Tuesday, May 24, 2016

Brentford - Methods Of Dance


It is a sign of how far Brentford have progressed that many of their supporters were somewhat disappointed with their ninth place finish in this season’s Championship. Their expectations had been raised by the Bees reaching the play-offs the previous campaign, which chairman Cliff Crown described as “our most successful in living memory.”

This was fair comment, given that Brentford had finished fifth in their first season in the Championship for 22 years, and were plying their trade in League Two as recently as 2009. In fact, Brentford had been languishing outside the top two divisions for the best part of 60 years before gaining automatic promotion from League One in 2014, which amply demonstrated the club’s ability to bounce back after the heartbreaking defeat to Yeovil Town in the previous season’s play-off final.

As Brentford owner Matthew Benham noted, “We’ve come a long way in a fairly short space of time and that can’t be forgotten.” Crown, in turn, described the 2015/16 season as one of “consolidation, before we kick on again.” That seems reasonable enough, considering the Bees’ impressive finishing run, when they won seven of their last nine games (though that did follow a less enjoyable run of 10 defeats in 13 games).

"Judgement Day"

On the face of it, the reason for Brentford going backwards was fairly straightforward, namely the departure of manager Mark Warburton, who had seemed to be working a minor miracle by guiding the club to an impressive fifth place the previous season. A former city trader, Warburton had been promoted from his former role as Brentford’s sporting director to manager by Benham, but his contract was not renewed following a disagreement about the future philosophy of the club.

Warburton was replaced by Marinus Dijkhuizen, the Excelsior manager, in June 2015, but he left just four months later after a miserable time with Benham himself admitting, “On the pitch, the level of the team is not where it was 12 months ago.”

He added, “Very quickly we realised that he wasn’t going to be our guy. But to be fair to Marinus, he was also dealt a bad hand. Such a vast turnover of players. Massive upheaval.” However, he did also note, “There was a huge cultural divide between him and the players.”

"Happy Jake"

In fairness to the Dutchman, not only did he lose star striker, Andre Gray, who was sold to Burnley, but also had to cope with a disastrous, newly laid pitch that contributed to injuries to a number of players, including record signing Andreas Bjelland, who was ruled out for the season.

Lee Carsley, the Development Squad manger, was briefly promoted to Head Coach, before making way for the current incumbent, Dean Smith, who arrived from Walsall in November. Despite losing a couple of key players in the January transfer window (James Tarkowski to Burnley and Toumani Diagouraga to Leeds United), Smith led the team to a top ten finish.

Given all the issues experienced this season, there is cause for optimism in the future. As co-director of football Phil Giles put it, “There's been so much happening this season with injuries, pitches, three managers, players striking, broken legs; all this kind of stuff. It can't happen every season surely.”

Overall, it does look like all the millions invested by Benham are beginning to pay off. He is a lifelong Brentford fan, who owns two betting and statistic companies, Smartodds and Matchbook. His initial involvement came in 2006, when the supporters trust, Bees United, needed another £500k to complete their takeover.

"Good Vibrations"

At that time, Brentford were in deep financial trouble. As former Chairman Greg Dyke said, “It is fair to say that without Bees United there would probably not have been a club for Matthew to take over.”

That said, Benham is the man that has brought financial stability to Brentford, first by pledging to inject a minimum of £5 million of new capital between 2009 and 2014, then by taking full control in June 2012, when he took over Bees United’s 96% shareholding.

Dyke again: “The days of spending monies that we did not have and borrowing monies that we could not repay are long gone for this club. Matthew’s monies have removed us from the hand to mouth existence that we endured.”

In fact, Benham’s financial commitment to Brentford was up to £76 million as at June 2015. The long-term aim is clearly to create a sustainable club, but for the time being its ability to maintain a competitive challenge in the Championship is almost entirely reliant on the owner’s generosity.

"He blinded me with science"

In addition, Benham’s background has led to Brentford being regarded as England’s prime exponents of statistical analysis. This approach was pioneered at FC Midtjylland, who won the Danish league in 2015, where Benham is the majority shareholder.

Benham himself does not appear completely comfortable with the “Moneyball” label being applied to this strategy, as it is so often misused and misunderstood: “Everyone came to the conclusion that our methods consisted only of maths and nothing else. However, there has always been a mix between maths and traditional coaching. Analytics has been responsible for identifying some of our most successful players. But analytics are one part of a very big process.”

The approach was further explained by Rasmus Ankersen, Brentford’s other co-director of football: “We really believe analytics can make a difference and have a role to play in football and will have a bigger role to play in the future. But no matter how many times we say we also do all the traditional stuff, people don’t listen because the narrative is set. We don’t disrespect or disregard traditional scouting or coaching at all.”

He added, “Brentford and Midtjylland are small clubs with small budgets and that means you’ve got to think differently. If you just do the same as the other team then money becomes the decisive factor and we will lose, so we have got to take a different approach. Analytics is a different weapon. We had to go down that route to find an edge.”


Brentford’s challenge was highlighted by their 2014/15 financial results, which saw their loss nearly double from £7.7 million to a hefty £14.7 million, despite revenue rising by £5.5 million to a record £10.0 million following promotion to the Championship.

All three revenue streams increased: (a) broadcasting rose £3.4 million from £1.1 million to £4.4 million, thanks to the higher TV deal in the Championship; (b) ticketing shot up £1.4 million (81%) from £1.7 million to £3.1 million; (c) commercial was up £0.7 million (44%) from £1.7 million to £2.4 million.

However, wages also surged by £7.8 million (78%) from £10.0 million to £17.7 million, which the club said was “required to not only ensure survival but compete in the Championship”. In addition, a significant element was “as a result of bonuses paid out based on the first team’s league position”.

In addition, player amortisation was £1.8 million higher at £2.1 million, while other expenses climbed £1.1 million to £7.3 million.

Profit from player sales increased by £1.4 million from £0.6 million to £2.0 million, but other operating income (unexplained) fell by £3.1 million from £3.9 million to £0.9 million.

It should be noted that Brentford have changed the way that they account for player trading. In the past, the club wrote-off transfer fees as they occurred, but they now capitalise player registration costs and amortise charges over the length of the contract (as do the vast majority of football clubs). This has resulted in a restatement of the 2014 comparative, but, interestingly, this does not explain why the revenue figure has also changed.


