The English Premiership is the most successful football league in the world in commercial terms, thanks in part to satellite television and the exposure created by BSkyB. Supporters of the game may wish at times that this was not so and that the ‘beautiful game’ was left unsullied by business imperatives and realities, but this is like harking back to the good old days of amateurs competing in the Olympics. What really matters to most clubs in the Premiership is the bottom line rather than the goal line. In February 2010, I wrote in my blog about the perilous state of Portsmouth football club who were on the brink of administration. In that post I made the following statement, which is as true now as it was then:
No business, whether a bank or a fashion house like McQueen, can spend more than it earns for a long period. If costs are higher than revenues there will come a time when the business is financially unsustainable. A business may represent the heart and soul of a community or be the brand choice of Hollywood stars, but if it fails to make a profit it is dead.
At the time of the post, Portsmouth owed millions to the tax authorities and could not find the cash it required to pay these debts, nor secure a new buyer by the 25 February deadline set by the court representing its creditors. On 26 February 2010, Portsmouth went into administration and insolvency specialist Vantis was appointed to prepare a statement of the club’s assets and liabilities, which did not make good financial reading. On 17 March, Portsmouth were docked nine points for entering administration, relegated from the Premier League as a result and the administrator Andrew Andronikou revealed that the club would be looking to start the following season with a whole new squad. In May the manager, Avram Grant, resigned and later joined West Ham United as their new manager. So why bring this up again? Well yesterday, my beloved West Ham United were themselves relegated from the Premiership. In itself, my despair is of little relevance to you; what is of interest is the business black hole the club finds itself in, which goes further to support and illustrate the contention that ultimately sport’s clubs remain businesses governed by the same rules as any other business. Indeed, the cases of Portsmouth and West Ham football clubs provide excellent business case studies.
Sport is unable to extricate itself from financial realities and it operates in the same external environment as do other businesses. The recession and the credit crunch affected West Ham United particularly badly, because in 2006 they had been acquired by Icelandic owners, Eggert Magnússon and Björgólfur Guðmundsson who had plans to transform West Ham into a top-four club. Guðmundsson, the majority owner of Landsbanki, the second largest company in Iceland was ranked by Forbes magazine in March 2008 as the 1014th-richest person in the world, with a net worth of $1.1 billion. Magnússon and Guðmundsson spent money at West Ham like it had gone out of fashion, buoyed by the same misguided optimism that prevailed in Icelandic financial markets at that time. New players were bought at inflated prices and offered wages that were completely unjustified for a club of West Ham’s size and revenues. The world credit crunch saw a spectacular economic collapse and the crash of the Icelandic banking system, most notably Icesave and its parent company, Landsbanki. In 2009, Guðmundsson was declared bankrupt by the Icelandic courts with debts of almost £500 million. What followed was an unseemly game of pass-the-parcel, where the parcel contained something no recipient actually wanted – West Ham United. In June 2009, Icelandic CB Holding which is 70% owned by Straumur-Burdaras bank took over Hansa Holding, whose only asset was West Ham United and soon they too had to file for bankruptcy protection. As a result, Straumur were forced into a ‘firesale’ and, in January 2010, David Sullivan and David Gold acquired from CB Holding, a 50 percent share in West Ham for what was reported to be a very low sum, giving them overall operational and commercial control of the club.
Premiership clubs certainly have some unusual, and perhaps some may argue, unique features. There may be no other industry where the wage bill is such a high percentage of the total costs of the businesses within it. The majority of a Premiership squad are millionaires in their own right. Kieren Dyer, for example, who has played few actual games for West Ham because of long-term injuries is said to be worth £14million, up by £2m from last year, and shares 64th place in the Sport Rich List recently compiled by the Sunday Times, yet is still paid an astonishing £83,000 per week. The problem is that few football clubs manage to break-even over a season with the revenues of the majority of Premiership clubs significantly lower than their total costs, swollen by spiralling wage bills, which require ‘hobby’ owners to finance the deficits. Indeed, while the Premier League received £1.9 billion in income during the 2009 season, £1.3 billion of this was spent on wages. Even the largest clubs such as Chelsea and Manchester United rely on the largesse of their owners to survive. For example, at the end of 2009, Russian billionaire Roman Abramovich wiped out £340m ($546m) of debt at Chelsea football club, reducing Chelsea’s burden of debt to Mr Abramovich from a peak of a staggering £760m to almost nothing. Mr Abramovich converted £340m of interest-free loans owed by the club to him into equity. Nonetheless, Chelsea fans could not contemplate a situation where the owner decided to walk away from the club, as it simply could not continue to compete at the highest level without his on-going financial support.
The financial cost of relegation will be huge for West Ham, who reportedly have the eighth highest wage bill in the Premiership. More than half of West Ham’s 2009-10 turnover of £71.7m came from Premier League revenue distributions. The minimum £40m of television and central sponsorship income for the bottom club this season will be exchanged for a £16m ‘ parachute payment’ season next. Gate receipts, commercial and merchandising income, worth £33.1m in the past financial year, will also drop. Matchday, commercial and sponsorship revenues could fall by as much as £20m. England internationals Robert Green, Scott Parker and Carlton Cole are likely to be sold to make up some of the shortfall and other contracts will not be renewed. This may make financial sense in the short term, but in selling the club’s prized assets, the chances of returning to the Premier league becomes more remote as this process could be compared to a major manufacturing company selling its recently purchased high technology equipment and replacing it with well used, poorer quality machinery. David Sullivan, one of the co-owners of West Ham described the prospect of relegation as “absolutely horrendous – like Armageddon”. Now that the club has been relegated, it is likely to need a further injection of loans from the present owners of between £20 and £40 million to keep it afloat. If the owners walked away from the problem now, there would be no bank in the world willing to prop the club up with further loans; which begs the question whether this is RIP for West Ham United?
Ask your students, individually or in groups, to investigate the finances of a major sport’s industry in your country and write a jounalist-style article, which:
- compares the incomes and costs of the industry and assess the industry’s financial viability and debt structure
- examines the nature of the financial backing and identifies the ‘key players’
- discusses where the balance of power in the industry lies
Extension activity: Students could develop their article with one or two case studies of particular teams or clubs in the sport’s industry and/or a summary of recent newsworthy events related to the ‘business’ side of that sport.
IB style questions
1. Distinguish between ‘administration’ and’ liquidation’.
2. Explain the importance of budgeting for all sports organisations.
3. Using appropriate graphs, analyse the effects on the break-even point of a football club as the result of changes in both internal and external environments that affect its revenues and costs.
4. To what extent can clubs in major sports industries, such as football, manage their finances prudently, while still remaining competitive?
Image source: skud’s photostream