Friday, February 4, 2011

Chelsea 2009/10 results: spin and red ink


Chelsea FC do not want the public to know much about their finances. On 31st January they put out a 326 word press release entitled "Chelsea Becomes Cash Positive" which went on to laud the club's financial achievements in the last financial year. Including the statement:
"Operating Loss for the financial year reduced from £72.3m to £68.6m"
Today (at the same time Torres was doing his first press conference at the club) Chelsea FC plc's accounts became available at Companies House. They paint a very different picture from that set out in the press release.


Revenue
Chelsea do not give a proper income split in their accounts (unlike United, Arsenal, Spurs, City, Liverpool, Villa, Bolton etc, etc). Instead they divide revenue between "Football activities" and four other tiny categories including Car parking and Hotel/Catering. Overall, turnover from "Football activities" (90% of turnover) only rose 0.1% despite the far better Champions League TV deal that came in last season. This was also the season that Chelsea won the domestic double. Total turnover rose 1.2%, roughly in-line with Arsenal (-1% ex-property) but behind United (+3%) and Spurs (+6%). All major English clubs are struggling to grow the top-line.

The JV with Sky (Chelsea Digital Media) saw decent turnover growth of 19%.

Costs
Football has a problem with cost inflation, especially wages, and Chelsea is no different. In 2008/09 Chelsea paid £12.6m in termination payments to Felipe Scolari and his backroom team. Stripping out this exceptional item, Chelsea's total staff costs rose an eye watering 12.8% in 2009/10 (see table).


No doubt there were bonuses payable following the league and FA Cup wins, but it is an unpleasant upward spike given that staff costs had fallen the previous year. Staff costs are 84% of revenue vs. 46% at United and 47% at Arsenal (and a bonkers 107% at City). Other costs (excluding depreciation and player contract amortisation) rose 8.0%.



EBITDA
With (pre-exceptional) costs up 11.5% and revenue up only 1.2%, EBITDA losses rose sharply to £23.8m from £2.5m. EBITDA (earnings before interest, tax, depreciation and amortisation) is effectively cash profit before transfers and interest. This number shows CFC running a long way behind break-even even before considering transfer spend and in a pretty good season.

Player sales and amortisation
Most large clubs make a book profit on selling players (because their value is written down over their contracts). In 2008/09, Chelsea made £28.6m from selling Bridge, Ben Haim and Sidwell. In 2009/10 by contrast, the sales of Pizzaro and Shevchenko netted a loss of £1m.

Shifting players off the books and little transfer spending caused a big fall in the amortisation charge for player contracts. This is an important number as UEFA will include it in "costs" when assessing clubs for Financial Fair Play. Amortisation was over £57m in 2007/8, fell to £49.0m in 2008/9 and only £37.6m last year. By contrast City's amortisation last year was £71m.

Operating profits
Adding amortisation and depreciation and the £1.5m profit from the TV joint-venture gives an operating loss of £68.6m. This is the number Chelsea were so keen to quote in their press release. They compared it to the £72.3m loss the previous year, but this number includes the £12.6m paid to Scolari and his boys. Excluding that exceptional, the loss actually increased by £9m. Nice spin.

Cash flow
The other area the press release was keen to focus on was cash flow. The club was cash positive in the year (by £3.8m before financing), but only because net cash transfer spending was an in-flow of £18.2m. Before transfers, there was a cash outflow of £14.4m. Obviously this year, Chelsea have gone on an enormous spending spree, incurring c. £87m of net transfer spending.

Financial Fair Play
There is a lot more to be written about Chelsea and FFP, but for the moment, this is my estimate of the "break-even result" for Chelsea for 2009/10. I have excluded the one-off exemption for player contracts signed before June 2010 in the first monitoring period. This will help the club materially but only in looking at the 2011/12 year.


On these estimates, Chelsea have a £50m+ deficit on the UEFA calculation and that is before Torres, Luiz etc (offset by losing Ballack, Cole, Deco etc). "Challenging" would be the word that comes to mind when wondering whether Chelsea can comply with FFP.

Thoughts
Chelsea have a major structural problem, they have the highest wage bill in English football (see chart) but a small ground and already very high ticket prices.


On Deloitte's estimates (Chelsea don't give "matchday" revenue numbers) CFC earn around £74.5m from Stanford Bridge or £2.7m per game. Arsenal and United earn around £1m more per match than that due to their far bigger grounds. Add in Chelsea's failure to grow commercial income (around the same as City's unbelievably and half Barcelona's) and this wage bill cannot be sustained without Abramovich's money. To hit FFP rules in the medium term, something has to give.....

LUHG