Aberdeen FC released their annual report a few weeks ago.
Much to the delight of the fans, the accounts were released with a statement saying
that the club is practically debt free. This is excellent news to the club,
whose debt had risen to very high levels. So high in fact, that paying that
debt back the traditional way would have been practically impossible for the
club. Willie and Elaine Donald, life-long fans of the club reportedly came to
the rescue of the club by injecting reportedly around £ 3 million to the club.
The Donalds are the founders of a civil engineering, plant hire and construction
firm and currently employ a staff of more than 100 persons. They foundend their
company in 1977, and are reportedly hard working and very dedicated to running
their business. Willie Donald recently said of their investment on the club:
”We decided some time ago we wished to
give something back to the community and we see the football club as a vital
and central part of the community.”
Now they certainly have given something back. Through their
cash injection the couple´s combined shareholding of the club will be
reportedly around 20 %, but they don´t even want a seat on the board. While the
Donalds´ involvement is a significant one in the whole restructuring process,
it is only one (if vital) part of it. As club spokesman said: “The cash invested by Willie and Elaine
Donald has been used as part of a wider deal to buy out bank debt
(£9.513million).” Other notable changes include the following: The club´s
chairman´s, Stewart Milne´s share of the debt is reportedly £ 4,42 million,
which will be converted to equity. As a result, The Stewart Milne Group´s
shareholding will increase to around 43 %, but his voting right will only be
around 29,9 %. The club´s sponsor, Aberdeen Asset Management have also
converted their remaining debt to equity. According to the annual report, the
Aberdeen FC Community Trust will receive a shareholding of around 9 % by way of
gift, and the total shareholding of existing ordinary shareholders will be
diluted by around 55 %. Some of the details of the whole process are still a
little unclear, but what is essential is that as a result, the clubs net debt
will be reduced by £14,49 million, and share capital and reserves will rise by
the same amount. This puts the club on solid ground, and allows them to plan
the future from a new, healthy perspective.
Just how bad, excatly, was the club´s situation prior to the
restructuring? Pretty bad. The debt had been building gradually during the past
20 years or so. In 1993, the club constructed the new two-tier Richard Donald
stand to their Pittodrie Stadium, which cost around £ 4,5 million. Unhealthy
wage bills caused the club to make heavy losses over the years, which in turn
resulted in increasing debts. By 2004 the debt was around£ 7,3 million, and by
2005 over £ 9 million. By 2011, the net debt had reached a stunning £ 14,7
million. Below is a figure describing the structure of the debt from the last
four years.
As can be seen, the total amount of loans hasn´t really
changed significantly over the last four years. The structure of the debts,
however, has. Up to 2012, the total amount of short term bank loans was £ 10,8
million. Needless to say, there was never any chance that the club would have
been able to actually pay these short term loans. Such a heavy short-term debt
burden needs to be renegotiated year after year, which is a pretty profitable
situation. For the bank, that is. For the club, it quickly becomes a vicious
cycle that restricts the club´s operations on and off the pitch.
In 2012-2013,
the club managed to ease the situation slightly. During the year the board
re-negotiated the terms of the bank loans, converting the loans from short-term
to medium term. As part of the restructuring, in December 2012 other loans
totalling £ 2,25 million were converted into Non-redeemable Preference Shares,
that have no rights to dividends (not that there were much dividends to be
shared anyway) and no voting rights. As chief executive Duncan Fraser decribed
the process in november 2012: "No
new cash will come into the Company as a result of this conversion but over
time its financial position will be considerably improved by removing
liabilities from its balance sheet totalling £5.75m and by the corresponding
improvement in the ratio of its net assets to called up share capital,".
Fraser wasn´t lying, the process did partly reduce the total debt, but as the
figure above shows, in reality this only
had a minor effect on the net debt. Yes, the net debt did diminish between 2012
and 2013, going from £ 16,4 million to £ 15 million. But for a club whose
turnover went from £ 8,3 million to £
7,8 million , that kind of change in net debt was hardly a game-changer.
And
that has been the case for Aberdeen during the last few years; Any minor
changes in net debt haven´t really affected the big picture. Despite that, one
thing the club hasn´t lacked is optimism. In November 2013 chairman Milne told
the Daily Record: ”I think we have the
club in a fairly sound position. It has been a challenging period for Scottish
football in the last five years. No one is under any misapprehension about the
difficulties faced by clubs in Scottish football but we’re as well placed as
anyone.” Saying the club was in a fairly sound position was a bit of an
exaggeration on Milne´s part. Having to renegotiate loans year after year is
hardly a sound position. And while the difficulties that the Scottish clubs
have been dealing with for the past years have been well documented, the fact
that other clubs are potentially even worse off is hardly a positive thing for
any club.
