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Fortune's Always Hiding at West Ham

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Fortune's Always Hiding at West Ham
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While the World Cup continues to thrill all and sundry (with the notable exception of the lugubrious TV pundits), the new club football season looms on the horizon, which means much transfer activity and even more speculation. One thing that has caught my eye is the goings on at West Ham. They have already signed midfielder Thomas Hitzlsperger , appropriately nicknamed “the hammer”, on a free transfer, indicating that the German would be “the first of many signings this summer.” Last week, they apparently made a £12 million bid for Brazilian “wonder kid” Neymar , while they have also been linked with the likes of YakubuJoe Cole  and those ageing superstars,Thierry Henry  and David Beckham .

Although this may seem foolhardy, it is certainly a clear statement of intent from West Ham’s new owners, David Sullivan  and David Gold , who acquired 50% of the club in January for £52.5 million, shrewdly paying a little over half of what they received when they sold Birmingham City to Hong Kong businessman Carson Yeung . Although the Icelandic group CB Holdings retain 50%, it is clear that the dynamic duo have taken operational and commercial control of the club. Indeed, it was evident that their takeover was tacitly approved by the club’s bankers, as their covenants would have included the power to veto any change of ownership. The deal included an option to purchase the remaining 50% and Sullivan and Gold have already increased their stake in the club to 60% in May at a cost of £8 million with £4m going to CB Holdings and £4m to the club to help bridge the gap in the club’s finances.

This injection of new funds was much needed, in fact, it was more or less essential for the club’s survival. Although the auditors did not go so far as to question the club’s ability to continue as a going concern (like Hull City and Liverpool), the Finance Director himself described West Ham’s business strategy as “fundamentally flawed”. On the delayed release of the club’s latest accounts (up to 31 May 2009), Sullivan stated, “These results testify to the amount of work that has to be done to restore this club to a position of financial strength.”

"You can put your shirt on them"

While Sullivan demonstrated commendable restraint in that instance, he had pulled no punches on his arrival in the East End, “We wouldn’t buy this club at all, if we weren’t West Ham fans. It makes no commercial sense for anyone to buy this club. It is a serious mess.” His co-owner, David Gold, also did not hesitate to put the boot in, “It’s madness what we have paid. The place was a car crash. Every page we turned in every document revealed yet another problem. It was the worst set of figures I have seen.”

The involvement of the Icelandic investors is a cautionary tale. Billionaire Bjorgolfur Gudmundsson  took over the club in November 2006 with much fanfare, promising to challenge the top four, and proceeded to splash the cash on huge transfers and inflated salaries. However, when his fortune was wiped out in the Icelandic financial collapse, West Ham also faced bankruptcy. Administration was only prevented when Hansa, the club’s holding company, was sold to CB (Claret & Blue) Holdings, a consortium of four Iceland banks led byStraumur , which is itself insolvent and is now owned by the Iceland government. This sale was extremely important for West Ham, as it protected the club against the threat that any one of Gudmundsson’s creditors could request a forced liquidation of Hansa’s assets – the largest of which happened to be West Ham.

The club was also fortunate when the District Court in Reykjavik  froze Straumur’s debt repayments until September 2010, which allowed them the breathing space to secure a reasonable offer for the club, hence the £50+ million bid from Sullivan and Gold, which was certainly higher than the sum they originally intended to pay. However, what was in the new owners’ favour was that it was obvious that CB Holdings had zero interest in owning a football club. Their only objective was to get back the money they were owed by Gudmundsson, so they were more than willing to do a deal, especially as the value of the assets would have dramatically decreased if West Ham had been relegated (a distinct possibility in January).

"I am the eggman"

However, there’s no doubt that Sullivan and Gold have inherited a club with countless problems, most obviously a lot of debt. The accounts list net debt of £44.9 million, arising from gross debt of £47.8 million less cash balances of £2.9 million. This comprises a bank loan of £31.5 million, revolving credit of £14.7 million and HP loans of £1.6 million. Interest is charged at 2.5% over  LIBOR , leading to £4m expenses in 2009. Obviously, £45 million of debt is low compared to many Premier League clubs (notably Manchester United over £700 million, Liverpool £350 million), but then again these clubs do generate considerably more revenue.

Nick Igoe, West Ham’s Finance Director, confirmed that the debt was a major concern, “At 60% of turnover, the bank debt can hardly be considered excessive. The reason why the level of debt is challenging is that it is relatively short-term in nature, expiring as it does in August 2011, and has to be viewed alongside other liabilities.” In fact, the bank loan is technically repayable on demand, as the club breached its debt covenants. Only the goodwill of the group’s bankers agreeing to waive those breaches allowed a new schedule to be established with the majority of the repayment back-ended to 2011.

