Good Old Sussex By the Sea

Many years ago, a young boy stood on the terraces at his local club, scarcely believing their remarkable rise from the old Third Division to the First Division, which was then the top tier of English football (yes, football did exist before the Premier League and Sky Sports). He watched them overcome an all-conquering Liverpool side, beat the reigning European Cup champions, Nottingham Forest, and, most memorably of all, come within a kick of beating the mighty Manchester United in the 1983 FA Cup Final (“and Smith must score”). The club was Brighton and Hove Albion; the young boy was me.

These were indeed the best of times, glory days when attendances averaged over 25,000, as fans turned out in great numbers to watch legends like Peter Ward (“he shot, he scored”), Brian Horton, Steve Foster, and even Mark Lawrenson (before he became a world-weary TV pundit) in those classic blue and white striped shirts.

Since those heady days, life has not been so kind to the Seagulls, as they have endured a rollercoaster ride, but the direction has mainly been downwards. They once again find themselves in League One, but after many years of re-branding, this is now the third level of English football. The decline reached its nadir in 1997 when they avoided relegation out of the Football League to the Conference by the skin of their teeth, as a 1-1 draw at Hereford United condemned their opponents to the dreaded drop.

"And Smith must score - you know the rest"

It was an incredible, dramatic escape, but the club’s on-field struggles were nothing compared to their problems off the pitch, as they paid a heavy price for the unsustainable spending under former Chairman Mike Bamber, whose attempts to “live the dream” had given the club the most successful period in its history, but also laid the foundations for major financial difficulties. The club’s increasing deficit gave rise to a series of winding-up orders from the Inland Revenue in 1992 and 1993.

In order to pay off the club’s debts, the Board made the hugely unpopular decision to sell the Goldstone Ground, which had been the club’s home since 1902, to property developers who built a frankly hideous retail park, including such gems as a Toys 'R' Us store and a Burger King drive-thru (“they paved paradise/and put up a parking lot”).

Although a few might have seen this as a desperate move to avoid bankruptcy, the vast majority of fans considered it a blatant act of asset-stripping by the reviled chairman, Bill Archer, and his partner-in-crime, chief executive David Bellotti.

Archer was the majority shareholder, securing control of the club for the princely sum of £56 via an off-the-shelf company, and the suspicion was that he was simply lining his own pockets with no regard for the fans, especially after it was revealed that the club’s Articles of Association had been amended to allow directors to benefit from any sales proceeds if the club were to be wound up. Indeed, there had been no consultation with supporters, no discussion with the local council and, tellingly, no alternative ground was lined up.

The fans were convinced they had been sold down the river. Not just those following the Albion, but fans from many other clubs recognised this injustice, thinking “there but for the grace of God, goes our team.” This solidarity culminated in the extraordinary Fans United day when supporters from all over Europe came to the Goldstone to join together in an unprecedented protest against the board.

Whatever the directors’ motives were, the result was that Brighton no longer had a ground to call their own and they have been without a permanent home ever since—for 13 long years (unlucky for some).

A mooted ground share with Portsmouth never happened, leading to a similar arrangement being agreed with Gillingham in Kent. Although this county is described as the “garden of England," it held few attractions for Albion followers, who had to endure a 140-mile round-trip to attend their “home” games. This awful period of exile lasted two long years before the club made its weary way back to Brighton in 1999.

Three years after Euro 96, football was finally coming home, but the destination was Withdean, an old athletics stadium on the northern outskirts of the city (and just ten minutes from where I used to live). Although it was a relief to be back in Brighton, the facilities were far from ideal. Largely open to the elements, the “theatre of trees” is arguably the worst stadium in the whole of the Football League with totally inadequate facilities. It was planned as temporary accommodation, but the club’s tenancy has lasted a lot longer than intended and they are still there, very much the unwanted guests.

As former Brighton chairman, Dick Knight, admitted, “We don’t want to be there any more than they want us there.”

"Withdean - a good stadium for athletics"

Hence the search for a new stadium, which eventually alighted on Falmer, but it has been a long, painful process ever since the original planning applications were submitted a decade ago back in 2000.