Looking at the assets – side of the clubs balance sheet, a
few things come to mind. The value of intangible assets (player registrations)
has been very low. In the latest accounts, this was £ 128 000, in 2013 the
figure was £ 150 000. This is because Aberdeen haven´t really bought
players during the last few years.
According to Transfermarkt –website, the only player the club has bought
during the last few years was Mohamed Chalali, who arrived from Panionios
during the season 2011-12 with a fee worth £ 48 000. The club has been
more active in selling players, most notable sales being Fraser Fyvie to Wigan
(£ 559 000) and Ryan Fraser to Bournemouth (£ 422 000), both
transfers took place during 2012-13. Aberdeen´s cash flow statemement tells a
similar story:
What is more interesting than players registrations, is the
value of tangible assets. Tangible assets consist mainly of the club´s home
ground, the Pittodrie Stadium. Pittodrie is one of the largest stadiums in
Scotland, and it currently has a capacity of 22 199. The value of the
Pittodrie Stadium has been reviewed repeatedly, and in the latest accounts it
was valued at £ 18,1 million, including the stadium itself and the land. The
value was increased to it´s current figure in the 2013 accounts, in 2012 the
stadium was apparently worth £ 17 million.
Despite the increase in the
stadium´s value, it seems that the Pittodrie has served it´s time. The age of
the ground and the restrictions concerning the surrounding land have made it
difficult to develop the stadium further. Because of that, the club has been
keen on relocating to a new, yet to be built, stadium. The planning of the new
stadium had already progressed realtively far by 2012, when the Aberdeen City
Council rejected the joint application by Aberdeen FC and Cover Rangers
FC. In August 2014 chairman Milne told
the BBC: ”We are back round the table
with Aberdeen city council again looking at how we can tie up the land and then
move forward from there. Our current thinking is we want to aim for having the
new stadium ready to play in probably season 2017/18”.
So the new stadium –project is still far from being
finished. But curiously, it is already present in the balance sheet. The
capitalised costs of the new stadium project are included in the fixed assets,
and were worth £ 2,9 million in 2014 (£ 2,8 million in 2013). It is stated in
the notes of the annual report that”the
Directors remain fully committed to the project and expect further progress to
be made over the course of the next 12 months. A number of milestones require
to be reached before the project will progress to the construction stage. These
include, amongst other things, the site acquisition and completion of the
fund-raising process. Notwithstanding the residual risks associated with
achieving these milestones, the Directors remain confident that these will be
satisfactorily achieved and, hence, continue to be of the view that is is
appropriate to carry these costs in the balance sheet”.
Whenever something is capitalized in the balance sheet like
this, the auditors usually advice companies to be careful when doing it. It is
not uncommon, though. It is not that rare to see companies capitalising costs
related to research & development, for example. But the thing is, there
needs to be some probable future income related to these capitalisations,
otherwise they aren´t really worth anything, and, consequently, have no
business being in the balance sheet. If Aberdeen for example would announce
they will abandon the new stadium project and stay at Pittodrie, the auditors
would most likely not accept the capitalised costs as part of the balance sheet
anymore. If that would be the case, the value (£2,9 million) would have to be
written down, making the income statement look very ugly. So for Aberdeen FC,
there are at least two good reasons to keep the project active: Firstly, to be
able to move away from Pittodrie at some point, and secondly, to keep the
capitalised costs as part of the balance sheet.
If Aberdeen´s balance sheet has been a story of ugly debt
figures until recently, the income statement has also been very telling of the
situation that the club has been in for the last few years.
The club´s revenue has shifted slightly over the past four
years. In 2011-12 turnover rose from £ 7,4 million to 8,3 million despite the
club reaching a dissapointing 9th place in the league. The rise in the revenue
was mostly due to the club reaching the semifinals of the Scottish cup.
According to the annual report, the club´s commercial operations were
succesful, the accounts included income from the Club shop for the first time
since 2004. In 2013-14 the revenue rose notably, all the way up to £ 11,1
million. This was due to one of the most succesful seasons in the club´s history.
