PO Box 306, Glasgow, G21 2AE, Scotland
banzai!
Barrow Bhoy, NTV's man in the green and white braces, takes a look at Celtic PLC's end of year accounts.
You know the rest. That's how I imagine Banzai - the spoof game show where Bert Kwok parodies western caricatures of the Japanese - might have described the week of frenzied press speculation over MON's future in July (I therefore hope you will accept the italicised text above as my homage to Kwok's parody; it is not intended to mock the Japanese or any Asian Tims).
Banzai is also of course what Japanese fighter pilots shouted as they attempted daring raids which almost invariably resulted in their death. While (contrary to what we have been used to in the past) the outcome of the Banzai "bet" was perfect for us and a shock to the huns, the climate of austerity in which Celtic now operates means that we run the risk of emulating the Japanese fighter pilots with our own cry of banzai, and crashing the Celtic fighter jet in a fit of bravura.
We have reached the end of a long party for professional football. Whether we do crash and burn depends on how we cope with the inevitable hangover that is now underway.
Time for an aspirin
Last season marked the end of the football boom, which started in the mid-nineties when Sky began to pour money into the game. Every year, clubs made more money from TV (up from £116m total in 1997 to about £370m from Sky alone in 2001), and were able to pay even more for players (up from £304m in 1997 to £471m in 2000, figures for 2001 not yet out). Clubs made more money from TV because there was an advertising boom. And the advertising boom itself was fuelled by an expanding economy. The more people can spend on your trainers, the more you will pay to advertise them during a big match. And the swelling outlay for players was justified, at that time, because it opened the door to yet more TV money; you had to spend to accumulate.
The problem is that the economy contracted in the second half of last year, and has now slowed to a crawl. This has inevitably led to a sharp fall in advertising. As a result, it's no wonder that NTL and Telewest are on the brink of receivership, and that Sky isn't so keen on paying vast sums of money for football rights.
The stock market, which I spend my day job investing in, experienced a bull run which was driven by the same factors that drove the football boom. Economic growth boosted company profits just as it did advertising revenues. Just as football clubs invested large sums of money on star players to get more advertising money the following year, so too companies made expensive acquisitions or technology investments in the hope that these would boost tomorrow's profits. And, just like football clubs, companies invested more cash than they generated, which was only possible due to cheap capital, the fuel for both equity and football bubbles.
The stock market bubble finished in March 2000, whereas for the Premiership the pain will be delayed for the duration of the Sky contract, i.e. for another two years. However, we in Scotland are already feeling the pain, as are the Nationwide, the German and the Italian leagues. Having personally had the "benefit" of suffering through two years, five months and counting of depression in the stock market, I would like to use this experience to anticipate how football, and more crucially Celtic, should respond to the economic downturn.
When sales are down, companies reduce costs, by shedding labor and freezing wages. If, as is the case now, those companies have large debts, they tend to cut their investments, and even sell off the assets that they accumulated in the boom period. To sell these assets you obviously need someone to buy them. To entice a buyer, you need to reduce your price, and often to sell at a loss. As equities fell, people took either of two views: "things are getting worse, better sell", or "prices are cheap, time to buy." It's the existence of both these views which makes a market possible. In retrospect, the second view turned out to be mistaken.
The problem with the "assets are cheap" view is that it is often backward looking, i.e. it reasons like this: I paid $50 for share A last week, it now trades at $5, therefore it must be cheap. But just because it's fallen to $5 doesn't mean it won't fall 80% again to $1, only that it was crazy to ever pay $50 for it in the first place! Underlying this view is a refusal to admit that you made a mistake when you first bought the shares.
The jagged decline of the stock market, with its periodic sharp upswings as investors piled back into shares, is a graphic illustration of a long period of denial.
No transfer news is good news
Our situation at Celtic, like all football clubs, is similar to that of the corporates. We need to cut costs, and if not sell assets, at least exercise more caution when purchasing them. What we must not do is follow the footballing equivalent of the "assets are cheap" view, exemplified by the following quote from Fraser Rorison's article in Metro: "Ajax summer spree shows Celtic the way" (July 24). The article says: "expensive debutants are getting ready to make their first appearance at Parkhead. The only problem for Hoops fans, however, is that they have signed for visitors Ajax."
