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Tuesday, July 19, 2011

Manchester City's Amazing Deal: Know Your Rights


When Manchester City announced that their commercial agreement with existing shirt sponsor Etihad Airways was to be expanded into a 10-year deal worth up to £400 million, the reaction of most observers in the football world was one of disbelief. This hugely lucrative contract includes the renaming of the City of Manchester Stadium in a naming rights deal that is likely to be the highest ever signed in football.

Indeed, Garry Cook, City’s ebullient chief executive, described it as “one of the most important arrangements in the history of world football”, while the CEO of Etihad Airways, James Hogan, was even more effusive, employing the full range of business buzzwords, “This is a game changing partnership agreement that redefines the traditional sports sponsorship paradigm.”

Of course, many people immediately assumed that one of the principal drivers of this deal was City’s need to boost their revenue in order to cope with the imminent arrival of UEFA’s Financial Fair Play (FFP) regulations that compel clubs to live within their means (if they wish to compete in Europe). This was tacitly confirmed by Cook, when he admitted, “The backdrop, of course, is UEFA’s Financial Fair Play and this deal helps (us) to continue to make significant progress in that area.”

Exactly how much is impossible for external analysts to say, as City have yet to publish the financial aspects of the deal. Initially, most newspapers suggested that it was worth £100-150 million, but now seem to have settled on £300 million, rising to £400 million. The truth is that nobody outside the club really seems to know for sure. Indeed, City released a statement to this effect, “The financial details of the comprehensive agreement announced last week between Manchester City and Etihad Airways remain confidential and figures being speculated about are not accurate.”

"Cooking up a good story"

The lack of certainty over the value of the sponsorship has not prevented prominent figures at other clubs from criticising the deal. The first to express his doubts was Arsenal manager, Arsène Wenger, who has often lambasted the practice of “financial doping” in the past, “It raises a real question about the credibility of the financial fair play. That is what this is all about. They give us the message that they can get around it by doing what they want.”

Liverpool’s new owner, John W. Henry, quickly followed suit, when he claimed that “Mr. Wenger says boldly what everyone thinks.” The Reds’ managing director Ian Ayre was unsurprisingly of the same opinion, questioning the transparency of the arrangement, given the close relationship between the sponsors and City’s owner, “The guys from UEFA said there would be a robust and proper process about related pay transactions.”

Wenger agreed, “It looks to me that Platini is very strongly determined on this. He is not stupid. He knows that some clubs will try to get around that and I believe they are studying behind closed doors, how they can really strongly check it.”

Certainly, UEFA talked tough last year, when Andrea Traverso, their head of club licensing and financial fair play, described what would happen if clubs attempted to beat the system by taking advantage of loopholes, “Should the clubs put in place specific structures that allow them, in ways we didn't think about, to easily get around some of the principles, we could amend these rules to catch up with these situations.”

"Michel Platini: this is how FFP will work"

UEFA President, Michel Platini, ostensibly substantiated the concerns of City supporters that he was targeting their club when he specifically mentioned them last year during the announcement of the new financial measures, “Manchester City can spend £300 million if they want to, but if they are not breaking-even in three years, they cannot play in European competition.”

However, Garry Cook did not appear overly concerned, “We have a very open dialogue with UEFA. We have had several meetings with them and they are very supportive of our plans.”

Indeed, UEFA’s response to City’s mega deal was far more measured than a year ago, “We are aware of the situation and our experts will make assessments of fair value of any sponsorship deals using benchmarks.” So, City are no longer being singled out, at least publicly, with UEFA keen to stress that they will investigate all major sponsorships whatever the club, which “will then be considered by the Club Financial Control Panel, together with any relevant information the clubs present regarding the deals, when they assess the break-even requirements.”

So how will UEFA assess City’s deal?

This is effectively a three-stage process. First, they have to decide whether the deal is a “related party transaction”. If they believe that it is, then they have to estimate the “fair value” of the deal. Finally, if the actual value is higher than the fair value, the difference is deducted from the revenue included in the FFP break-even calculation.

"Every cloud has a Silva lining"

The notion of related party transactions is evidently important to UEFA, as no fewer than three pages of the FFP regulations are dedicated to defining exactly who or what is a related party. The key point here is that “close members of the family” are considered to be related parties, so long as they have “control” or “significant influence” over the club.

