Peterborough United´s financials

For fans of Peterborough United, it has been another rollercoaster-year. On April 24th, the club parted ways with manager Graham Westley, who had been in charge since last September, when he replaced Dave Robertson. Westley´s fate was sealed after Peterborough lost to Scunthorpe United 2-0, a defeat which saw the club slipping back to 14th position in League One. The season has been a rocky one for the Posh. Westley was able to lift the club to play-off places in January, but since then the form has dipped again. In January, the club sold forward Conor Washington, and went on to lose six of their next seven games, effectively ending hopes of promotion to the Championship this season. As the season is nearing its end, Washington is still the club´s top scorer with 15 goals this season. The club´s colorful owner Darragh MacAnthony has been less than pleased about the club´s situation, and told BBC in the spring: ”I employ over 300 people at Peterborough United, not one of those employees right now has a job in the summer.” 

In a way, this season´s wild swings in form and results are not really all that surpising. The current season is actually very telling of the way the club has been performing in recent years. A lot of it has to do with the owner, Darragh MacAnthony, and the business model he has brought to the club. MacAnthony is an entrepreneur, who has made his fortune through real estate, namely MRI Overseas Property, a company that helps people buy and sell property abroad. Developing property abroad was obviously a profitable business, since in 2007 MacAnthony´s worth was estimated at £ 150 million by the Sunday Times rich list. According to BBC, MacAnthony felt he needed an outlet, and in 2006, at the age of 30, he took the helm at the club. A year later, after a dispute with Peterborough landlords was settled, he became the sole owner of the club. According to BBC, by this time he had already pumped over £ 5 million into the club. At this point, Peterborough were playing at League Two, and MacAnthony was quick to promise the fans something better, a promotion from League Two to the Championship within two years. While doing this, he wasn´t too concerned about what kind of reactions his methods would cause in the football community. As he told BBC in 2014: ”To be not liked by a lot of people in football, I couldn't care less”. 

Under MacAnthony´s reign, the Posh have certainly made the leap forward. His promise to get the club to Championship within two years was fulfilled, but unfortunately the club has been unable to stay there. In fact, Peterborough´s results have been resembling that of a yo-yo:

 

 

It certainly hasn´t been boring for the fans of Peterborough, or for MacAnthony himself. As he told BBC in 2014, talking about the club´s performances: ”It's like my life in a way. It's what I expect. I wake up and never expect a normal, boring day.” 

Looking at the club´s finances, it is no surprise that the club´s form has been swinging wildly. MacAnthony has brought a relatively unconventional business model into the club,  relying heavily on active player trading. In other words, buying low, and selling high. If that sounds like a simple way to operate, it is. In theory. In practice, not so much. But Peterborough have certainly been succesful in doing that. According to calculations made by Daily Mail in January 2016, Peterborough have made a staggering profit of £ 21,58million on player sales  in the last five years. Some of the most notable transfer have been as follows:

 

At this point it shoud be noted that  ”profit” above is the difference between the price the player was bought and the price he was sold. While that is the logical way of thinking, in the club´s accounts the matter is dealt with a bit differently. When a player is bought with, for example, £ 10 million, and his contract duration is 5 years, his original value in the club´s balance sheet is £ 10 million, which is amortised over the duration of the contract. In this case, the annual amortisation would be £ 2 million (£ 10 million/5 years). If the player in question is then sold, the club´s profit is the selling price – the value left in the balance sheet. For example, if the player in question here would be sold for £ 10 million after two years, the club´s profit would be £ 4 million (10 –(10-2x2)). This is just to point out the difference in how these kind of profits are handled in the official accounts and how they are perceived in real life. Also, the selling price may not always be strictly for the seller. According to Peterborough Today (December 2015), half of the selling price of Britt Assombalonga for example, went to the striker´s former club Watford.

If we look at Peterborough´s profit & loss account from the last four years, we can clearly see the impact that the player sales have had on the club´s figures. 

 

The first thing to note here is that in the first two years of the figure above (2011-12 & 2012-13) the club was playing in the Championship, so the turnover was obviously much higher than in the two seasons since then. Relegation takes its toll on attendance figures, ticket prices, other commercial income etc. For many clubs, the biggest challenge then is to adjust the expenses (namely, wages) accordingly. For Peteborough, relegation clearly had an effect on profitability, as the club´s EBITDA (earnings before interests, taxes, depreciations and amortisations) went from less than £ -1 million to £ -2,8 million in 2014, improving slightly in 2015. 

When looking at the EBITDA, it should be noted that since the club does not own the stadium it plays in, London Road (currently known as ABAX Stadium, due to ABAX´s sponsorship deal with the club), the rent it pays affects the EBITDA. According to the accounts of 06/2015, the rental commitment increased to £ 380 000 per annum in 2014, when the Moys End stand construction was completed. 

Operating income (which includes amortisations and depreciations) went from  -1,4 million to £ -3,9 million. These are obviously not flattering numbers, although the club´s wage bill was actually quite modest at the Championship -level. Wages/turnover -ratio was around 50-60 %, which is really not that big, especially at the Championship, where many clubs aim for promotion to the lucrative Premier League. In fact, Peterborough´s wage bill was the smallest in the Championship in 2012-13, and wages/turnover -ratio the second lowest. After relegation to League One, the wage bill has declined, but the wage/turnover-ratio increased up to 81 % in 2013-14, then dropping to 73 % in 2014-15. This was not surprising, since the turnover dropped by almost £ 4 million. It would have been very hard to lower the wage bill so that wages/turnover -ratio wouldn´t have increased.