Aberdeen FC reached the third place in the Premiership, reached the semifina-stagel
in the Scottish Cup and won the League Cup. Excellent succes on the pitch was
reflected in the revenue. Attendance figures rose, average attendance jumped
from just over 9 000 in 2012-13 to just over 12 000. This obviously
resulted in higher gate receipts, which were £ 3,5 million (£ 2,2 million in
2013). Broadcasting rights rose from £ 1,2 million to £ 2,1 million and
commercial income from £ 3,2 million to £ 4,0 million. So it´s safe to say
2013-14 was, results- and revenue-wise, a very succesful year for Aberdeen FC.
The figures also show very clearly what the club´s problem
(in addition to high net debt) has been over the years. The operations of the
club are just not profitable. The EBITDA (earnings before interest, taxes,
depreciations and amortisations) has been negative between 2011-13. In 2014 it
was finally positive, but only barely. And let´s not forget that this required
one of the most succesful seasons in the club´s history to happen. In 2011 and
2013, the EBITDA-figures, were quite horrible, to be honest. The club´s
wages/turnover –ratio has been as follows:
Between 2011 and 2013 the wages/turnover –ratio varied
between 60 % and 70 % That is not outstandingly high for a football club, but
high neverthelesss. In 2014 the wage bill rose to £ 6 million. This was due to
bonuses being paid to playing and management staff of the excellent results the
club achieved. But even despite this, the wages/turnover –ratio declined to 54
%, so high was the rise in the revenue. So while the wages haven´t been at a
disastrously high levels by any means, combined with other operating costs the
EBITDA has been taken to a very low level. Amortisations of player registrations
hasn´t really had an effect on the club´s profit level. Amortisations have been
very small, since the value of players contracts in the intangible assets has
been low to begin with. Depreciations relating to the Pittodrie Stadium dragged
the operating profit down in 2011-12, but since then the depreciations have
been notably smaller. The operating profit has been firmly negative between
2011-13, in 2014 it was finally positive, but again, barely. During the past
four years the club has made nice profit from sales of intangible assets
(players). As the figure from cash flow stamenet earlier indicated, the club
has sold way more players the bought. But this profit from player sales has
been offset by interest payments. Over the past four year, the club has paid
over £ 2 million in interest payments. This has been the price of having such a
high detbtness, and it has been a major factor in the clubs losses, which
amount up to about £ 5 million over the past four seasons.
So now that Aberdeen FC are finally free of debt, what´s in
store for the club? The move to a new stadium is still very much a plan. As
Stewart Milne told SkySports in November: "If
the final steps are approved at the AGM we will have a strong
balance sheet and the debt servicing burden will be removed allowing us to
drive forward on training facilities and the plans for the new stadium
with much greater confidence in our ability to raise the additional investment needed." It
must be noted though, that while being free of debt is a great position to be
in, this restructuring doesn´t really bring any new cash to the club´s
disposal. The only notable cash flow –effect is that the club doesn´t have to
pay the annual debt servicing –payments, which have been around £ 0,5 million /
year during the last four years. And that´s not a small amount by any means.
But that´s not the kind of money you build a stadium with. It should also be
remembered that the club´s operations haven´t been profitable. The combined
operating profit during the last four years has been around £ -4,5 million and
was barely positive last year. The club needs to figure out how to make those
operations profitable, since as long as they keep making losses, it will slowly
but surely consume the club´s equity.
Having a new stadium probably wouldn´t hurt in boosting the
turnover and improving the profitablility. But the move to the new stadium
won´t happen without significant new financing. Since the banks are nowadays
reluctant to lending money to football clubs, the investment would likely have
to come as some form of equity. Also, now that the club is debt free, they would probably rather not go back to
lending money from banks, and paying the debt service payments as a result. As
Aberdeen´s all-time leading goal-scorer Joe Harper told The Evening Express: ”You don't strive to become debt free and
then start blowing money.” So it´s very likely the club will not be
spending big bucks on the transfer market in the near future, or let their wage
bill get out of hand. In the long run, the stadium –project obviously remains a
priority, but how that will be financed, remains to be seen.
Regardless of what the club decides to do in the future,
they are certainly in a good position now without the debt burden. The
situation allows them to plan their future from a very different perspective
than earlier, when renegotiating the loans and handling the interest payments
dominated the finances. The new
situation is an excellent opportunity for the club, and if they will play it
smartly and figure out how to improve the profitablity, the future is looking
quite bright for Aberdeen FC.
