Friday, January 03, 2014

I'll Be Your Friend, Roland

"I'll be your friend, Roland." (Janet St. Clair, Grange Hill - circa 1985)



Perhaps the longest drawn out negotiation since the Louisiana Purchase in 1803 has finally been concluded.


The euphoria is such that I've been persuaded to post my own musings here for the first time in nearly a year. 

There are several reasons for my lack of blogs (many unrelated to the club), but it's fair to say that the approach of the previous owners was relevant also. 

They threatened to drain the club of its soul in much the same way as a succession of poor managerial appointments had done in the post-Curbishley era. 

However it had initially promised so much. 

As I espoused in a lengthy post in Jun 2011 ("CAFC: The Movie"), I think there was a viable and genuine plan to develop the club (which I loosely termed the 'Moneyball' approach). 

This plan was evidenced by an excellent set of summer 2011 signings (generally young, hungry and with potential resale value) combined with a continued investment in the Academy. 

I considered the appointment of Powell to be reckless but importantly it got the fans onside, a not insignificant consideration given what had come before. 

However as I wrote at the time, "We assume that the funder’s expectation is that this investment will make money at some stage and that means in real hard cash, not merely on paper.

Even a fool would surely understand that (barring a miraculous double promotion), an investment in a League One club would be loss-making on at least a 3-year view. 

Meaningful operational losses even at Championship level appear structural (for reasons admittedly I don't understand), and as perhaps they didn't fully appreciate at the time, the clubs we compete with aren't exactly standing still either. 

It's unclear whether the apparent breakdown in the relationship between owners and 'the funder' rested upon falsely presented assumptions at the outset. 

Either way with hindsight the plan was fundamentally unstable and liable to fail long before completion.

Tony Jimenez et al thus ended up akin to a homeowner with grand plans to extend and renovate a property, but with no means to finance said development amidst crippling outgoings. 

Meanwhile the garden doesn't drain properly. 

The plan thus having become untenable, a sale to what I might cynically describe as a 'greater fool' became unavoidable. 

Meanwhile the ridiculous lack of boardroom communication remained inexcusable - in a social media-driven world that seemingly can't stop talking, the owners remarkably never found their voice. 

Regardless of the challenges behind the scenes, this was illogical.

With a vicious cycle well under way (lack of investment in the squad leading to poor results), time increasingly became of the essence rather than price. 

In short they were trapped in a hole of their own making.

Mere fans like me are not privy to any implicit or explicit financial agreements that may exist between the owners and 'the funder' but today's announcement may well not signal the end of this saga for them (happily it's no longer our problem). 

We will perhaps never know if they were ultimately 'made whole again' by the transaction, but our best hope of knowing lies in the 30 June 2014 accounts, unlikely to be filed before Q1 2015. 

Likewise we will have to wait to learn about other important issues, such as the treatment of the loans to the previous directors (who despite their position as 'fans', would have been well within their rights to play hardball regarding their debt seniority). 

As for Roland Duchatelet, we frankly don't know much about him but at least the source of his wealth seems clear whilst his political activism suggests someone unafraid of communication. 

Fans will be looking for evidence of his ambition in the January window yet with relegation a clear risk, he may well pull forward future investment, lulling us into a false sense of optimism.

 I can broadly identify four possible motives for the purchase: 

1. Ego or Fun:  He is probably too bright to do something crazy, but this potential motive is in my view the most dangerous scenario for the club. 

For every Tony Bloom or Steve Gibson, there's a Vincent Tan or an Assem Allam eager to create a different kind of legacy.

Premiership riches (and importantly the glamour) appear tantalisingly achievable yet we compete every year with similarly bankrolled clubs, some whose financial wheels are greased by parachute money.  

To give it some perspective Leicester City, Nottingham Forest and Sheffield Wednesday were last in the top flight 10, 14 and 13 seasons ago respectively. 

2. The 'multi-club' model: The concept isn't particularly new (for example ENIC owned stakes in multiple clubs), but it has been brought to the forefront again most notably by the Pozzo family which owns Watford, Udinese and Granada. 

The Watford experience would seem to suggest the potential use of effectively a large single pool of players, initially to benefit the 'junior' club in the arrangement (in this case Watford) for the longer-term benefit presumably of the two more senior clubs. 

Such an arrangement requires not only the judicious use of the loan system and 'fudged' permanent signings, but also a manager willing to agree to such an arrangement. 

In this sense Gianfranco Zola might have been considered a willing stooge (Powell might be less accommodating). 

However whether this model is preferable to utilising the existing loan/transfer system (albeit with a larger budget for fees and wages) is far from clear. 

Indeed it is notable that Udinese have fully 30 players out on loan, of which 24 are at 'non sister' clubs (including Matej Vydra now at WBA, having previously starred at Watford). 

In short maintaining such a large centralised squad is expensive, especially if some (like Vydra) are playing 'below their station' and demanding to be paid accordingly. 

Unfortunately for Charlton, with the exception of perhaps a few fringe Liege players, it's hard to imagine that any more of the players within Duchatelet's group would be playing 'below their station' at Charlton. 

Moreover the relative hierarchy of clubs within the club is by definition fluid - for example Watford get larger crowds than both Udinese and Granada, yet play in the second tier of its domestic league. 