Although Brentford’s £15 million loss is clearly not great, it is by no means the worst in the Championship, having been “beaten” by Bournemouth £39 million, Fulham £27 million, Nottingham Forest £22 million and Blackburn Rovers £17 million. The harsh reality is that hardly any clubs are profitable in the Championship with only six making money in 2014/15 – and most of those are due to special factors.

Ipswich Town were the most profitable with £5 million, but that included £12 million profit on player sales. Cardiff’s £4 million was boosted by £26 million credits from their owner writing-off some loans and accrued interest. Reading’s £3 million was largely due to an £11 million revaluation of land around their stadium. Birmingham City and Wolverhampton Wanderers both made £1 million, but were helped by £10 million of parachute payments apiece.

So the only club to make money without the benefit of once-off positives was Rotherham United, who basically just broke even – and ended up avoiding relegation to League One by a single place.


Of course, losses are nothing new for Brentford, though there has been a clear willingness to accept higher losses since Benham came on board. In the five years up to 2010, the annual losses were kept down to £1 million or lower, but in the five years since then Brentford have reported aggregate losses of £36 million, averaging £7 million a season.

The approach was outlined by Crown in 2013: “The board continues to run the club with a level of losses commensurate with the capital injections by Matthew Benham. We believe that this is the correct strategy in a results oriented business and one which involves a prudent approach to the level of risk to the financial security of the club. The continuing losses are accepted by Matthew and your board as the price to pay to reach our goals.”

That said, Benham explained that “It wasn’t sustainable for us to continue making such heavy losses as we were last season. But off the pitch, we (now) have a more sustainable structure. The club isn’t operating anywhere near the loss it was operating at 12 months ago.”


Part of that improvement will have been due to profits made from player sales. These can have a major impact on a football club’s bottom line, but Brentford only made £2 million from this activity in 2014/15, presumably for the sale of Adam Forshaw to Wigan Athletic.

In fairness, this is not an enormous money-spinner outside the Premier League, though some clubs made a lot more than Brentford here: Norwich City £14 million, followed by Ipswich £12 million, Leeds United £10 million and Cardiff City £10 million.

Actually, that £2 million was the highest amount that Brentford have made from player disposals for ages, accounting for almost 50% of the profits from player sales in the last nine years.


That is all going to change in the 2015/16 accounts with the lucrative sales of Andre Gray, Moses Odubajo, James Tarkowski, Stuart Dallas, Will Grigg and Toumani Diagouraga, which should bring in at least £15 million of profits.

Crown explained the thinking behind these departures: “Sometimes we lose players that we would rather keep – whether for offers that the leaving players feel they can’t refuse, and more recently for the slightly more practical purposes of complying with the League’s Financial Fair Play (FFP) regulations.”

This was echoed by Benham: “We have to cut our cloth accordingly… which unfortunately includes having to accept big bids for our best players from time to time.”

At least players are now leaving for big money rather than peanuts. The club has also got smarter about structuring its transfers, as it has been reported that they will earn around £3.5 million in add-ons on the Gray/Tarkowski deals as a result of Burnley’s promotion to the Premier League.


To get an idea of underlying profitability, football clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation), as this strips out player trading and non-cash items. Again, Brentford had one of the lowest with their minus £14 million EBITDA only better than Bournemouth minus £25 million, Nottingham Forest minus £20 million and Blackburn Rovers minus £15 million.

To be fair, only three clubs had a positive EBITDA in the 2014/15 Championship (Wolves, Birmingham City and Rotherham) and none of those clubs generated more than £1.5 million. In stark contrast, in the Premier League only one club (QPR) reported a negative EBITDA, which is testament to the earning power in the top flight.


Brentford’s revenue has increased in line with the club’s rise through the divisions: £3.0 million in League Two in 2009, £4.4 million in League One in 2014, and £10.0 million in the Championship in 2015. As Crown said after the promotion to League One, “it was important for the club’s long-term future to get promoted as soon as possible.”

One other important driver for revenue movements before promotion to the Championship was progress in the Cup competitions, e.g. 2013 was boosted by taking Chelsea to a replay in the fourth round of the FA Cup.


However, Brentford’s revenue was nowhere near the big hitters in the Championship. In fact, it was the smallest in the division in 2014/15 at £10 million. To place this into perspective, four clubs enjoyed revenue higher than £35 million (over £25 million more than Brentford): Norwich City £52 million, Fulham £42 million, Cardiff City £40 million and Reading £35 million.

Benham is acutely aware of this structural imbalance: “You have to remember, our revenue is very low. So we can’t ‘spend, spend, spend’ like other teams do. We have to be realistic. We have the lowest revenue in the Championship by far.”

This alone explains Brentford’s desire to find an edge by better use of analytics, as it’s a competitive necessity. Given their revenue level, Brentford have punched well above their weight in finishing 5th and 9th in their two seasons in the Championship.


Of course, these revenue figures are distorted by the parachute payments made to those clubs relegated from the Premier League, e.g. in 2014/15 this was worth £25 million in the first year of relegation.

If we were to exclude this disparity, then the revenue differentials would be smaller, but Brentford would still be rock bottom of the league table, behind the likes of Wigan Athletic, Huddersfield Town, Rotherham United and Millwall – and two of those clubs ended up being relegated.


The increasing importance of TV revenue higher up the football pyramid is seen by Brentford’s revenue mix. In the Championship, broadcasting accounted for 45% of their total revenue, compared to just 24% in League One. As a result, match day’s share fell from 38% to 31% and commercial decreased from 38% to 24%.


In the Championship most clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to just £4 million of central distributions: £1.7 million from the Football League pool and a £2.3 million solidarity payment from the Premier League.

However, the clear importance of parachute payments is once again highlighted in this revenue stream, greatly influencing the top eight earners, though it should be noted that clubs receiving parachute payments do not also receive solidarity payments. As a comparison, Brentford’s broadcasting income was £4.4 million, while Fulham earned nearly £30 million.


Looking at the television distributions in the top flight, the massive financial chasm between England’s top two leagues becomes evident with Premier League clubs receiving between £65 million and £99 million, compared to the £4 million in the Championship. In other words, it would take a Championship club more than 15 years to earn the same amount as the bottom placed club in the Premier League.