The debt would have been even higher if former owner Gudmundsson had not invested a further £30.5 million of equity in 2008 and CB Holdings agreed to a £10 million loan being converted into equity in November 2009.

That’s bad enough, but Sullivan has spoken of a far higher figure, “When we took over in January, the club was £110m in debt, though we have cut it down to just over £90 million. In simplistic terms, £50 million is owed to banks, £40 million to other clubs and the club’s settlement to  Alan Curbishley .”

Not that I don’t trust Sullivan, but I have analysed this in the table above to see where he’s coming from. On top of the £48m bank loans (gross), the accounts tell us that other clubs are owed £25m for transfers: £14 million of net creditors, £2 million of contingent liabilities dependent on number of appearances and £9 million of transfers registered after the balance sheet date. In addition, I reckon that the club still owes Sheffield United £16 million for the Carlos Tevez  affair – the 2009 settlement of £21 million is to be paid over four years, so presumably a quarter (£5 million) was paid last year. In addition, the notes to the accounts include £8 million owed to the tax authorities, £1 million to purchase the freehold interest of the training ground and £4 million outstanding legal claims. I have also included an estimated £5 million in respect of severance payments to former managers.

As we can see, many of West Ham’s financial problems have been of their own making, the result of poor executive decisions and downright incompetence. Incredibly, the club has wasted £47 million over the last three years on “exceptional items”, primarily the cost of a number of very damaging legal actions. The daddy of them all has to be when the Premier League found the club guilty of acting improperly and withholding documentation over the transfers of Carlos Tevez and Javier Mascherano . Although the club was given a record £5.5 million fine, many fans believe that the club got off lightly and should have received a points deduction, which would have been enough to send them to the Championship. The team that was relegated, Sheffield United, sued West Ham, settling out of court for £21 million. Adding in the legal fees of £5 million, this whole sorry saga cost the Hammers nearly £32 million.

"It's nothing to do with me"

The club has also had to pay over £5 million in redundancy charges over the last three years, as various appointments have not worked out. This does not include the £2m pay-off to former manager Alan Curbishley, who claimed for constructive dismissal following the sale of  Anton Ferdinand  and  George McCartney  without his approval. On the face of it, “Curbs” did not have much of a case, until we discovered that some fool at the club had included a clause in his contract that he had the final say over which players would be sold.

That’s bad enough, but what sort of prize would you award to the half-wit that decided to award the notoriously injury-prone strikerDean Ashton  a five-year contract? When Ashton was forced to retire less than a year later, the club was liable for £5.8 million compensation. Although West Ham have made an insurance claim, the chances of success seem low, as evidenced by the accounts not recognising any potential recovery.

Just for good measure, the club managed to lose over £1 million on foreign currency translation. Not bad, when virtually all of your business is conducted in Sterling.

"£2m? Let me think about it"

David Sullivan has also bitterly complained about the wage bill, “The crazy wages the Icelandics were paying brought the club to its knees. I can’t believe the contracts I’ve inherited. Every position is over-paid, whether in administration or on the playing side. All are earning more than they would at other clubs.” When you look at the figures, his arguments carry a lot of weight. Although salaries were cut by £3 million last year, they are still twice as much as they were in 2006 £31 million. In the last five years, revenue has grown by an impressive 140%, but salaries have grown by even more, 200%. This has meant an increase in the crucial wages to turnover ratio to nearly 80%, which the club itself described as “unsustainable”.

This generosity was epitomised by the salaries of the management team. In his first job as manager, Gianfranco Zola  was paid £1.9 million a year, while his assistant, Steve Clarke , earned £1.2 million, more than double his equivalent at Manchester United (and he did not have to handle interviews from the BBC, as Mike Phelan  does).

The cost growth is not just due to the munificent wages, but also a significant increase in playing staff – from 77 in 2006 to 107 in 2009. It was a similar story off the pitch with “an army of people supporting the first team”, according to Sullivan, though last year there were obviously strenuous efforts to make cuts here, as administrative staff fell from 156 to 110 and part-time employees were slashed from 1,122 to 728.

With such high wages, you would have expected the club to have performed a great deal better than they actually did. In an astonishingly candid admission, the annual report stated, “Clubs with fewer resources and lower levels of expenditure on their squad have achieved a greater level of league and cup success.” Last season, West Ham’s wages were the seventh highest in the Premier League, but they only finished seventeenth. The only other club with a comparable differences between wages and league position was Portsmouth.