In this case, Etihad Airways is owned by the government of Abu Dhabi, whose ruler Sheikh Khalifa bin Zayed Al Nahyan is the half-brother of City’s owner Sheikh Mansour bin Zayed Al Nahyan. It is conceivable that City might be able to demonstrate that no influence exists, but it would appear that there is a prima facie case to answer.

It is not clear whether the fact that the majority of City’s commercial sponsorships come from the Gulf state, including the Abu Dhabi Tourist Authority, Etisalat and Aabar Investments, will have any bearing on UEFA’s ruling, but Cook himself has admitted that it is “clearly evident” that there is a strong Abu Dhabi bias. Anyway, for the purpose of our analysis, let us assume that UEFA do indeed treat this deal as a related party transaction.

In fact, the FFP regulations expressly include “sale of sponsorship rights by a club to a related party” as their first example of “transactions that require a licensee to demonstrate the estimated fair value.” This has also been verbally confirmed by UEFA’s general secretary, Gianni Infantino, who said that such transactions would be compared to similar deals already in place.

"Fast Kompany"

Again, John W. Henry expressed his scepticism, when he asked, “How much was the losing bid?” Wenger also cast doubts on the value of the deal, “If FFP is to have a chance, the sponsorship has to be at the market price. It cannot be doubled, tripled or quadrupled, because that means it is better we don’t do it and leave everybody free.”

However, Garry Cook argued, “There’s real value in that partnership. Financial Fair Play isn’t the driver, commercial growth is the driver.” That obviously makes sense for City, but how about Etihad? The airline’s executives would contend that this deal has already been superb for their profile, as evidenced by last week’s intense media exposure, and will provide them with a more than acceptable return on their investment.

Not only do City compete at the upper levels of the most viewed league in the world, but their global visibility has been dramatically enhanced by their qualification for the Champions League. Indeed, it is quite possible that the airline gets more bang for its buck with City compared to more established clubs, as the exposure is higher with such a project. Big money deals may be old hat at clubs like Manchester United or Real Madrid, but it’s a relatively new phenomenon at Eastlands, sorry, the Etihad Stadium.

"Nigel de Jong - Dutch courage"

Some have questioned how it could make sense for a loss-making company like Etihad Airways to splash out such a large sum in sponsorships, but that ignores the fact that this investment is all about “building the brand” in the same way as Emirates have done in the past.

At this stage, it’s worth pointing out that the FFP regulations refer to “fair value”, as opposed to the “market value” that is incorrectly used by much of the media. The difference can be seen by an analogy in the housing market. If you decide to sell your house and 99 people offer you £250,000, that would be considered fair value, but if one enormously wealthy individual likes it so much that he bids £500,000, that is the market value.

This is an important distinction, as market value would be easy to prove. Sports lawyer Andrew Nixon of Thomas Eggar LLP asserted, “Competition law challenges rarely succeed on sponsorship deals. There is a vast number of football teams and leagues airlines can sponsor and there are many viable market alternatives.”

Importantly, even if UEFA rules that City’s deal is above fair value, it is only the excess that would be deducted from the club’s income for the purposes of the FFP break-even calculation and not the entire agreement. In other words, if the deal is worth £30 million a year and UEFA consider the fair value to be £25 million, only £5 million would be deducted.

"Don't cry for me, Argentina"

UEFA’s difficulties in assessing the fair value of the deal are compounded by the structure of the deal, which covers far more than the stadium naming rights that were initially reported. This is just one element of a broad agreement that also includes an upgrade of the current shirt sponsorship and naming rights for the Etihad Campus, which encompasses a large part of the Sportcity site in East Manchester.

Furthermore, given the long-term nature of the contract, City could argue that they have built in uplifts, as the sponsorship market might be even more lucrative in ten years time. In addition, part of the money is almost certainly based on performance bonuses, e.g. qualifying for the Champions League or winning the Premier League, which might make it more palatable to the powers that be.

