Wednesday, September 1, 2010

Celtic – If You Know The History

Another nail was hammered into the coffin of Scottish football last week when all three of their remaining entrants failed to qualify for the Europa League, leaving only Rangers to fly the flag. Nowhere was the disappointment more keenly felt than among Celtic supporters, who saw their beloved Hoops unceremoniously dumped out 4-0 by mid-ranking Dutch side Utrecht, after squandering a 2-0 lead from the home leg. This followed Celtic’s elimination from the qualifying stages of the Champions League by Portuguese side Braga, and meant that another European adventure was cut short almost before it had started. Manager Neil Lennon probably spoke for all fans when he complained, “I’m fed up with coming back from Europe with my backside being smacked.”

How the mighty have fallen, for these are very much the History Bhoys. Not only have Celtic won 42 Scottish league titles, including nine in a row between 1966 and 1974, but they were memorably the first British team to win the European Cup in 1967, when they beat Inter Milan 2-1. Under the leadership of the incomparable Jock Stein, the Lisbon Lions achieved this feat with a team of players all born within 30 miles of Glasgow. No wonder that Bill Shankly, who knew a thing or two about great managers, told his friend, “John, you’re immortal now.” Stein’s magnificent team almost repeated the feat in 1970, narrowly losing the final 2-1 to Feyenoord.

"A genuine legend"

More recently, Gordon Strachan recalled those glory days, when he became the first Celtic manager since Stein to guide his team to winning three league titles in a row in the 2007/08 season. While not quite attaining the same heights in Europe, at least Celtic twice reached the last 16 of the Champions League during his tenure, only falling to the giants of AC Milan and Barcelona. Despite losing every time they travelled away, they compensated by winning all their home games at fortress Parkhead, understandably nicknamed “Paradise” by Celtic fans.

That was then, but this is now. And these days it’s not just about the prestige on the pitch. No, progress in the Champions League is also critical to Celtic’s success off the pitch. For example, last year’s failure to reach the group stages was the major factor in the club’s turnover slumping by 15% to £62 million, the lowest it has been since their last absence from the tournament in 2005/06, following the disastrous elimination by Artmedia Bratislava.

Indeed, if we look at Celtic’s revenue over the last seven years, we can see just how important Champions League money is to their financials, as their revenue is virtually flat without it. The impact can be clearly shown in 2007, when total revenue increased by an astonishing 31% from £57 million to £75 million, almost entirely off the back of the solid European campaign.

The other side of the coin came in 2010, when Celtic earned just £1.6 million from the Europa League. In the same period, their great rivals Rangers earned £14.3 million from the Champions League, even though they finished bottom of their group, thus highlighting the vast gap in prize money between the two competitions. This difference was exacerbated by Rangers being Scotland’s sole representative in the Champions League, as Scotland’s share of the TV revenue is distributed equally to all clubs that qualify, meaning that Rangers received the full amount, instead of having to divide it with Celtic.

The Champions League revenue distribution depends upon a number of factors, but based on last year’s figures it is worth around £14 million – even if you lose all six group games. Each team is guaranteed £6 million for participation plus around £8 million from the TV (market) pool. There are also bonuses of £0.7 million for each win and £0.3 million for each draw in the group stage plus other performance bonuses for each further stage reached. This is serious money for a team like Celtic – and it does not include the additional gate receipts.

"Reid all about it"

Celtic chairman, John Reid, has attempted to downplay the significance of missing out on the Champions League, “It’s not as bad as some people make out. The differential is roughly equivalent to £7 million.” However, his predecessor, Brian Quinn had estimated the net contribution to profit as being “of the order of £11-12 million” after taking into consideration additional costs such as bonus payments.

Chief executive, Peter Lawwell, went one better as he managed to contradict himself when talking about the Champions League, initially claiming, “It’s a fantastic revenue stream, but we don’t have to necessarily depend on it. We’ve got a structure in place that allows us to operate comfortably without it.” Great stuff, but recently he modified his stance, “Clearly European progress remains key in enabling the club to achieve its financial objectives.”

That much is abundantly clear if you look at the profit trend over the last five years, which features profits between 2007 and 2009, but losses in 2006 and 2010. Guess which years Celtic did not qualify for the Champions League. Well done.