The money available upon promotion however would dwarf both of their sister clubs. 

So the key therefore must be to understand the overall goal of the group owner - if it is to maximise group earnings then using the likes of Udinese/Granada/Liege to give Watford/Charlton a cheap way to be leapfrogged into the Premiership has some obvious merit. 

However what happens once they get there? A juggling act with each club's fans feeling entitled to special treatment no doubt. 

In terms of other potential synergies between group clubs, whilst I'm sure a management consultant would happily go wild with Powerpoint, in truth they are somewhat limited given cross-border complexity (despite the very high fixed costs of running a club). 

One might imagine the possibilities of say a centralised online operation for tickets/retail, or the benefits of a centralised scouting system for example. 

Negotiating power for commercial deals would be enhanced when representing several clubs, but it would hardly be formidable in the face of the type of global brands all owners crave. 

Yet if the owners wish to maintain the option to exit from any of the clubs if a suitable offer is received in short order, then does it make sense to make the clubs less independent operationally than they otherwise would be? 

3. Community: It is notable for example that Ujpest, Carl Zeiss Jena and now Charlton are clubs whose best days are in the past, yet they have a sufficiently proud history to tempt an old romantic like Duchatelet perhaps? 

His political activism and writings suggest he's a relatively cerebral type so perhaps he just loves football and will get a kick out of getting the respect from fans and the media for doing 'the right thing' (in this case putting each club on a stable footing in an inherently unstable industry). 

If so then this will most likely resemble the fondly remembered period roughly from the return to The Valley in 1992 to relegation from the Premiership in 2007, when Alwen/Murray/Simons et al pretty much did just that. 

This motive may be fanciful however - there are plenty more worthwhile causes for the philanthropic to support.

Then again children are demanding and stressful financial liabilities, yet it doesn't stop families from willingly accumulating several of them.  

4. A quick turnaround then sale: This was basically the Jimenez model until it was clear the promotion to the Premiership might take rather longer than expected. 

Given the 'structural' nature of the financial losses in the Championship, it is hard to see how even stabilising the club in midtable (which itself will require meaningful further investment), will suddenly make us an attractive proposition for the next potential buyer. 

The only way to engineer a profitable sale (ie. one in which the equity is valued materially above zero) is to achieve promotion but then immediately sell! 

As the extraordinary debts revealed at Bolton Wanderers demonstrate, being a supposedly well-run Premiership club for eleven consecutive seasons still rendered them a financial basket case. 

Richard Murray would probably concur (but he just never quite found the right moment to mention it).






8 Comments:

At 11:49 PM, OpenID alburyaddick said...

NYA
Great to have you back and excellent commentary as always .
Basically I think you just have to be a bit barmy to own a football club and the logic that we try to apply doesn't necessarily work with these people.
Lets hope Mr Duchatelet's barminess makes a positive difference

 
At 8:40 AM, Blogger Dave said...

NYA,

Whilst we would like to think it's 3 and would probably live with 4, the fact is he has a multi-club model )2). realistically speaking, I think that leaves us with a best option of ego/fun (1). the trouble with that is how does he balance that across four clubs and what happens when he best tired of it….good to see you posting again.

 
At 8:57 AM, Anonymous WFAddick said...

NYA
I've missed you too, and it's great to read something intelligent, balanced and sane for a change. Some blogs seem too ready to condemn Mr Duchatelet before he's had a chance. Only time will tell which of your 4 motives is closest to the truth. Cynicism often proves to be justified in football, but for me romantic, cerebral, wealthy and a bit barmy is a massive improvement on what we've had recently. So I'll be Roland's friend too!

 
At 11:50 AM, Anonymous sillav nitram said...

i'm not a business man nya but do wealthy men need loss making companies to reduce their own tax liability and does that apply to overseas owners?

and yes it is good to have you posting>

 
At 12:54 PM, Blogger New York Addick said...

The short answer is "I don't know", but I am not sure I have understood why adding a structurally loss-making entity to a group to reduce tax liabilities makes sense because you still have to fund the loss!

To use round numbers, say you have a group with profits of £50m on which 30% tax is owed (ie. £15m).

Then let's say you then add Charlton to the group and it has annual operating losses of say £10m pa, reducing group profit to £40m and thus the tax liability to £12m.

You have thus reduced your tax bill by £3m but you have £10m of losses that need funding (through debt, equity, asset sales etc.).

Maybe the argument is that in this scenario the owner would rather spend £22m on a combination of tax and football (having fun along the way), than just writing out a £15m cheque to the taxman.

Similarly charity donors are tempted by the thought that their hard earned cash goes to good causes rather than the taxman (via the income tax offset). They don't save money but just have more say in where it ends up.

However I may be missing something....


 
At 8:31 AM, Blogger Wyn Grant said...

As others have said, it's great to have you back and a great post.

 
At 9:49 AM, Anonymous richard said...

Welcome back NYA, I sincerely hope you're well.

 
At 9:54 AM, Blogger New York Addick said...

All well thanks.

Demands on my time are significantly higher than they were when I began the blog a decade ago (work, kids, travel etc.). Something had to give but I'll continue to write if something piques my interest....

 

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