[Archived] Philipl's Financial Review

[Alan75]

Once again we are indebted to philipl for preparing another Review of the Rovers Financial Report.

Finances review 2006/7 season.

prepared by philipl.

One comment we often see on the message boards is that “we don't know” about the Rovers or the Trust. From my perspective, we know a remarkable amount about what is ordinarily the most effectively guarded secret- a private will and a private trust. By and large the Trustees and club management have been as open about their intentions for the club as is consistent with conducting a business (and I think we can all agree football is a business) in a fiercely competitive environment.

Not only the information coming from the club but in Cheshireblue and BrianPotter we have two contributors who are businessmen and have explained on these threads how they have knowledge -one from dealings with the Trust's businesses, the other from his commercial activities. I can see no possible benefit to either of these gentlemen of their contributions being incorrect or misleading and a big down side if they were. I therefore put a huge amount of credibility on their contributions to the Rovers sold and Nicko threads (OK chesh has also had great fun baiting red top journalism!) and it might be helpful to gather their pieces into one place.

My notes are being written after Jan has kindly circulated copy of the published accounts so they are more of a commentary. Please PM Jan to get a copy of the original so the note and page references make sense.

I have three over-riding impressions of this year's numbers and report:

1) There is no tarting up. Usually when a business is put up for sale the accounts are dressed to make the old girl look as good as she possibly can. There is not much sign of that in the Rovers' annual report and accounts supporting the view that the Trust wants to see the best possible new ownership for the club and is not “greedy” about the sale if it ever happens. Of course, you cannot hide a faded beauty's business fundamentals but it is amazing what some verbal make-up and the right numerical corsetry can do to alter the picture!

2) This report is fuller than previous ones and clearly sets out to communicate what is happening and the future intent of the club with the support of its current owners. The club has taken a view on its business environment (the Premiership) and set its strategy accordingly. We might not like it (I happen to agree with it) but it is presented and cogently supported by facts and arguments.

3) The numbers are not as bad as the operating loss headline initially suggests and point towards the business plans of the current owners being achieved.

So to the analysis and two phrases taken straight from the document:

“They are in no hurry to sell. Focus is on finding a suitable investor to take the club club forward beyond the Jack Walker dynasty.”

“Given the new TV deal they (the Trustees) see no immediate requirement to invest further.”

In other words, we Rovers supporters have a one-way bet. The safety net of the Trust continues whilst an investor to take the club forward is sought in their (and the club's) own good time. The report also observes that there is a climate of emerging overseas markets, buoyant domestic TV revenues and increasing rarity of available Premiership clubs and says that the Trustees and advisers are confident that a suitable buyer will be found... eventually (my qualification).

The £3m donation was made again last year (see note 27 on page 27) but the owner's loan account was not increased and remains at the £3m contributed in 2005/6 (see note 15 on page 24). So the cash contributed by the Trustees fell from £6m overall to £3m last year. But £80 million of redeemable (ie repayable) preference shares were converted into ordinary shares (note 18 on page 25) which is to all intents and purposes a write-off of past loans and losses by the Trust.

Yes, £80 million.

To the numbers themselves. Because it is difficult to tabulate within the messageboard, I am presenting the numbers in the following way:

2006/7 - 2005/6 - 2004/5 - 2003/4. All figures are in £ millions unless otherwise specified.

Total income 43.3 - 43.4 - 41.3 - 40.8 includes

Matchday 9.0 - 7.1 - 7.3 - 6.9

Media 23.9 - 25.7 - 21.4 - 21.8

Commercial 10.4 - 10.7 - 12.4 - 12.2

(Note 2 page 19) So slipping from 6th to 10th cost us £1.8m in prize money whilst a good domestic cup run and an unprecedented European campaign boosted matchday incomes by £0.9m from Cup competitions and kept TV appearance income buoyant despite yet another reduction in the number of live Premiership TV appearances.

Operating profits were (3.3) - 0.7 - 1.0 - (1.4) (brackets denote an operating loss in 2006/7 and 2003/4)

The final bottom line losses were 3.4 - 6.9 - 5.0 - 5.1

So an operating profit turned into an operating loss yet the final bottom line has improved DESPITE the club investing in new players during 2006/7.