The reality is that from a financial perspective qualification for the Champions League is an imperative for Celtic, as it is for all teams from “smaller” leagues, i.e. those outside England, Spain, Germany, Italy and France.

Actually, the 2010 loss of £2.1 million is pretty good in the circumstances, coming in a season when Celtic competed in the Europa League rather than the Champions League, did not win a trophy and did not even reach a cup final.

In fairness, it was their first loss after three years of profits, though the club did report consistent losses for a number of years before that. The relatively small deficit was down to careful stewardship of their finances, which allowed them to largely absorb these financial blows, including a substantial payout to former manager Tony Mowbray and his coaching team. In fact, much of the blame for the poor results (both on and off the pitch) was attributed to the unfortunate Mowbray, who was sacked after only nine months.

The figures were also greatly helped by the £6 million profit from player sales, including five players snapped up by former manager Strachan at Middlesbrough. This is another key driver for Celtic’s financials, as was evidenced in 2007 when Celtic reported a record profit of £15 million, which was enormously influenced by the £9 million profit made from player trading, mainly due to the sales of Stilian Petrov and Shaun Maloney to Aston Villa.

"You are my Larsson"

One reason why Champions League revenue is so crucial is the incredibly small amount of television money received for the Scottish Premier League rights, which works out at around £2 million a year for Celtic. In fact, the entire annual payment to all SPL clubs is only £13 million. To place that into context, it is less than a third of the £40 million that the team finishing bottom of the English Premier League can expect to receive this season. An even more amazing statistic is that the total SPL payment is worth just 1% of the EPL rights. Peter Lawwell summed up the problem, “The fact of the matter is that in a Scottish nation of five million people, the media values are very low.” Actually the real problem is that this makes it almost impossible for clubs like Celtic to compete.

The situation was not helped by the collapse of Setanta last year. The upstart Irish channel was replaced by a combination of Sky and ESPN, but there was a harsh price to pay, as the new deal was worth only £65 million over five years, compared to the previous £125 million over four years. Celtic had been against the Setanta deal, and (with some justification) John Reid did not hesitate to put the boot in, “No-one should under-estimate the blow that has been inflicted on this club and Scottish football by the way in which the whole affair has been handled. Today the SPL accepted a bid that is less than half the value of that offered by Sky last year. To Celtic it means a potential loss of up to £12 million over four years.”

This is why Celtic and Rangers showed interest in securing the Scottish TV rights package themselves, as they could hardly have done worse than the SPL. The Old Firm believe that they could significantly increase their broadcasting revenue by negotiating and selling their own TV rights, but SPL head honcho, Neil Doncaster, has firmly rejected this idea.

Many top European clubs are over-reliant on TV revenue, but that cannot be said for Celtic, as broadcasting accounts for only 17% of their turnover, which is lower than any of the top 20 clubs in the Deloitte Money League – much lower in most cases. Celtic have featured on this list in the past, but have slipped out in recent years, as the TV revenue has multiplied in other countries. As an example of its significance (the power of the media, if you will), Celtic’s revenue would be well over £100 million if they received the same TV revenue as clubs in the Premier League, which would comfortably get them back into the higher echelons.

In stark contrast, Celtic’s match day revenue is a much higher proportion of total revenue than other leading clubs at 58%. The 2009 accounts stated, “These results have been achieved … in reliance upon the tremendous contribution of the Celtic support.” You can say that again. Celtic have consistently enjoyed average attendances of around 57,000, which is higher than all but two clubs in the Premier League (Manchester United and Arsenal). Welcome to the Jungle, indeed.

It is clear that Celtic have a huge supporter base, but even here there are some warning signs, as the average attendance fell by more than 10% last year with the number of season tickets sold falling from 54,000 to 48,000, though in fairness the previous year had been a record. Whether the decrease is due to the economic recession or the poor displays on the field is open to conjecture, but Celtic have already reacted by freezing prices and offering other cheap concessions. Reid cautioned that season ticket sales might fall again, which would place Celtic’s business model under even more strain.

"Another Greek tragedy?"