As I said earlier, nobody can honestly claim to know the actual revenue split of the deal, but we can make a reasonable working assumption that the shirt sponsorship is worth £20 million a year, the stadium naming rights £10 million and the campus another £10 million. As we assess each element for fair value, it will become clear why these values have been chosen.

An assumed shirt sponsorship value of £20 million would place City right at the top of English deals, generating the same annual revenue as Liverpool and Manchester United. Those clubs might argue that City’s historical performance should not allow them to be at the same level, but the counter-argument would be that nobody complained about Liverpool increasing their sponsorship deal by £12.5 million a season when they replaced Carlsberg with Standard Chartered last season, even though they had not qualified for the Champions League. Similarly, Tottenham managed to increase their sponsorship by nearly 50% from £8.5 million to £12.5 million (via an innovative combination of Autonomy and Investec), based on just one season in the Champions League.

If the net is cast a little wider, Bayern Munich’s sponsorship deal with Deutsche Telekom is worth around £23 million, though performance bonuses could take that above £25 million. That might seem reasonable for a club with Bayern’s tremendous record, but the value of deals at other German clubs is more debatable, particularly Schalke’s money-spinning deal with Gazprom.

Equally, the announcement of Barcelona’s first ever shirt sponsorship deal with the Qatar Foundation, a non-profit organisation, did not attract the same levels of opprobrium as City’s. This has been widely reported as €150 million over five years, but is actually worth up to €170m, as it also includes €5 million trophy bonuses and €15 million for “the concept of commercial rights”. So, it is likely to be worth €34 million a year (or just under £30 million at the current exchange rate).

"The Italian Job"

Others have pointed disapprovingly at the magnitude of the increase in City’s shirt sponsorship, but they have cited a current value of £2.3 million for the Etihad deal, which looks far too low. Deloitte and other reputable sources have said that this deal is worth £25 million over three seasons, so with uplifts, it’s around £7.5 million as we speak. Other commentators have probably confused this with City’s previous deal with Thomas Cook that was worth £2.3 million.

If UEFA genuinely want to investigate the value that companies obtain from sponsorship, it might be pertinent to ask why they don’t also take a look at Emirates, which sponsors many different clubs. Or indeed the ethicality of clubs being sponsored by gambling sites, which is a growing trend in football marketing.

Probably the most contentious aspect of the deal is the stadium naming rights, which is virtually unprecedented in football at its estimated value. There are very few decent benchmarks in the Premier League with the obvious comparative being Arsenal’s deal with Emirates, which was worth £90 million (£100 million less £10 million fees), covering 15 years of stadium naming rights (£42 million) and 8 years of shirt sponsorship (£48 million).

This works out to just £2.8 million a year for the naming rights, which is considerably lower than City’s deal, but it’s not really a fair comparison for many reasons. Not only have sponsorship values in general grown significantly since the agreement was signed, but also this particular deal is very much a special case, as Arsenal compromised on the total value so that the cash payments would be heavily front-loaded to help finance the construction of the stadium. When questioning the merits of City’s deal, Arsène Wenger drily observed, “We must have done a bad deal”, but there’s more than a grain of truth in that assertion with Emirates admitting that they “did well with Arsenal.”

"Get your Yaya's out"

It’s worthwhile looking at Germany for a more considered view on naming rights, as the market there is more than four times as large as in England, according to Sport + Markt’s 2011 Naming Rights report. Many clubs in the Bundesliga have sponsorship deals for their stadiums, including Borussia Dortmund (Signal Iduna), Hamburg (Imtech), Wolfsburg (Volkswagen), Stuttgart (Mercedes-Benz) and Eintracht Frankfurt (Commerzbank).

However, perhaps the best known is Bayern Munich, whose deal with Allianz is worth €90 million over 15 years, producing €6 million (£5 million) a year. On the face of it, this might suggest that City’s £10 million deal is over-valued at double the money, but this is far closer than the difference in overseas TV rights, which are around 14 times higher in the Premier League than the Bundesliga. Obviously, this is not quite the same thing, but it’s food for thought.

Or UEFA might look even further afield to America, where naming rights are a well-established feature of the sporting landscape. Virtually every major sports arena is now named after a sponsor that provides the club with a healthy source of income. The concept is nothing new under the sun either, as Times Square was named after the New York Times way back in 1903.