Despite the overwhelming majority of the local community being in favour of the development, there has been strong opposition, mainly by Lewes District Council, due to its proximity to an “area of outstanding natural beauty.” Nevertheless, after much debate and numerous inquiries, the Deputy Prime Minister John Prescott granted the club planning permission in October 2005. When he visited Withdean to support his hometown club, Hull City, the Albion faithful serenaded him in their own style, “He’s fat, he’s round, he’s given us a ground.”

Except the overweight imbecile hadn’t, as his department had messed up the Decision Letter, referring to the site being in the “built up area” of Brighton and Hove, while part of the development is in Lewes. Amazingly, this minor technicality allowed the NIMBYs in Lewes District Council to mount a legal challenge, which further delayed the process.

However, all good things come to those who wait and the definitive approval was given by Hazel Blears, the new Secretary of State, in July 2007.

Throughout this unhappy period, the passionate Brighton fans contributed a considerable amount to the movement, especially the “Falmer for All” campaign led by Paul Samrah. As well as inundating the politicians with petitions and letters, this featured many innovative ideas such as a hit record and the formation of The Seagulls Party to contest seats in local elections.

"Dreams do come true"

However, once bitten, twice shy, and chief executive Martin Perry greeted the approval with caution, “This is fantastic news for the club, but it isn’t green for go just yet. We’ve already had one false dawn.”

And sure enough, the legislation relating to the design and operation of stadium had changed during the drawn-out approval process, so the club had to submit a revised planning application for the stadium only, which was approved by Brighton & Hove City Council in February 2009.

At long last, building could start and the new stadium should be ready for the start of the 2011/12 season.

So, all systems go? All things Brighton beautiful? Not quite. The credit crunch hit and banks were unwilling to lend the money required to fund the costs of the stadium, which had risen to a staggering £93 million, or at least would only grant a loan at exorbitant rates.

Step forward, Tony Bloom, a successful poker player known as “The Lizard”, who had already provided the club with substantial loans. He promised to fund the majority of the construction costs, injecting a cool £80 million into the club.

Dick Knight welcomed his cash. “This is the natural progression for the football club. Tony's investment will mean no need for external funding,” he said.

Martin Perry was even more effusive, not to mention blunt, “We would not have the stadium without him.”

It’s only natural that fans’ expectations have grown with the arrival of Bloom and his millions, but it’s worth looking at the club’s financials to see whether these are realistic.

The club’s reliance on its directors’ support is very clear when looking at its debt, which is now up to £17 million (from £11 million in 2008). Hardly any of this has come from bank loans with almost all of the funding being provided by the directors, namely Tony Bloom. The club’s latest accounts (up to 30 June 2009) actually report a net debt of only £10,000, but this excludes the £16.9 million owed to group undertakings, which is clearly an inter-company loan, so should be considered part of the club’s overall debt.

Any road, the important point is that this loan is very generous, being unsecured and interest free.

This is crucial for the club, as commercial interest rates on a loan of this magnitude would have been prohibitively expensive. The fact that the loan is unsecured is also critical, as this means that Bloom has no guarantee of repayment, because there is no security on the money. The £80 million he has pledged is repayable in 2023, but again there is nothing mysterious about this, as a convertible loan requires a returnable date. If the money is not available, Bloom could convert the loan into shares, as have many owners at other clubs, or the loan could simply be refinanced.

"A Blooming miracle"

So Bloom’s shareholding in the club has increased to slightly more than 75 percent, but his stake would grow to 90 percent if he were to convert the loans repayable in 2023 into shares. He has also assumed the role of chairman, replacing Dick Knight, who still holds 6.42 percent of the equity.

Knight’s role in supporting the Albion should not be under-played. He is the man who bought out the despised Archer and his cronies, steadily guiding the club forward in his 11 years as chairman. Bloom for one recognised his efforts, “Nobody should be in any doubt that he saved the club from almost certain extinction at a time when no one else was willing to come forward.”

But Bloom’s investment does not necessarily mean that big money will be available to spend on improving the squad, as most of the funds are earmarked for the new stadium. Fans may have to take a reality check here, especially if they listen to comments made by manager Gus Poyet, who has said that he is not going to pressurise the chairman for a bigger budget. He has also warned transfer targets to be reasonable in their wage demands.