Rorison is in denial. He thinks we're still in the old days when successful clubs were the ones who paid up for big name signings, leaving those who didn't spend behind in the race for TV's pot of gold. He doesn't realise that the pot of gold has gone. Celtic should go on a 'spree' for 'expensive' players, as if the more expensive a player was, the better.
Rorison is like the last stockbroker who advised people to buy shares in Enron. Prices are falling. In such an environment, the last thing you want to do is sign expensive players. To follow Rorison's advice would be real kamikaze stuff. First because while your revenues fall, the wages you pay the expensive player will go on rising; he becomes a millstone around your neck. Second, because in a few months you will be able to sign him cheaper. "Path clear for Matt [Elliot] to join Celts" (Metro, July 23), read a headline urging Celtic to be quick to snap Elliot up. A fortnight later we find Elliot on the free transfer list at Leicester with no takers: "Elliot goes from hero to zero at Leicester" (Metro, August 6).
The lesson of the equity slump, which the tabloids are ignoring, is be patient; keep your powder dry. Footballers themselves are supreme examples of such denial. Not surprising, as most of them are hardly financial luminaries, and because they were by far the major beneficiaries of the gravy train. Just as equity investors couldn't accept that they'd overpaid for their shares, footballers can't stomach the fact that the massive wages they got so used to were unsustainable. That's why you read about Tony Vidmar training on his own because no club can afford to pay him the wages he still thinks he deserves; or about Lee Bowyer's move to Liverpool or Tore Andre Flop's move to Bolton falling through because of their wage demands. Which really means that Leeds and the Huns were paying them too much in the first place.
But if you please the tabloids by making an expensive signing, until someone else is willing to foot his bill, you're stuck with him. The only way they'll do that is if you sell at a loss, just like companies after their acquisition binge.
There is no easy way to break the bad news to players. They will feel hurt that their playing ability is attracting a lower reward due to changes which they can't understand, and over which they have no control. The adjustment process will be more difficult in football than in equity markets. Equities are traded every second, and analysed using commonly accepted (though often abused) principles: accounting. So if something changes to make shares fall in value, their price adjusts right away. Footballers value is a lot more subjective (just try getting five Celtic supporters to agree about Bobby Petta). And they are bought and sold on average every two years, and sometimes don't trade for five years or more. Footballers can therefore dig their heels in and refuse to lower their wages, but they are only delaying the inevitable. By the time their contracts are up for renewal, the club will be so impoverished, due to their crippling demands, that their wages will fall twice as much as if they had reduced them earlier. This will be made worse by the transfer windows, which will give clubs and players even less flexibility to reach what they think is a fair price.
But clubs must be prepared to look like the bad guys in the short term, to avoid the long run consequence of being too nice: bankruptcy.
When this happened to Motherwell, it was the players who suffered first. Quietly, football clubs are realising this. In the Premiership, you can count 45 players who were 'released' by their clubs. I.e. the clubs were willing to give them away for free, but there were no takers. And these included some household names, like Matt LeTissier, probably again due to unreasonable wage demands as his abilities are not in question. The most striking example is of course the pay cut offered by Christian Vieri et. al. at Inter Milan.
However, you also find clubs taking the opposite view: Everton spent a net £9.75m, and Man City and Middlesborough c. £22m for the 2002 season. They are like the people who bought on the dips when the market was collapsing. Nicholas Annelka may give the fans at Maine Road some happy moments, but I'm convinced that the £13m paid for him will in retrospect be viewed as another one of Keegan's many follies.
What about the fans? I think that we, and most fans, are a bit like the players and the tabloids. Most of us don't understand cash flows; we complain if Celtic don't make any trophy signings. But the world has changed, and so must we. Celtic urgently needs to cut its wage bill. New contracts should as much as possible stipulate that wages should vary with the clubs' income.
We also need to conserve cash and pay off debt, which means spending less money than we generate. The bottom line is, we need to change our innate reflexes. In the current environment, no transfer news is good news. Admittedly, the champions league is so important in terms of profits that you could argue we didn't spend enough to qualify; the prudent approach I'm advocating could be a false economy. But whether any signing we might have made would have swung the Basel game in our favor is purely hypothetical. And of the signings we did make, only one played in the return leg; without really distinguishing himself.
More importantly however, even if we had made it through, we would hardly have made enough money to cover the costs of the players we did buy.
