May 2019 - FFP & Promotion – Analysis as a Premier League Club!
As the dust finally settles on what has been one of the best weeks of my Aston Villa supporting life, it is feels appropriate to review our financial outlook now the shackles of the Championship have finally been removed. Whilst previous articles and tweets on financial matters surrounding AVFC have been considered to be ‘negative’ in the past (I would say a realistic though…), hopefully we can now all finally see some light at the end of the tunnel.
I find myself quite amazing at the appetite from our fan base to digest such technical information. However, if a detailed look under the bonnet of our situation isn’t for you, check out the thread posted by Dave J (@Yorkshire AVFC) on Twitter.
And so, without further ado… the detail
Impact of Promotion on our Revenue
As many of you will have seen, the game against Derby was said to be a “£170m game”, this figure is misleading and is just something which Sky have attached themselves to in order grab the headlines.
So, how much is promotion worth? Well, that just depends on how long we stay in the premiership. As Nick Harris has made clear in his tweet (right) concerning West Ham, their game was said to be worth £90m at the time. So far, experience has shown it to be actually worth £1Bn… and that figure is still rising!
In simplistic terms, even if we finish bottom next season, our broadcasting revenue will be c.£96m which is an increase of c.£75m compared to what we received in the 17/18 EFL season. It is also an increase of c.£85m compared to what we would have received had we not have been promoted.
From an operating point of view, our business has been awoken from a 3-year long coma. Furthermore, every place we climb above 20th next season increases our revenue for that season by c.£3.25m per place. PER PLACE! Again, finish 17th and our revenue is increased by c.£10m
to £106m. The numbers are quite astounding. Finally, if we appear on TV more than 10 times… We will then be paid an extra £1.1m per game.
As you can see from the table to the left, only 3 teams appeared on TV fewer than 10 times this season. Newcastle were on TV 19 times (approx. extra broadcasting revenue in the region of £10m).
In fact, Newcastle are a good example. If we finished 13th, and were on TV 19 times, our total broadcasting income would be c.£96m + (c.£3.25m * 7) + (c.£1.1 * 9) = £129m. This is based on the new Overseas Rights distribution model which can be read about below. Again, £129m vs approx £10m in the championship.
It doesn’t stop there either. That is just the impact on broadcasting revenue. Presuming that any commercial and sponsorship deals negotiated have clauses in them for increasing the terms upon promotion, just using our relegation season as a proxy would result in the two income streams increasing by c.£15m. That is also based on Faulkner, Fox and Co negotiating rather than Purslow & Co. This increase could be a very conservative estimate.
To summarise: In year one alone, regardless of if we finish 20th, our revenue will be c.£100m higher than if we had remained in the EFL. Furthermore, finish 13th and it will be £133m higher than if we had remained in the EFL. That is just in one season as well.
Crazy, crazy numbers!
I have banged on about the need for the club to become sustainable. Overnight, we now have that ability, which is fantastic. We just need to learn the lessons from the last 10 years. Performance based contracts. Significant relegation clauses. Young talents whose value will be retained or increase.
Now is our chance to do it right.
Revisit 2018/2019 & 2019/2020 forecasts
Whilst I have alluded to the way in which our revenue with be transformed next season, our cost base will also naturally increase. However, we were already paying “Premiership wages” to a number of our squad, so I don’t see it increasing out of control, in year one at least. Maybe if we stay up for 3 years, that is when the next concerted effort to stride forward will happen. See the FFP section below for further details on this.
From pieces written about AVFCs promotion, it is understood that £6m has been paid out in one off bonuses following promotion. Interestingly, this is £4m less than the rumoured £10m Derby players were due to collect if promoted.
Below is a table of my workings and assumptions for both the 2018/19 & 2019/20 accounting periods. I will summarise these underneath.
Therefore, based on the projections above, we have turned around the position from a loss of £58m (before any unusual activities such as selling Villa Park) to a profit of £32m solely as a result of being promoted. The 2019/20 forecasts need to be taken with a pinch of salt to an extent as this is the position, as it stands now. We clearly need 10 additional players (including converting the existing loan deals) and therefore our wage bill and amortisation will increase significantly this year (my guestimate would be £30m wage bill rising to £87m and amortisation rising by £25m to £46m). Even if this scenario plays out and we finished 20th and increase our expenses by £55m, we would then “only” report a loss of £22m for the season. Finish 13th though and we would report a profit of £11m!
How do we sit with the EFL FFP now?
As a recap, we passed the EFL FFP for the 2017/18 assessment period so I will not revisit this in any detail. We know that we passed this test as this is the same assessment period Blues were punished for. From my calculations, we scrapped through, but that is all in the past now.
However, the concern has recently surrounded the 2018/19 assessment period which relates to our promotion year. This has been fuelled by the likes of TalkSport and the Daily Mail making claims about how we are concerned about the EFL deducting points, yet their articles have very little substance.
From my calculations I circulated back in Feb/March 2019, my assessment is that we could have failed FFP by approx. £30m before any unusual activity such as a copycat Derby exercise of selling Villa park to our owners. It is my belief, based on the stance Christian Purlsow has taken, that we are in the process of doing something “creative”. Other clubs won’t like it and it doesn’t sit comfortably with me. However, whilst other clubs are being creative, it is fair game. Middlesbrough are understandably feeling hard done to, yet they have been naïve to not realise that other clubs must be utilising a work around. The figures are clear to anyone that looks at them closely. I also understand the argument of that Gibson shouldn’t be throwing stones in glass houses given his questionable accounting actions in the past.
For the purpose of this section of the article, lets play out a “WhatIf” scenario. IF(!) we did fail FFP for the 18/19 assessment period, the EFL could deduct points from us.