And you can see why when you look at the club’s profits—or I should say losses, for the stark reality is that Brighton do not make money. In fact, the club’s losses have actually been increasing over the last few years. OK, the club reported a profit of £877,000 in 2008, but that was only due to an exceptional item of £3.6 million, which represented a net expense reversal for the Falmer development costs, which had previously been impaired. The planning approval and work commencing on site has allowed the club to now include these costs as an asset on the balance sheet.

However, fundamentally each season is a struggle for the club to keep its head above water and avoid administration, as can be seen by the latest loss of £4.6 million in 2009. The losses have been lower in the past few years, especially 2006, but this was heavily influenced by profits made from selling players. The weaknesses in the club’s business model have been noted by the auditors, who mentioned in the accounts that the club’s ability to continue as a going concern depended on the “continued support of the directors in providing adequate loan facilities.” This explains the financial prudence demonstrated by the former chairman, who acquired the unwelcome nickname of Dick “Tight”—but even with all this caution the club still makes large losses.

In fairness, it is difficult for the club with its relatively low turnover of just over £4 million. To place this into context, Manchester United’s revenue the same year was £279 million. OK, that’s maybe not a fair comparison, but even a club like Portsmouth with relatively low attendances earned £60 million, which demonstrates the impact of TV revenue in the Premier League.

"The good old days"

Brighton will always face financial challenges with such low revenue, even though it is boosted by £347,000 of other operating income, which includes a £165,000 youth development grant and £114,000 made from loan players.

However, the bread and butter revenue for any club in the lower leagues is its gate receipts, which are cripplingly low at Brighton—one of the many problems associated with playing at such an appalling stadium. This was acknowledged in the club’s accounts, “Clearly the poor facilities offered to spectators at Withdean remains the main factor in low attendances coupled with the continuation of the economic recession and relatively poor achievements on the pitch.” In fact, average attendances have actually been falling with the recent high of 6,802 in 2006 (when the team was in the Championship) down to 5,679 last season. The figures also highlight the importance of glamour ties in the FA Cup to such teams, as the 2005 revenue was boosted by £300,000 from the third round away tie with Spurs.

The sad thing is that all these years without a decent stadium have cost Brighton big time. In 2005 Dick Knight said that the club had lost out on at least £30 million, but it must be much more than that. He estimated that the club missed out on £3 million gate receipts every season, assuming crowds of 12,000, which implies lost revenue of £39 million (after 13 seasons without a permanent stadium). Add to that the £3 million spent on refurbishing Withdean, the £4 million or so spent on public inquiries and even a £350,000 tax bill for the capital gain made on selling the Goldstone and the total is close to £50 million—a huge sum for a club Brighton’s size. And that does not include any money lost from commercial opportunities afforded by a purpose-built football stadium (corporate hospitality, merchandising, programme sales, etc).

"Thumbs up for Dick Knight"

Things might have been better on the playing side too. As former manager Steve Coppell said, “The football has almost been a sideshow. If that money had been spent on the pitch, we wouldn’t have found ourselves in this position.” Many good managers have left the club because of the restrictions arising from a lack of a decent stadium: Micky Adams, Peter Taylor, and Coppell himself. Not to mention the thousands of young fans who have never had the opportunity to watch the Albion.

To cut a long story short, the importance of the new stadium to the club cannot be emphasised enough. Against all odds, work is well and truly underway and the pictures from the Falmer site look terrific. Martin Perry said that “the delivery of the stadium remains an absolute priority," while the accounts warned that “the operating loss clearly demonstrates the urgent need for the new stadium at Falmer with all the facilities, commercial and economic benefits and additional revenue streams it will generate.”

Having said that, dreams don’t come cheap and building Brighton’s new home is going to cost an eye-watering £93 million, comprising construction costs of £66 million with the rest going on associated legal, refurbishment, and acquisition fees. On the plus side, the contract with the building contractors is fixed price to reduce the risk of over-runs, while the South East England Development Agency provided a £5 million grant towards the infrastructure cost.

"If we build it, they will come"

Falmer will be a state-of-the-art stadium with a 22,500 capacity, which will be three times the size of Withdean. Given the falling attendances, it is legitimate to question whether the new ground will be filled, but the obvious response is the one given by Dick Knight, “We are not building a new stadium for League Two.” That man Coppell agreed, “They’re capable of being in the top division. Once the crowd return, they’re going to be very good.”