Although the link between football and American sports like baseball, NFL and NBA may seem rather tenuous, fundamentally the principle is identical and it seems quite pertinent with the influx of foreign owners into English football. Some of the stadium deals signed on the other side of the pond provide an indication of where this market may go in the future, going as high as $30 million a year paid by JP Morgan Chase for Madison Square Garden. Citigroup and Barclays both pay $20 million a season, the former to the New York Mets, the latter to the New Jersey Nets. Farmers Insurance have paid an astonishing $700 million over 30 years to name a stadium in Los Angeles where a team is not even established yet.

This does rather beg the question of how the sponsor benefits from such a deal: what’s in a name? The obvious answer is brand awareness with a raised profile, which is particularly well served if it is a new stadium. This point was seized upon by Ian Ayre, Liverpool’s managing director, who noted, “It hasn’t happened in Europe that a football club has renamed an existing stadium and it’s had real value.” This is correct, but it’s doubtful whether too many fans are attached to the name Eastlands (or even the City of Manchester Stadium). It would be a different story if this had been Maine Road. This is why it would be difficult to sell naming rights for grounds like Anfield or Old Trafford, as whatever name anybody tried to call the stadium, everyone would still use the old/real one.

One valid point about City’s agreement is that other Premier League clubs have to date been unsuccessful in securing large naming rights deals, though paradoxically this announcement could potentially help others make progress in their discussions. Chelsea have been looking to secure a partner for some time with analysts suggesting that £10 million is the objective, while Liverpool would be equally eager if they move to a new stadium, as Ayre confirmed, “We already have a very healthy dialogue in place with several leading brands regarding naming rights.”

"Hart and Soul"

That said, the Sports + Markt report confirmed that the value of stadium naming rights has been steadily rising, up over 60% from €48 million in 2007 to €78 million in 2010 with the total projected to increase to €87 million in 2011.

Given the difficulties inherent in finding solid comparatives for naming rights, it is possible that UEFA might look at this as just another commercial deal. If they did so, they could not help noticing that the bar is being constantly raised in the commercial sphere, e.g. contracts with kit suppliers. Liverpool’s recent £25 million deal with Warrior Sports is more than double the amount that they previously received from Adidas, helped by the relationship that the new owners enjoyed with the company, which already provides kit for the Boston Red Sox.

Similarly, Manchester United are in discussions to extend their deal with Nike for a record £450 million, which would be worth around £35 million a year, a £10 million increase. If you think that’s impressive, the French national team’s deal with Nike is worth €320 million over 7½ years, which works out to about £37 million a year for just a handful of matches.

In short, commercial opportunities in football are big business these days and City’s deal should be assessed in that light. In a strange way, it brings to mind the movie “The Wizard of Oz” and the famous line about not being “in Kansas anymore.”

With the exception of Manchester United (£81 million), English clubs have lagged their continental counterparts when it comes to making money from commercial opportunities, growing fatter on a diet of ever-increasing TV contracts. Not only do the Spanish giants, Real Madrid and Barcelona, earn substantially more at £124 million and £100 million respectively, but German clubs also consistently generate more income. This description does not just refer to Bayern Munich, who earn an astonishing £142 million commercial revenue a year, but also clubs like Schalke, Hamburg and Dortmund.

There’s certainly room for improvement, which is exactly what English clubs are belatedly doing. In 2010/11, Manchester United’s commercial revenue will exceed £100 million, while Liverpool’s £62 million will ultimately be boosted by £25 million growth from the Standard Chartered and Warrior deals. Likewise, Chelsea will increase their revenue by £12 million from £56 million following better deals with Adidas and Samsung.

In other words, it’s become a commercial arms race with each of the leading clubs significantly increasing their commercial revenue in their own way – and City are no exception.

Actually, I tell a lie, as City’s deal includes one unique element, the Etihad Campus, which is perhaps the cleverest and certainly the most innovative part of the agreement. This is a gigantic redevelopment project on 80 acres of land adjacent to the stadium, including a relocated training ground, youth academy, a sports science facility, office space, a call centre and City Square retail outlets. The academy will be seriously impressive, catering for up to 400 young players, with 16 football pitches, a 7,000 capacity stadium for youth matches and on-site accommodation.