Therefore, the club has embarked on a programme of player sales and consequent wage savings, which will mean a reduction in the size of the squad and the replacing of highly remunerated players with less costly replacements. This is reflected in the table above, where we can see that the club had net proceeds of £10.8 million last year, after selling  Craig Bellamy , Anton Ferdinand,  Bobby Zamora  and Matthew Etherington . However, that’s less than 25% of the net expenditure incurred in the previous two seasons. You can clearly see the impact of the Icelandic takeover in late 2006 on the transfer policy.

Their extreme activity once again provoked “open kimono” time in the accounts, which describe many of the group’s investment decisions in this period as “ill judged”. In particular, they note that Calum Davenport  and Nigel Quashie , signed in January 2007, only started a combined total of 15 games in three years at a cost of £12 million over the term of their contracts. If you think that’s bad, get a load of the business done the following summer: Freddie Ljungberg  andKieron Dyer  have only started 32 games between them and will cost a jaw-dropping £34 million in total.

"Kieron Dyer - no wonder he's smiling"

The club was at pains to avoid a fire sale, as this would have weakened the squad and increased the chances of relegation, but Sullivan told the fans that without his takeover, “£8 million worth of players would have been sold in January and in the summer the club would have needed to sell £16 million worth of players to carry on surviving.”

As you would expect, player amortisation has grown in line with salaries. When a player is bought, the cost is capitalised as an intangible fixed asset and written-off over the length of his contract, as the assumption is that the player would have no value after his contract expires, since he could then leave on a “free”. As an example, Dyer was bought for £6 million on a four-year contract, so £1.5 million costs would be booked to the accounts in each of the next four years. Although costs of buying a player are not fully reflected in the accounts in the year of purchase, over time the amortisation costs can have a real impact, which is what has happened at West Ham with these costs rising from £5 million in 2006 to £20 million in 2009. That’s a lot in the context of the £16 million loss West Ham reported last year, though still much less than a really big spending club like Chelsea (£49 million).

The 2009 loss was nothing new, as the club has only reported a profit once in the last five years, back in 2006, when the results were boosted by promotion to the Premiership and the associated increase in TV money. As Sullivan put it, “This club lost £20m, £40m and £20m in the last three years and there are another £20m losses this year.” Matters financial clearly took a turn for the worse after Gudmundsson appointed  Eggert Magnusson  as chairman and allowed him to indulge in a form of supermarket sweep.

I n fact, the 2009 loss of £16m was less than half of the previous year’s £37 million, a veritable  annus horribilis . At the level of the holding company, the loss was even higher at £72 million, mainly due to amortising the goodwill arising from the Icelandic take-over. The losses in the last two years would have been worse still without significant profit on player sales (£16 million in 2008 and £22 million in 2009). On the other hand, exceptional items have severely impacted the bottom line, so that the 2009 loss would have been only £5.7 million in 2009, if these were excluded.

Total revenue last year was £76 million, which was £5 million less than the year before, though in fairness there had been a massive increase in 2008 from £57 to £81 million, largely due to the new three-year Premier League television deal coming into effect. Actually, West Ham’s 2009 revenue is still pretty good – it’s the tenth highest of all English clubs, only just behind Aston Villa and Everton.

The main reason for the drop in 2009 revenue came on the commercial side, where revenue was £8 million lower, following the loss of the XL sponsorship (£4 million) after the holiday company was placed into administration and outsourcing the group’s catering and hospitality operation (£4 million). Although the club did manage to secure SBOBET, a Far Eastern betting firm, as a replacement sponsor at short notice on what was described as “favourable terms”, it is understood that the revenue is much less than the previous deal. The club has also changed kit supplier from Umbro to the Italian firm Macron from the 2010 season. Former chief executive,  Scott Duxbury , said that, “Commercially, the club is going from strength to strength”, but this boast does not stand up to scrutiny, if you consider that Spurs earn twice as much commercial revenue as West Ham.

Like almost every other club, television has been the driving force behind West Ham’s revenue growth, rising from £8 million in 2005 (when they were in the Championship) to £44 million in 2009, though this has little to do with the club, being down to the collective Sky Premier League agreement. West Ham now have a huge dependency on television with nearly 60% of their total revenue coming from this stream. West Ham’s share of the Premier League distribution in 2008/09 was £40.4 million, but this will be nearly £6 million less for the season just gone, as they finished eight places lower, so receive a smaller merit payment.

