shareholders are we!

With another share issue looming, who better to ask what the hell's going on than our resident financial guru Barrow bhoy?

 

NTV: Why a share issue and why now(coming up to Christmas)?

Barrow Bhoy: 'throw my ticket in the wind'
Celtic need the money. Last year, our cash profits - i.e. the money we have available to pay for interest on our debts, and invest in players and things like a youth facility - was £5.2m. Our dividends were £1.5m and net interest at £1.3m. That left us with £2.4m for investment. But we invested £2m on fixed assets (new shops, improving the corporate hospitality facilities, turnstiles etc.) and a net £2.5m in players. So we had £2.4m to spend, and we spent £4.9m. Incomings less than outgoings! That contributed to debt increasing again, from £15.8m to £19.5m.

However, last year we were in the champions league, which is worth around £8-10m, depending on how you calculate. So this year, all other things being equal, before any interest payment or investment, we will be cash flow negative! In other words, if we don't make it into the Champions' League, our cash revenues are less than our cash costs. That means an uncontrolable spiral: losses increase therefore debt increases therefore interest costs increase therefore debt increases ....

In other words, Celtic's debt needs to be rebased to a level where interest costs and dividends are less than 50% of what our cash earnings amount to in a Champions' League year. Looking at things in a longer term perspective, we have been unable to reduce our debt - without resorting to rights issues - any time since Fergus left. A lot of that is due to our costs being too high.

This was unavoidable in a way. We had to raise our wage costs to attract the players we needed to become competitive again, and we did so at a time of significant inflation in players wages, as everybody knows. This was compounded by MON's tendency to reward players like Paul Lambert with 'loyalty bonus' contract extensions. Since players wages are fixed for multi-year periods, it has taken us a while to reduce these fixed costs.

The silver lining is that last year we have finally reduced player costs by an impressive £2.6m (although part of this was due to less performance bonuses, ie less UEFA cup TV money). And one thing management deserve credit for is the significant outsourcing of costs, which lowers Celtic's fixed costs and operational risks.

At last, we are starting to operate more like a modern business. The changes in our squad this season mean player costs will come down next year. Just like our debt, our fixed costs needed to come down to a more sustainable level, which means that in future if we fail to qualify for the Champions League, we won't necessarily go £5m cash flow negative.

Oh yes, why Christmas? They wanted to do it as fast as possible, as the earlier they get the money the sooner they save on interest costs. Results to December will look poor, given the lack of champions' league, but that's to be expected and shouldn't surprise anyone.

NTV: Is Dermot's underwriting of this as near as we're going to get to a sugar daddy-style hand out from him?

BB: 'someone who will open each and every door ... but it ain't me babe'
Yes. Desmond as an investor is amazing. He is totally clinical and unemotional. That's why he buys things when they're cheap and unfashionable, and sells them when they're overhyped. Celtic is seemingly unique among his investments in that he isn't doing it for the money. He is doing it for non-financial, personal, emotional reasons.

But we have to make a big distinction between him and other sugar-daddies, most obviously Murray. For all the hagiographies in the Scottish press, Murray was totally emotional in the way he spent money at Rangers. Only serious delusions could have stopped him realising what a waste of money he was guilty of. Desmond is more canny. He realises that being in the SPL seriously limits Celtic's financial fire power. He is therefore accordingly limiting his current investment to reflect the SPL's limitations. My guess is that he is keeping his powder dry for Celtic's participation in a better league, when he will get more bang for his buck.

It won't please the Hun tabloids, but wasn't it by pleasing them with his private jet signings that Murray was landed in his current, delectable, mess?

NTV: To put it another way, what does DD get out of this and are some fans right to question his motives?

BB: I think DD must get a kick out of it, because there's no other explanation. He certainly will make £0 in terms of financial investment, in the short term at least. It's still important to question his motives. All we know is his clinical, financial side. But it is another side of him which governs his investments in Celtic. Nothing wrong with that, but this side is a complete mystery, so far as I can see.

NTV: Is this share issue going to shore up the club financially or is there a basic problem with running things without losing money every year?

BB: 'The only thing I knew how to do was to keep on keeping on'
In the state we were before, we didn't make enough money to fund our investments, even when we qualified for the Champions league and played three ties in UEFA (as we did three years ago). If we stay in that state, every time we fail to make it to Europe we will need a rights issue.

The point of the current issue, as well as the cost reductions, is to start with a clean(ish) state, so that the club can fund its own development on a sustainable basis. The only way for this to be sustainable is for us to accept that we'll have very few trophy signings of the sort regularly demanded by Celtic fans. We simply can't afford it.

NTV: What kind of figure would you envisage going on reducing the club's debt once the share issue is complete?

BB: I'd assume they'd use £10-11m for debt reduction, roughly halving our debt before the increase this year due to the loss of champions' league money. The other £4-5m or so for the youth academy.

NTV: In general terms, would this share issue be viewed by business analysts as good strategy?

BB: 'Don't think twice, it's all right'
In one sense it's like asking a blind man about the design of a new art gallery. No sensible financial investor would invest in any football club run purely for footballing reasons. That's because financial investors need a return on their investment. Every pound you spend on financial returns (interest, dividends) can't be spent on players. Fans want all their surplus cash spent on players, and this is the way Celtic has been run (and please God will remain so).