"Opportunities (Let's Make Lots of Money)"

Such a development will not only benefit the community, but will bring a raft of sponsorship opportunities. Nothing like this has been done before, so it will be very difficult for UEFA to assess and almost impossible to deem unfair. In fact, this is exactly the type of expenditure that UEFA is trying to encourage with direct youth and community development costs being totally excluded from the FFP break-even calculation. For someone with pockets as deep as Sheikh Mansour, this is effectively “free” money, at least in terms of FFP.

On top of that, Annex X allows any profits from non-football operations to be included in the calculation, so long as the operations are: (a) based at, or in close proximity to, a club’s stadium and training facilities, such as a hotel, restaurant, conference centre, business premises (for rental), health-care centre, other sports teams; and (b) clearly using the name/brand of a club as part of their operations.

That sounds very familiar, so it’s a double whammy for City: the costs for this development are excluded, while the profits from the business located there are included. Not only that, but UEFA should be positively delighted, as it’s very much in the spirit of the stated objectives of FFP. Given those factors, the temptation must be to load up the sponsorship on this part of the agreement, so the deal split might be more like £10 million on shirt sponsorship, £5 million on naming rights and £25 million on the campus. We shall see.

Even with the benefit of this deal, City are still a long way from break-even, having recorded a thumping great loss of £121 million in 2009/10. The deficit is anticipated to be even higher last season, as the impact of the previous summer’s incoming players will have further increased the wage bill and amortisation. Nevertheless, City insist that matters will improve. Garry Cook stated, “Clearly our intention is to comply. FFP is on our conscience. We talk about it at every board meeting and it’s part of our long-term plan.”

Even the spendthrift manager Roberto Mancini now appears to have accepted the new financial realities, “FFP is for everyone”, saying that City would no longer “pay £10 million more than other clubs” for new players. Indeed, so far this summer, City have only signed Gael Clichy from Arsenal for £7 million and Montenegro defender Stefan Savic for a similar amount. That’s chicken feed by the Blues’ recent standards, though there’s still time for them to splash out on another big name.

That said, City are very keen to reduce their bloated wage bill by offloading players that no longer fit into Mancini’s plans, including the likes of Emmanuel Adebayor, Craig Bellamy, Wayne Bridge and Shay Given. From this season, the club’s revenue will also be significantly boosted by a Champions League campaign and, of course, the vast growth in sponsorship deals.

They will also be helped by the UEFA’s so-called “acceptable deviations”, namely the €45 million aggregate losses allowed in the first two-year monitoring period, which means that they don’t have to actually reach break-even from day one, so long as the owner covers the losses, which I think we can safely assume.

If that wasn’t enough, the glide path is made even easier by clubs being allowed to exclude wages from players signed before June 2010, so long as they are reporting an improving trend in their accounts. Granted, that “loophole” only exists for the first two monitoring periods (2013/14 and 2014/15), but it will buy City time to execute their strategic plan.

In essence, that has been to spend big in the short-term on transfers and wages in order to break into the Premier League top four, so that they can qualify for the riches of the Champions League, which is easily worth £30 million additional revenue a season. That extra income will contribute towards balancing the books while the academy can be established, producing top class players in-house, but the growth in commercial revenue is still a vital component to that strategy.

One of UEFA’s main objectives in implementing FFP was to “curb the excessive spending and inflated transfer fees and player salaries that have endangered football in recent years.” To a certain extent, there are some signs that this is happening, but new regulations often have unintended consequences and it appears that clubs are also striving to increase their revenue, as opposed to simply cutting costs.

Even though City’s revenue grew by an impressive 44% in 2009/10 to £125 million, which pushed them up to 11th place in the Deloitte Money League, this is still a long way behind other leading clubs. For example, it’s less than half of local rivals Manchester United (£286 million) and £100 million lower than Arsenal (£224 million). On the continent, both Real Madrid (£359 million) and Barcelona (£326 million) generate £200 million more than City every season.

City could look to increase their match day revenue, which they have partially addressed via a new agreement with the council, whereby the club pays them a fixed amount regardless of the attendance instead of the previous percentage. Any further growth would mean raising ticket prices, increasing the corporate seats or expanding the capacity of the stadium. The first two moves would be unpopular with fans, while the stadium expansion is longer-term in nature.