Just as well that Celtic’s “sponsor programme remains one of the most successful in British football”, at least according to John Reid, who knows a little about spin from his time in Tony Blair’s government. It’s not entirely straightforward to see what Celtic’s commercial revenue is worth, as only merchandising (£15.5 million) is separated with the rest bundled in with multimedia, but in total it must be around £22 million. So, in reality, Celtic’s commercial revenue is comparable to a team like Newcastle United (£19 million), but way behind the Big Four in England, e.g. Manchester United £70 million.

Merchandising is by far the largest element, but this is dependent on the timing and number of kit launches. The “bumble bee” away kit may be hideous, but apparently this is one of Celtic’s best selling strips ever. A new shirt sponsor was announced earlier this year with Tennent’s replacing Carling (notice a theme here?) in a three-year deal that Lawwell said would generate “important revenue” for the club. However, it is believed to be worth only £1.5m a season, compared to the £20 million that Liverpool get from Standard Chartered. Incidentally, Tennent’s sponsor both Celtic and Rangers, as they cannot risk alienating supporters of the other Glasgow club. A new five-year deal was also signed with kit supplier Nike, extending the partnership to ten years, with annual royalties expected to be around £5 million.

Celtic’s response to their limited revenue has been the old-fashioned idea to control their costs. Not only has there been no cost growth, but costs have actually been reduced by nearly 10% since 2004. A good example of Celtic’s ability to manage a budget came last year when operating expenses were cut by £4 million in order to mitigate the £11 million revenue reduction. Not enough to break-even, but you get the idea. Avoiding any temptation to refer to national stereotypes, there’s clearly a thrifty side to Celtic’s style. Although this is a breath of fresh air compared to the profligacy of most other clubs, it has not helped their ambitions on the football side.

The key to Celtic’s cost containment is their ability to keep wages down. Unlike most football clubs, the wage bill has essentially remained flat over the last few years. In point of fact, it’s dropped slightly from £37.4 million in 2004 to £36.5 million in 2010. The wages to turnover ratio has been held in a pretty good range between 50-60%. Although it rose from 53% to 59% last season, this was entirely due to the decline in revenue, as wages actually fell.

If we compare this trend with Premier League clubs, we see a big difference. Back in 2004, Blackburn (£31 million) and Fulham (£34 million) both had lower wage bills than Celtic (£37 million), but while the Scots have cut their salaries, both English clubs now spend much more at around £46 million. Peter Lawwell drily noted, “The affluence of other major leagues – particularly the English Premier League – is an inflationary factor, pushing up wages throughout Europe.” Given that Celtic’s wage bill has stayed at the same level, the logical conclusion is that the quality of their players must have become worse.

However, there is always an exception to the rule and directors’ pay has been steadily rising at Celtic, especially the chief executive, Peter Lawwell, whose total remuneration has increased from under £300,000 four years ago to a staggering £739,000 last year. His salary is fixed at £455,000 until 2011, but he also has a 60% bonus plus hefty pension contributions and benefits in kind. Oh, and let’s not forget the loyalty bonus payable in 2011, which is partly dependent on the company’s earnings per share. Not bad, considering the feeble on-field performances in the last couple of seasons and the declining share price (down 15% in five years). All I can say is that Mr. Lawwell must be an amazingly good negotiator, especially as he was once quoted as saying, “"I'm just doing my job. I'm only part of an all-round team effort.”

"Blame it all on Mowbray"

The 2009/10 accounts also include exceptional items of £3.1 million, but these are effectively also staff costs, as they “mainly relate to costs associated with the early termination of certain employment contracts” (Mowbray’s management team), though they also cover some impairment in player values. These costs are relatively immaterial, but Reid was keen to tell people that “if it weren’t for these costs, we would have equalled last year’s figures.” However, that’s a little misleading, as last year also included £2.8 million of exceptional items. In fact, we see such costs booked every year, so they’re arguably just a normal part of Celtic’s modus operandi.

Reid is also the man who told fans, “Tony has the right to expect our loyalty and moral support while he faces this huge challenge”, only to fire him a few weeks later, directly causing the “exceptional” item. Following the recent results, Reid warned, “the performance of our football management team and players will be placed under even more scrutiny than normal.” Given that Neil Lennon only has a one-year contract, he probably shouldn’t spend too long choosing new decorations for his office.