It is at this point that the “finer” points of accounting come into play. The report comments that the true market value of the players rose during 2006/7 to an estimated £60m (MD's statement- valuation of players). However, accountants measure actual amounts paid and received and length of contracts.

The player trading account shows the following (Note 9 page 21):

Original transfer values 26.1 - 26.1 - 27.6 - 33.7

Net Book Value 12.6 - 10.7 - 9.1 - 14.7

Contingent Liabilities 7.2 - 4.3 - 4.7 - 4.8

Reported transfer spending (not net of sales) were £11.1m in 2006/7, £8.2m in 2005/6 and £6.3m in 2004/5.

Some explanations- original value is the sum of transfer payments paid for all the players currently at the club. Rovers in common with every other club amortises the transfer payment over their length of contract. So if a player was bought on a 4 year contract at the end of 2004/5 for £4m, he would be valued at £3m in 2005/6 and £2m in 2006/7. The sum of those residual values gives us the Net Book Value figure for all the players.

If the same player in my example is then sold for £3m at the end of 2006/7, the club makes a “profit” in accounting terms on the sale of £1m because he is only worth £2m on the books.

Rovers sold players originally bought for a total of £9.4m but who had been amortised by £5.8m making them worth £3.6m at the time of sale. They were actually sold for £10.1m so the club made a “profit” of £6.5m.

This is why the club made an operating loss for the first time for three years but its overall loss was reduced.

In addition, many transfers have clauses which trigger additional payments IF players or the club achieve certain targets. Those amounts ONLY become payable if there is achievement. The total value of those clauses is the contingent liability figure (Note 24 page 27). This has jumped in 2006/7 and I think it points to the Dunn deal being made up of a lot of ifs and maybes to enable the BIG CLUB to boast a £2.2m transfer figure.

A final point on player trading is that the post balance sheet events (note 29, page 27) refer to the club entering into transfer deals during the most recent summer window which cost net transfer fees of £2.7m.

The big number in the accounts is wages of 36.7 -33.4 - 31.3 - 31.3.

That is a 10% increase in the last year. Within that number £32.2m is actually paid out to employees (Note 4, page 19). There was minimal movement in the cost of the three executive directors who together including all associated costs come to a very reasonable £617K (Note 5 page 20) – less than Fat Freddie paid himself at Newcastle.

Staff numbers were 232 – 230 -231 -244 but Note 4 shows a shift from off-field staff numbers to senior players and management who have grown from 57 to 69.

It is worth highlighting Tom Finn's comment that cost increases outside of the players were kept down to 0.35%.

The Balance Sheet showed a further deterioration in net current liabilities from £14.8m to £22.3m. This reflects the increase in bank borrowings from £5.5m to £12.7m (although interest payments were “only” £0.9m- Rovers pay 3.25% over LIBOR which compares favourably with the interest rates paid by Liverpool or Manchester United) and transfer fees not yet paid of £6.6m; up from £3.9m (Note 14 page 23).

OK, what is the underlying story?

Quite simply in the face of static average gates, the Rovers gambled last year by spending some of the 2007/8 windfall from the new BskyB and Setanta deal ahead of time. John Williams explained that the club foresaw the rapid rise in transfer fees so structured itself by bringing in players last year and letting the wage structure adjust ahead of time.

So the percentage of income spent on wages which had been falling reaching 76% the previous season shot up to 85% in 2006/7 and John Williams forecasts wages reaching £40m in 2007/8. However, with turnover likely to be over £50m this season, the ratio will again fall below 80%.

The crunch is, Rovers spent £7m more cash during 2006/7 than it received. This is after three years during which the net cash flow (irrespective of accounting losses) had remained in balance.

This is the simple answer to where has the media income gone?- the club has gone out of its way to smooth the impact of this sudden massive rise and used what financial strength it had to buy ahead of a rising transfer market whilst keeping the club competitive in wages paid for the players within its bracket.

The crawling and regular increases in wages for star players and management linked to contract extensions is all part of the tactics of keeping wages competitive yet under control whilst maintaining the value of the players to the club over a longer period.