Plans exist to increase the capacity of the stadium from 47,000 to at least 60,000, but this would not be entirely straightforward, due to its awkward design. There have been some concerns that City would struggle to fill a larger stadium. Although their attendances have always been good (4th highest in the Premier League), they do not regularly achieve full capacity. That said, the crowds have risen since the move to Eastlands and continued success on the pitch should produce a further increase, as was the case with Chelsea after Abramovich’s arrival.

Television has been the big driver of revenue growth at football clubs and the latest Premier League deal for the three years between 2010/11 and 2012/13 helped increase City’s distribution from £50 million to £56 million. However, this is a tide that floats all boats with very little difference between the leading clubs. The real distinguishing factor is the honey pot known as the Champions League, so City’s qualification will have a transformational impact on their revenue, but it’s a one-step growth.

So, with match day and TV relatively fixed, it’s really down to the commercial side, notably sponsorships, to substantially close the gap with the big boys. Even before the blockbuster Etihad deal was announced, City’s revenue from commercial activities had more than doubled in 2009/10, including an increase of almost 400% in revenue from corporate partnerships up from £6.5 million to £32.4 million.

This explosive growth has inevitably raised suspicions, particularly given the provenance of the sponsors, but the criticism of City has taken on something of the nature of a moral crusade with many commentators accusing the nouveaux riches of buying success, after Sheikh Mansour ploughed close to a £1 billion into the club since acquiring them in 2008. There’s little doubt that City have contributed to the inflation in transfer fees and wages, with net transfer spend of £343 million in the last three seasons and a wages to turnover ratio of 107%, though they are hardly alone in that.

However, there are two sides to every story and there are a couple of facets of this deal that should be commended. From the point of view of the fan, it is surely better that a club tries to grow its revenue by taking more money from sponsors than raising ticket prices. This is where Arsenal’s criticisms ring a little hollow after they hiked ticket prices that were already among the highest by 6.5% for next season.

And while I yield to nobody in my admiration for Sir Bobby Charlton, his suggestion that big clubs should not think about renaming their stadium should also be considered alongside Manchester United’s stratospheric ticket price rises. Indeed, City were top of the ING Direct Value League last season, measured by comparing clubs’ season ticket costs with Premier League performance.

City’s commercial deal will also benefit the local community, which is why the council agreed to let City sell the naming rights of a stadium that is not owned by the club, but the council. In fairness, the club had already contributed £30 million to the stadium conversion costs after the Commonwealth Games, but the council’s willingness to let the deal proceed on these terms still came as a surprise to some.

However, the council will receive £20 million over the next five years, and, more importantly, their leader points to “the regeneration of the area, delivering significant community and economic benefits”, including the creation of new jobs. Faced by severe government cuts, the cash-strapped local authority have gratefully accepted City’s proposal for this deprived neighbourhood, describing it as “great news for Manchester, reinforcing our sporting, transport and economic growth.”

Of course, other clubs have also been very active in their community, but this plan is on an altogether different scale. Yes, it might feel a little like wealthy philanthropists establishing charities as a way of reducing their tax bill, but the fact is that the community will still gain.

This has not stopped other clubs from sniping, led by Bayern Munich chief executive Karl-Heinz Rummenigge, who also happens to be chairman of the European Club Association. When commenting on City’s large financial losses, “Kalle” sniffed, “Maybe they know a trick I don’t that will allow them to take part in the Champions League.” This is the same Bayern where two of their most prominent sponsors, Adidas and Audi, each own around 10% of the club.

Similarly, Wolfsburg is a wholly owned subsidiary of Volkswagen Group, who also pay for the club’s stadium naming rights and shirt sponsorship. Little wonder that Stefan Szymanski, professor of sports business at London’s Cass Business School, said, “If there’s a question of fair value in relation to an Abu Dhabi client sponsoring Manchester City, I see no reason why the same questions can’t be raised about corporate Germany sponsoring German football.”

