Barrow Bhoy, NTV's man in the green and white braces, takes a look at Celtic PLC's half year report.  

However heroically we perform on and off the pitch, we still spend more cash than we generate, due to the SPL’s limitations. That’s what the latest results from Celtic demonstrate. The most important news for us is not in these figures, but in the discussions over the future of European football, and Celtic’s role in that future. The results are like watching a meaningless game while listening to a more important one on the tranny.

 Here are the main points however. We played 5 extra games due to our European exploits, and our matchday revenues went up by 37.1%, a little less than the increase in the number of home games played (+38.5%, or 18 versus 13). The 20% increase in ticket prices has been offset, I expect, by the proportion of European match revenues passed on to UEFA. Media revenues reflect half of the extra £8m Celtic should gain from UEFA over the full year, but even stripping that out, revenues impressively increased 49%. Merchandising is up 70.7%, as the store roll-out continues, but this has likely increased fixed assets: total capex of £10.9m, minus the £7.4m spent on players, gives £3.4m of other investment, nearly double the £1.8m from last year, much of which was likely spent on the new stores (and the Jock Stein Stand restaurant). In all, revenues were up 59.2%. At the same time, players’ wages increased 38.6%, and other costs 51.9%, again likely reflecting the store roll-out. Wages reflect the net effect of getting rid of Berkovic and others, offset by the signing of Balde, Hartson, Guppy and Scylla; salary renegotiations; and a bonus for qualifying for the Champions League. All in all, this left us with net cash profits of £7.3m, almost exactly what we spent on players.

 Good news is, profits are up. Bad news is, even in our best half as a quoted company, we only just managed to self-finance our investment in players. Add interest costs and other investments, and our debt increased by £3.6m. The only reason it decreased overall was the £22m share issue. Looking forward, the second half will have lower match revenues than the first, due to fewer games, and merchandising is usually weaker in the second half, although media should be roughly the same. Offsetting lower revenues, we haven’t spent anything on players yet in the second half, so investments will be lower. All in all though, I expect net debt to increase slightly by year-end from here (see below).

 

Thousand s of £s			H12001	H22001	2001	H12002	Inc./dec.	H2’02 (E)	2002 (E)	inc./dec.
Home games			13	14	27	18	38.5%	10	28
978	640	803	-1.5%	964
Match revenue			12,718	8,963	21,681	17,436	37.1%	11,569	29,005	33.8%
Media revenue			4,640	5,264	9,904	10,488	126.0%	10,843	21,331	115.4%
Merchandising revenue			4,070	3,648	7,718	6,946	70.7%	6,226	13,172	70.7%
Other revenue			1,405	1,299	2,704	1,490	6.0%	1,317	2,807	3.8%
Total revenue (A)			22,833	19,174	42,007	36,360	59.2%	29,956	66,316	57.9%
minus player's wages			-11,103	-11,103	-22,205	-15,389	38.6%	-13,645	-29,033	30.8%
% revenue			-48.62%	-57.90%	-52.86%	-42.32%	65.2%	-45.55%	-43.78%
minus other costs			-8,952	-8,852	-17,803	-13,594	51.9%	-11,596	-25,190	5.0%
Equals cash profits (B)			2,779	-780	1,999	7,377	165.5%	4,715	12,092	504.9%
Minus interest			-746	-1,079	-1,825	-464	-37.8%	-849	-1,313	-28.0%
minus preference dividend			0	-599	-599	-599		0	-599
minus tax			0	0	0	0		0	0
minus working capital			-1,581	1,884	303	977		-2,704	-1,727
Equals cash available for investment (C)			452	-574	-122	7,291	ns	1,162	8,453	ns
Check					2,302				10,365
Investment in players			-13,331	-7,452	-20,784	-10,277		0	-10,277
Sale of players			3,332	3,523	6,855	2,807		0	2,807
Net investment on players			-9,999	-3,929	-13,929	-7,470	-25.3%	0	-7,470	-46.4%
Investment on stadium and other			-1,845	775	-1,070	-3,419	85.3%	-2,136	-5,555	419.1%
Total investment (D)			-11,844	-3,154	-14,999	-10,889	-8.1%	-2,136	-13,025	-13.2%
Decrease/(increase) in debt (C-D)					-15,121	-3,598		-973	-4,571	-69.8%
Cash/(debt) beginning of year					-14,505	-29,626		-11,508	-29,626
Capital increase						21,716			21,716
Debt year end					-29,626	-11,508		-12,481	-12,481	-57.9%

*H102 and FY2002 are my estimates

 To understand the long term implications of this, we need to look at the ongoing investment requirements at Celtic.

	2001	H12002	2002
Total cost of playing squad	50,082	46,589	46,589
Write off of transfer fees p.a.	9,604	4,251	4,251
Average length of players' contracts (years) (E)	3.1	5.4	4.0
Cash we would generate at this rate in that time (E x B)	6,144	39,628	48,125
Surplus (shortfall)	-43,938	-6,961	1,536

 I have shown the total cost to Celtic of its current playing squad. This cost is written down on over the life of the contract, so if you have a £5m player on a 5 year contract, you write down £1m pa. Since we know what the write down is, we can approximate the length of the player’s contracts by dividing one by the other (£5m/£1m is five years), with adjustments made for the fact that older assets are not being written off at the same rate as new ones (which is why the total cost of players divided by the year’s write-off is not equal to the average contract length I give, fuller explanation on request). Now, we had players on average 3.1 year contracts in 2001, and generated £1.99m. Assuming no change, we would generate £6.1m by the time the contracts terminated and we had to buy new players. If the actual cost of the players was £50m, we would need £44m of new capital just to keep the squad at the level it was previously! This year, the contract renegotiation has been beneficial insofar as contract lengths have increased, and I expect we will just bridge the shortfall, though I haven’t included any other investments or interest payments, which we will have to make.