 

 

 

As mentioned above, the club´s EBITDA has been negative the past four years and operating level has been even worse, due to amortisations of intangible assets (player registrations) and depreciations (tangible assets). But this is where the club´s true business model comes into the picture.

In each of the past four years, the most notable part of the profit&loss account is the ”profit on disposal of player registrations”. The club has made a significant profit through player trading every year, the combined profit from the last four years is a huge £ 15,6 million. Even after paying interest payments of £ 200-300 000 every year, 3 of the last 4 years have been profitable, with a total profit of £ 3,4 million. And that´s the basic idea behind the business model that the club has adapted, it doesn´t really matter if the club makes losses a the EBITDA -level, since they actively compensate that through player trading.

The strategy is perhaps even clearer when looking at the cash flow statement:

 

 

Since the operations of the club are not profitable, cash flow is always negative after operating activities. Interest payments weaken the cash flow further, but negative capex (capital expenditure) compensates for that. But what is important to note here is that the club is not just making money by selling its assets. They are also investing in new players all the time. In the last four years, cumulative payments to acquire new player registrations have been £ 5,6 million. That´s not a small amount for a League One club by any means. But the money gained from player sales far outweighs the money spent on acquisitions. From a financial point of view, that is very succesful player trading. In 2011-12 the money made from player sales was so good, that the club managed to pay back some of its loans.  The same was done the next season (although repayments were far smaller), which caused the cash reserves to decline substantially. The next season it was the other way around, as cash reserves improved quite a bit. What is worth noting here is that apparently the ”change in cash reserves” -figure takes into account the bank overdrafts, as well as the actual cash. Another thing worth pointing out is that while the club has paid back some of the ”other loans”, it hasn´t used player sales strictly for loan repayments. In 2013-14 the club withdrew £ 0,4 million of other loans in addition to profit from player sales, to rid themselves of bank overdraft (£ 1,9 million at the end of season 2012-13). In 2014-15 the player sales were not enough to cover the operating loss, so the club withdrew new short term loans in order to cover the gap. 

Because of their succesful way of doing business, the club´s balance sheet has remained in a relatively healthy state:

 

As always, we need to remember that this is a football club we are talking about, so how healthy the balance sheet is, is truly relative. The equity ratio has been firmly negative, due to losses the club has been making. Since MacAnthony has chosen to finance the operations through loans rather than equity, the only way for the club to improve the equity has been to make profits. That is something the club has indeed done, but not enough to turn the equity positive. But then the club´s net debt hasn´t really increased in the last four years either.

Obviously the clear majority of the club´s financing comes from the owner, Darragh MacAnthony. According to the accounts, the amounts that the club has owned to DMA Holdings S.A, a company in which MacAnthony has a financial interest, are:

 

 

These loans are not listed in the accounts as director´s loans or anything of the sort. My guess is that they are included in ”other creditors”. No exact interest rate is defined in the accounts, but according to the accounts of 06/2015, a commercial interest is charged on this loan. MacAnthony also personally guarantees the club´s bank overdraft up to an amount of £ 250 000. Since the loans owed to MacAnthony are not interest free, they most likely make up a lion´s share of the club´s total interest payments, which were £ 344 220 in 2015. 

One of the weaknesses of this kind of business model is, that it is difficult to find stability, when you have to sell players when their market value is high, whether or not it is the optimal time for the club. That is likely one of the reasons why Peterborough have been promoted or relegated 5 times in the last 9 seasons. If they get promoted to the Championship again at some point, some part of the strategy might have to be reconsidered. As mentioned earlier, Peterborugh´s wage bill in the season 2012-13 was the lowest of the Championship.

While they did manage to hold on in the Championship for two seasons, surviving with a wage bill like this is very hard. If Peterborough want to get back to the Championship, stay there, and possibly even battle for promotion to the Premier League, they will likely have to increase the wage bill. That, in turn, would weaken the operating profit, and put even more pressure on player trading, if the club wants to continue to cover the operating losses through player trading. Which in turn might even increase the instability on pitch. To sum it up, as succesful as that business model has been for Peterborough, it does have some problems, that will likely need to be thought out carefully. Obviously that also depends on how far the club wants to go.  Considering how business minded MacAnthony has been with the running the club, it´s hard to imagine Peterborough splashing out on the wages like Bolton or Blackburn in the graph above, though. One way forward might be to find a way to increase the club´s attendance figures. The ABAX stadium currently holds 15 314 people, but the club´s average attendance hasn´t surpassed 10 000 even when they were playing at the Championship. Finding a way to improve those figures might give them some room to increase the wage bill, as well.

As it stands, Peterborough are at the 13th place in League one at the moment. They won´t be promoted this season, but not relegated either. Peteborough Today reported MacAnthony saying in February that he wants to take the club back to the Championship within 18 months. If that doesn´t happen, he will find another owner with different policy. Based on that statement, next season will be a big one for Posh.  And for the fans, it most likely will not be a boring one, either.