bank by not paying PAYE and national insurance on time.  Nor of course should clubs be able to avoid paying transfer fees or debts due to other clubs.  And the introduction of these rules is the first time the hands off, laissez-faire Premier League has ever contemplated imposing financial controls on a member club, even if it has taken seventeen years to put the powers in place.

But beyond these small positive steps, the rules are totally inadequate and crucially would have not have stopped Portsmouth FC from collapsing in the way it did.

Don’t rely on qualified accounts and future financial information

The fundamental problem with the new Premier League rules is that the things that can trigger Premier League intervention (other than breaking the two new rules about taxes and overdue transfer fees) are so, so weak.  Intervention can take place if:

Rule 81.1 the club fails to deliver annual accounts to the league by 1^st March; or

Rule 81.2 the club fails to deliver interim accounts to the league by 1^st March (which set of accounts are required depends on the club’s year end); or

Rule 81.3 the club fails to deliver “Future Financial Information” by 31^st March; or

Rule 81.4 the club fails to deliver additional information requested by the Premier League relating to the auditor’s qualifications of its accounts; or

Rule 81.5 the club has failed prove its doesn’t owe HRMC or other clubs money it should have paid; or

Rule 81.6 the accounts supplied are qualified or part qualified by the auditors; or

Rule 81.7 the Premier League Board, having looked at the information supplied by the club doesn’t believe the club will be able in the next season:

Rule 81.7.1 to pay its “football creditors” or employees; or

Rule 81.7.2 be able to play its 38 league matches the following season; or

Rule 81.7.3 be able to fulfil its league obligations to broadcasters

Putting aside the rules about delivering information on time (something tells me even the most rotten club will manage to comply with those), the other main triggers are whether the club’s accounts are qualified or part qualified and whether the PL board thinks the club might not be able to play its matches or pay its football creditors the next season.  This is totally inadequate and no form of “early warning system”. To see why, just look at the Portsmouth situation.

March 2009 – all well in Pompey world?

Under the new rules, to play in the Premier League in the current season, Portsmouth would have had to file accounts with the league last March.  They actually had their 2008/09 accounts signed off on 27 February 2009 and crucially, there was no qualified auditor’s opinion in the accounts.  Grant Thornton did not issue a qualified opinion about the accounts because they were convinced by the club’s board that although the club had massive liabilities, loans would not fall due before the opening of the next transfer window when player sales could be made.  No doubt the club had a business plan at the time the accounts were signed off which it shared with its auditors and helped satisfy them that the business would continue as a going concern.  Under the Premier League’s new rules, this plan would have to be submitted to the league board of course.  But would the Premier League board have disagreed with the club’s own auditors about the viability of the business?  It would be an extraordinary, effectively inconceivable thing to do.  So the whole new system now relies on the auditors identifying a problem.  If they don’t, whether through their own fault or because they are misled by the management, the whole new system falls over.  No red lights flash.

You may be wondering if the collapse of Portsmouth was a sudden event, unpredictable by anyone in March 2009.  Since the Administrator published the details of the club’s financial position, journalists have expressed shock and dismay at the £122m of liabilities on the balance sheet.  If they looked a bit closer, they’d actually see that the last published accounts showed even greater liabilities.  You can see this in the following table (I have kept the classifications of assets and liabilities as they are described in the Administrator’s Report to Creditors and the Report and Accounts respectively, but the total numbers are completely comparable):

	Current	May 2008
Liabilities from administrator
Owed to Portpin	-14,201,000
Owed to finance co.s	-1,035,943
Owed to financial instituions	-14,157,518
Staff holiday pay arrears	-100,000
Unsecured creditors	-92,698,695
Liabilities from 2008 accounts
Short term creditors		-114,909,135
Long term creditors		-22,135,100
Total liabilities	-122,193,156	-137,044,235
Assets
Freehold property	7,729,516	8,733,958
Other fixed assets		5,717,295
Stocks		152,360
Debtors		17,033,110
Financed Assets	1,914,630
Player transfers	14,157,518
Players	19,514,418	48,354,597
Other	17,954,770	203
Cash at bank	1,463,701	9,537,363
Total assets	62,734,553	89,528,886
Net liabilities	-59,458,603	-47,515,349

Now the net position has indeed worsened (unsurprisingly the club lost money between May 2008 and today), but the key point is that when these accounts were signed off by the auditors in 2009 (when no doubt the Premier League also would have nodded them through if its new rules had been in place), the situation was already hopeless without huge injections of new capital.  None of the Portsmouth’s recent owners had or were willing to inject the money required of course, but none of this is even considered in the Premier League rules and most importantly there is absolutely nothing in the rules to prevent a club getting into such a state in the first place.  As long as the accounts aren't qualified, all is well....

