Friday, February 28, 2014

The Myth of Mike Ashley's Financial Competence

Newcastle United have said they made "positive progress" when reporting on their latest accounts on the club website, citing a "strong commercial performance".  They've also correctly pointed at increasing match day income, increasing profit and increasing turnover alongside falling wages to paint a rosy view of Newcastle United's financial standing. 

It all sounds excellent and it's been enough to generate optimism from Alan Pardew who said “The finances of the club are in good shape. We know we've got to do some work in the summer after losing Cabaye, so you'd like to think we'll have to spend some of that this summer. The board have done well to get those figures, and we look forward to the next stage of our growth."

However, when you place the figures into context, have the board done that well?

Freddy Shepherd has been much maligned, while at the club and since, for spending too much on players that weren't good enough, for allowing debt to spiral while chasing trophy signings.  In seven years has Mike Ashley repaired any of the damage that was allegedly done back then?

In a word, no.

Even with the increase reported this week, at £17.1m commercial income today remains lower than it was back in 1998 (£17.3m).  It has reduced from a peak of £27.6m when Ashley bought the club, which is a 38% drop.



Match day income has generated £27.8m which continues the slow recovery following relegation, but it remains lower than any of the last four years under Shepherd.  It has reduced from a peak of £35.3m in 2005, which is a 21% drop.




On wages, as much as Ashley makes noises about reducing the wage bill, outside of relegation, this year is the first that he has spent less on wages than the previous year.  Of course the market dictates wages, in order to survive Ashley has had to pay something at least approaching the going rate so it is no surprise that wages have continued to go up and are 15% higher than when he bought the club.




High wages are not a problem if you have the turnover to afford them, so you need to look at how much of the money the club earns that it then hands straight to players and staff. 

At 64.3% this year, Ashley still exceeds the highest level that Shepherd ever spent on wages as a percentage of turnover (64.1% in 2000).  He has been able to recover the situation from his own massively inflated levels of 82% (Premier League) and 90% (Championship), but remains a couple of percent down on Shepherd's worst days.




This year, turnover itself is only marginally lower than the 2 previous peaks in 2003 and 2008.  This suggests Ashley has done well to maintain the level of income while people cancel season tickets and boycott any club products.  But when you graph TV money alongside it you can see exactly how this has been achieved.




While the TV and Turnover lines mimic each other almost exactly, there is a widening and closing gap that is almost imperceptible.  It's quantified by the "difference" line though, which shows how Ashley has failed here.  In 1998 the club earned £40m over and above the TV money, by 2007 that had increased to £60m.  Ashley has reversed that trend completely and returned us to only earning £40m more than what we get from TV.  He has increased our dependence on the TV cash which has doubled since he bought the club, hiding a multitude of sins.  This leaves the club far more exposed financially than we were in 08/09 in the event of relegation.

Finally, Debt.  The single most annoying thing I hear from uninformed fans is that Mike Ashley has cleared the debt at Newcastle.  Whether this is ignorance or a misleading choice of words, it's simply not true.  Newcastle United used to have debt to Barclays Bank, now they have debt to Mike Ashley, and it's a lot more than before Ashley arrived. 



Back in 2001 the debt was £66m, within 3 years Shepherd had almost halved that debt to £37m in 2004.  In another 3 years again it was back up to £70m, but there was a precedent at the club of reducing debt approaching that size.

On Ashley's arrival the mortgage on St James Park (not included as a debt when accounting up to then) became instantly repayable.  Rather than remortgage, Ashley paid that mortgage off and the debt was up to £111m within 2 years.  Following relegation this increased further to £140m.  Double what it was prior to the buyout.  He has since paid himself back £11m to satisfy some of the debt, but £129m remains outstanding.  

The only benefit Mike Ashley has brought to Newcastle United's finances is that unlike Freddy Shepherd, he can afford the massive debt he has accrued.  That was true on day one. His financial and business acumen has not improved anything whatsoever on the balance sheet.  The club are only able to report a profit off the back of increased TV revenue and the work done by Graham Carr on player trading.