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!


At 9:30 PM, Blogger Philip said...

Wow, booking your promotion before mathematical certainty. I'm impressed. It's been an enjoyable year.

At 9:46 PM, Blogger New York Addick said...

Prudence requires it.

At 11:11 AM, Blogger Kings Hill Addick said...

From a quick read of this it does look like we still have significant debt and it is rising. This is to be expected in this division but if the cash injections are more directors loans I can't help wounding what happened if the burdens backers get fed up and want their money back.

I've been very scathing of Portsmouth in recent weeks, yet we are, all be in on a much smaller scale, doing what they did by building a team with someone else's money.

With in excess of £2m to be repaid on promotion or within the next twelve months and with trading losses at the level they are all of the extra TV money could go on just that, leaving likely for Powell to use to strengthen the squad - unless we are going to borrow more money next season.

Even after the best season we've had for years the is still much to be cautions about.

At 11:19 AM, Anonymous gazzaddick said...

Just re-read your previous piece and the tradability of players like Solly and Wiggins seems to back up your theory.

At 3:54 PM, Anonymous Anonymous said...

From a quick read of this it does look like we still have significant debt and it is rising

It will have done, the club was forecast to make a loss this year of around £4m and with attendances still relatively low then I doubt that we are that far off that figure. We didn't get much of a cup run either to provide an unexpected boost. Promotion means bigger TV and sponsorship and other commercial revenues plus a few more local derbies (especially Millwall and CP) and we may attract more ST revenue and drag a few more casual supporters in, but some of that may be offset by higher salaries (which depends on what the contracts say), maybe a bigger squad and other costs. I wouldn't be surprised to see one or two squad members traded on if the right offer came in, that will be the reality for most clubs and the "Mysterons" whoever they may be don't give me the impression that they are anything other than hard headed businessmen.

At 5:50 PM, Anonymous Chris said...

Very interesting read as usual NYA.

I have a question for clarification if that’s OK. KHA says “it does look like we still have significant debt and it is rising”. That comment surprised me. My understanding and/or expectation has been;

Baton’s liabilities are;

1) A “legacy” loan from RBS - no way will RBS be interested in advancing further funds.
2) Contingent liabilities to the former Directors who wrote off their immediate claims, enabling Murray to create and to take complete control of Baton and reassure prospective buyers that over and above the money owed to RBS the Club was debt free – save those contingent liabilities.
3) I assume that Charlton’s banker, HSBC, is providing working capital. It won’t be doing any more than that.

At 5:51 PM, Anonymous Chris said...


As you say, Baton (the Club) is being funded by CAFCH, presumably Tony Jimenez and his pal(s). We have no idea how this works or whether THEIR financing is via debt or equity. However, I’m not sure we care, in the narrow context of this discussion anyway. Either the “owners” are happy to fund the operating loss or they are not. Let’s hope they are, but if they decide they are not then Baton has a major cash flow deficit to finance (as it did when they arrived), but no more debt than it had when Murray created it? Let’s not forget that Murray is still there. If this is right, then in the unlikely event that Jimenez et al leg it, Murray is simply back where he started, but with a Club playing in the Championship rather than in League One.

I guess my question is, is there anything in these accounts which suggests this might not be the case? Is there any evidence of a Manchester Utd or Liverpool (pre Henry) like leveraging WITHIN the football club? My assumption is not.

I guess the really interesting question is what happens now. If you’ll allow me to make a few bold assumptions I’ll have a stab. If I’m right we’re in for an interesting and very busy summer.

Whilst we have no real idea what the end game and/or exit strategy might be, it seems clear that Jimenez and partners bought Charlton because they considered it to be an ideal vehicle to execute the Jimenez vision (NYA’s “Charlton the Movie”). They bought the Club for nothing, more or less debt free (save for those contingent liabilities and “a pain in the neck” loan from RBS), but with an annual operating loss of circa £5m per annum which they must, by definition, have been willing to fund for at least a few years. It appears that they are doing this without putting any debt in Baton – this is a critical “risk factor” and hence my question above. Using the “Moneyball Strategy” they thought they could get the Club back to the Premier League.

At 5:52 PM, Anonymous Chris said...

So far so good - either bang on schedule or even ahead of it. What next? I’d expect them to aim to keep the operating loss the same, i.e. £5-6m p.a. Why wouldn’t they do this? They must be able to afford it and so far they’ve created no economic value. They have to keep going.

This means, of course, that they will spend all the additional revenues arising from being in the Championship. Further, if I make the heroic assumption that all costs aside from the cost of the “core” playing staff are more or less fixed, then this means that wages and salaries paid to the first team squad will increase by the increase in revenues. If that cost was circa £5.5m in the season just ending – i.e. they spent the money saved on Racon, Semedo and Youga – then it may be possible to spend up to 50% more next season, assuming revenues in the Championship are between £2.5-3m higher than in League One.

What would Billy Beane do with such an increase in spending power? He’d “wheel and deal”!! I don’t know what sort of an increase in quality that increase in wages would allow, but it must mean we can now compete for players that have been out of reach so far.

Paying players is one thing, acquiring them is another and begs the question of the likely transfer budget. This is much harder to speculate about given what we know (or don’t know) about the owners. For sure, the “Moneyball Strategy” means that the Club would expect to make money on transfers (and already has – Rhoys Wiggins being the best “unrealised” example), but that doesn’t mean that there is either the money or the risk appetite to spend aggressively.

I think we can expect Chris Powell to “trade” and to emphasize the purchase of young players with potential. We may see some surprising departures because he’ll also no doubt need to be tough – I don’t mean Solly or Wiggins, more Wright-Philips, Green etc. It could be very interesting.

By the way, I believe very strongly that the suggestion that the Club was heading for administration last season, i.e. 2010-11, involves a considerable degree of poetic licence. When Richard Murray “bought out” his former fellow Directors, he said that he would fund the operating loss through the 2010-11 season. That means that the Club was NOT going into administration last season unless Murray changed his mind. However, he also said that he couldn’t sustain this situation and needed to find a buyer/partner. This means that had he been unable to find a buyer/partner, the Club would have been in serious financial difficulty last summer. This may well have been a disastrous situation, but administration wouldn’t have helped because the problem was the operating loss NOT the debt or the club’s creditors. Perhaps the Club would have ended up in liquidation? This would have been an even worse scenario obviously, but a more logical outcome. In this sense it is true that first Richard Murray and then the new owners saved the Club from disaster, but it is NOT true to say that without the sale in January 2011 the Club would have gone into administration during THAT season!!        

At 8:29 PM, Blogger Philip said...

How will the League One Financial Plan affect Charlton next year?


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