Monday, October 23, 2006

City's Finances (Part Seven)


This is (thankfully, you may say) the last in the series on the finances and accounts. I will summarise the position and give you some pointers to what to look for this week when the accounts are published. Before I get into the bones of this final article I'd just like to re-iterate why I did them. There was clearly a desire within parts of the City supporting community to understand the real financial state of the club. Much of this was due to a lack of detailed knowledge of financial issues. Published accounts of public companies are supposed to give investors relevant information on those companies' finances but that only works if you understand what you're looking at. I also understand that many people couldn't care less. I never claimed to be an expert but I admire people that have the ability to simplify a complex subject.

In the first article I talked about the share structure of the club and who the major shareholders are. There are four holders of more than 3% of the company and many smaller shareholders. Since then the price has drifted and you can now buy shares for 24p each and sell for 21p. Anyone can buy the shares, via a stockbroker. The Supporters Trust have had enquiries about buying the shares and we plan to publish contact details of a stockbroker that has indicated that they will not require a minimum contract value (although there will be a small minimum commission charge). There have been no significant changes in shareholdings or the composition of the board since then.

The next article covered the structure of the annual report and the business of the AGM. I expressed concerns about aspects of the club's corporate governance, namely that our chief executive is a member of the audit committee, in contravention of the major guidelines on the subject. The board had a very easy ride at the last one and while I don't want a return to the friction of the latter days of Peter Swales' reign, the board are there to be challenged.

Next up was an article about the stadium and the debts. The stadium is leased from Manchester City Council and the term of the lease is 250 years. We pay the council on a formula based mainly on attendances in excess of those achieved at Maine Road and the estimated total liability under the terms of the lease is shown in the balance sheet. The stadium is shown in the accounts as though we own it and this is correct under the applicable accounting standard. However, there are many unanswered questions about this topic and neither the club nor the council seem in a hurry to expand our knowledge.

I told you that we have two main sources of borrowing. The first is two long term loans secured on our future income streams and these are being paid back over 15 and 25 years. It was interesting to note that in his recent podcast, Alistair Mackintosh was saying that we have used the stadium for securitisation in contrast to what the accounts say. So there's a question for the AGM.

The other source of borrowing is the loans from John Wardle & David Makin, totalling £19.2m. These attract interest but we don't pay it. John Wardle had to introduce an additional £7m during the previous year and the suggestion is that this was required to replace the season ticket money that had to be ring-fenced and therefore we couldn't use for operational purposes. This ring-fenced money was offset against our total debt but I would query whether this was really appropriate as much of the £7m would be used to pay interest, rather than capital. So apart from a repayment of £2.2m, being the first of two repayments of another outstanding debt, and £700k paid off the one of the secured debts our debts weren't reduced. In fact they effectively increased with the introduction of the extra £7m by John Wardle.

The fourth article looked at the Profit & Loss account and analysed the three main sources of income. Ticket receipts are actually third, behind TV and commercial income. Our wages were £37.7m and around 62% of turnover. This is generally regarded as on the high side of acceptable in the crazy scheme of things in modern football but this was the sixth highest figure in the Premiership and we certainly didn't see that translate into top six performance. I also explained the difference between cash and accounting transactions and tried to explain the concept of depreciation/amortisation. I also explained how we calculate the profit or loss on the sale of players and that, although we showed a large loss, this is not necessarily disastrous in the larger scheme of things.

In the fifth article on the Balance Sheet, I showed how the different types of assets and liabilities were set out and what some of the figures meant. The nature of how assets and liabilities were accounted for, which may not relate to their "true" value. Football clubs assets don't reflect the market value of players so this can be misleading. Also the treatment of the stadium as though we own it tends to skew the balance sheet. Ideally, I would like the club to give us a clear and unequivocal statement about the actual value of the lease to us and what we can and can't do with it. This could have a crucial bearing on our true financial position and as whether our actual asset value was greater or less than the value of our liabilities.