Match day income has been fairly constant at around £18 million a season, but it’s very low compared to other clubs, largely due to the limited capacity of the Boleyn Ground  (35,300). Revenue fell £0.7 million in 2009, mainly because the team did not repeat its Carling Cup run from the previous year. However, it was discouraging that the average attendance dropped from 34,500 to 33,250, while season ticket sales also declined from last year’s record of 25,600 to 23,100. To place this revenue into context, Manchester United and Arsenal both earn more than £100 million from match day income, while even Spurs, whose ground is not much larger than West Ham’s, managed to gather £40 million.

"Time to move?"

This explains why Sullivan and Gold are so keen to move the club to the new  Olympic Stadium  in Stratford with its larger capacity and potential to generate far higher revenue: “Leaving the Boleyn Ground would be a wrench, but the Olympic Stadium is an amazing, once-in-a-lifetime opportunity in a financial and football sense. To move forward, we have to move.” Although the club has made a joint bid with Newham Council, there are many barriers to this project. Three years ago the government rejected this vision, but the former Olympics Minister,  Tessa Jowell , has since opened the door to a revised bid, though making it clear that there could be no deal without “money on the table”.

It is unclear who would pay the bill for converting the stadium, reducing the capacity from 80,000 to 50,000, but the costs would be enormous, estimates ranging from £140 million to £200 million. Parallels have been drawn with Manchester City’s conversion of theEastlands Stadium  after the 2002 Commonwealth Games , but this was a planned part of the design, unlike the Olympics Stadium.

The London Organising Committee for the Olympics has also insisted that the running track must remain, which would leave fans far from the pitch. However, David Gold argued, “As an athletics stadium, you’ll get 5,000 people there on three weekends a year. It doesn’t make any economic sense. To claim you’re leaving that as a legacy is like saying we’ll leave it to rot.” He’s got a point and Baroness Ford , Chair of the Legacy Company, conceded that it could be a multi-purpose venue with football and athletics co-existing in the stadium.

"If the hat fits, wear it"

Of course, the other benefit to West Ham’s owners of moving to Stratford would be that they could realise the profit on the club’s major asset by selling Upton Park. In the accounts, this has a net book value of £28 million, but independent surveyors have estimated the value in the real world to be £73 million, which would imply a potential gain of £45 million. As the property market recovers, the profit to Sullivan and Gold could be even higher. If they could persuade the government to foot most of the bill for converting the Olympic Stadium, this would be a “nice little earner”.

In fact, there is much method in the owners’ apparent madness, as West Ham is a club with a lot of potential: it’s well supported, loved by the media and has a recognisable East End brand. The last accounts recognised this, albeit in the driest possible terms, “Forecasts indicate that the group is capable of returning to a position of generating operating profits in forthcoming periods.”

The most obvious step is to cut costs and the club has already embarked on a number of cost saving initiatives. Once again, Sullivan did not mince his words, “There has to be some savings here. This is a club haemorrhaging money.” To that end, the club made the whole squad, with the exception of Scott Parker , available for sale and has already released a trio of mediocre forwards (MidoIlan  andGuillermo Franco ). The belt-tightening also impacted the executive team with chief executive Scott Duxbury and technical directorGianluca Nani  being asked to pack their bags. And, of course, Sullivan also sacked the manager, even though he had said immediately after the takeover, “Zola is absolutely staying. I can say that categorically. We believe in our managers and give them the time and support they need.”

"Wake me up, before you go go"

However, there are only so many costs you can cut, so at some stage the club will need to look for revenue growth. They’re unlikely to get much in the near future on the commercial side, as they’ve signed agreements with their current sponsors until 2013. Nor will they be able to greatly increase match day revenue, as it would be difficult to raise ticket prices in the current economic climate. Moving to the Olympic Stadium is the big hope, but even that would not take place (if it is approved) until 2015. More encouragingly, they will benefit from the new Premier League television deal, which kicks-off next season. As a minimum, they will receive £10 million more, due to the significant increase in overseas rights. Furthermore, each additional place in the league is worth around £800,000, so if they finished up in the top ten, which is not beyond the realms of possibility, then they would earn another £6 million.

On the other hand, if the club were to be relegated, this would severely dent their prospects. When asked about this possibility, Sullivan’s response was telling, “It would be absolutely horrendous – like Armageddon.”

The new owners have made great play on being West Ham fans: Gold was born across the road from Upton Park and actually played for the youth team, while Sullivan was born nearby in Hornchurch. However, their constant mentions of their roots brings to mind the classic quote from former Crystal Palace chairman, Simon Jordan , “If I see another David Gold interview on the poor East End Jewish boy done good, I'll impale myself on one of his marital aids” – a reference to Gold’s main business (a retailer of, ahem, adult goods).