The size of the prize goes a long way towards explaining the loss-making behaviour of many Championship clubs. As Benham observed, “If we get into the Premier League, things become easier because of the TV deal money.”


This is even more the case with the astonishing new TV deal that starts in 2016/17, which will be worth an additional £30-50 million a year, to each club depending on where they finish in the table. For example, I have (conservatively) estimated that the club finishing bottom in the Premier League next season will receive £92 million, which is £86 million more than a Championship club not receiving parachute payments.

From 2016/17 parachute payments will be higher, though clubs will only receive these for three seasons after relegation. My estimate is £75 million, based on the percentages advised by the Premier League (year 1 – £35 million, year 2 – £28 million and year 3 – £11 million). Up to now, these have been worth £65 million over four years: year 1 – £25 million, year 2 – £20 million and £10 million in each of years 3 and 4.


There are some arguments in favour of these payments, namely that it encourages clubs promoted to the Premier League to invest to compete, safe in the knowledge that if the worst happens and they do end up relegated at the end of the season, then there is a safety net. However, they do undoubtedly create a significant revenue disadvantage in the Championship for clubs like Brentford.

Crown has openly stated that Brentford’s goal is “sustainable Premier League football”, but Benham’s ambitions don’t stop there, as he has noted that the new deal “to an extent levels the playing field”, as seen by the improved performances this season of clubs like Southampton, West Ham and, of course, Leicester City.


Despite rising 81% to £3.1 million, Brentford had one of the lowest match day incomes in the Championship, only ahead of Huddersfield Town £3.1 million, Rotherham £2.6 million and Wigan Athletic £2.4 million. This was far lower than clubs like Norwich City £10.7 million, Brighton £9.8 million and Leeds United £8.8 million.

This was even though attendances increased from 7,715 to 10,700 in 2014/15 with the sale of season tickets almost doubling to 5,641. This was 140% higher than the 4,469 average in League Two in 2007/08. There has been a dip in attendances 2015/16 to 10,310, which was only ahead of Rotherham – and some 2,300 behind Huddersfield Town, the next lowest club.


So Brentford’s average attendance is still one of the smallest in the Championship, though it is a similar level to Bournemouth who managed to gain promotion despite this disadvantage. Interestingly, the south coast club operated a similar strategy to Brentford, effectively speculating to accumulate, as the club’s owner heavily financed their attempts to go up.

Brentford have some of the lowest ticket prices in the Championship, especially at the important cheaper end, as explained by the board: “We took a conscious decision to keep season tickets and match day prices to a level that would reward all those who had supported us through so many previous seasons.” Moreover, season ticket prices have been frozen for the 2016/17 season in line with the club’s views on affordability.


The club’s income is clearly limited by the 12,300 capacity of Griffin Park, hence the plans to build a new 20,000 capacity stadium at Lionel Road. The club has acquired the site and has planning permission, but needs to buy one remaining piece of land before any work can start.

This is subject to a Compulsory Purchase Order, but the tribunal still needs to set the price. Even though the land is only valued at £2.5 million, Brentford have offered £6.25 million in an attempt to accelerate the process (the owners are apparently looking for £8.5 million).

The club has admitted that this is a very complex development, including not only the construction of a new stadium, but also a hotel and over 900 apartments that will help fund the development (along with the sale of Griffin Park).

"Is that you Mo-Dean?"

Benham has already provided around £25 million of funding for the new stadium, though the final cost could rise to £45 million to overcome all the challenges. In particular, the site is surrounded by three railway lines, which poses “unique problems”, including the construction of a bridge across one of the lines.

This is another sign of the owner’s commitment, though the delays have been frustrating for Benham: “When I first became involved with the club, around ten years ago, we were talking about the new stadium possibly being used as a venue for the 2012 Olympics, but it has drifted further and further away.” Nevertheless, the club “remains confident of being in the new stadium ready for the 2018/19 season.”


Once again, despite rising 44% to £2.4 million, Brentford’s commercial income was also among the smallest in the Championship, way behind Norwich City £12.8 million, Leeds United £11.3 million and Brighton £8.9 million. In fact, it was only higher than Millwall £1.9 million and Wigan £1.5 million.

Brentford’s shirt sponsor is Matchbook, the global sports betting exchange and one of Benham’s companies. The deal was extended for the 2015/16 season with an option to extend for one more year. The partnership also sees Matchbook branding on the roof of the New Road Stand.

In 2014 Adidas extended the kit supplier deal by four years until the end of the 2018/19 season.


Brentford’s wage bill shot up by 78% (£8 million) from £10 million to £18 million in 2014/15, though this was impacted by bonuses for finishing in the play-off positions. Effectively, Brentford have increased their wage bill in order to get out of League Two and League One, and then upped it again in the Championship.

This has resulted in a fairly horrific wages to turnover ratio of 178%, though this was actually better than the 224% in League One.

Of course, wages to turnover invariably looks terrible in the Championship with no fewer than 10 clubs “boasting” a ratio above 100%, but Brentford’s 178% was only surpassed by Bournemouth 237% - and that was inflated by substantial promotion bonus payments.


However, Brentford’s £18 million wage bill was still in the lower half of the Championship. On the fairly safe assumption that Bolton’s wage bill was higher than Brentford’s, the Bees only had the 15th highest wages in 2014/15.

Of course, this was still ahead of many other clubs, which might surprise some Brentford fans, as Benham noted, “The big myth of last season was the squad was run on a shoestring. In reality, the total first team budget was mid-table.”


That said, Brentford will always struggle to keep its top talent, as there are some clubs that will pay players a lot more. The impact of parachute payments is again felt keenly here with the highest wage bills found at Norwich City £51 million, Cardiff City £42 million, Fulham £37 million and Reading £33 million.

Benham appreciates this point: “It comes back to budget. Once we went up, and the players became aware that if they were playing for any of our Championship rivals, they would get paid more money, we had a job on our hands keeping certain players happy. Our structure is much more bonus-heavy, which hasn’t helped us.”

This is likely to mean a fairly frequent turnover of players, as those departing will need to be replaced by new recruits, who, if they do well, will almost inevitably be sold. Many clubs have to follow this strategy, but it’s a difficult one to successfully execute.


Another aspect of player costs that has risen is player amortisation, which is the method that most football clubs use to expense transfer fees and was adopted by Brentford this season. This has grown by £1.8 million from £0.3 million to £2.1 million in 2015.

