Sunday, April 02, 2017

Master of Puppets

"Master of puppets I'm pulling your strings,
Twisting your mind and smashing your dreams,
Blinded by me you can't see a thing,
Just call my name 'cos I'll hear you scream....
...Master! Master!"  (Metallica)

Charlton's audited accounts for the year to 30 Jun 2016 have finally been filed at Companies House (four months after being signed off).

Given the smoke and mirrors which characterise the club's current owners, this is a precious document which presents some real unarguable facts.

As in previous years, I start each point with an observation from the accounts followed in brackets by my own interpretation (which may or may not be accurate).

- The 'strategic report' begins with a review of the Academy before discussing the poor onfield performances of the first team (this is decidedly odd and would be akin to say Tesco beginning their annual report by trumpeting say 'sustainability' or 'inclusivity' goals they have met before talking about their challenges in the aisles);

- Total turnover was relatively stable at £12.1m vs £11.8m in 2014/15 (this is not surprising given both seasons were spent in the Championship - higher TV/broadcast revenue from a new deal and more live home games more than offset lower revenue through the turnstiles);

- Total administrative expenses rose significantly to £24.1m from £19.4m (this was a pretty shocking observation which is largely explained by wages/staff costs rising by £2.6m - we all know that the season on the pitch represented abject failure in absolute terms, but it was also abject failure relative to the additional resources which were made available to the three 'managers' we used);

- There was a de minimis profit on disposal of players of £39k (this makes sense as the only players sold during the period for an undisclosed fee would either have been virtually given away eg. Parzyszek, Nego, Daniel or sold for fees which were not in excess of their carrying value on the balance sheet [having been signed for a fee in the first place] eg. Wiggins, Wilson - it is worth recalling that there was a profit on disposal in the prior year of £4m [mainly from Gomez] which explains why the total loss for the year below is higher than implied by the rise in administrative expenses alone);

- The total loss for the year increased by 234% to £13.5m (largely self-evident given the above);

- Some of the club's leasehold property (comprising The Valley and the training ground) was revalued by £9.2m during the year resulting in the 'comprehensive loss for the year' falling from the above £13.5m to £4.3m (this struck me as somewhat unusual and can be interpreted in several possible ways - cynics might suggest some underhand property development deal is in the works, although a more positive interpretation might be that the owners are preparing the club for sale by presenting its assets in the best possible light [or they may simply be planning to borrow against it] - alternatively the £9.2m neatly bridges the increase in administrative expenses and the decrease in profit on disposal of players resulting in the 'comprehensive loss for the year' being virtually unchanged from 2014/15! [even though the cashflow position is materially worse as this is clearly a non-cash effect]);

- Moving on to the balance sheet, cash at bank is a measly £628k (like any current asset or liability, this is a dynamic item for which a one-look snapshot at year-end might not be very meaningful but with administrative expenses above of £24.1m pa, this cash balance is enough to pay just ten days' of expenses emphasising the frequency with which Staprix must be injecting cash and the psychological toll this might finally be having?);

- The profit and loss account has exceeded the negative £50m mark as a result of the above £13.5m loss (since this represents the cumulative losses of the football club [including all those go-go years in the Premier League], it's a reminder of just how awful a business proposition midsized clubs like Charlton are - a quick look at the accounts to 30 Jun 2007 [our last season in the Premier League] shows the cumulative losses at that point were £27.3m suggesting that we have generated approx £25m of losses during the decade or so since [even after the constant selling of players like Shelvey, Jenkinson, Gomez, Poyet etc.] - indeed whilst the current owners have made matters materially worse with their reckless decisions, when fans sing "Just sell the club", I can't help asking myself "To whom?" - note 2.2 to the accounts rightly confirms that it is only the stated ongoing support of the owners which enables the accounts to be prepared on a 'going concern' basis);

- Once again directors were not paid any emoluments directly by the club (given it's reasonable to assume Katrien Meire is not working on a pro bono basis, she is presumably being paid via some external arrangement);

- There were exceptional staff restructuring costs of £623k (it is easy and probably right to assume this relates to the dismissals of Luzon and/or Fraeye although the figures seem high if so alone);