The answer of course is to take a far more fundamental approach to regulating football.  Specifically, English football needs binding rules limiting wages and salaries as a percentage of turnover, and limiting debt as a multiple of profits (with due allowance for borrowing for proper football investment like Arsenal building the Emirates stadium).  Such rules would have gone a long way in stopping Portsmouth or Leeds or Cardiff or Chester (or dozens of the other 50 professional clubs that have gone into administration or CVA in the last twenty five years) ever getting into severe trouble in the first place.

Preventing clubs running up debts at the expense of the taxpayer or other football clubs is a very welcome step, but it doesn’t go nearly far enough.  So next time Richard “over £900k a year but I’m not bailing out the St John Ambulance” Scudamore or Premier League spokesman Dan Johnson wax lyrical about the new “early warning system” and “a set of regulations designed to protect the viability and sustainability of the clubs” remember that these rules wouldn’t have saved Portsmouth and will do little or nothing to save the next football club which falls victim to greed, stupidity and mismanagement.

LUHG

How to make money from leveraged buyouts 101

I was writing a post on David Gill's interview when up he popped on the TV talking about the Glazers "are not sellers" so I thought I'd break off to write a quick post about  how people who buy companies through leveraged buyouts ("LBOs") are always sellers because that's how you make money from an LBO.  It is intended as a quick description for people who know nothing about the subject.

An LBO is the acquisition of a company using a large amount of debt (secured on the company you are buying) and relatively little cash ("equity").  Because LBOs gear companies up and impose higher interest payments on them, they are risky for both the buyer and the company.  Readers Digest was acquired by Ripplewood, a private equity firm, in 2007 using $2.2bn of debt and $275m of equity.  In less than two and half years, poor management and recession made the excessive debt unaffordable and the company went into "Chapter 11" administration.  Ripplewood's investors lost every penny of their $275m and the lender now own the company.

There are two standard means of getting a return from an LBO (and a little "extra" sweetener). The two main ways of making money are "dividend recaps" or selling the business.  Ideally you do both.

A dividend recap (recapitalisation) is where you drive up the profits to a level where more debt can be taken on and you pay yourself a dividend using all or some of the debt you've raised.  Example: you buy a company with EBITDA of £100m using £500m cash and £500m debt.  Through great management and ruthless cost cutting you drive the EBITDA to £130m.  Assuming you can still borrow 5x EBITDA as you did when you bought the business, you can now borrow another £150m (five times the extra £30m of profits).  You pay the £150m to yourself.

A sale speaks for itself, but its worth pointing out that leverage exists to boost the return.  Take the same company as above.  You paid £1bn which is 10x EBITDA.  When the profits hit £130m (assuming valuations haven't changed) its now worth £1.3bn (10x the £130m profits).  You sell that to somebody else and pocket £800m (they keep or refinance the £500m debt).  So you've made a profit of £300m on the £500m cash you invested  or 60% and all because you added a mere £30m (or 30%) to the profits.

Dividend recaps are comparatively rare, because they increase the risk for the debt holders relative to equity holders and increase the risk for the company itself (which the owner wants to sell looking all shiny and attractive at some point).  Lenders don't like to see the equity owners reducing their financial stake in the business whilst the debt holders are stuck in a riskier venture.  Dividend recaps were very "pre-credit crunch".  For an example of recaps followed by a swift sale, the sad tale of Debenhams being floated back on the market with over £900m of acquisition and recap debt just as the economy began to sank is a good place to start.

The point is, you strip out dividends or sell, that's how you get a return.  There are no other ways to make proper money from LBOs.  All LBO buyers are sellers by definition.  The only uncertainty is when you sell and how much you get.

Finally, the "sweetener".  Most leverage buyouts are done by private equity funds (companies make acquisitions using debt too but we are looking at single company deals by self declared experts in the industry, not mergers).  The Private Equity manager gets a cut (usually 20% above a certain hurdle) of the profits from the deals he does, but deals can take years so in the meantime the private equity manager charges his investors fees (often 2% of the committed value of the fund each year), in addition the manager can charge various expenses and fees to the companies owned by the fund.  The big money is in the manager's share of the profits (the "carry" or "carried interest") but the 2% pa and expenses at least pays for the golf club membership and the second home in the meantime.  As we know, the Glazer family have put in place their own sweeteners to the tune of £23m in the last five years and are entitled to £9m in fees and expenses every year under the bond agreement.

There is no evidence that the Glazers (like Hicks and Gillet) are anything other than financial buyers.  And no financial buyers can honestly say they "aren't sellers", its purely a case of when.

LUHG

Who's missing from the party?