The club’s net debt increased in 2010 for the first time in five years, but it is still only £6 million, a level that the club believes is “sustainable” and “not out of control”. That seems fair enough, as the debt has come down a great deal from around £30 million ten years ago with a sizeable decrease in 2006 following a £15 million share issue. Current debt represents a £12 million loan from the Co-operative Bank, which bears interest at LIBOR plus 1.125% (floating rate), less £6 million of cash, though these figures exclude the £4 million debt element of the Convertible Preferred Ordinary Shares.

Reid said that the debt had gone up, because the club had “pushed the boat out last summer” with a “hefty investment” of £13.6 million in football personnel, but the big question is whether the club should further increase debt in order to strengthen the squad. Reid commented, “there has been a myth that the board are against borrowing”, but “we are prepared to spend money and get into debt if it doesn’t put the club into danger.” That sounds promising, but the bottom line for many fans is whether the board will make enough cash available to bring in some top quality players.

In years gone by, the club managed to find enough money to buy players of the calibre of Henrik Larsson, John Hartson and Chris Sutton – maybe not world-beaters (with the exception of "Henke"), but a class above the present crop. Reid boasted, “We can still invest in the team more than any club in Scotland”, noting that “Last year we signed or took on loan 13 new players. Already, under our new management in the new financial year, we have brought in seven new faces.” The problem is that very few of those acquisitions are likely to make a massive difference – Daryl Murphy from Sunderland and Gary Hooper from Scunthorpe are not exactly going to set the world alight.

The problem is that Celtic have to do their shopping in the bargain basement, which was effectively admitted by Reid, “We will continue to scour Europe for players at big clubs who cannot command a first-team place there, but who may prosper with us in Scotland.” That has lead to some opportunistic signings like Thomas Gravesen, Craig Bellamy and Robbie Keane (the latter two on loan). The Keane deal was actually a rare example of the club extending itself in a gamble to win the SPL and secure Champions League riches, as they had to pay around £1.3 million in wages during the loan period.

"It went this far wide"

As the song goes, it’s a grand old team to play for, but this summer the likes of Sol Campbell, David James, Jimmy Bullard and that man Bellamy have all rebuffed Celtic’s advances, presumably because of the low wages on offer. That explains why Lennon had to admit, “There are players out there, if you shop around, at reasonable fees and wages.”

Peter Lawwell has also explained that spreading the Celtic brand worldwide has become a major concern in the club’s transfer policy, leading to the purchase of players from countries like Japan and Poland. He said, “Obviously they must be able to play, but to find players in the markets where we think there is growth is also important.” Unbelievable. Here’s an idea: buy some good players, start winning things and the bloody brand will take care of itself.

Every cloud has a silver lining and the flip side of the other leagues’ booming TV earnings is that clubs like Celtic can make good money by selling players into those markets. Indeed, Celtic have already raised over £15 million this summer, mainly from the sales of Aiden McGeady to Spartak Moscow and Marc-Antoine Fortune to West Brom. The board has pledged to reinvest the proceeds into the squad, but this might actually be a pointer to Celtic’s future as a selling club. Although it would be unappealing to supporters, it could be a good financial strategy to make use of the new Lennoxtown football academy to develop young players that could be sold later for healthy gains.

"To Russia with Love"

Celtic’s challenge is magnified by the generic problems facing Scottish football as a whole. Indeed, PricewaterhouseCoopers’ “Financial Review of Scottish Premier League Football” said that action was required to remedy the poor financial state of the SPL or Scottish football would fall into a “downward spiral”, concluding, “In a nutshell, the SPL cannot compete financially.” John Reid went further, warning that much of Scottish football was “edging the narrow line of insolvency.” It al looked very different ten years ago, when Celtic were managed by Martin O’Neill and Rangers had Dick Advocaat, with both clubs spending big money for the times.

The Old Firm can now be considered as big fish in a small pond or an “unattractive league in comparison to Europe’s major championships” according to Lawwell. Their dominance is such that no other team has won the SPL since its formation in 1998 and there has only been one season when both clubs failed to occupy first and second positions. So, Celtic have a great chance of winning trophies and securing regular access to European competitions, but the gulf in quality in the SPL means that they are ill-prepared to compete in the Champions League.

