PO Box 306, Glasgow, G21 2AE, Scotland
We emerged into the still and heavy darkness outside the Olympic Stadium with our throats flinty from shouting and dehydration, our minds bewildered by the emotions coursing through us. At once uplifted by the ecstatic glory of what we had seen, which still seemed to burn through us like rays from a bright sun, and at the same time downcast by the sense of injustice and failure, haunted by what might have been. We felt like we had been watching our own children play. The same instinctive pride. The same unbearable identification with their disappointment.
Whatever we thought, we knew this was what we lived for as supporters; whatever we made of the outcome, we had been there. Any practical consideration was trivial next to this event. It was like those odd, tranquil post-coital moments when for five minutes we stop thinking about sex.
But after walking past the soulless, bureaucratic buildings which surround the stadium, as we queued up in one of the riverside bars, discussing the game with perfect strangers, reality soon reared its ugly head. “They’ll have to give O’Neill some money to rebuild the squad now” volunteered a Cockney Irish guy who had flown to the game from Australia, seemingly via Timbuctoo. The five minutes are over; I’m thinking about finance again.
The times they are a changin’
Seville has prompted many to call for more spending; if after reaching a European final the time isn’t right to invest in the squad, then when will it ever be the right time? Unfortunately, just as we were testing new heights on the football field, football itself was plumbing new financial lows.
This is due to the position of football in the wider economy. During the boom, the cycle of money went in roughly this direction: consumers spend more (e.g. on beer) ® consumer goods companies (e.g. Fosters) spend more on TV advertising to attract the consumer ® TV companies spend more on football rights to attract the consumer goods companies ® football clubs spend more on players to attract the TV companies ® the players buy themselves Porsches.
When the economy turned down the whole mechanism went into reverse. But the speed at which this happened was not the same throughout the chain. Consumers react pretty instantly: as soon as you are worried about your job you spend less. Companies generally book advertising space a month in advance, which means they can cut back a month after the consumer retreats. But TV companies sign multi-year contracts, and so must wait for several years before they can reduce their costs. Football clubs in turn sign multi-year contracts with their players, which often straddle their most important TV contracts. They therefore can only react with a delay to the already late reaction from the TV companies.
We are only now reaching the stage where the media companies are reacting. German Bundesliga football rights have gone to public sector channel ARD, after ProSiebenSat1’s parent Kirch went bust (just as the BBC picked up the SPL rights after the cable companies’ demise left Sky as the only private sector bidder). “ARD is paying significantly less than Sat1 has been until now” an ARD spokesman said. In Spain, the two competing satellite companies Sogecable and Via Digital have merged, with Morgan Stanley’s analyst commenting: “We cannot think of a single supplier [i.e. football club] that will be immune to Sogecable’s bargaining power.” Already, the prices for the Champions League have been renewed “with a substantial price reduction versus last year.” England was the last one to go, with Sky spending £90m less to show over twice the number of live games, that’s a reduction per game of 35%!
The reaction by clubs is slower still, but it is happening. Last October, I pointed out the trickle of players being released by clubs for free, just to trim their wage bill. Since then the trickle has become a flood. Craig Burley is “among 586 players released by British clubs” (Metro, 4 June): that’s over 50 football teams. Agent Raymond Sparkes expects 300 more players to leave the game in Scotland this coming season.
I also predicted more clubs in receivership, falling prices for players, and another two years of financial decline. Nine months on, Wimbledon and Luton have gone into receivership, Leicester and Ipswich were placed in administration, and a similar fate is befalling many clubs outside Britain, most poignantly St. Pauli. A year after spending just under £30m upfront for Rio Ferdinand, Man Utd have sold Beckham - who normally would be a more expensive player - for £17m over four years, with another £7m conditional on success in the Champions’ League. £25m Veron has just been bought by Chelsea a year later for £10m less: that’s a decline of 40%. Players today are being offered lower wages when signing new contracts, and clubs are desperate to move those with expensive contracts on. The Champions League cup winning AC Milan team have been put on variable (performance related) pay packages; Serie A salaries are down 14.4% on last season, and 40% from their peak in 2002.
Bottom line, it was right not to spend your cash last season, and I expect that prices and wages will fall for another year at least. If you don’t believe me then listen to those who have the biggest vested interest in my being wrong, the agents: “I think O’Neill has called it correctly in sitting back … It’s a buyer’s market, and practically any club will sell any player for the right price” (anonymous agent, SoS).
A season of two halves
So what should Celtic do? A lot depends on how much money we will make from our UEFA exploits. After a quick look at the preliminary full year results, I am impressed: the UEFA run more than reversed the first half decline caused by our exit from the Champions’ League. Ticket revenues were up 10% thanks to a 27% increase in home games, offsetting a 12% fall (I estimate) in average gates. Media revenues were down £0.7m, as I expected, with UEFA offsetting the Champions League, and the decline entirely due to a worse SPL contract. The big surprise was an outstanding turnaround in merchandising, which, having been down 16% in the first half, increased 15% for the full year, mainly due to the new kit and Seville related sales.