How much is left in the tin? The preliminary figures released by Celtic indeed paint an even bleaker picture than what I forecast (my estimates were inaccurate, but in my defence I got no guidance at all from Celtic). I thought that Celtic would get the TV money from the champions league throughout the year, but in fact they recognised all of it in the first half. This meant I overestimated media revenues by £5m. I also thought the new Edinburgh store would help second half merchandising revenues hold up, when in fact they fell 16%.
On the plus side, ticket sales were nicely ahead of forecast, rising 15% despite fewer games played. And we spent £1.7m less on player wages than I expected, and £2.1m less on other costs. In terms of investment, we spent £5.5m more on buying players than I expected. Celtic had spent £7.4m in the first half, but despite no new players being purchased in the second half, ended up spending £12.3m in the full year! They say they paid £2.5m owed for players we bought in previous years, but that still leaves another £2.4m unaccounted for. On the plus side, instead of spending the same amount on other investments (new shops etc.) as in the first half, as I expected, Celtic seem to have sold off about £1.9m worth of assets
All in all, our sales and profits were respectively £5.7m and £2.4m less than I hoped (though clearly above last year's). We spent £8.6m more than we generated in our most successful financial year ever, so our debt only went down by £13.1m, despite us getting £21.7m from the share issue.
This is likely to be a high point for us in financial terms. Even if we had qualified for the champions league, we would still get £1m less in TV money next year, due to the new lower SPL contract. Player wages are locked in an upward spiral. Assuming a 10% increase (less than half last year's) knocks another £2.8m off our profits. And we will pay £700k more in preference dividends due to last year's rights issue. Very roughly then, even if we had beaten Basel, we would have had about £2m to invest this year (last year's cash profit minus increase in wages, minus fall in TV money minus extra dividend). We have already spent more than that on our three new signings.
But add to that the c. £3.5-4m in cash foregone from the champions league, and our debt could go up by millions while our cash profits go to zero (or negative). If the Basel game demonstrates anything, it's the unpredictability of football. How could a team composed of mostly the same players who put the champions of Italy, Spain, Holland, Portugal and Norway to the sword last year, lose to an unfancied Swiss team? You'll all have your reasons, but the point is, you can never guarantee results in football. We should therefore restrict our spending so that we generate excess cash even if we don't make it into the champions league.
If we do make it through, as I hope we will next year, the extra cash we make will create a cushion for years when we don't do so well. In our current state, whether we made it into the champions league or not, it was only a question of how many millions our debt increased by.
Which takes me back to Banzai. It may be that the condition for MON staying was the promise of more player spending. If that's the case, we may well have won the Banzai bet at the cost of crying banzai as we take Celtic dangerously close to bankruptcy.
We should bear this in mind the next time we say "the board should give O'Neill more to spend on players!" For that we need another big share issue. And if we think that that can happen without us putting our hands in our pockets, we fail to learn another lesson from Banzai.
Murray left Rangers because he couldn't afford to bankroll them any more. While we rub our hands in glee, we should remember that whenever we say "the board should," we are implicitly assuming that Desmond should bankroll us, just as Murray did Rangers. Murray is the last of the big spending owners, and his departure demonstrates the bankruptcy of depending on one wealthy individual to finance a club.
I close with this prediction. Celtic will either sell a big name player, or seek further capital through a share issue, or both.
For football in general, the decline in revenues will last at least two more years. Players' wages will fall in absolute terms. Players will be sold for a fraction of the prices they commanded at the top of the bubble. More clubs will go bankrupt. And the clubs that succeed will exhibit two characteristics. Their boards will court short-term unpopularity by cutting player costs, and spending less than they earn.
And their fans will never again say "the board should spend more." The only person who will spend more money on players for Celtic is you, and all the other Celtic fans across the world. And here we have a huge advantage over our rivals in Glasgow. They are used to having an owner with big pockets. We had to save our club from bankruptcy. They were handing their season tickets in after their draw with Kilmarnock. We've been used to worse pain than that for decades, so nothing is strong enough to break our loyalty.
Because of that, from now on, whenever we talk about spending on players, it should always be in the first person.
Comments, insults etc. welcome. Please don't use the barrow.bhoy@easy.com address, the new address is: barrow.bhoy@ukonline.co.uk
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