desmond now owns celtic: who will he eventually sell us on to?

barrow.bhoy@easy.com

If you'd told me at the start of last season that we would win the treble and qualify for the Champion's League - winning 3:1 away to Ajax in the process - I would have called you hopelessly optimistic. What a fool, I would have sighed. What a fool I am: it's all come to pass, and no one's woken me up yet to tell me it's a dream. So why am I so worried?

It's because it is impossible for Celtic as part of the SPL to make enough money to satisfy its fans' ambitions on the football pitch. As a result, we would now be headed for bankruptcy if Dermot Desmond, Eddie Jordan and friends had not bailed us out.

This bailout has, in turn, resulted in us losing control, as fans, of the club we love.

At worst, Desmond & friends may eventually sell their stake to a media company, who would limit future investment in players to maximise profits. Bankruptcy 2001 was our most successful season in over ten years. However, our sales only went up 9%. That is because Celtic has all but outgrown the SPL.

From 1998 to 2000, our sales increased on average by 18%. Then we were expanding our stadium (from 50.5 thousand to 60.5 thousand seats), and progressively filling it up (from 92% to 96% of capacity). But in 2001, capacity didn't change, and utilisation only improved 1% to 97%.

As a result, after averaging a 28% annual increase from '98 to 2000, matchday revenue only increased by 9.5% in 2001. TV revenue averaged about 12% growth (this is an estimate, as Celtic changed the way it reported media revenues in 1999), as Celtic gained a bigger slice of an expanding Sky cake; last year media revenues only increased 7%, less than they did in the duff 2000 season! Only merchandising revenue increased faster in 2001 than its '98-2000 average (36% vs. 9%), as Celtic (finally) opened new shops to better capitalise on its brand.

Overall however, although our revenue keeps growing in absolute terms, the rate of revenue growth has decreased every year since 1995. By 2001, Celtic in the SPL hit a glass ceiling in terms of revenue.

Our costs however have demonstrated the opposite pattern. Players' wages grew at an average of 37.5% from '98 to 2000, accelerating to 38.5% in 2001. From 30.5% of revenues in '98, wages have grown to 53% in 2001. That's perhaps as it should be, you might say: it's time we took the lid off the biscuit tin.

The problem is that the cash available to the club to buy new players is equal to its revenues minus its costs, of which players' wages are a crucial component. While other costs grew less than sales on average, and actually declined in 2001, the increase in players' wages meant that cash profits, i.e. the cash the club uses to buy new players, fell from 21-22.8% of revenues in '98-99 to 10% in 2000 and 4.8% in 2001.

So is that why the club have been so stingy in the transfer market?

Well no. Net money spent on transfers increased on average by a whopping 87% p.a. from '98 to 2000 (an increase accentuated by John Barnes' naivety in 2000). Although the rate slowed to 30% in 2001, the increase was still more rapid than that of our revenues, at a time when our margins were declining.Far from penny pinching, the club has spent more cash than it generated, in every year from 98 to 2001!

Now, the only way to spend more money than you generate is to use up your cash reserves. And if your reserves run out, you have to borrow. This is exactly what we did. From a net cash position of £2.9m at the beginning of 1998, we went to net debt of £29.7m by the end of 2001 - a ten fold negative increase!

What happens when you accumulate debt is that you accumulate interest. From an insignificant proportion of profits in 98 and 99, interest reached 20% of cash profits in 2000, and 91% in 2001. That meant that after paying off our interest and preferred dividend, we had NO money (in fact a small deficit) left over for new players. And this is in one of our best years. This didn't just jeopardise future player spending. It meant that, if nothing changed, Celtic would spend more money than it generated every year FOREVER. If you do that long enough you go bankrupt.

I estimate that that's what would have happened to us in three years, absent any fresh injection of cash. The recent convertible share issue for £22.5m orchestrated by Dermot Desmond was just such a cash injection, or, plainly speaking, a bail out.

Falling behind the EPL

The situation looks bleaker if we compare Celtic with the English Premier League (EPL), which is possible thanks to the annual reports made freely available by Deloitte & Touche.

Celtic's position relative to the EPL clubs is summarised below.

