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Football Shorts — Part II

Football has to wake up to the financial reality ahead of it — a lot of fixed costs and reducing income. Even in the Premier League some clubs (including those close to home) are going to struggle

Football Shorts is an analytical series 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.

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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 New York Stock Exchange 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	Â
European	Depreciation of assets	Â
Player trading* (key to the Profit & Loss account but not part of turnover)	Exceptional costs	Â
Â	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 just how much of the total turnover that 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-to-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 and a 20% reduction in broadcasting and commercial revenues.

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

Scenario I — 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 matchday income and 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 and financing costs.

EBITDA of 17 Premier League Clubs based on 2018-19 accounts under two different scenarios:

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

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

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

The clubs with the highest matchday 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, are 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 clubs' abilities to move players on and reduce costs:

Squad size and age

Staff costs in £ millions	Staff costsÂ	Squad size	Average age
Arsenal	234	27	25.6
Aston Villa	Â	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	Â	22	27.8
Sheffield United	Â	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

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 numbers 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:

Squad age profile

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%

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 â…“ 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:

Distribution of player contract lengths

Contract expiry distribution	2020	2021	2022	2023	2024	2025
Arsenal	15%	23%	23%	27%	12%	Â
Aston Villa	23%	27%	5%	23%	23%	Â
Bournemouth	33%	19%	22%	15%	11%	Â
Brighton & HA	8%	19%	27%	46%	Â	Â
Burnley	25%	42%	13%	17%	4%	Â
Chelsea	11%	15%	22%	22%	22%	7%
Crystal Palace	10%	57%	24%	10%	Â	Â
Everton	20%	8%	28%	12%	24%	8%
Leicester City	19%	12%	23%	19%	27%	Â
Liverpool	12%	12%	12%	35%	31%	Â
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%	Â
Sheffield United	38%	19%	19%	19%	4%	Â
Southampton	14%	24%	38%	19%	5%	Â
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%	Â

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.

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