As a reminder of how this works, transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract via player amortisation. As an illustration, if Brentford were to pay £5 million for a new player with a five-year contract, the annual expense would only be £1 million (£5 million divided by 5 years) in player amortisation (on top of wages).


Brentford’s £2.1 million is towards the lower end of the Championship, significantly surpassed by most other clubs, especially those relegated from the Premier League in recent times, i.e. Norwich City, Cardiff City and Fulham. Of course, this expense will have grown considerably in 2015/16 based on the much high transfer expenditure recently.


For many years, Brentford spent hardly anything on player recruitment, but have averaged gross spend of around £5 million in the last two seasons. This season alone included the following purchases: Andreas Bjelland (FC Twente) £2 million, Lasse Vibe (IFK Göteborg) £1 million, Maxime Colin (Anderlecht) £0.9 million and Josh McEachran (Chelsea) £0.8 million.

However, as a result of the high player departures, Brentford actually had £12 million of net sales over the last two seasons. Benham argued that this was a necessity, “With FFP we were always going to have to sell players.” This meant that they were comfortably outspent by the likes of Derby County £29 million and Middlesbrough £23 million.


It’s a challenge to sign players, but Brentford can offer certain advantages, as Benham explained: “What we can demonstrate to potential new signings is that if they come to Brentford, and excel, then it can be a springboard for their careers. Look at what it did for Andre, Moses and Forshaw. When they come to a team like us, they also have more chance of getting regular first team football.”

Brentford have also made good use of the loan system, e.g. last season their loans included Sergi Canos from Liverpool, Marco Djuricin from Red Bull Salzburg and John Swift from Chelsea.


Brentford’s net debt more than doubled in 2015 from £19.2 million to £43.5 million, as gross debt rose by £23.8 million from £22.7 million to £46.4 million and cash fell £0.5 million from £3.5 million to £3.0 million.

Most of the debt (£43.4 million) is owed to the club’s owner, Matthew Benham, and is interest-free, though secured by a legal charge over the club’s freehold property. In addition, there are £2.9 million of other loans, while the club has a £500,000 overdraft facility.


Brentford’s was by no means the largest debt in the Championship, being lower than nine other clubs. In fact, four clubs had debt over £100 million, including Brighton £148 million, Cardiff City £116 million and Blackburn Rovers £104 million. Bolton Wanderers have not yet published their 2015 accounts, given their much-publicised problems, but their debt was a horrific £195 million in 2014.

That said, the vast majority of this debt is provided by owners and is interest-free, so the amounts paid out by Championship clubs in interest is a lot less than you might imagine.


Even after adding back non-cash items such as player amortisation and depreciation, then adjusting for working capital movements, Brentford have made substantial cash losses from operating activities, e.g. £10.8 million in 2015. They then spent a net £3.2 million on player recruitment and a hefty £16 million on infrastructure investment, i.e. stadium development. This was funded by £23.7 million of loans and £5.9 million of new share capital.

Since 2009 the club’s only real source of funds has been money pumped in by Matthew Benham. This has been used to cover operating losses (£30 million) with a further £24 million spent on infrastructure investment (stadium and training ground) and £8 million on acquiring a subsidiary (for the Lionel Road site). Only £4 million went on player purchases (net), made up of £8 million purchases and £4 million sales.


Benham’s total commitment was up to £76 million as at 30 June 2015, comprising £43 million of loans, £25 million of non-voting preference shares, £5 million of new share capital and £2 million of working capital loans. This included £24.5 million on the Brentford Community stadium.

With some justification, the chairman described this as “magnificent financial backing”, while even Mark Warburton, who has more reason than most to criticise the owner said, “You have to respect the fact that someone’s put so much money into the football club and put it into this state of health.”


Of course, the long-term aim would be to reduce this reliance on Benham. As far back as 2013, the chairman said, “We believe as a board we should be striving to be breaking even on a sustainable basis, without the requirement for substantial cash injections from our owner.”

Being so dependent on one individual can be a concern, but Benham has to date been willing to provide substantial funding. However, Brentford will not be able to simply buy success, as they will need to continue to comply with the Financial Fair Play regulations.

Under the rules for 2014/15, clubs were only allowed a maximum annual loss of £6 million (assuming that any losses in excess of £3 million were covered by shareholders injecting £3 million of capital). Any clubs that exceeded those losses were subject to a fine (if promoted – like Bournemouth) or a transfer embargo (if they remain in the Championship – as was the case with Fulham, Nottingham Forest and Bolton Wanderers).

It should be noted that FFP losses are not the same as the published accounts, as clubs are permitted to exclude some costs, such as youth development, community schemes, promotion-related bonuses and infrastructure investment (such as stadium improvements and training ground). This latter expense in particular will help Brentford’s FFP calculation, as they have spent a lot in these areas.

"Spanish Steps"

From the 2016/17 season the regulations will change to be more aligned with the Premier League, so that the losses will be calculated over a three-year period up to a maximum of £39 million, i.e. an annual average of £13 million. This will likely encourage clubs to “go for it” even more.

Recently the club announced that they would close their Academy, which has come as a major surprise, given that they had attained the coveted Category Two status. This is once again about finding an edge in order to compete and progress as a Championship football club, as Brentford “cannot outspend the vast majority of our competitors”, though it will undoubtedly hit the affected youngsters hard.

The club statement explained their decision thus, “This philosophy is particularly relevant with regards to the future of the Brentford FC Academy. As a London club, there is strong competition for the best young players, and the club’s pathways to First Team football must be sufficiently differentiated to attract the level of talent that can thrive in a team competing towards the top end of the Championship.”

“Moreover, the development of young players must make sense from a business perspective. The review has highlighted that, in a football environment where the biggest Premier League clubs seek to sign the best young players before they can graduate through an Academy system, the challenge of developing value through that system is extremely difficult.”

"Wild Woods"

There’s no doubt that Brentford have come a long way, but the club is still far from breaking even, so continues to be reliant on Matthew Benham to a large extent. The owner has invested heavily to give the club the best possible chance, but there is no guarantee of success, especially with big clubs like Newcastle United and Aston Villa joining the fray next season.