Interesting times indeed.

Knights and knaves, leaks and spin.  And dragged back from 2005, United apparently "not for sale".

In the middle of all this is the two day Soccerex football business conference in Manchester, which starts this morning.  The BBC are holding an hour long live debate on "Football in the Red" on 5Live and the BBC News this evening to coincide with it.  At precisely the same time, the England 2018 bid team are hosting a VIP reception in the Victorian splendour of the Town Hall.  No handbags please lads.

I'll be at Soccerex for the next two days thanks to a kind benefactor and will try to take the temperature of the game (whilst also benefiting from happy hour sponsored by the Russia 2018/22 bid).

No doubt it will be weird and I can't help feeling there is something missing from this self description of the event  by Soccerex Chief Exec Duncan Revie (any relation?):

"The Soccerex European Forum in Manchester will provide the perfect occasion for UEFA, football clubs, leagues, global media, commercial partners and other key stakeholders to come together to assess how we need to improve the running of the game and help secure its long-term future,"

Spotted which "key stakeholders" are absent from the assessment of "how we need to improve the running of the game"?

Yes, that's right.  The fans.

LUHG

Out of control

So today Portsmouth became the first Premier League club to go into administration.  Of course more than 50 professional clubs have gone down this route over the years, some more than once.  The infamous “football creditor” rule kicks in and the taxpayer and local supplier gets screwed at the expense of other clubs and (in Portsmouth’s case at least) multi-millionaire players.

This may all seem a long way from United as we prepare for another trip to the Wembley, but the same madness that drives clubs to the wall impacts the biggest clubs too.  One of the most pressing issues, and a central feature of UEFA’s report on club finances this week, is the endemic inflation in costs.

The Glazers have always described themselves as being experts in managing sports clubs (although I imagine a few Tampa Bay Buccaneers fans would beg to differ).  Unfortunately, the reality is that they too have fundamentally underestimated the cost pressures running through football.

The bond prospectus is not the only financing document Red Football Ltd has published since the takeover.  In July 2006, the Glazers published an “Investment Memorandum” when they were raising the bank debt for their first refinancing (you can download it here).  The section entitled “Key wins under the Glazer reign” makes particularly galling reading for supporters (and not just because of the title).  Their three “key wins” are a) building the quadrants (where their only role was to say “carry on lads” to the builders), b) winning the AIG sponsorship (that “brand association” worked out well) and c) putting up ticket prices (no comment required).

Because it was sent to banks interested in lending to Red Football, the document differs from the bond prospectus in the level of detail it provides and crucially, includes forecasts for the club from 2006-2011.  It is here that we can see how naïve they are about costs.  The following table shows what they expected operating costs to be and what they actually have been in the subsequent years:

	Actual 2005	2006	2007	2008	2009	2010	2011
Glazer plan 2006	111.3	114.5	125.0	135.2	141.3	146.3	152.3
Actual costs	111.3	134.2	133.2	175.4	186.4	???	???
Cost overrun		19.7	8.2	40.2	45.1	???	???
% of plan		17%	7%	30%	32%	???	???

As you can see, by the end of last season, costs were almost a third above budget.  Rather than growing by 6.2% pa from 2005 to 2009, costs have actually risen by a staggering 13.8% pa, almost twice as fast.  Some of the big leap in costs in 2008 relates to winning the Champions League, but sadly in 2009 we got taught a lesson by Barcelona and no such bonuses were paid.  The wage bill went up 31.2% in 2008 and rose again in 2009, even though we lost the Champions League final.

In the bond prospectus, the club identifies the problem (my emphasis):

“This increase [in 2008] was largely due to significant increases in players’ compensation resulting from performance bonuses as a result of winning the Premier League and Champions League and a very competitive open market for players as a result of the announced increase in the contract value for Premier League media rights.”

So as the new TV contract kicked in, United were forced to follow the market and pay ever higher salaries.  Of course in 2008 and 2009 we did exceptionally well on the pitch, which pushed up TV revenues; in any sport such success can’t be guaranteed (just look at 2006).

So what is more worrying here, the fact that the Glazers totally underestimated the cost pressures in football to the tune of £113m since 2006, or the fact that extra media money is making the problem worse not better?  For United fans, the fact our owners appear to understand nothing about our “industry” should be of enormous concern given the debts they have burdened the club with.  For football as a whole, the worm has turned as the TV “bonanza” is beginning to work against clubs not for them.  Quite soon Richard “£866k a year” Scudamore will be triumphantly announcing his “success” in selling the Premier League’s overseas TV rights for over £1bn, but injecting yet more money into the system he may just be accelerating the arrival of the next Portsmouth.

LUHG