However, it is my belief that this could only take place in the event that we remain in the EFL. The EPL share transfer happens this week. At that point, we are formally bound by the EPL Handbook. Whilst there are scenarios within the regulations which trigger mechanisms for point deductions such as in the event of administration, not paying certain creditors (including the EFL) and other nuances, this mechanism does not extend to honouring a points deduction awarded by an EFL panel. From my reading of the regulations, the EFL can notify the EPL of a financial penalty and the EPL can then enforce that (see above). The EFL are treated as a creditor in the EPL handbook and debts must be paid within 120 days. This therefore removes the previous issues where the EFL were penalising a club financially but had no mechanism to enforce the penalty. See Bournemouth and Leicester who dragged out the payments. From my reading, only if we fail to repay any fine within 120 days, would we be hauled before the EPL (not EFL) disciplinary panel where a points deduction could be considered. The other terms which talk about being bound by the EFL regulations are, in my opinion, simply talking about disclosure.
To reiterate though, whilst the above section focuses on the scenario that we fail FFP for the assessment period mentioned above, I do not think that we will fail FFP for reasons which I will go onto explain below…
How do we get around FFP?
Dave already tweeted his hypothesis of what is happening, and I have included that tweet to the left.
The changes at Companies House have purposely, in my opinion, been made too overly complex to create a smokescreen to hide what is happening regarding assets which are possibly being removed from the group. I suspect this may be Villa Park.
The myriad of subsidiaries within the Group UK company have frequently changed names over the last 18 months, quite often just switching names between one and another.
As a consequence it is better to rely on the Company House number rather than the Company House name when trying to follow the fillings. As the Twitter thread explains, a former shell Company, now named NSWE Stadium Limited (NSWE standing for Nassef Sawiris & Wes Edens) appears to no longer be dormant.
Both Purslow and Xia have been removed as directors from this previous shell company but most importantly, the Group UK Company is no longer the “Persons of Significant Control (PSC)”. Instead, both Edens and Sawiris are now personally the PSCs for this company. This suggests to me that the subsidiary has been removed from the Group company, presumably to move some assets outside of the Group company. This is what I would expect to happen if we sold the stadium to ourselves.
I have checked the Land Registry and Villa Park is currently registered as being with Recon Football Limited (or Aston Villa Limited as it is now known) however, this was only with effect from Feb 2019. We therefore know that some shuffling of the ownership of Villa Park is already under way. I expect within the next month either an announcement of the sale of Villa Park or a new filing with Land Registry to be made which shows the owner of Villa Park is now NSWE Stadium Limited. I also expect to see the ownership (shares) of NSWE Stadium Limited changing hands to Wes Edens and Nasef Sawiris.
Last quick point on this, it appears from the wording of the PSCs that a Trust has been set up. If so, this should provide some comfort about the intentions of our owners and protect Villa Park for the future. We should look out for developments on this in the near future.
With all of that explained, how does this help with FFP? As discussed earlier, as at the end of the 18/19 season, we have a FFP black hole of c.£30m. This needs to be plugged and based on everything Purslow has said, will be plugged. I therefore expect the stadium to be sold at least £30m above book value. Now, as the transaction is to a “related party”, it still has to represent “fair value” as assessed by an independent valuer, however Derby appear to have had no problems concerning this.
This now brings me nicely onto the EPL FFP. Whilst the Premier League Handbook is 610 pages long, I couldn’t believe that their P&S regulations section is only a mere 3 pages long. By comparison, the EFL P&S regs are approx. 50 pages long! This demonstrates to me that the EPL place very little importance on FFP and this also explains why the likes of Man City have been able to manipulate it for years without punishment.
Firstly, there are transitional regulations which need to be managed. Year one back in the Prem, the three year accumulated permitted losses can be a maximum of £61m. Year two the accumulated permitted losses can be a maximum of £83m and from year three onwards the FFP permitted losses are upto £105m over a three year accumulated period.
Interestingly, the regulations don’t appear to be able to strip out youth and community expenditure like the you can under the EFL regs. However, other breakdowns say that you can so for the purpose of this analysis, I have assumed that Youth and Community expenditure can be removed.
From the analysis above, I have concluded that as things stand now (which will change as we need to buy players) we have £61m to play with in order to stay within Premier League FFP.
Spending power & Amortisation
With this in mind, many observers might think that £61m is “not enough”. However, this is £61m worth of accumulated Profit & Loss losses not transfer spend. I mentioned above that I expect the wage bill and amortisation to increase by c.£55m on the P&L. This would amount to a £30m hike in the wage bill and £100m spent on transfer fees. In my view, this would still keep us comfortably within the EPL FFP (£6m under the permitted losses) and importantly it would keep us sustainable, providing we remain a premiership club.
It has to be remembered that this method of accounting will soon lead to amortisation increasing future losses as an amortisation cost of £25m would be felt in each set of accounts for the next 4 years (based on all players signed a 4-year deal). However, a much better transfer policy can help manage the amortisation risk.
There is also a restriction within the EFL Handbook called Stort Term Cost Control (STCC) which appears to restrict the annual wage bill to £81m per year. We are currently under this but there appears to be some flexibility surrounding the “Club Own Revenue Uplift” which relates to increased revenue compared to the previous year. Again, nothing to be overly concerned with, at the moment.
Importance of staying up
And on that note, I will draw this article to a close. Whilst relegation wouldn’t be an absolute disaster, we have to get the right contracts in place going forwards. Furthermore, we don’t want the ticking timebomb of relying on parachute payments again, any time soon. To kick on and finally have no more false dawns, we need to stay in the Premiership for a sustained period and consolidate. Once FFP limited rise to £105m, that might be the time to roll the dice again.
Thanks for reading.