Even the formality of Champions League qualification is now endangered, due to the recent lack of success. Scotland’s two places depend on the country’s ranking in UEFA’s table of coefficients. At the moment, they sit in 15th position, but if they drop just one more spot, they will lose a valuable Champions League place. As the coefficients are based on the previous five years, there could well be trouble ahead when the successful 2006/07 and 2007/08 seasons fall out of the calculation. Celtic reached the last 16 of the Champions League both those seasons, while Rangers were finalists in the 2008 UEFA Cup, but nothing comparable has been achieved since then.

"Against the odds"

Although Celtic and Rangers attract crowds around the 50,000 mark, the club with the next highest attendance in Scotland averages less than 15,000. It may be time for (yet) another change in the SPL structure, expanding the league to 14 teams to add more variety and adding play-offs to ensure that Sky could still show four Old Firm derbies every season. That last point might seem ridiculous, but money talks and Sky are the “only show in town” at the moment.

All of this is why Celtic (and Rangers) have cast their eyes elsewhere. They would clearly love to join the Premier League, viewing this as an escape route from their financial difficulties. In fact, they are so keen to make the move that Peter Lawwell was apparently even prepared for Celtic start at the bottom, i.e. the second tier of a revamped Premier League. However, although this idea has been discussed for many years, it looks like it won’t fly, as the English Premier League firmly rejected the proposal last November. The official statement was unambiguous: “The clubs were of the opinion that bringing Celtic and Rangers into any form of Premier League set-up was not desirable or viable.” As if that weren’t plain enough, Premier League chief executive Richard Scudamore made it crystal clear, “No means never.”

At first glance, Celtic and Rangers would bring some financial gains, but the Premier League sees its future earnings expansion mainly coming from overseas TV rights and sponsorship, to which it was felt the Scottish clubs would not greatly contribute. Some have also mentioned safety as being a cause for concern with the Glaswegians’ vast away support, but the main issue is probably the lesser English clubs worrying that they would be risking their own place in the lucrative Premier League. After all, turkeys very rarely vote for Christmas.

"Do the huddle"

However, things can change and we probably shouldn’t definitively rule this idea out. If the TV money ever shows signs of drying up, the plan might be re-visited, though not in the near future. Having said that, at that stage football might be run along franchise lines in any case (like the NFL). Glasgow Bravehearts vs. London Cockneys, anyone?

There has also been talk of an Atlantic League, comprising teams from less important countries (in financial terms) like Scotland, Portugal and Holland, but that initiative is again unlikely to get past first base. It would resemble a poor man’s Champions League and TV companies would almost certainly not pay much for such limited fare. Given that the only rationale for doing this would be financial, there would seem to be little point in going ahead, as it would be like jumping out of the frying pan into the fire.

"Hail, hail, the Celts are here"

Where does this leave Celtic? Unfortunately, they find themselves in a vicious circle. If they can’t get the money to buy better players, they will struggle to reach the group stages of the Champions League, but if they don’t qualify for the Champions League, then it’s difficult to see where they will get the money to buy those players.

The Celtic board are clearly aware of this dilemma, as they say in the latest accounts, “Revenues generated by progress in European competitions remain of major significance and provide greater flexibility when considering player investment.” More pithily, the old bruiser, John Reid, explained that “football and commercial success go hand in hand.”

So they’re going to start investing in better players then? Unlikely, if you listen to Reid, “If you start getting into a position where you are running up debts that you cannot afford, spending money you don’t have, it is the road not to success, but to ruin.” Celtic’s chairman had already taken aim at Rangers and their strategy of “borrowing endless amounts of money”, but that does beg a rather uncomfortable thought for Celtic fans: if Rangers can dominate Scottish football when their finances are so shaky, what will happen if they sort themselves out?

"Derby day"

As we have seen, there is no easy answer. Celtic are clearly not broke, but they do not have the financial resources to get to the next level. In theory, their ambition should be scaled back in line with their relatively modest income, but the fans are hungry for success. Anyone that has experienced European nights at Celtic Park will understand that this is a special club and would surely want them to be part of the Champions League experience.

It is difficult to criticise a club for adopting a “careful and business-like approach”, but the challenge for the board is to deliver success on the pitch as well as financial sustainability. Bhoys don’t cry, but they must have been just as upset as Reid, when he described last season as “simply not good enough.” You said it, big man. The question is: what can he do about it?