I show Celtic's revenue, total wages, and net transfer spending, express them as a % of the EPL average (e.g. Celtic's revenues in 1998 were equal to 97.9% of the EPL average, which was £28,424), as well as showing what position Celtic would occupy in the EPL (e.g. Celtic would lie between the 8th and 9th highest revenue clubs in 1998) and who those clubs were (Leeds were 8th and West Ham 9th).

In terms of revenues, we are exactly average for the EPL, and would rank in the bottom of the top half of the table, along with clubs that never challenged for the championship.

Despite this, we paid below average wages, at the top of the bottom half of the table, mostly in line with clubs characterised by mid-table mediocrity. Transfer spending was relatively parsimonious in '98 and '99, in line with clubs like Coventry whom we would be embarrassed to be mentioned in the same breath as.

In 2000, we went right up the scale thanks to Barnes' (and MacDonald's) profligacy. Taking a three year average, we are bang in line with the EPL three year average, positioned between 7th and 8th place with Villa and Sunderland. In other words, all we have achieved with our bank-breaking spending is to keep up with teams that are at best distant challengers and at worst downright mediocre.

Although figures are not available for all the clubs for 2001 (the D&L 2001 report will only be available at the end of this season), it is certain that the EPL will not face the same revenue slowdown in 2001 as us. Although most EPL clubs have smaller stadia than us, already in 2000 more than half the clubs were running at upwards of 96% capacity, and all (apart from Wimbledon and Wednesday, for obvious reasons) above 80%. They do not therefore have much scope to increase revenues from ticket sales, except by raising prices, which are already at a high level.

TV revenues however increased strongly by 24% in 2000. Celtic's total broadcasting revenue in that year was £5.3m (of which an estimated £2m from the SPL), a pitiful 68% of the EPL average of £7.8m (not counting European games), with only Watford scoring lower. From 2001/2002, Sky will pay £1.11bn over three years. This averages £18.5m per club per year, a 137% increase over 2000. Add in what NTL and ITV paid for the other games and the figure goes up to £25.4m per club p.a. EPL clubs get twice what we hope to get from the Champions' League just for turning up.

In short, if Celtic was struggling to catch up in 98-2000, we will be left completely behind as of this coming season.

Who pays off the debt calls the tune

There are several ways we can increase our revenue to keep up with the best in Europe. But we should once and for all stop saying "the club should spend more." That's like people who, when asked in a questionnaire whether public spending should go up, taxes be lowered, and the national debt reduced, say yes to all three.

We are the club. We are going to give Celtic more money with the 20% increase in ticket prices, which should give us an extra £4.4m revenue. Another way would have been to subscribe to the latest convertible share issue: ordinary fans invested an estimated £5.5m of the £22.5m raised. The other £17m was pumped in by Dermot Desmond and his friends, and that's what I think we mean when we say "the club should invest more."

If the club isn't us, then it's wealthy sugar daddies like Desmond. They pay to entertain us, like Roman emperors funding the gladiators. The common problem with sugar daddies is that the price for their money is control of the club.

The Scotsman estimates that after the recent convertible share issue, fans fell from 40% owners of the club to around 29%, with Desmond's consortium owning 25%. There is a certain amount of guesswork involved, but Desmond probably has effective control of the company. Before the issue it was us who owned Celtic. What that means is that we are now no longer in control of the club's destiny. We can't tell Desmond how much to reinvest into the club. And we can't decide who he sells his shares to.

But haven't we been here before? The Kellys and the Whites were wealthy patrician owners who were supposed to finance the club out of largesse, whether it made money or not. They really did leave us bankrupt.

There are other precedents, not all as bad, but none great. Blackburn is funded by Jack Walker, and they just spent a couple of seasons in division one, and are managed by Graham Souness. Fiorentina's sugar daddy, the film magnate Vittorio Cecci Gori, left the club £95.4m in debt, and sold off its stars like Rui Costa. After being raided by the tax officers he handed over the club's management to his mum, Valeria. AC Milan benefited from the wealthy patronage of Silvio Berlusconi, but they have never been the same since he ran for president. In fact, Milan may have been a tool for Berlusconi's political ambitions.

The most tenacious sugar daddy owner in modern football is in fact none other than ... David Murray. His motivations are more complex; he may, as a result of the terrible accident that confined him to a wheelchair, get vicarious pleasure out of turning a sleeping giant into a successful Scottish football team. It now seems however that even he has put the lid on the Huns' expenditure; perhaps the provincialisation of Scottish football in the European context has dulled the lustre of investing in Rangers for him.