But, this also means the club is now looking to pay down its external bank borrowing as the higher media income is coming in and putting itself back into a position of being able to react to a rainy day (threat of relegation or the media deals beginning to fall in value). Hence the current reluctance to gamble on transfers when there clearly was no value available in the market. The early FA Cup exit won't have helped either.

Blackburn Rovers are putting the preservation of the club's Premier League status for the foreseeable future as its number one priority and to the extent that financial planning can predicate football success, that is what they are achieving. For younger supporters this is deeply unexciting but as one of many who were scarred by 26 years of being outside the top division, I can see exactly where the Board are coming from.

The Rovers remain an extremely well-run business and a cornerstone of the Blackburn community.

[Boz]

Excellent review and succinct.

I'm sorry but can I indulge myself in just one minor anomaly please?

Player trading, original transfer values as at 2007 - £27.8 and not £26.1, this was the opening position.

Might I also query on page 6 under operating expenses, additional UEFA Cup costs of £0.4m, if whether you think that this is the overall net cost of competing in the UEFA Cup?

[USRoverME]

I also had a quick query, but first I'll offer my yearly thanks for the yearly review!

So, basically, the quick answer to a question from another thread of "where did the media money go" is:

It went primarily went 3 places:

1 - it went to player transfers a year before we got the money (an approx 4 mil bump in transfers);

2 - it went into that 10% bump in player wages las season(an approx 3 mil bump) and this season (an estimated 4 mil more);

3 - it was used to pay down some outstanding debt to give the club flexibility in spending in the near term duture (harder to quantify numbers)

is that a logical summary? I feel confident about 1 and 2, but you give hints that some form of 3 did occur.

[FourLaneBlue]

Interesting report as always Philip.

One thing that stands out....85% of income going on wages. That is just far too much.

[modes98]

Great read as always.

The only worry is the increase in borrowing from the banks, when the trust feel there is no need to give us the added £3m they were before. However if this is only a short term solution and they don't keep borrowing that's fine.

[Florida Rover]

Thanks for your analysis and taking the time to digest that document and put it "English".

Not so bad as I would have thought based on some hysteria here but certainly not the sexy spending of back in the day.

[LeChuck]

2006/7 - 2005/6 - 2004/5 - 2003/4. All figures are in £ millions unless otherwise specified.

Commercial 10.4 - 10.7 - 12.4 - 12.2

Hmm...what are the reasons behind this? Seems like a large drop.

I'd be interested to know how these figures stand up to the theory that we're making more money from sacrificing the club shop to Sports World rather than running it ourselves...

[Paul Mellelieu]

I spotted that too Chuck. Is Beamo past his best?

Anyway many thanks as usual Philip.

[SIMON GARNERS 194]

''Blackburn Rovers are putting the preservation of the club's Premier League status for the foreseeable future as its number one priority and to the extent that financial planning can predicate football success, that is what they are achieving. For younger supporters this is deeply unexciting but as one of many who were scarred by 26 years of being outside the top division, I can see exactly where the Board are coming from.

The Rovers remain an extremely well-run business and a cornerstone of the Blackburn community.''

We are in good hands,staying in the top flight is now No1 priority,relegation would be a disaster.

Walsall at home on a wet wednesday night anyone?........never let it happen again.

[Driftpeasant]

Interesting report as always Philip.

One thing that stands out....85% of income going on wages. That is just far too much.

Rovers are a non-profit organization who put players on the field as their primary purpose. I think that 85% of income going to this is completely normal... I mean, if you totaled capital expenditures + wages at most companies I'd think it would hit 85%...

[Exiled in Toronto]

Thanks for putting in the effort Phillip in presenting the accounts.

There are a few areas I feel you have glossed over or ignored in your positive view of things, that to me are necessary to put a more balanced assessment as to the performance of the executive management.

The only real part of income for which the executives could be held directly accountable is commercial. Place money and gate money are so tied to the team's perfomance that they should be laid at Mark Hughes' door. To see commercial income decline for the second year in a row, despite unprecedented Euro and FA Cup runs, is poor. Also, the most visible manifestation to most supporters of the club's commercial ventures is an outsourced, shabby excuse for a shop. The net outcome is falling income and disgruntled customers on activites that are really the only variable income in management's hands.