Looking at it from the point of view of Celtic's financial health, rather than Celtic as a potential investment, it's the only logical thing to do. Our debt was too high. Our costs were too high. We needed to reduce them. This is the obvious way to reduce our debt.

NTV: What will this share issue mean to supporters who already have shares?

BB: Normally when a club has a rights issue it enables existing shareholders to apply for shares before others. That prevents their stake in the profits of the company from being diluted. This has no relevance to this case. Since Celtic makes losses, if, for the sake of argument, you are an existing shareholder, and the percentage you own in Celtic is diluted by the issue, in purely economic terms it means your share of Celtic's losses per share is lower. So from a financial point of view, you are sharing your pain with more people.

But this completely misses the point of investing in Celtic. You buy shares to support the club financially, and in exchange to have something to say about its management. It's more like a charity raffle ticket than a share, or like a subscription to a club. In practice, if most existing shareholders don't subscribe, they will lose more control of the club to Desmond. And vice verca, the more demand there is from us, the less Desmond's share will increase.

NTV: Broadly speaking, do you think the club is being well run, from a financial point of view?

BB: 'What's good is bad, what's bad is good, you'll find out when you've reached the top, you're on the bottom'
Some things are within the club's control, some are not. TV income is not. Players' wages are dictated by the market. Ticket income is pretty much guaranteed, unless fans get really upset (no sign of this having an impact on revenues yet). What the club can control is how aggressive we are in recruiting players, and how we maximise revenues such as multimedia or merchandising.

On the cost side, we can control the non-footballing coast. Celtic have been moving in the right direction, but too slowly. We have increased our own retail stores and improved our matchday hospitality offering. But so have all other clubs. We didn't make any big investments in our own TV channel, but we have developed a viable Celtic TV format.

However, a lot of this was still amateurish. The mediocrity of the Celtic multimedia department, or whatever it was, was well documented by NTV. For a long time calling the ticket office was an exercise in monastic patience (but it was an improvement from the mid nineties - I still remember the grumpy pre-recorded message from the old guy who managed to say 'thank you' at the end as if it was a euphemisim for 'get tae ****')

Looking forward, there are some grounds for cautious optimism. More of Celtic's non-footballing operations are being outsourced. Even such sacred cows as the Celtic View are being slaughtered (it is now produced by an independent company). The new agreement with ticket master enables us to book over the internet on their existing platform, without Celtic wasting money on its own, redundant, e-booking platform. All this means that Celtic is being run to make as much money as possible for the football squad, not to keep people in a job for the sake of it, or build empires for its management to play with.

And there are some good initiatives. Celtic Replay looks quite exciting, for example, as it will enable Celtic to make money from the non-Setanta-televised gemmes. You don't want to get carried away. Running a football club shouldn't be rocket science. Celtic are as professional at this as an average English premier club, I think.

More important is the strategic dimension. One could fault management for agreeing the Paul Lambert type sinecure deals. But when a guy gives you success like O'Neill did, it's hard to question his judgement too much.

Overall, the Celtic board have held their nerve when the Hun tabloids - unfortunately abetted by elements in our support - goaded them with references to the biscuit tin. The red tops wanted them to spend money on all sorts of ridiculous things (isn't the entire Rangers first team currently a kind of Daily Record fantasy football ensemble?). Looking back, their decision to be prudent, both in player and off-field investment, has proven wise. Murray Park cost a bomb and produced ... Stephen Hughes. Our 'biscuit tin' youth policy produced: Maloney, McGeady, McManus, Beattie... And now, without being hurried into it by the Sun et al, and probably having learned a thing or two from Rangers' experience, we are in a good position to make a success of our investment in the youth academy.

NTV: In your opinion is it better to have DD and company pitching for our team or not?

BB: 'She's acting like we never have met'
If not him, who else? I don't see too many people queueing up with big cheques. T he last alternative was the lead singer of Simple Minds ... funded by the sort of venture capitalists who make Malcolm Glazier look like a choir boy.

NTV: Should Celtic fans subscribe?

BB: If you don't support the issue, who else will? If you don't, don't complain about Desmond. Put your money where your mouth is, or keep it ...

NTV: How many roads must a man walk down?

BB: 'Any day now, any day now, I shall be released'
Just reading the offer document. Desmond owns some non voting prefs which entitle him to a fixed divie and automatically convert to ordinary voting shares in 2007. If this happens post the issue, Desmond will own more than 50% and have to make a mandatory offer for the rest of Celtic. What the board are proposing is that conversion is no longer mandatory. The problem with that is that the prefs would then stil earn the dividend, impoverishing the club. The board have accordingly agreed that the shares will receive no dividend after 2007. The board's main shareholder is Desmond himself, who must have agreed to this. What that means is that Desmond has agreed to forgo his dividend on the prefs. So he holds shares with neither votes nor dividends as a result of this issue. Not the behaviour of a Scooby-Do like scheming bad guy IMHO.

NTV: Thanks BB. Now you can get back to the capitalist gang bang.