Football Shorts (part II)

Football Shorts is an analytical series (part I here examining Premier League finances in the light, not only of the short term implications of lockdown and suspension of professional football, but the wider long term implications of a severe global recession or worse.

Wilkins_Micawber_from_David_Copperfield_by_Frank_Reynolds

Micawber, David Copperfield

In Part I, I examined the income sources that football has relied upon and the possible challenges to those sources in the future. Since last weekend, Manchester United (as required) has updated the NYSE on its quarterly performance. Apart from the expected loss of matchday revenues the most interesting aspect is that Manchester United made a £15m provision for broadcasting rebates in respect of the 29 Premier League games played so far this season. In total, the company anticipates a £20 million rebate for the whole year, on the assumption the Premier League is completed over the summer months. There was no mention of the potential liabilities in the event of the season not concluding. Double would not be an unreasonable guess.

Turnover/Income Expenses Capital Requirements
Matchday Wages Working capital
Broadcasting Other operating costs Player acquisition
Commercial Financing costs Funding of Stadium/training ground development/construction
Sponsorship Amortisation of player transfer costs  
European Depreciation of assets  
Player trading* (key to the Profit & Loss account but not part of turnover) Exceptional costs  
  Tax

So, in part II, I want to examine the costs associated with Premier League clubs. Costs can be broken down into costs that impact cash flow (wages, other operating costs, finance costs, exceptional costs and tax) and non cash costs (Amortisation, depreciation of assets and occasionally impairment (writing down the value of a player’s book value).

Wage costs

Most observers will be familiar with the idea that wages are the largest single expense item for Premier League clubs. What might be surprising though is how much of total turnover wages account for. The following chart demonstrates total wages for each club (including non playing staff) but perhaps more importantly what percentage of turnover they account for. When the wage/turnover ratio goes above 70% then the long term sustainability of a club is brought into question.

The further to the left, the smaller the wage element as a percentage of turnover, the further to the right the greater. In an environment where income is expected to fall, those to the right are most vulnerable. The orange vertical line represents 70% wages to turnover ratio – 40% of clubs had a ratio higher than 70% in season 2018/19, in the most benign of conditions.

Note, no club had a higher wage to turnover ratio than Everton.

Two scenarios

I’m going to look at two scenarios (i) season 2020/21 played totally behind closed doors with zero matchday revenue but all other revenue unaffected, and (ii) season 2020/21 played behind closed doors, zero matchday revenue & a 20% reduction in broadcasting & commercial revenues.

I’m also going to assume that wages don’t fall – more on that later though.

Scenario 1  – zero matchday revenue, all other unaffected

This chart shows the impact of no matchday revenue for season 2020/21 (using 2018/19 figures, the most complete set available). I have not used the data of the clubs relegated in 2018/19. As a result of the reduced turnover, 11 of the 17 clubs (64.7%) would have a wage to turnover ratio above 70% (including Chelsea and Arsenal). 2 clubs, Everton and Bournemouth go above 90% and Leicester City above 100%.

Scenario II, no match day income & a 20% reduction in all other income.

Clearly, not every club would lose the same percentage of revenue in a scenario where either broadcasters negotiated a discount and/or merchandising, sponsorship and other commercial income fell. However in terms of scenario planning it’s worth looking at. The wage to turnover ratio changes rapidly in such a scenario with 16 of the 17 clubs going above the 70% threshold, and 7 (41%) clubs having a wage bill higher than their turnover. Please remember that none of the other costs have been considered at this point.

EBITDA (Earnings before interest, tax, depreciation and amortisation) is the most commonly used measure of a company’s operating performance. It is effectively total revenue minus staffing costs and other operating costs. Taking the two scenarios (I) – no paying spectators for the whole of the season; (II) no paying spectators and a 20% reduction in all other income we can see the impact using the costs from the last complete season (2018/19).

Please remember, this is just the operating performance – it doesn’t take into account player amortisation, depreciation nor tax & financing costs.

EBITDA in £ millions 2018/19 Scenario I Scenario II
Manchester United 155.90 45.10 (57.90)
Liverpool 122.0 37.79 (52.21)
Chelsea 93.97 27.34 (48.66)
Manchester City 125.04 70.03 (26.05)
Spurs 141.83 59.83 (30.17)
Leicester City (6.00) (20.69) (49.30)
Everton (15.40) (29.58) (64.58)
West Ham 36.18 9.05 (20.88)
Bournemouth 36.30 31.31 8.31
Arsenal 77.20 (19.04) (39.70)
Southampton 6.15 (10.85) (37.85)
Wolverhampton Wanderers 7.06 (4.48) (36.94)
Watford 16.10 8.14 (15.06)
Crystal Palace 11.10 0.23 (27.24)
Newcastle 51.16 27.22 (3.57)
Brighton 34.06 15.52 (8.45)
Burnley 43.98 38.37 11.99
EBITDA of 17 Premier League Clubs based on 2018/19 accounts under two different scenarios

In scenario I, collectively the 17 named Premier Clubs – ignoring the clubs relegated in 18/19, (based on 2018/19 figures) would see the aggregate EBITDA fall by approximately £600 million to approximately £200 million. 5 clubs would make operating losses.