- The club spent £4.1m on new players during the year (this would have related to Messrs. Kashi, Bergdich, Teixeira, Sarr, Ajose and Holmes - Sarr, Bergdich and Ajose were clearly failures but Kashi looked a decent signing until his injury, whilst the contribution of Holmes and Teixeria has generally been positive - either way again one can't reasonably accuse the owners of not spending but as the old adage goes, "price is what you pay, value is what you get");

- The players sold/released during the year orignally cost the club a total of £3.1m (this can be deduced from the note 10 regarding intangible assets - given that the list of players sold/released during the period was [Etheridge, Munns, Osborne, Ben-Haim, Wilson, Daniel, Wiggins, Thomas, Nego, Eagles, Vaz Te, Parzyszek, Moussa] and we know that many of these were not even signed for a fee, it suggests quite extraordinarily that we likely paid £1m+ type fees for Nego and/or Parzyszek [it is reasonable to assume that Wiggins might have cost say £500k from Bournemouth - unless I have completely misinterpreted the accounts, this is perhaps the single most damning indictment of the mismanagement of the club in this document);

- £2.1m was spent on leasehold property (this is separate and unrelated to the above uplift in the valuation of leasehold property - this must relate to various stadium/training ground improvements);

- Bank loans outstanding were fully paid off during the year (it is hard to put a negative spin on this and it is another supporting factor to back up my view that the owners are benevolent albeit incompetent, rather than anything worse);

- The amounts owned to the parent (Staprix) increased to £55.6m from £40.1m (this type of increase is self-evident given the losses sustained during the year - the accounts additionally confirm that this debt is accuring interest at 3% pa - there are some fans that become agitated by this fact but in my view it is akin to your 'current account' borrowing from your 'savings account' for some short-term needs but charging it some interest for the priviledge - your 'current account' [the club in this case] might be aggrieved but from your consolidated point of view, your financial position is unchanged);

- Interestingly the accounts confirm for the first time that Staprix took on £21.6m of debt upon acquisition of the club in Jan 2014 (again it is not clear why the accounts would suddenly mention this very relevant fact - however if one extrapolates from the accounts to 30 Jun 2013, then it is reasonable to assume that the debts at that time due to the previous owners were in the region of £22-23m, suggesting they didn't after all take a meaningful 'haircut' upon sale as I had always assumed - also it proves quite neatly that Staprix have injected £34m since they purchased a Championship club which is now fighting a League One relegation battle - what did they used to say about fools and their money?);

- The £7m of loans to current/former directors (including Richard Murray) remain in place (these are repayable upon promotion to the Premier League - it would be an interesting financial exercise to estimate the fair value of these loans given their contingent but perpetual characteristics - how much would you pay today to have the chance to earn £7m if Charlton win promotion to the Premier League at any point in the future [administration/liquidation etc notwithstanding]?);

- An additional £2m might be payable if certain players reach milestones, whilst a further £4.6m might be receivable for the same reasons (the £2m payable figures seems high and is most likely very unlikely to occur [may well have related to Premiership promotion clauses etc for the likes of Vetokele or Watt], whilst the £4.6m receivable must relate to various long gone players such as Gomez, Poyet etc as well as more recent departures, and are likely on average relatively worthless);

- Between 30 Jun 2016 and 28 Nov 2016 (the date of accounts signing), £6.1m was received in transfer fees (this must have related to the sale of Gudmunsson, Pope, Holmes-Dennis, Cousins and Harriott - from a purely financial point of view this seems a decent return [given there are probably additional contingency payments as suggested above], but as we know the real problem has been how we subsequently spent any proceeds);

- Between 30 Jun 2016 and 28 Nov 2016, £359k was spent on transfer fees, agents and termination payments (the only player acquired for a fee during this period was Magennis).

- The sale of Lookman is not relevant for these accounts as they were signed before he was sold (it is not clear how much of the reported fee was paid upfront and how much will be contingent, but in addition to the other post-30 Jun sales it is likely that losses in the current season will be relatively limited).

- The accounts of the parent company (Baton 2010 Ltd) are not available yet (but I'm prepared to assume that they won't reveal much more than is included above).