In terms of profits, I would not get too alarmed by the Chairman’s statement. The write down of the tax asset (£5.9m) and the increased loss on player sales and player amortisation (both up £1.5m) are pure accounting entries, with no impact on cash. Real cash costs were up circa £1.8m, which I estimate will consist of less than £0.5m for player costs due to Seville bonuses, with the balance made up of higher expenses incurred to produce all the extra merchandise we sold. This led to an increase in cash profits of c. £1.7m. Advanced season ticket sales increased again, improving the working capital, but this still declined against 2002 by £2.2m, so net net, our underlying cash generated declined by circa £0.5m. Bottom line, in our strongest season in footballing terms, we only generated about £6m in cash. £6-6.5m is therefore a short term maximum in terms of cash available for investment.
The problem is, we invested net £6.2m, so including interest payments our debt increased again, albeit only by £1.3m which is a creditable result. Looking out to next year, given our qualification for the Champions League, we should make roughly the same cash profits, with reduced TV revenue due to weaker ad markets offset by stronger merchandising, due to the follow through from Seville, and lower player costs as we gradually rationalise the playing staff. Cash generated should improve, as working capital should be better, but we have about £0.8m of preference dividends to pay from last year, and still owe money for some players bought in the past. In other words, the awful state of the Scottish football industry means that we are running to stand still.
Our debt is too high
And standing still is not enough. Our debt has to come down. We are spending the equivalent of two good players on servicing it every year. It was built up during a time of hopeless optimism, and we must accept that that time is now over. The sooner we adapt our finances to reality the better. And at the risk of being called a Cassandra, imagine if we hadn’t made it to the final. Imagine if Benny McCarthy had scored from point blank range in Vigo, instead of sclaffing it wide. We might have lost £2m instead of making £8m (cash profits), and our debt would have gone to around £27m, just below where it was before our last rights issue! Given the parlous state of the footballing industry, and the inherent unpredictability and sometimes unfairness of football results, carrying this level of debt is simply too risky. “Rangers’ debt is higher and they’re still spending,” I hear you say. Aye right I say, since when has copying the Huns ever been a good idea? (more of this in a future article).
There will come a point when prices hit rock bottom and it will be time to buy. I’m not convinced we’ve reached that point yet. Football clubs are disadvantaged by the fact that they are the only ones in the commercial chain (described above) who are not acting purely according to financial self-interest. The consumer gets his beer, the player gets his Porsche, and the consumer goods and TV companies take a cut along the way. But football clubs have ideals, such as winning trophies, in the pursuit of which they are happy to make losses. Instead of taking a cut, the clubs give more than they take: Italy’s Serie A made €1.1bn in 2002, but spent €1.3bn on players, according to Deloitte & Touche.
So football clubs are both the slowest and the least savvy in their ability to react to the downturn. You can clearly see that in the behaviour of some clubs, such as Barcelona’s insane £27m purchase of Ronaldinho despite being heavily in debt, or in the laughably high prices being discussed in relation to the mooted sale of Barry Ferguson. We are only now seeing the first signs of media companies reacting to the downturn, it will be at least a year before football clubs have done the same.
Once the English premier deal is renegotiated, a further period of hardship will ensue, and prices and wages will take another tumble. At that point, Celtic should be ready to pounce. But we will only be able to do so if our debt is down. And if we can’t lower our debt in a year when we’re reaching UEFA finals, something is dangerously wrong. In successful years, we need to repay our debt, to build up a cushion for the inevitable bad years. If we attract new players this year, it should be for no fee, and on low wages. No big name signings.
In that respect, the most humbling thing about the Porto defeat for me was the nationality of the Porto players: one Lithuanian, two or three Brazilians, and the rest all Portuguese. Clubs outside the super rich only thrive when they have young players coming through the ranks. It is time for Celtic to invest more in their youth programme, but that means spending less on established players, perhaps forgoing immediate success. In the meantime, why not give our established young players a run, rather than splash out on overpaid superstars we can’t afford?
Going back to Seville, the performance which most moved me was Henrik’s. Watching him that night was one of the proudest moments of my life. He’s a God. But he’s said he wants to leave at the end of next season, so from a practical point of view we should sell him rather than let him go for free. Indeed, I suspect that O’Neill’s £5m budget is predicated on the sale of Larsson, probably when (if) our European campaign is over. But to sell Larsson … it’s like selling your child into slavery. No wonder no one wants the job of Celtic CEO.
If we do sell him, I think we should use the money to repay debt, but after Seville, it kills me to say it. Sell your best player, or go penniless. Fail to build your squad, or go bust. These are the brutal choices we face in the brave new world of football. Perhaps moments like Seville will make the pain of such choices bearable. Perhaps they will remind us of what we are saving. Perhaps they will give us the courage to believe that we will continue, in the finest Celtic tradition, to triumph over our circumstances.
Back to top