Scenario II would create an aggregate operating loss of over half a billion pounds million with only Bournemouth and Burnley making an operating profit – 15 out of the 17 would make operating losses.

The clubs with the highest match day revenues will be more adversely impacted. When their revenues are high but their operating costs also high then the clubs are in a very vulnerable position. 

All clubs, including Everton would have significant cash flow and therefore for some, funding issues. I will address funding in part III.

So what can clubs do about this potentially disastrous scenario? 

Clearly, cost cutting, and in some cases, significant cost cutting is required. Operating costs other than staff costs in almost all organisations can be cut, however given that staffing costs form such a high percentage of overall costs, let’s concentrate on this. The focus will be on player costs which make up the bulk of staffing costs overall but it should be noted that most clubs even when having outsourced various activities have seen large increases in overall staffing levels in recent years.

  Reducing the wage bill

The obvious solution then is to reduce the wage bill. Just how easy is that? Players are on fixed term contracts and as has been shown to date, reluctant to reduce their income levels even in the face of growing financial uncertainties. Clubs cannot unilaterally change contract terms.

The clubs will have to manage the situation in a manner not seen during the Premier League years. There are several factors to look at, including the size of squad, how many players are out of contract this summer, which squad members represent good value in terms of current wages, length of existing contracts, the age of players, relationships with agents, future contingent liabilities with existing players etc. The objective in a cost saving exercise should not be just to cut short term costs but to reduce the wage burden over a number of years. All of this whilst ensuring that relegation doesn’t become a factor.

Thus, the construct of the squad, size, age of players and length of contracts will be key factors in club’s abilities to move players on and reduce costs.

Staff costs in £ millions Staff costs  Squad size Average age
Arsenal 234 27 25.6
Aston Villa   27 27.2
Bournemouth 111 29 26.4
Brighton & HA 102 26 27.2
Burnley 87 24 29.2
Chelsea 286 27 26.3
Crystal Palace 117 21 30.0
Everton 160 25 27.5
Leicester City 150 26 27.3
Liverpool 302 26 27.8
Manchester City 316 24 27.5
Manchester United 332 27 25.9
Newcastle United 94 31 27.6
Norwich   22 27.8
Sheffield United   27 28.1
Southampton 119 21 25.8
Tottenham Hotspur 177 25 28.5
Watford 84 28 28.2
West Ham United 136 25 28.5
Wolverhampton Wanderers 92 23 25.7
Squad size & age

Clubs with larger squads may be able to achieve cost savings by reducing squad sizes. However, selling players will be dependent on other clubs ability to buy and critically, other clubs ability to meet existing salary levels. Very few players will move for less money whilst still having years left on their existing contracts. Everton in particular, given our experiences of the last couple of years can bear witness to that. The largest squads currently are Newcastle United (31), Bournemouth (29) and Watford (28).

Player ages will form a significant part of future transfer strategies. One of the probable impacts of less funding within football is that players’ careers at top clubs on the highest levels of income will reduce in term. Clubs will either look to replace older players earlier or even if performance levels are still good, pay less and/or offer shorter term contracts. Clubs with a higher percentage of older players will face difficulties in moving such players on – Crystal Palace, Burnley, Watford and West Ham United have high percentages of players aged over 29.

Conversely, clubs with greater numbers of younger players should be better placed. Typically, younger players command smaller salaries and importantly, offer future value if the sales’ market recovers in future years. Currently, Tottenham, Wolves, Manchester United, Leicester, Bournemouth and Arsenal have higher levels of players 23 or under in their first team squads.

The strength of existing academies will become critical as  clubs seek to introduce academy players saving transfer budgets, likely paying lower wages and offering the potential for trading profits in the future.

Age profile of squad 18-23 24-28 29+
Arsenal 33% 52% 15%
Aston Villa 18% 45% 36%
Bournemouth 37% 30% 33%
Brighton & HA 23% 42% 35%
Burnley 8% 33% 58%
Chelsea 30% 44% 26%
Crystal Palace 10% 24% 67%
Everton 24% 40% 36%
Leicester City 38% 31% 31%
Liverpool 15% 54% 31%
Manchester City 23% 36% 41%
Manchester United 37% 41% 22%
Newcastle United 13% 48% 39%
Norwich 23% 41% 36%
Sheffield United 22% 41% 37%
Southampton 29% 57% 14%
Tottenham Hotspur 40% 40% 20%
Watford 21% 29% 50%
West Ham United 20% 36% 44%
Wolverhampton Wanderers 39% 35% 26%
Squad age profile

The length of existing player contracts is an important consideration both in terms of reducing costs but also calculating and budgeting for future liabilities.