It will be important that the transfer budget is spent well in the summer. According to co-director of football, Phil Giles, there should be money available after the January sales: “The money will be reinvested in the summer. I believe we’re fine for FFP this season.”

Although Brentford is clearly a club with ambition, they have to strike the right balance off the pitch. A couple of years ago, Benham gave some idea of the long-term vision: “Every club in the Championship would like to get to the Premier League at some point, so we are no different. But we are not going to put a timeframe on it. At some point we are going to try to make a push for it... in x years. I don’t want to say publicly. But yes it is achievable within a few years.”

At the time that seemed extraordinarily bullish, though Bournemouth and Burnley have shown the way for “small” clubs. These days, the owner is keeping his feet on the ground: “Brentford is a long-term project, and we are a team in transition at the moment.”

In a recent interview, Benham beautifully summed up Brentford’s dilemma: “We will give it everything to go up – as long as it makes financial sense of course.”


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Many of the Matthew Benham quotes in this blog have come from a rare, lengthy interview that the club’s owner granted to the excellent Brentford fan site Beesotted. You can read that interview in full here and also follow them on Twitter @beesotted and @billythebee99

Tuesday, May 17, 2016

Bournemouth - Welcome To The Pleasuredome


There is a lot to admire about Bournemouth, not least the fact that they have managed to avoid relegation from the Premier League in their first ever season in the top flight, despite suffering early injuries to star striker Callum Wilson and summer signings Tyrone Mings and Max Gradel.

Under the guidance of talented young manager Eddie Howe, Bournemouth have played some stylish football to secure safety and finish ahead of major clubs like Aston Villa and Newcastle United.

For a club of Bournemouth’s size, this is a notable achievement, but it is merely the latest chapter in an amazing story. As recently as 2010 they were playing in League Two, England’s fourth tier, before winning promotion three times in six years. In fact, this season was only the sixth that Bournemouth have spent above the third tier in their entire history.

Not only that, but Bournemouth have fought their way back from severe financial problems, twice falling into insolvency: first in 1997 when the team had to pound the streets collecting money in buckets; then 11 years later when the club started the 2008/09 season with a 17-point deduction after failing to exit administration.

"Howe It Is"

In fact, Bournemouth only avoided non-league football by winning the last game of that season after promoting Howe to manager at the age of 31. As chairman Jeff Mostyn said following promotion to the Premier League, “Six years ago we were on the abyss. We were 10 minutes away from the Conference and the chances are we would never have got out of the Conference with the resources we had available to us at that stage.”

Players and staff went months without being paid, as Mostyn helped prop up the club, before leading a consortium that took control in the summer of 2009, including local builder Eddie Mitchell. Despite a transfer embargo, Howe somehow took Bournemouth to promotion the following season.

Finally putting years of financial chaos behind them, stability arrived in the shape of Maxim Demin, a petrochemicals tycoon, who was introduced to the club by Mitchell. The Russian first bought Mostyn’s stake in 2011 and then bought out Mitchell two years later to take full control.

Since then Demin has bank-rolled Bournemouth’s climb through the divisions. They were promoted to the Championship in 2013, spending a season getting used to that level before the glorious promotion campaign of 2014/15 took them to the delights of the Premier League.

"Tommy Gun"

Howe argued that this amazing accomplishment was not purely due to Demin’s financial support: “We’re thankful to the owner for his investment, but our success is not down to money.” That is undoubtedly true with Howe himself obviously playing a major role, but it is equally fair to say that having a wealthy Russian benefactor has not exactly hurt.

In some ways then, this is not the classic “fairy tale”, but it is undoubtedly tough for a small club to make progress these days without some form of investment, so it is difficult to blame Bournemouth for having a go.

That said, the club has to an extent gambled by investing heavily in order to secure promotion. Clearly, their bet has paid off, but it could easily have gone the other way and who knows what would have happened if Bournemouth had languished in the lower leagues for a few seasons?

"Charlie Don't Surf"

Mostyn referred to this tricky balance in the last accounts: “The club is aware of the risk associated with reliance upon finance from its parent company to fund operations. However, the directors are confident that this risk is minimal based on the ongoing commitment from its investors and recent positive developments within the business.”

Demin has indeed provided significant financial support, amounting to around £63 million over the last four years in the form of loans and new preference shares. That has helped to cover large losses that culminated in a £7.6 million fine for breaking Financial Fair Play (FFP) regulations in the 2013/14 promotion season.

That fine contributed to Bournemouth’s loss before tax rising from £10.3 million to a hefty £39.1 million in 2014/15. These numbers were also adversely impacted by the price of promotion, which caused a £2 million payment to a former shareholder, and bonus payments. These were not detailed, but helped drive the wage bill up £13.1 million (75%) from £17.3 million to £30.4 million.


This meant that wages were more than  double the club’s revenue, even though this rose £2.8 million (28%) from £10.1 million to £12.9 million, partly due to the Bournemouth’s highest ever attendances.

Unlike the previous year, the club made no significant profit on player sales, leading to a £7 million reduction year-on-year. Other expenses increased by £1.5 million (25%) from £6.0 million to £7.5 million, while player amortisation also went up by £1.1 million (43%) from £2.6 million to £3.7 million.

The loss after tax was slightly lower at £38.3 million, thanks to the sale of group relief tax losses to other companies in the group.

It is important to note that Bournemouth’s financial results should be much better this season for two reasons: first, the TV money is massively higher in the Premier League; second, there should be no repeat of the exceptional payments. As a topical example, Leicester City went from a £21 million loss in the Championship in 2013/14 to a sizeable £26 million profit in the top flight the following season.


Even so, Bournemouth’s £39 million loss was the largest in the Championship in 2014/15, ahead of Fulham £27 million, Nottingham Forest £22 million and Blackburn Rovers £17 million. In fairness, hardly any clubs are profitable in the Championship with only six making money in 2014/15 – and most of those are due to special factors.

Ipswich Town were top of the pops with £5 million, but that included £12 million profit on player sales. Cardiff’s £4 million was boosted by £26 million credits from their owner writing-off some loans and accrued interest. Reading’s £3 million was largely due to an £11 million revaluation of land around their stadium. Birmingham City and Wolverhampton Wanderers both made £1 million, but were helped by £10 million of parachute payments apiece.

So the only club to make money without the benefit of once-off positives were Rotherham United, who basically just broke even – and ended up avoiding relegation to League One by a single place.