Finally, there was the cash flow situation. I explained that despite our huge £60m income we struggled to generate any net cash and therefore this prejudiced our ability to sign players where the deal involved large cash payments. In a very speculative piece, I also made the assertion that I believed our day-to-day cash flow meant we had to renew season tickets so early as we were short of cash by that time and, if I was right, this could be a major problem if we were in trouble at that time and many people were reluctant to renew.

If you want a really good bullet point summary of the 2005 figures, please read David Hamer's report in MCIVTA 1186

So that's a brief look back but what about the accounts we should see this week? I hope they're better than the performance against Wigan.

2006 Pointers

I will be doing something on these when they see the light of day but would encourage everyone to have a good look themselves and ask questions, based on what you hopefully now know. What should you be looking for?

Read the Chairman's Statement carefully. He talked about the proceeds of the SWP sale in 2005 (even though it was in the following financial year). There were clues even then that investment in the squad and reduction of the unsecured debt were not high on the list and that much of the cash might well be spent on more mundane purposes. He should be spelling that out in detail this year, as well as telling us what the board's strategy is going forward.

Something else to look for will be in the Directors' Report. Look for the make up of the Audit Committee, which should consist of two, suitably qualified, independent non-executive directors. If one of those is still Alistair Mackintosh then serious questions need to be asked of the board and our auditors. I know I am not alone in being concerned about this. I have heard that the board consider that they have sufficient numbers and experience to do their job but if they can't find a suitably qualified non-executive to sit on the Audit Committee then they clearly haven't.

The accounts should show an overall profit but this will be mostly due to the sale of SWP for a guaranteed £21m. This is pure profit as he cost us nothing. Take that out and see where that leaves us. Look at operating profit and the breakdown of income and the level of wages. Fowler, McManaman, Bosvelt, Tarnat & Anelka all left before or during the financial year and you would expect the wage bill to have been reduced significantly. But comments from Mackintosh recently suggest it hasn't, so where's the money going?

Compare gate and commercial income to the previous year. It wouldn't surprise me if gate income has fallen. Now any normal business seeing their receipts fall would reduce prices or otherwise offer better value to attract customers. But what do football clubs do - increase prices, that's what. City also angered season ticket holders like me by stopping our exclusive period for claiming cup tickets.

The level of debt is clearly a key item of concern. What we need to know is how much we still owe Wardle and Makin. Last year it was £14.7m to Wardle and £4.5m to Makin. The big question is whether any of the SWP money has been used to repay any part of these loans. This can be easier said than done but the answers can be found in the note on Borrowings listed under Shareholder Loans so read these carefully.

Finally, look at the cash flow statement. We had a huge influx from the SWP sale so take that out to see how we actually did over the year. It is a complicated statement to read but you need to work out how much cash we have generated (and it should include the SWP money so take that out) and how much of that has been because we managed our money well or because it had to be introduced via loans or other external financing.

I hoped you have enjoyed these articles. I've had direct and indirect feedback from a great number of people. That has ranged from the "So what" camp (thank you Mr Heavis) to some that claimed my articles were too simplistic. The latter charge has a ring of truth to it but I don't have the knowledge to satisfy people in that camp and it wasn't aimed at them anyway. But most has been supportive and appreciative and if I've helped just a few people to cast a more informed eye over our accounts then I've achieved what I set out to do. I may well have got things totally wrong or missed something obvious and, in one case at least, I jumped to an incorrect conclusion until corrected but I never promised you that I was a financial wizard.

I also started these well before I got involved with the attempt to form a supporters' trust and these articles are 5 totally separate from that activity. However there is a clear connection between the two. As a supporter and shareholder I want to understand what the board are doing to bring success (or avoid failure) and how we are building for the future. If I believe that the board is doing the best it can for my club then I will support them wholeheartedly and so should we all. I would love to be able to walk away from the AGM thinking that the board had been giving a good grilling but had succeeded in convincing us that they were on the right path. So December 7th (as I hear the AGM will be) should be interesting.

My sincere thanks to those who took the time to read and disseminate them and also to the handful of people who really helped me to understand what I was looking at. And, of course, to MCIVTA for publishing them.

Colin Savage


Post a Comment

<< Home

Web Counters (Since 24.9.06)