And there is a lot of potential in Brighton to back up these seemingly outlandish claims. The city has a population over 250,000, while the club has a huge catchment area, being the only Football League club in the county of Sussex. The 30,000+ fans that the Albion took to the Millennium Stadium in Cardiff for the 2004 play-off final highlighted the possibilities.

This is evidenced by the demand for corporate packages at Falmer, which are selling like hot cakes. The head of sales put it very well, “The people of Brighton have had to put their love for their club on hold, but now they are coming back in droves.” Furthermore, naming rights for the new stadium have already been sold, though the club has not divulged how much the deal is worth. Falmer will henceforth be named the American Express Community Stadium, though the fans will inevitably call it “The Amex,” after the city’s largest private employer.

"Brighton rock Manchester City"

God knows the commercial revenue could do with a shot in the arm. Although it is reported in a lot of detail in the accounts, it is still only £1.5 million, but I suppose that’s not too bad if you consider that the club can only attract local sponsors in its present guise.

The main shirt sponsors are IT First, who have confirmed their support until 2010/11, the final year at Withdean. Similarly, a local restaurant, Donatello, extended its agreement as secondary shirt sponsors for the same period. For ten years, the club was famously sponsored by the appropriately named Skint Records, the record label of Brighton fan Norman Cook, better known as the DJ Fatboy Slim. In addition, the club has benefited from direct sponsorship from “Friends of the Albion”, a supporting network of local businesses. Last, but not least, the supporters have also raised funds over the years, notably the “Alive & Kicking” campaign in 2004/05, which raised £262,000.

In much the same way, the television revenue is obviously on a different scale from the Premier League, coming in at less than £700,000. Compare that to the team finishing last in the “best league in the world” (© Richard Keys), which will pocket around £40 million from the central distribution.

Yes, it is indeed a “different ball game”. Nevertheless, Brighton still face similar issues to those clubs, whose sole strategy is Premier League survival in order to avoid the steep drop in TV money.

"He's a dedicated follower of fashion"

The effect of relegation from the Championship can be clearly seen in 2007, when the Albion’s TV revenue fell by a dramatic 60 percent from £1.4 million to £0.6 million. This was the direct result of a far lower central distribution from the Football League, though there was a small increase of £106,000 in 2008, thanks to the introduction of a “solidarity payment package” funded by the Premiership.

Actually, the 2006 television revenue highlights the fine margins at this level, as it was inflated by three once-off payments: a £250,000 windfall from a competition sponsored by Coca Cola (which was used to buy striker Colin Kazim-Richards); a relegation parachute payment of £120,000; and proceeds from the ITV Digital liquidation of £88,000.

Given the small turnover of just over £4 million, it is shocking that the costs are nearly £9 million – more than twice as much. This includes relatively high administrative expenses of £4.2 million. The accounts don’t reveal the full details here, but in the past Dick Knight has bemoaned the fact that 50 percent of the gate receipts go in putting on a game, compared to the average of 10 percent for others.

However, as with all other football clubs, by far the highest component of the costs are wages, which accounted for £4.8 million in 2009, an increase of £0.9 million over the previous year, which the club described as reflecting “increased investment in the playing budget.” You can say that again—a 22 percent increase in just 12 months. This has produced a quite horrific wages to turnover ratio of 115 percent. In fact, this important measure has been increasing (deteriorating) over the last five years, which is not surprising when the revenue has fallen by 25 percent, while the wage bill has grown by 34 percent.

Salary costs increased by £0.5 million in 2006 in a failed attempt to stay in the Championship, but were then cut £0.4 million in 2007 to reflect the lower budget following relegation. However, wages have shot back up since then, despite remaining in the same division, though the 2008 increase was largely due to resources needed to deliver the stadium project and the introduction of an in-house scouting system. To be fair, it’s not as if the players earn fortunes. My guess is that most first team players are on around £50,000 a year, though some will inevitably be on higher packages, while the fringe players would probably earn half of that.