As we have seen, profit from player sales can have a major impact on a football club’s bottom line, but it’s not an enormous money-spinner outside the Premier League with the most profit made by Norwich City £14 million, followed by Ipswich £12 million, Leeds United £10 million and Cardiff City £10 million.

However, Bournemouth made the least money from this activity in the Championship in 2014/15. In fact, they were the only club to actually lose money from player sales, though this is more an indication of the fact that they wanted to keep the squad together, rather than not having any players that others wanted to buy. Many clubs need to sell players to help balance the books, but Bournemouth were in the fortunate position that this was not the case for them.


Of course, losses are nothing new for Bournemouth. Since making a small £1 million profit in 2011, the Cherries have reported losses four years in a row, including £15 million in League One in 2013. In fact, they have aggregated a total of £65 million of losses in the last three seasons alone.

The strategy was outlined by Mostyn: “As is the case with any business, success required investment. That is precisely what we embarked upon, and the end justifies the means.”


In this period, Bournemouth have been hit by a series of exceptional charges. On top of the £7.6 million FFP fine, there have been £2.4 million promotion payments to former shareholders, an impairment of £0.8 million of goodwill and various write-offs (£0.3 million investment in Poole Community Radio Limited and £0.2 million for loans due from related parties).


The only season where Bournemouth have benefited from player sales was 2013/14 when £6.9 million reduced the net loss to £10.3 million. This was enhanced by the 25% sell-on fee that Southampton had to pay Bournemouth following Adam Lallana’s sale to Liverpool. This should have been worth £6.25 million, but it has been reported that Bournemouth accepted a reduced fee of £4 million in order to facilitate the move.

There should be a similar sell-on fee from striker Danny Ings’ sale from Burnley to Liverpool in the next set of accounts, but this was capped at £200k. In the absence of any lucrative sales, profit from player sales should once again be on the low side in 2015/16.


To get an idea of underlying profitability, football clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation), as this strips out player trading and non-cash items. Even excluding exceptional items, this has been negative at Bournemouth and on a downward trend, falling from minus £3 million in 2012 to minus £25 million in 2015.

Again, only three clubs had a positive EBITDA in the 2014/15 Championship (Wolves, Birmingham City and Rotherham) and none of those clubs generated more than £1.5 million.


That said, Bournemouth still had the lowest EBITDA with their minus £25 million ahead of Nottingham Forest minus £20 million and Blackburn Rovers minus £15 million. This is again something that Bournemouth would except to sort out in the Premier League, where, in stark contrast, only one club (QPR) reported a negative EBITDA.

Bournemouth’s revenue has roughly tripled in the last three seasons, rising from £4.2 million in League One in 2012 to £12.9 million in the Championship in 2015. Of course, it will be massively higher in the Premier League in 2016, but we will have to wait for those numbers.


Unfortunately, Bournemouth is one of only two Championship clubs that does not separately break-down its revenue, so we have to estimate the split for match day, broadcasting and commercial.

Given the equal split of central TV distributions, we can fairly safely put in £4.5 million for broadcasting, while I have assumed £4 million for match day, based on average attendances and ticket prices of similar sized clubs. That leaves £4.4 million as the balancing figure for commercial. Of course, these figures are unlikely to be exact, but they can certainly be used for illustrative purposes.


What we can say without question is that Bournemouth’s £12.9 million revenue was one of the lowest in the Championship in 2014/15, which makes their promotion all the more impressive. Although Blackpool and Bolton Wanderers are yet to publish their accounts, their revenue was definitely higher than Bournemouth, as they both received £10 million parachute payments.

Therefore, Bournemouth had the 19th highest revenue in the Championship, only above five clubs: Charlton Athletic, Millwall, Rotherham, Huddersfield Town and Brentford. To further place this into perspective, four clubs enjoyed revenue higher than £35 million (around three times as much as Bournemouth): Norwich City £52 million, Fulham £42 million, Cardiff City £40 million and Reading £35 million.

The challenge for clubs like Bournemouth was neatly summarised by Howe, as he justified their (relatively) big spending: “We do not want a league table that picks itself. We want that smaller club that can still achieve great things. We have got an ambitious owner, we’re an ambitious club that wants to move forward and to do that, I’m sorry, at this level and Championship level, our income is nowhere near enough to achieve success.”


Of course, these revenue figures are distorted by the parachute payments made to those clubs relegated from the Premier League, e.g. in 2014/15 this was worth £25 million in the first year of relegation. Mostyn has complained that the Championship is intensely competitive, but is financially imbalanced by the substantial parachute payments.

If we were to exclude this disparity, then the revenue differentials would be smaller, but Bournemouth would still be well down the league table in 18th place, only overtaking Wigan Athletic.


In the Championship most clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to just £4 million of central distributions: £1.7 million from the Football League pool and a £2.3 million solidarity payment from the Premier League.

However, the clear importance of parachute payments is once again highlighted in this revenue stream, greatly influencing the top eight earners, though it should be noted that clubs receiving parachute payments do not also receive solidarity payments. As a comparison, we have estimated Bournemouth’s broadcasting income as £4.5 million, while Fulham earned nearly £30 million from this revenue stream.


Looking at the television distributions in the top flight, the massive financial chasm between England’s top two leagues becomes evident with Premier League clubs receiving between £65 million and £99 million, compared to the £4 million in the Championship. In other words, it would take a Championship club more than 15 years to earn the same amount as the bottom placed club in the Premier League.

As a result, promotion to the Premier League will have delivered immense financial gains for Bournemouth. Securing their status in the top flight means that they will also share in the astonishing new TV deal that starts in 2016/17, which will be worth an additional £30-50 million a year, depending on where they finish in the table.


Even if Bournemouth were to be relegated next season, their two years in the Premier League would have brought them around £240 million in TV money alone (£70 million in 2015/16, £95 million in 2016/17, then £75 million in parachute payments). The size of the prize goes a long way towards explaining the loss-making behaviour of many Championship clubs.


From 2016/17 parachute payments will be higher, though clubs will only receive these for three seasons after relegation. My estimate is £75 million, based on the percentages advised by the Premier League (year 1 – £35 million, year 2 – £28 million and year 3 – £11 million). Up to now, these have been worth £65 million over four years: year 1 – £25 million, year 2 – £20 million and £10 million in each of years 3 and 4.

