Trust board member’s analysis of club’s accounts

Trust board member and football finance expert, Keith Morgan, gives his take on the club’s latest accounts with a detailed examination of the financial position.

Cardiff City Football Club (Holdings) Limited has today filed their statutory accounts for the year to May 31, 2014. They do not make pleasant reading.

Despite record income for the club of £83.1m in the year (2013 income £17.3m) , principally due to the huge benefit derived from Sky and other broadcasting income (up from £4.9m in 2013 to £64.0m) , it still made an overall loss for the year of £12m.

The overall result is very disappointing – if a club can`t make money in the Premier League with all the broadcasting riches that brings , then when can it?

There are some items in the accounts which do go some way to explaining why a loss was made in the year.

1) The club obviously had to pay more in wages for a squad of Premier League players compared to the previous Championship squad cost (the total wage bill went up £20.4m from £32.8m to £53.2m).

2) The club bought new players at a total cost of £45.8m in the season. It is normal policy in football clubs to write this cost off equally over the length of the contract involved. So the cost in the 2014 accounts of wht is called amortisation of those contracts at £14.5m does not seem unreasonable (£45m over a three year contract period) but was considerably up on the 2013 figure of £7.4m because we bought more expensive players in transfer value terms.

At the end of each year , the club then has to do a further review of its assets to estimate if they have the same real value as their value in the books. In this case , the club decided that the playing squad at 31 May 2014 had a value of £6.6m less than their value calculated as above , so made a further write off in the accounts (the 2013 comparative figure was £4.0m).

3) The club lost £5.1m on player sales in the year (2013 only £345k). Players who were in the books at the time at a combined value of £8.2m were sold for only £3.1m.

As at May 31, 2014 , the total value of the playing squad was recorded as £25.2m (not unreasonable if this included the likes of Medel and Caulker so shouldn`t be much of an overall loss on players for the current season.

4) During the year the club spent £11.8m on the Ninian Stand extension. As with the playing squad above , the club then has to do a year end review to estimate if that is a fair value. It decided it was not , by nearly a half , so there was a further write-off in the accounts of £5.5m, or nearly half of what it had cost.

5) The club had “exceptional costs”( i.e those which don`t relate to normal business activities) of £2.0m . This was to do with the cost of terminating the contracts of Malky Mackay (and his support staff?) part way through the season.This is becoming a bit of a habit for the club as it also had £1.6m of such costs in 2011-12 in terminating the contracts of Dave Jones etc. There will , of course be further costs to the club in the 2015 in respect of terminating the contracts of OGS etc thsi season. This cost is becoming more “normal” for the club than “exceptional” in recent years.

6) On the good news front , the club again benefited from a finance cost credit (as opposed to a cost) in the year , but at £1.6m rather than the higher figure of £5.3m in 2013. This relates to a mix of interest charged by some lenders and interest waived by Vincent Tan, who charged no interest on his loans to the club throughout the year. I have no analysis of the split of this from the club , including an answer to when and where VT`s interest was charged in the accounts to enable it to be waived in 2013/14.(you can`t credit back interest if it wasn`t charged in the first place).

7) A strange note to the accounts appears for the first time this year (it didn`t appear in the 2013 accounts even though the 2014 accounts give a comparative figure for that year). This states that a very large amount of £1.68m (2013 £758k) was paid in the year to “key management personnel”. The club does not have to disclose , for confidentiality purposes , who these people are (they are not directors ) but my guess that this is a new accounting disclosure requirement and relates to the likes of OGS his predecessor as manager – not bad work if you can get it!! (I suspect Russell Slade will not be shown as earning anywhere near such an amount in next year`s accounts.)

8) In the year end balance sheet , the losses of £12m for the year take the overall balance sheet shortfall up to £65.8m. This is the net figure of assets less liabilities.

Assets were £91.4m (stadium and equipment £55.3m , players £25.2m , cash , debtors and stock £10.9m).

Liabilities were £157.2m (due to VT £122.8m , due to Mehmet Dalman £7.5m , due to Langston £5.6m , trade payables £8.8m other debts £12.5m). The other debts would have included normal debts due to HMRC payable after the year end and season ticket money received in advance of the current season.

In analysing the above figures I have assumed that the reference in the accounts to a £7.5m debt due to Torman Finance Inc is a company controlled by the club`s chairman Mehmet Dalman. I have done so on two bases – that I van think of no other director who would have put the money in and because I understand that MD has told the media that it is his company.

9) The accounts enable me to analyse how the amount due in respect of” loans from overseas shareholders and associated undertakings” (VT plus MD in the above figures) has grown from £65.8m in May 2013 to £130.3m in May 2014, an increase of £64.5m. The £64.5m was added to by a new share issue of £2.2m in the year , £3.1m from player sales and £4.2m generated from trading (cash generated is not the same as losses) . That total cash generated of £74.0m was then spent on players( £45.8m) , paying off other debt (£15.4m) and spending on the new stand extension and training ground (£12.8m).

In summary:

The club made an unexpected loss in 2013-4 , despite enjoying the benefits of a greatly increased income from its season in the Premier League.

As a result of the above losses , the club became even more insolvent than it had been before.

Of its total debts of £157m , all apart from £4.5m was technically repayable within one year after May 31, 2014 and the vast majority of it was due to Vincent Tan as a secured creditor which continues to represent a huge financial risk to the club.It is a risk which could have been avoided if the club`s directors had pursued the option  publicly offered by Vincent Tan during the above financial period to convert £130m of debt into shares to make the club solvent and virtually debt free (other than  accruing debts in the normal course of business).

My personal views on whether a failure to follow this course of action is the appropriate conduct for the club`s directors in carrying out their legal fiduciary duties of an insolvent company is a topic for a separate discussion.

Keith Morgan