Friday, April 13, 2012

Accounting for Promotion

I appreciate that whilst most fans' attention is on Brunton Park, I’m perhaps alone in being fascinated instead by the realisation that the club’s accounts were quietly filed last month at Companies House.

By way of a recap, since 23 Aug 2010, “the club” (Charlton Athletic Football Company Ltd) has been 100% owned by Baton 2010 Ltd (“Baton”) and on 31 Dec 2010, a British Virgin Islands entity CAFC Holdings Ltd (“CAFC”) acquired a 90% interest in Baton.

According to the club website, the remaining 10% interest in Baton is owned by Richard Murray.

Information on CAFC Holdings Ltd is not easily obtainable given its domicile, but the club website states that it is owned 28% and 23% respectively by Tony Jimenez and Michael Slater. At least five other shareholders own the remainder, since the website states that no other shareholders own 10% or more.

The audited financial statements of the club and Baton were filed on 2nd March 2012 and are available to view for the princely sum of £1, ironically the exact same amount that Baton paid to acquire the club.

I think it’s fair to say that the accounts to 30 Jun 2012 will be more interesting, particularly in terms of understanding what type of investment (in transfer fees and wages) was required to secure this season’s near-certain promotion.

However they do nonetheless provide a few interesting insights which I would summarise as follows (my intepretation in italics):

From the club’s accounts:

- The audit firm changed even though the audit fee remain unchanged - usually when assessing a company this would be a potential 'red flag' (or maybe 'red and white' in Charlton's case) but this is presumably just a relationship issue pertaining to the new owners;

- Turnover fell by nearly 10% from 2009/10 (the first season in League One), due mainly to lower matchday revenues (average attendances fell by virtually the same degree, although in 2010/11 the club did have a big payday at White Hart Lane as a partial offset);

- Unlike Premiership clubs (for whom TV revenue is usually the key contributor to revenues), 59% of the club’s revenues are generated on matchdays, with TV revenues at just over £1m (not so bad, thanks to appearing on TV more often than most League One clubs);

- The operating loss remained high at £6.1m, although continued cost-cutting saw it reduced by 45% from 2009/10;

- During the initial transfer of control in Aug 2010, Murray agreed to provide £3m in working capital to the club, but this was amended to £1.5m following the CAFC deal in late-Dec – the view (if you believe it) that Murray saved the club from administration but in return insisted upon full control, rests upon this key provision;

- Profit on disposal of players was £2.8m (mainly from Jenkinson, Bailey and Richardson, but also a sell-on fee related to Darren Bent) - it should be noted that this is not equivalent to the cash transfer fees received because in some cases (eg. Bailey) the fees the club itself paid to acquire them were not yet fully amortised on the balance sheet;

- Virtually by definition given the operating losses, the accounts have only been prepared on a ‘going concern’ basis subject to the ongoing support of the club’s bankers and CAFC;

- Total wages/salaries were £6.8m, down from £9.3m the previous season despite total staff numbers only falling from 133 to 121 - given that 59 of the 121 are on the non-playing side, if one assumes that these are paid a total of £1.5m (average: £25k pa, skewed by a couple of well-paid execs eg. Kavanagh) then the 62 playing staff are paid a total of £5.3m (average: £85k pa). This sounds relatively well-controlled by typical football standards, although it must include a myriad of relatively junior staff for example on the training and Academy side, as well as several younger poorly-paid pros. It has previously been implied that Racon/Semedo/Youga were being paid in the region of £1m total, thus leaving £4.3m unexplained. In turn, if one takes Powell (or Parkinson) plus say their six most senior staff (eg. Matthew, Dyer, etc.), and twenty further first-team squad players, then this implies these 26 were paid on average approx £125k pa each (total: £3.3m). This still leaves £1m to pay the remaining 33 playing staff (average: £30k pa) – this seems a reasonable way of assessing how it might have broken down;

- The best paid director earned £121k during the year - it is not clear who this is but one can have a very good guess;