There are some arguments in favour of these payments, namely that it encourages clubs promoted to the Premier League to invest to compete, safe in the knowledge that if the worst happens and they do end up relegated at the end of the season, then there is a safety net. However, they do undoubtedly create a significant revenue advantage in the Championship.


Of course, Bournemouth would also have spent more on improving their playing squad, but the net impact on the club’s finances would undoubtedly have been positive, as evidenced by the clubs promoted in the past few seasons. In 2014/15 the closest comparative to Bournemouth from a wages  perspective were Leicester City, whose wage bill rose by £21 million (from £36 million to £57 million), but their revenue surged by £73 million.

Bournemouth had one of the lowest match day incomes in the Championship (based on our estimate of £4 million), far lower than clubs like Norwich City £10.7 million, Brighton £9.8 million and Leeds United £8.8 million.


This was despite the attendances being the highest ever, rising from 9,952 to 10,265 in 2014/15. Mostyn said that this demonstrated “strong and continual support for the club”. In fact, attendances have further risen in the Premier League to 11,189, which is nearly double the 5,720 attendance in League Two.

However, the club’s income is clearly limited by the 11,500 capacity of the ground, meaning that Bournemouth’s average attendance was the second smallest in the Championship, only ahead of Rotherham.

The comparison is even starker in the Premier League, as there are only two clubs whose grounds have a capacity lower than 25,000, namely Swansea City (21,000) and Watford (22,000).


The club is well aware of this weakness with chief executive Neill Blake commenting, “Whilst we are delighted with the progress that the team has been making on the pitch, we are fully aware that demand for tickets far outweighs our current capacity.”

As a result, Bournemouth have announced their intention to submit plans to increase the capacity of the Vitality Stadium. Specifically, they would install a new permanent South Stand and fill in the South West and South East corners.


This limitation has also hit the supporters in the pocket with the club applying big increases to ticket prices in both 2014/15 (20%) and 2015/16 (15%). Given that there are fewer home matches in the Premier League, the price per game actually went up around 40% this season.

Mostyn justified the increase as being due to the size of the ground: “When you also consider the fact that that our capacity is under 12,000, and the effect that has on match day income, we believe we have been respectful in our pricing structure. It is very easy for (clubs with larger stadiums) to balance the books with cheap tickets in order to fill the ground, we don’t have that luxury.”

The chairman added, “Whilst I know supporters of any club, given the choice, would prefer no increase in season ticket prices, I sincerely hope the vast majority of our supporters will understand this increase given our new Premier League status. There can be no question that our ticket pricing remains more than competitive in comparison with other Premier League clubs.”


The estimated commercial income of £4.4 million was also among the smallest in the Championship, way behind Norwich City £12.8 million, Leeds United £11.3 million and Brighton £8.9 million. This included stadium naming rights for the Vitality Stadium (Dean Court, as was).

The shirt sponsor in the Championship was Energy Consulting, who paid the princely sum of £200k, though they were replaced by online gaming business Mansion Group in 2015/16. The new deal increased the annual payment to £750k, but this was still the lowest shirt sponsorship in the Premier League.


Although the press is full of reports of colossal sponsorship deals for the elite clubs, e.g. £47 million for Manchester United from Chevrolet and £40 million from Yokohama for Chelsea, the reality at the lower end of the table is very different with six Premier League clubs earning £1.4 million or lower.

The terms of the kit supplier deal with Carbrini (owned by JD Sports) are undisclosed, but this is also unlikely to bring in big money.


Bournemouth’s wage bill shot up by 76% (£13 million) from £17 million to £30 million in 2014/15, though this was inflated by promotion bonuses. These were not quantified, but as a comparison Watford paid £6.7 million, while Burnley paid £6.1 million, so this is likely to have had a substantial impact on Bournemouth’s wages. In addition, the number of playing staff increased from 96 to 112.

Either way, the Cherries’ wage bill has risen by £26 million in the three years since 2012, while revenue only grew by £9 million in the same period, pushing the wages to turnover ratio up to a staggering 237%.


Of course, wages to turnover invariably looks terrible in the Championship with no fewer than 10 clubs “boasting” a ratio above 100%, but Bournemouth’s 237% was in a class of its own, a long way ahead of Brentford 178% and Nottingham Forest 170%.


It might come as something of a surprise then to see that Bournemouth’s wage bill of £30 million was actually only the fifth highest in the Championship, behind Norwich City £51 million, Cardiff City £42 million, Fulham £37 million and Reading £33 million – though it was almost £10 million more than Watford, who were also promoted.


Stop me if you’ve heard this before, but this was once again because these clubs enjoyed the benefit of parachute payments. If we look at clubs who did not receive such payments, then Bournemouth had the highest wage bill, ahead of Nottingham Forest and Derby County.

Howe observed, “You are not going to get promoted to the Championship or into the Premier League without some investment”, though that has not stopped Burnley, who have not splashed the cash.


Another aspect of player costs that has been steadily rising at Bournemouth is player amortisation, which is the method that football clubs use to expense transfer fees. In line with the higher sums spent on bringing players into the club, player amortisation has grown from just £0.5 million in 2012 to £3.7 million in 2015.


As a reminder of how this works, transfer fees are not fully expensed in the year a player is purchased, but the cost is written-off evenly over the length of the player’s contract via player amortisation. As an illustration, if Bournemouth were to pay £5 million for a new player with a five-year contract, the annual expense would only be £1 million (£5 million divided by 5 years) in player amortisation (on top of wages).


Although this is not a huge charge, it was actually the 6th highest in the Championship, only significantly surpassed by those clubs relegated from the Premier League in recent times, i.e. Norwich City, Cardiff City and Fulham. Of course, this expense will have grown considerably based on the much higher transfer spend in 2015/16.


The other side of that coin is that player values on the balance sheet have also increased, rising from £2.1 million in 2012 to £16.9 million in 2015. That is the accounting value in the books, but the actual market value would obviously be much higher if Bournemouth were to sell any of its players.

Up until very recently Bournemouth spent hardly anything in the transfer market. Even after Demin’s arrival, the club hardly went crazy, averaging just £3 million gross spend a season while in the Championship. They only really pushed the boat out following promotion to the Premier League, when they spent £41 million gross in the 2015/16 season.