"In Gus we trust"

Another important expense for major clubs is player amortisation, i.e. the annual cost of writing-down their value (which is taken to be the purchase price). This is a highly technical accounting procedure, which is not really worth discussing here, as it’s so immaterial for Brighton (only £177,000 in 2009). This is an indication that the club spends small sums on buying players, which is backed-up by the £300,000 purchase of Glenn Murray from Rochdale in 2008 being the largest transfer fee paid for over a quarter of a century. In the same year, long-serving midfielder Gary Hart celebrated ten years service, having been bought for just £1,000 plus a set of training kit. Nobody is whistling “Hey, big spender” here.

So, this is clearly not a club that has splashed the cash when it comes to buying players, but that has not prevented a large turnover, e.g. the latest accounts mention nine new players coming in (plus another seven after the end of the season). They have also made extensive use of the loan system with an incredible 13 players signed in this way. It has to be said that there has also been a bit of a merry-go-round at the managerial level with 12 managers in the last 12 years.

Brighton has made some money from player sales in the past, but not that much. In fact, the last substantial profit from player trading (£2.1 million) was reported back in 2006, when Adam Virgo was sold to Celtic for £1.5 million, Dan Harding to Leeds for £0.5 million and Leon Knight to Swansea for £125,000.

This is important, because of the way the club’s business model works, which was explained in the 2007 accounts thus, “Losses can only be sustained through the sale of our greatest assets, namely our players, or through shareholder funding.”

So if very little money is raised via player sales, that means that the only practical option left for Brighton is funding from the owners and this is confirmed when we look at the cash flow statement, which reveals that the club requires additional financing almost every year to break-even.

So it’s just as well that Brighton have found in Tony Bloom their own version of Roman Abramovich, albeit on a smaller scale. One concern is that it’s not entirely clear what is the source of his wealth.

Obviously it’s unlikely that the money will have come from poker, no matter how good a player he might be, but it is known that he sold his stake in Premierbet, the company he founded, in 2005. Like so many other investors in football clubs, he is also involved in property development and “finance.”

But why would Bloom want to invest in Brighton, apart from football reasons? He would probably only get a return on his money if the club reaches the promised land of the Premier League, which is not impossible, but the odds are a lot longer than a professional gambler would appreciate. At the moment, the only “positive” financially is that he may well be able to write-off the loans to the loss-making football club against profits in other parts of his business organisation in order to reduce tax.

Similarly, he might be able to utilise the £5 million deferred tax asset at some stage in the future, if the club starts making profits.

"The spade is in the ground"

There is always some concern with the benefactor model, which works just fine as long as the owner remains dedicated to the football club, but can be problematic if his circumstances change. Bloom himself admitted that he had to “make a bigger commitment than I would have envisaged”, because of the difficulties in securing credit.

The other worry is the sheer size of the debt, which is approaching twenty times the club’s annual turnover. Unless the loans are converted into shares, there has to be a possibility of repayment at some stage, though this would presumably only be likely if Bloom were to fall on hard times. Considering their experiences with Bill Archer, the fans would be justified in feeling nervous about a repeat performance. As one fan memorably put it, “We don’t want to have all our eggs in one bastard.”

On the face of it, Tony Bloom is cut from a different cloth and has hastened to assure fans that he is nothing like Archer. Indeed, there are strong family ties to Brighton and Hove Albion, as his uncle Ray is also a director, while his grandfather Harry was vice-chairman when the club reached the old first division in 1979. You could say that the Albion is in his blood and Bloom himself is a lifelong supporter.

"Glenn Murray - he's mint"

This is clearly not some fancy toy for the chairman, which he has reinforced by bringing in two of his long-time associates as directors: Adam Franks, the finance director for all his companies, and Marc Sugarman, an equity analyst for Citigroup. He will also have to continue to cover losses for a number of years before the club can stand on its own two feet, while building a solid legacy in the form of bricks and mortar (and steel and glass). Finally, if Bloom were simply looking to make money on his investment, there are many other better opportunities around.

These are exciting times for the Seagulls. The future would have been very grim without the new stadium, but this is the club that refused to die. Paraphrasing the title of one of Fatboy Slim’s albums, the club has come a long way, baby.

It’s been a long journey, but when the first match kicks-off in Falmer (sorry, The Amex), grown men will raise a glass (probably a pint of Harveys), maybe shed a tear and in a distant corner in Switzerland, passers-by will be startled, when, for no apparent reason, a man suddenly pauses to bellow, “Seagulls!!!”

It’s going to be emotional.