- During the year, £1.46m was added to intangible fixed assets as ‘players registrations’ (akin to transfer fees) - this instinctively feels ‘high’ but it certainly includes any fees paid for Benson and Wright-Phillips, whilst the transfers of Stephens and Green were announced just prior to year-end. Furthermore, the undisclosed fee paid for Wiggins may also have slipped into the same accounting fiscal year as it was announced on 1st July. Either way it again emphasises how the key Jenkinson sale allowed for substantial squad investment for no net cash outlay;

- £2.6m is owed by the club to Baton whilst there remains £8.5m of loans to ex-directors (including Murray), of which £7m is interest-free and repayable only upon promotion to the Premier League (the remaining aforementioned £1.5m is working capital provided by Murray, and appears to be repayable upon promotion to the Championship) - the Baton debt appears to be a form of financing of the ongoing operational deficits, of a type which anyone who has studied football club accounts will be familiar with. What we don’t know unfortunately is who is funding Baton, why and how (although I did make some suggestions in an earlier blog). Obviously this is the key question. Meanwhile there is something quite extraordinary in my view about the club owing money to ex-directors who are effectively now mere individual fans – talk about having all the pain and none of the glory in recent seasons.

- The club still has outstanding bank loans of £6.8m, of which £1.1m is due within one year - it will be interesting to see if this tranche got paid as it came due or restructured in some way;

- The club could still receive a further £4.5m of transfer fees if certain goals are met eg. Appearances, international caps etc. - presumably these particularly apply for Jenkinson and Shelvey, but who knows how likely they are to be received?;

- The club ‘accelerated’ the payment of £1.6m in transfer fees due by discounting them with a financial institution - as has become apparent in various high-profile club administration cases, transfer fees are typically paid in instalments over time, not in an upfront lump sum. The risk for the club in these ‘acceleration’ deals (ie. borrowing against future fees) is the failure of the buying club to make good on its debts, but if the counterparty was the likes of Arsenal or Liverpool, then one can sleep fairly easily at night, and indeed they were paid;

- Between 30 Jun 2011 and the signing of the accounts, transfer fees of £330k were received and £466k were paid - the transfer fee received must largely have related to Rob Elliot, whilst those paid would have included the likes of Haynes, Morrison, Hamer, Smith and (as above) possibly Wiggins. Again some smart rejigging of the playing squad for little net cash outlay - I wonder what role Jimenez played in selling Elliot to his former employer?;

- Murray personally guaranteed the £840k bank overdraft at 30 Jun 2011 - this was slightly curious given it would now have been six months since Baton was 90% acquired. In other words why would the overdraft be guaranteed solely by him, rather than Baton (of which he only owns 10%)?

From the Baton accounts:

- The Baton accounts consolidate those of its subsidiaries, including the club (as above);

- The ‘group’ has £53m of tax losses to carry forward against future trading profits - it’s fair to say the club won’t be helping to reduce the country’s fiscal deficit any time soon via its corporation tax payments;

- Baton did indeed pay just £1 for the club (or £151 to be precise, if you include ‘Charlton Athletic Holdings Ltd’, its other subsidiary) – the net assets of the club at the time were £9.1m but given the scale of the ongoing cashflow deficits and the fact that most of the assets of the club were tied up in the ‘illiquid’ stadium, the equity of the club was indeed functionally worthless;

- Baton has been financed by £3m of share capital since inception -as above, £2.6m of this was injected into the club during the year (and is thus owed back). Again what is not a matter of public record is how this is being financed and by whom.

So there you have it. In short, whilst no-one could reasonably complain about the way the new owners have approached their task (or indeed the results thereof), the fact remains that at 30 Jun 2011 at least, the club was still loss-making and owed nearly £7m to the bank.

In the meantime those deficits (and those debts as they come due) are being financed via a company which is in turn 90% owned by an offshore company rather shrouded in mystery.

One might argue that on-pitch matters have given the club it’s heart and soul back (and they would have a point, infact 91 of them) but this fact still leaves me slightly uneasy, even if it is a sign of the footballing times.

However likewise there is nothing in the above accounts to suggest that success this season has been achieved simply by throwing money at the problem.

Instead as I had always hoped, there may indeed be room for a smarter third way (the 'Moneyball' approach if you like) bringing together team spirit, good coaching, smart transfer dealings, enlightened scouting and youth development.

Let's hope it works just as well in the Championship.

Up the Addicks!