However, it is worth noting that the core of the side remains the survivors from the days in the lower leagues, including the entire first-choice back four: Simon Francis, Tommy Elphick, Steve Cook and Charlie Daniels.

As Howe said, it’s a challenge for a club like Bournemouth to sign players: “We need to look at it from a different angle. Of course the finances are difficult for us. When we are competing against other clubs we will lose, so that’s where the other factors become so important in trying to attract players here. We can offer a really good environment and total dedication to their profession, trying to develop them and give them a great stage to show how good they can be.”


Nevertheless, little old Bournemouth had the third highest net spend in the Premier League this season, only behind Manchester City £91 million and Newcastle United £73 million. Of course, any promoted club has to spend big if it wishes to survive, as shown by Watford being the fourth highest spenders, so maybe this should not be overly surprising.


Bournemouth’s net debt almost doubled in 2015 from £21.5 million to £40.6 million, as gross debt rose by £17 million from £25 million to £42 million and cash fell £2.1 million from £3.5 million to £1.4 million. All the debt is owed to the club’s owner. Maxim Demin, via his company A.FC.B Enterprises Limited, and is unsecured and interest-free.

A previous loan with Wintel Petrochemicals Limited, another Demin company, bore interest at 3% per annum before being transferred to A.FC.B, though interest on this loan was written-off (as was the proposed dividend on the owner’s 6% preference shares).


Bournemouth’s was by no means the largest debt in the Championship, being lower than 11 other clubs. In fact, four clubs had debt over £100 million, including Brighton £148 million, Cardiff City £116 million and Blackburn Rovers £104 million. Bolton Wanderers have not yet published their 2015 accounts, given their much publicized problems, but their debt was a horrific £195 million in 2014.

That said, the vast majority of this debt is provided by owners and is interest-free, so the amounts paid out by Championship clubs in interest is a lot less than you might imagine.


Even after adding back non-cash items such as player amortisation and depreciation, then adjusting for working capital movements, Bournemouth have substantial cash losses from operating activities, e.g. £16.7 million in 2015. They then spent a net £3.8 million on player recruitment and £4.6 million on bringing the stadium up to Premier League standards. This was effectively funded by Demin injecting £23 million through £17 million of loans and £6 million of new preference shares.

As the accounts drily observed, “The company is dependent on the financial support of its parent company.” You can say that again.


In the four seasons since Demin arrived, the club’s only real source of funds has been the £63 million that the owner has pumped in (£42 million in loans and £21 million in preference shares). Most of this (£44 million) has been used to cover operating losses, with £8 million spent on infrastructure investment and £8 million on new players (net). Another £1 million went on interest payments, leaving £1 million to increase the cash balance.

As we have already noted, Bournemouth’s hefty 2014/15 loss brought them a £7.6 million FFP penalty, which provided their detractors with more ammunition, though at least the Cherries have accepted their punishment – unlike QPR who are still challenging the legality of these regulations two years after they were promoted to the Premier League with an even bigger loss.

Some have questioned why Bournemouth’s fine was not higher, given the size of their loss, so let’s have a go at explaining this.


Under the rules for 2014/15, clubs were only allowed a maximum annual loss of £6 million (assuming that any losses in excess of £3 million are covered by shareholders injecting £3 million of capital). Any clubs that exceeded those losses were subject to a fine (if promoted – like Bournemouth) or a transfer embargo (if they remain in the Championship – as was the case with Fulham, Nottingham Forest and Bolton Wanderers).

There is a sliding scale for excess losses up to £10 million, but beyond that the fine is imposed on a pound-for-pound basis. Therefore, based on Bournemouth’s £7.6 million FFP fine, we can calculate that their excess loss was £10.9 million. Adding that to the £6 million maximum permitted loss, we can see that the FFP loss was £16.9 million.

That is still a lot lower than the reported £39.2 million loss, but that included the FFP fine itself, so that should be deducted. In addition, there are certain costs that can be excluded for the purpose of FFP, including any promotion bonuses. From the accounts we know that £2 million was paid to a former shareholder and I have estimated £7 million for bonus payments (based on similar payments at other promoted clubs).

We can also exclude the £4.6 million paid for stadium improvements, which would leave a balancing figure of £0.9 million for youth development, which is another allowable expense. Therefore, it does seem possible to get from the reported loss to the smaller loss required for the FFP fine.


"Kiss Like Ether"

Enough of the mechanics, what about the moral issues? Yes, FFP regulations can prevent another Portsmouth (to take another South Coast club as an example), but they also seem designed to maintain the pecking order (“survival of the fattest”, if you will).

Not only that, but the Football League itself has moved the goalposts by increasing the allowable loss to £13 million from the 2015/16 season (in line with the maximum loss of £39m over a rolling three season timeframe).

Let’s leave it to Eddie Howe to provide the main argument against FFP: “If you look back through the history of football there have been great stories where teams have achieved great things from an owner or a benefactor or whatever you want to call it. They have enabled that side to push on to great things. What the FFP structure will do is stop the underdog, the smaller team, having the chance to succeed and I do not think anyone will want to see that.”

All that said, if Bournemouth maintain their presence in the Premier League, they are likely to become a profitable club, though they are still likely to require support from their owners for investment in the squad and potential stadium redevelopment.

To that end, Demin sold a 25% stake in November to US investment firm Peak6, led by Matt Hulsizer, who also owns a share of the Minnesota Wild in the NHL. Jeff Mostyn explained the thinking behind this move: “The club is confident this partnership will further strengthen its ability to compete with the very best, and provide a platform to establish itself as a long-term Premier League club.”

"Hurry Up, Harry"

So there you have it, a small club on the South Coast of England, now backed by a combination of Russian and American money. In a way, that’s a perfect demonstration of the global nature of today’s Premier League, but that should not detract from a great story about Bournemouth beating the odds.

This was perhaps best summed up by Eddie Howe: “The qualities that saw us win our fight to stay in the Football League are the same qualities that have seen us succeed ever since. Hard work and a total commitment to our footballing philosophy have seen us develop into the team we are today.”

That seems fair enough to me. Of course, the owner’s money has helped, but it’s not a guarantee of success. The club has invested well and deserves its place at the top table. As club captain Tommy Elphick said, “Together, anything is possible.”
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