Their second, clear accountability is the wage bill. I do not understand why increasing the wage bill AHEAD of a windfall income bonanza can be classed as anything other than inept. These increases are permanent and will only go up further. For a club with one of the lowest incomes to be fuelling player wage inflation is crazy.

Thirdly, I was struck by the disparity between virtually every poster's assessment of the Academy (usless, close it down etc,) to the Chairman's review which essentially said, "Another terrific year for the Academy with countless (!) players getting games in the ressies." So what? The Academy is needed to make up for our inability to compete with peer clubs in transfer funds and should be assessed as such. Too many of the ten players brought in are essentially squad makeweights wich the Academy should be producing.

Add these to the positives that you outlined and I would give the executives an 'Average' assessment.

[trueblue]

Great revue yet again... Many thanks Philip for making the balance sheet understandable.

Satisfying to know that the trustee's ARE concerned about selling to the right buyer and not just turning a quick buck as some on here would have it.

[Jan]

Rovers are a non-profit organization who put players on the field as their primary purpose. I think that 85% of income going to this is completely normal... I mean, if you totaled capital expenditures + wages at most companies I'd think it would hit 85%...

Capital expenditure has nothing to do with the profit and loss account. It's a balance sheet item. Wages are a profit and loss item. Capital expenditure and wages together might total 85% of CASH spent, but even then I don't think it would be considered healthy as you have all of the running costs of the business to find out of the remaining 15%. That'a why Rovers don't make a profit- you still have to pay electricity, gas, insurance, etc out of very little left after wages.

[philipl]

Replying to the points raised:

Boz; you are right, I made a typing error and entered the same number twice

ME; you are right except point 3 as there was no debt pay down to non-related parties. Bank borrowing went up £7m.

LeChuck; sorry I don't have an answer on commercial income dropping 3%

EiT; bit harsh as the Execs have managed extremely well if you put last year's numbers into the four year picture. They have set strategic targets and delivered. Other examples are the way that non-player costs have been controlled, the club has found cash to invest about £2m in new fixtures and fittings over 4 years (probably medical/training equipment mostly) and the way the club has negotiated very good deals on new players when Hughes et al have found them. The amount of transfer fee money we owe is a multiple of transfer fee money owed to us. That is a zero sum game so for Rovers to be using other people's money to play for us means other clubs are paying cash out on transfers and not getting cash in.

Jan; yes

[Paul Mellelieu]

Replying to the points raised:

LeChuck; sorry I don't have an answer on commercial income dropping 3%

Jan; yes

Over two years, it's dropped by £2m

[Bazzanotsogreat]

One point of future optimism is that income from media for the next financial year, will be at least 16 million more (10th place finish) than this income for 06/07

[philipl]

Let me put what has happened in the numbers into an overall business perspective.

1) Jack Walker and the Trust have AVERAGED £5m to £6m cash injections to Rovers ever since Jack first stepped in with £25m new share capital which swamped the sub-£1m shares then in issue and took control of the club. That has not come in smoothly- there were years where Jack put next to nothing in.

2) The Trustees have steadily put £6m a year in for several years after the big numbers for the promotion and first season up. The £20m transfers in 2001/2 was funded roughly 50/50 by the Trustees and bank borrowing and that bank borrowing has stayed there as a reasonably constant number ever since (OK it dipped when Duff and Dunn were sold but it soon shot back up).

3) If you look at it from the Trustees' perspective, there are plenty of downside risks that they will be called on to make extraordinary payments to the club:

- A new manager is needed who needs his own backroom team and then his own players

- A relegation battle

- Please not, but managing the consequences of relegation and trying to get back

- Getting the players to keep us up if we got back

- Getting into the Champions League and snapping up the type of players who would then be interested in joining us

- Mark Hughes finds the new Pele and he costs us a few million

It is odds on that one or more of those circumstances will have to be faced at some point in the not too distant future.

4) The opportunity to reduce the amount they are putting in came as a one-off; the extraordinary 60% boost to media income. Whilst it is easy to list the opportunities to spend more Trust money, there are hardly any footballing circumstances in which Rovers could start to hand money back to the Trust.

Therefore it makes sense to take advantage of the new TV deal so when the Rovers come begging in future, the club is looking to get back to old levels of help. Putting more on top of a steady £6m pa going up to a level at which the club becomes utterly dependent on Trust handouts and starts seriously depleting the cash the Trust has available for investing in the money-making businesses that underpin the Rovers would be bonkers.