"Simon Jordan - a cross between Spandau Ballet and a clay court"

At times, the owners do indeed speak just like other fans, “I apologise to every supporter for that pathetic showing”, said Sullivan after an embarrassing home defeat. Gold claimed they would “push the boat out” and dip into their own pockets to buy quality players, while Sullivan was of the same opinion, “One year, we’ll chase it, knowing we’ll run up a £30-40 million loss.”

They maintain that they have bought the club on a mercy mission, but it’s intriguing that Sullivan predicted two years ago that he would be able to take advantage of the Icelandic owners, “They might want to say to me, ‘Come and buy half the club and make it work for us’, because they have done some appalling things at West Ham.” Their ambition was highlighted in January, when they announced a “seven-year plan to get them into the Champions League.”

However, Birmingham City fans might remember a similar promise of a five-year plan to take their club up from the Championship into the Premier League. Instead, 18 months later, they were relegated to League One. To be fair, Sullivan and Gold ultimately did steer the club into the Premier League, where they are now solidly established, profitable and virtually debt-free. Most commentators acknowledge that they did a good job at the Midlands club, including developing the stadium, though some fans have bemoaned the higher ticket prices and the club’s lack of ambition. What is without doubt is that Birmingham City was an extremely good investment for Sullivan and Gold. They bought the club 16 years ago for £1, transformed it and sold it last year for a cool £82 million.

This time round, they might need a little help, so the club has appointed Shore Capital to raise £20-40 million in fresh investment, presumably in order to pay back the £35 million of loans which are due for repayment in just a year’s time (August 2011). We cannot know for sure, as the fundraising is being handled via a private placement, so the club can keep financial disclosure to a minimum. Sullivan has revealed that their preferred option is to find other investors who want a 5% or 10% stake. He has already invited Tony Fernandes , owner of Air Asia and one of the rival bidders for the club, to come on board and has even flown to Dubai to hold talks with potential Middle East investors.

"Do you want to know a secret?"

The reality is that West Ham’s business model is “unsustainable” – not my word, but their own Finance Director’s - as it is dependent on continued financial support from the owners or increased bank borrowings. The last three years have seen a combined net cash outflow of £50 million, which has only been compensated by equivalent financing, either via the issue of shares or more loans.

This must be why West Ham’s owners are so eager to pronounce on football’s economic problems. Gold gave us his views on debt, “Controlling debt is one of the fundamentals that the Premier League should be addressing. We almost need to be saved from ourselves. Because we're in such an extraordinary business we are subject to building debt because we're under pressure from fans, other board members, the manager, the players.” Sullivan then took aim at players’ wages, “Maybe the ultimate solution would be a salary cap. Other than that I just don't see an end to it – of wages out of all proportion to the turnover of the clubs. Somehow there should be some sort of control.”

All very admirable, but there are some obvious contradictions with West Ham’s own actions. Just after asking everyone at the club to take a 25% cut in their salaries, Sullivan was willing to offer the prolific Ruud van Nistelrooy  £100,000 a week, even though his best days are clearly behind him. While understandably complaining about the excessive spending of the previous regime, he simultaneously handed the unfit Benni McCarthy  a £50,000 a week contract that will see him through to his 35th birthday (the same player who was rejected by South Africa for being overweight).

On the one hand, Sullivan is against the benefactor model, but they are personally paying for vice chairman Karren Brady , who worked for them at Birmingham, out of their own pocket. Similarly, the owners are not taking a salary themselves, as part of their cost containment campaign.

"The Brady Bunch"

To be fair, Sullivan and Gold do seem to be focused on taking care of the club’s finances, rather than themselves, unlike many other owners we could mention. Although they possibly got the club on the cheap, they are making all the right noises. Gold said, “Our job is to reduce the debt and at the same time to improve the squad. If that means we have to put some money in, then that’s what we’ll do. WE will do that. We will not go and borrow it, knowing that if we fail, the football club will be landed with the debt.”

Their confidence in their own abilities provides some comfort, with Sullivan painting a bright future, “We are taking over an incredibly bad situation. However, we will sort it out, because we are good at it.” Whether the happy couple live up to that pledge or are just a couple of Cockney  chancers, only time will tell. For the sake of West Ham fans, who have had to put up with more than their fair share of broken promises, let’s hope that they can deliver and it’s not just another set of dreams that fade and die .


 

 

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