Typically in the past, clubs with large numbers of players in the final years of their contracts might have concern with the loss of players with no transfer value. Perversely in this very different and rapidly changing (some might say deteriorating) situation many clubs will feel advantaged to be in such a position. Sheffield United, Newcastle United and Bournemouth all have at least 1/3 of their current squad out of contract on 30 June 2020. Newcastle United and Bournemouth as we have seen above have large squads, therefore the potential for cost savings are high.

As might be expected, the larger clubs have the highest percentage of players with contracts of 3 or more years. Liverpool (66%), Manchester City (61%), Chelsea (49%), Tottenham Hotspur (48%)  Manchester United (45%) and Everton (44%). In a market of falling revenues, falling transfer values and contract values each of these clubs having secured the long term services of expensive players face the greatest future liabilities.

Contract expiry distribution 2020 2021 2022 2023 2024 2025
Arsenal 15% 23% 23% 27% 12%  
Aston Villa 23% 27% 5% 23% 23%  
Bournemouth 33% 19% 22% 15% 11%  
Brighton & HA 8% 19% 27% 46%    
Burnley 25% 42% 13% 17% 4%  
Chelsea 11% 15% 22% 22% 22% 7%
Crystal Palace 10% 57% 24% 10%    
Everton 20% 8% 28% 12% 24% 8%
Leicester City 19% 12% 23% 19% 27%  
Liverpool 12% 12% 12% 35% 31%  
Manchester City 14% 14% 9% 27% 18% 18%
Manchester United 4% 26% 15% 33% 15% 7%
Newcastle United 35% 26% 13% 10% 6% 10%
Norwich 5% 18% 41% 27% 9%  
Sheffield United 38% 19% 19% 19% 4%  
Southampton 14% 24% 38% 19% 5%  
Tottenham Hotspur 20% 12% 20% 12% 24% 12%
Watford 18% 14% 29% 25% 7% 7%
West Ham United 12% 28% 16% 20% 20% 4%
Wolverhampton Wanderers 19% 10% 24% 29% 19%  
Distribution of player contract lengths

Conclusion

As expressed previously football clubs have allowed costs and  liabilities to increase year after year for two principal reasons (i) competitive pressures and (ii) the belief that revenues would always continue to increase. Whilst the competitive pressures will obviously remain, the macro picture is very different, revenues and asset values are going to fall sharply.

It is is difficult to see how most clubs can cut their cloth to meet new reduced levels of income. Some will be better placed than others through superior management and being in a better position at the start of this recessionary period.

Others however, despite wealthy shareholders are not so well placed either financially nor from a future compliance point of view. Whilst it’s reasonable to see financial regulation relaxed to accommodate the new circumstances, re-capitalising football clubs to meet future working capital requirements arising from negative cash flow and perhaps an absence of debt facilities will be fascinating.

In part III I will look at the club’s balance sheets and in particular their shareholders’ abilities to fund losses and provide working capital.

 



Categories: Everton, Everton finances, Premier League

Tags: , ,

6 replies

  1. Paul really enjoyed your analysis as usual, and really looking forward to the next addition, as I expect are your new found friends on the Uptheclarets message board, I would ask that you check your research for the Burnley wages and % of turnover last accounts said £87m and 63% respectively.

    Though we so have some fans that would like the club to spend the £103m you have worked with. I and our board would like to see how the lower number works through.

    Must say I was surprised by the Bournemouth numbers, I thought we would be the only ones with a positive EBIT in scenario 2. Many thanks for all your efforts – stay safe

  2. Interesting analysis Paul, those clubs who have been desperate to ‘tie down’ their top performers to long term contracts will be under most pressure. All this of course, will be dependent on whether or not the Government lifts the ‘lockdown’ prior to late August/Sept 2020, when the new season is likely to start.

  3. Interesting the average age scenario of each squad. I guess Everton’s average age would drop significantly if they were to offload, Schneiderlin, Walcott, Stekelenburg, Sigurdsson,,even Baines?

  4. Without wishing to appear alarmist or alarmed, this analysis is damned scary to a layman like myself with a rudimentary understanding of how a sports club operates. Looks to me as though the days of lengthy e.g. 5-year player contracts are seriously numbered. Football needs to get its collective head out of the sand and address a whole host of matters seriously and collectively.

  5. Superb analysis, Paul. Thanks.

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