Aberdeen FC Financials

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.