5) This year Rovers will be spending £40m on wages but the EPL overall will burst the £1bn mark. In other words, Rovers will be 20% UNDER the average paying £40m. The club clearly embarked on a strategy of smoothing the impact of the inevitable helter-skelter rise in wages by getting a bit of a pre-emptive strike in first. It seems to be working in terms of the club not really coming under that much pressure to sell top players for two windows running now.

[philipl]

One point of future optimism is that income from media for the next financial year, will be at least 16 million more (10th place finish) than this income for 06/07

Wages up another £4m + Trust income down £3m + repay last year's £7m borrowings + gate money down £0.3m + Cup money down £1m

Leaves a smidgeon for spending on rubbish players in January or keeping calm whilst we see whether the signs emerging at the end of January that several clubs are no longer on gravy trains will make for a more balanced summer window.

[Bazzanotsogreat]

Wages up another £4m + Trust income down £3m + repay last year's £7m borrowings + gate money down £0.3m + Cup money down £1m

Leaves a smidgeon for spending on rubbish players in January or keeping calm whilst we see whether the signs emerging at the end of January that several clubs are no longer on gravy trains will make for a more balanced summer window.

Good job We will get that extra cash from the new sky deal. Wouldn’t like to think what next years account would look like without it.

[colin]

I suppose you have to be an accountant to fully understand that lot, but thanks once again to all concerned for letting us know that we are not Leeds United or Liverpool.

A tip of the hat to Phillip, Jan, Chesh & Brian Potter for putting it all in lay-persons' (ahem) terms.

[philipl]

Good job We will get that extra cash from the new sky deal. Wouldn’t like to think what next years account would look like without it.

Chicken and egg.

Eighteen months ago, Rovers and all other EPL clubs were budgeting for a 10% decrease in TV moneys, not the 60% increase which transpired. At that point, the Premiership had actually suceeded in stopping the wage spiral.

We would have been OK without it- probably better off as the change caused the Trustees to see that now was the time to seek a new owner and reduce their support for the time being whilst the latest twist in wages and transfer fees really has exposed the pain of Rovers being in a poor, small town.

[FourLaneBlue]

Rovers are a non-profit organization who put players on the field as their primary purpose. I think that 85% of income going to this is completely normal... I mean, if you totaled capital expenditures + wages at most companies I'd think it would hit 85%...

I'm sorry but I disagree. If you look at our competitors then very few will be running at such high levels as 85%. It needs to be brought down to allow some space for the money to be used on transfer fees, signing-on fees etc

[LeChuck]

LeChuck; sorry I don't have an answer on commercial income dropping 3%

Sorry, I wasn't very clear on what I meant. I meant the drop from £12.4m to £10.4m over two years, as Paul Mellelieu said...

Over two years, it's dropped by £2m

What's also more confusing is that we managed over £12m income from the commercial side three years ago as well. Around that point we were playing horrible football with no 'star' players at the wrong end of the league, so how have we apparently become less marketable since then?

I'm also interested to know how Sports World owning the club shop is benefiting us financially, shouldn't this be shown in the commercial section?

[Scotty]

I may have missed it but isn't the fact we appear to have a debt of over £20m worth mentioning somewhere?

[philipl]

FLB- the wages point is covered by the fact that wages started rising early last year and hopefully will increase by a smooth progression to around £40m this year. The TV money is a one-shot step increase so the percentage shot up to 85% last year and should drop under 80% this year.

Scotty- I covered debt when I talked about net current liabilities ie the amount we owe to be paid within 12 months in excess of the amount we are due to receive. That is pretty well mostly bank borrowings but we have got a healthy excess of transfer fees yet to be paid over transfer fees yet to be received. Very clearly, the tight control on transfer spending this January will help significantly to getting that debt back down but the failure in the UEFA and FA Cup competitions compared with last year is the equivalent of dropping three places in the league.

So if the club budgets on 10th which I believe it does, meeting budget probably now needs 8th or 9th (they won't have budgeted for as good a cup year as last but probably for better than Rovers 1 Coventry 4)