In each case however, the club is run according to the personal whims of its wealthy owner. As for Desmond, he is certainly not as incompetent as Kelly and White, and there is no evidence that he is as slippery as Cecci Gori, or as megalomaniac as Berlusconi and Murray.

My problem with Desmond is that I haven't got a clue as to why he is investing in Celtic. There is no reason to believe his motives are mercenary, but there are no reasons to believe they are not. The fact that he demanded a 4% minimum yield on his shares (increasing depending on how Celtic do in the European Cup), thus ensuring that some of Celtic's cash profits will be taken away from the club, is not a good omen.

He says that his most recent investment in Celtic was made at a time when the shares were undervalued. That is how Desmond makes his money: buying cheap. He bought London City airport when it was an ailing business in the early 90s. It is now a busy airport, used by city people like me to get in and out of London, and could easily be sold at a big premium to another airport group.

Celtic, similarly, are not viable as a club with European aspirations but stuck in the SPL. If they were to move to the EPL, as Desmond intends, they would suddenly get an uplift of around £23m to their earnings from the EPL rights alone. Not to mention the extra money you could get for showing Celtic - Liverpool in Australia compared to Celtic - Kilmarnock.

This indeed is the only way that Celtic can get more money without us or a sugar daddy owner having to stump up. If neutral fans buy satellite dishes to watch Celtic, Sky will give some of that money to Celtic for the privilege of showing the games. We would, like Man Utd. and all successful clubs, get money from neutral fans to buy players. An appealing prospect.

Without access to that pool of 'neutral' money, there is no way we can keep up with Europe's best. From Desmond's point of view, the £23m would, if applied to our 2001 accounts, have enabled us to make enough profit to buy players and have money left over. Although Celtic's share price bears little to no relationship to its economic value (it trades above its financial value because we fans put a non-financial value on Celtic), Celtic would certainly be worth more in profit than bankrupt.

But what would Desmond do with his stake? He may already have enough money, and just enjoy owning Celtic as some millionaires enjoy owning a yacht, or Ivana Trump. But if he wanted to make money from the deal, he could sell Celtic to a media company.

Sure, Sky were prevented from buying Man Utd., but the decision to block the takeover was highly criticised, and there is no reason why it may not go ahead in the future. And Celtic would be seen as having less of a dominant market share than Man Utd.

From the media company's point of view, it would save £23m in costs every year at least, and could sell Celtic games to other countries; the sums involved can only be guessed at, but they would be in proportion to the size of the Irish diaspora, which is pretty big. At Celtic's current price the payback period for a media company buying the whole club would be 4-5 years, I estimate.

There are precedents for this: Bordeaux and PSG in France are owned by M6 and Canal +. As I have said before, for a media company, or indeed any financial owner, the less you invest in players, the more cash you can take out of the business for yourself. That is the ultimate goal of all businesses. The media company would invest enough to produce a team good enough to sell satellite dishes, but not necessarily good enough to win the champions' league. If you look at Bordeaux and PSG, neither of them have enjoyed particularly generous transfer policies of late. Neither of them are currently real champions cup challengers.

I admire Desmond as a businessman, and he may be entirely honorable in his intentions. But the fact remains that we are now owned by a question mark. We have no idea of who the ultimate owner of our club will be, and, if it's Desmond himself, how he will run us.

What then should we do? This is maybe the subject of another piece (yawn), once I hear what other people think (email address above).

One thing you can do is not sell any shares, or if you do, liase with the Celtic Supporters Trust so that you can make sure you're selling to other supporters. The Supporters Trust could also form a fund which would bid for any blocks of stock sold by members of Desmond's consortium.

Finally, the convertible shares convert into one ordinary share if the ordinary shares are trading at 125p. The higher the price, the less shares the convertible shareholders get. The supporters trust could take action, in 2007, to ensure the conversion ratio is as low as possible. Any owners of the old preference shares should convert them, as this also lowers the conversion ratio for the new convertible shares.

Above all, we should, in a constructive form, ask Desmond what his long term aims are.

Am I getting worked up for nothing? I really hope so, but Celtic is simply too important to me, and I think to all of you, to leave it to chance. (For the financial workings underlying this article, which I have in spreadsheet form, please email me and I'll send you a copy).

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