 The problem is that it will be very hard for us to increase revenues from here (though merchandising and initiatives like the SMS service and webcasting have potential), unless we get to the second round of the champions league. In fact, rather than improve, we may find we will not always be able to maintain such a fortunate position. Celtic is actually in the sweet spot. We are reaping the benefits of heavy investment in the past in terms of low investment and high profits. We also have an unusual (for any club) combination of a brilliant manager who can buy players for less than they’re worth, and an awesome player who actually wants to stay with us rather than flit off for a bigger package. Although there is no reason not to expect this to continue, I would merely caution that it hasn’t often been the case in the past. The balance of probabilities lies toward a higher level of spending in the future, and a lower level of on-pitch success (particularly in the long term when Larsson retires).

 Looking at the broader picture, figures for the EPL are not yet available, but a comparison with our Champions’ League rivals Juventus (who are floating on the stock market this year), is instructive:

To June 2001 (£m except score)	Score over two legs	Sales	TV revenues	Cash Costs	Player wages	Cash profits	Investment in players
Celtic	6	42	10	40	22	2	14
Juve	5*	103	44	88	57	14	32
Celtic rel. to Juve	116%	40.9%	22.7%	45.3%	39.0%	14.1%	43%

*Amoruso penalty disallowed

 

Even if we just about manage to keep up with ourselves, so to speak, we are being left trailing in the wake of the superclubs: our expenditure is less than half Juve’s, but our ability to fund our own investment is one seventh! It’s not enough to say “look at Rosenborg, they survive fairly well without spending lots of money, even though they are in a poor league.” You can only say that if you are happy with us spending about £5m on new players each year. And if we’re struggling (valiantly) to cut it in Europe now, imagine what it would have been like without Balde and Hartson, say.

The key to this obviously lies in TV revenue. If we could earn the same as Juventus there, we would be at just under 80% of their revenues. This requires moving to a new league. The problem is that there is no incentive for most English clubs to let us in. What Leeds Utd. could gain in gate receipts might not outweight the potential loss of European money, should Celtic pip them for a UEFA place. A version of the Antlantic Leage would not suffer the same problems, as the other clubs in it are in the same boat as us. The problem is UEFA. UEFA was once an amateur federation, and now finds itself sitting on millions of pounds in profits. Imagine Jim Farry in a fur coat and you get the idea. Their management skills are still pretty amateurish, but, like most bureaucrats, they are corrupt, and paranoid of anything which might upset their hold on the game. One way to get around this is some kind of legal appeal to the EU, but that could take years and be very expensive.

In the long term, movements afoot with the superclubs may throw us a lifeline. During their flotation, Juventus commented that they would like to see the formation of a Euro superleague. As long as they remained part of their domestic league, UEFA would be powerless to stop this. Celtic’s future lies in our potential participation in such a league, but it will never alter the fundamentally unattractive nature of our domestic set-up (let’s face it, would anyone normal watch us play Motherwell for fun?). Another positive is the proposal for the top clubs to limit spending on players to a certain percentage of turnover, effectively stopping clubs like Real Madrid spiralling into debt while driving up everyone else’s costs; this might have a beneficial knock-on effect on us.

In the short term, we are faced with a fall in the advertising market, and the near bankruptcy of NTL and Telewest which removes any competition to BskyB for TV rights. Some have naively thought that this would lessen the attractions of other leagues, as the froth would be taken out of their TV revenues. But what’s happening is that the strong are getting stronger, with the SPL and the Nationwide suffering first. In that respect, the potential for a new SPL TV is encouraging. The whole SPL currently gets £9m per annem from Sky. Celtic averages about 60k supporters a game, but the potential is at least four times that if you include the diaspora and people who don’t go to the game. If half of those paid £10 for “SPL TV,” that would generate £1.2m of itself, without taking account of follow on sales; and I think the estimate of the potential market is conservative.

In summary, the results tell us that the club are playing a very poor hand in a canny way. If nothing changes, our future profits will bump around where they are now depending on our success in Europe, and the club’s debt will continually increase. The important issues facing us  – the proposed changes to the European and domestic leagues we play in, and the new TV contract for the SPL – are not in the report, and I would watch them with attention. In the meantime, during the lean years between now and a new league, we, as fans, will need to fund the club. This involves changing certain instinctive reflexes we have as supporters. When we blame “the plc.” because they don’t spend enough on players, we forget that they have spent more than the club earned on players in every year since 1997. It’s not the “plc.” which restricts the amount of money we spend, it’s the fact that we’re in a crappy provincial league. The only way the club can get more money during these lean years is for us to give it to them. In return, we control the club’s destiny, which I think is more crucial than ever before, given the challenges we face.

Otherwise you agree with what Ewing Grahame said as part of his attempt to soften the blow to for the Huns from the recent announcement of Rangers’ massive debt: “The champions also carry a significant level of debt and, with three share issues in six years, cannot, in conscience, go back to their support with the begging bowl” (Herald 27 November 2001). This sentence would make sense for Rangers, who are owned mainly by one wealthy individual. But Celtic is owned mainly by us, the fans. We are the club. It makes no sense for Grahame to talk about us turning to ourselves with a begging bowl (but why let logic get in the way of an anti-Celtic soundbite?). Why shouldn’t we be happy to fund Celtic? The only alternatives are for the club to go bankrupt, for us to lose control of it, or for it to stop investing in the playing squad. Can we, would we, in all conscience, do anything else?