"Gael force"

If UEFA did decide to broaden their investigations into other sharp practices, they could also take a look at the ridiculously unfair advantage enjoyed by Real Madrid and Barcelona with their huge slice of the Spanish TV pie. And while they’re about it, what about those clubs that directly inflate the transfer market by paying over the odds for average players (naming no names)?

My simple point here is that if you look hard enough, you will surely find reasons to investigate activities at numerous clubs, so it would be very harsh for UEFA to zoom in on City. There will be many such deals sailing close to the edge and there must be a better use of UEFA’s time than to review each one. Adopting a basic tenet of the English legal system, a reasonable man will know when a deal is completely ludicrous, e.g. a £200 million annual season ticket, but to my mind City’s deal does not fall into that category.

While UEFA’s credibility over FFP is at stake, there’s every indication that they will help clubs towards break-even, instead of throwing them out of Europe. Otherwise, in City’s case, it would feel like they should re-release The Clash’s seminal “Know Your Rights” with slightly modified lyrics: “You have the right to sponsors’ money, providing of course you don’t mind a little humiliation, investigation, and, if you cross your fingers, authorisation.”

"Sometimes a picture is worth a thousand words"

There may be a whiff of creative accounting around this incredible deal, but there’s also genuine substance and benefit to the community. City’s commercial growth might have been fuelled by money from companies that are at the very least “friendly” towards their owner, but when the deals are broken down the sums are not inordinately high, so are more or less in line with benchmarks.

Furthermore, the proceeds will be invested in a state-of-the-art academy with the objective of producing homegrown young players who will ultimately replace the imported “mercenaries”. It’s a well-considered plan that seems to me to be within both the letter and to a large extent the spirit of FFP.

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Tuesday, July 12, 2011

West Bromwich Albion's Risk Averse Strategy


At one stage last season West Bromwich Albion seemed destined to be relegated from the top flight yet again, despite the sterling efforts of top scorer Peter Odemwingie and the tough tackling Youssouf Mulumbu, but a timely change of manager inspired a solid series of results in the last few months, culminating in the club’s best ever finishing position of 11th in the Premier League.

Under the leadership of Roberto Di Matteo, West Brom made a bright start to the campaign, including an impressive victory against Arsenal at The Emirates and a draw against Manchester United at Old Trafford, but a dramatic loss of form and a crippling injury list led to the young manager being sacked in February after a lengthy run of defeats.

He was replaced by the vastly experienced Roy Hodgson, who proved to be the right choice for the Baggies, even though his time at Liverpool had hardly been a great success. The introduction of a new manager gave the team the necessary impetus to avoid the dreaded drop, mainly thanks to Hodgson’s well known organisational skills.

Although it is never fun to replace a manager, the West Brom chairman, Jeremy Peace, explained that this decision gave the club “the best possible chance of remaining in the Premier League.” In all probability, he had absorbed the lessons from previous campaigns, when the Albion board had remained loyal to their managers for too long, resulting in relegation.

"Roy Hodgson - job done"

They did not have to search too far in their memory for examples, as this was the case with Tony Mowbray in 2008/09 and Bryan Robson in 2005/06. Both of them had performed well the previous season (Mowbray securing promotion from the Championship, Robson beating the drop on the last day), but arguably they should have been let go when things started to go awry and not when Albion’s fate had been determined.

West Bromwich Albion are a club with a lot of tradition, having been in existence since 1878 and one of the twelve founding members of the Football League. They have only been champions of England once, way back in 1919/20, but have a very good record in the FA Cup with five victories. For fans of a certain age, Albion might be best remembered for “Big” Ron Atkinson’s exciting team of the late 70s, featuring such legends as Bryan Robson, football’s original “Captain Marvel”, the dazzling winger Laurie Cunningham and the powerful centre-forward Cyrille Regis, which came close to winning the title on a couple of occasions.

West Brom have spent the majority of their history in the top flight of English football, but were playing in lower leagues for 16 long years between 1986 and 2002, before embarking on a decade of promotions and relegations that has made them the very definition of a yo-yo club. In fact in the nine seasons from 2001/02, Albion achieved promotion from the Championship on no fewer than four occasions, but were also relegated three times. Boing Boing Baggies, indeed.

"Peace in our time"

After one promotion to the Premier League, Jeremy Peace commented, “We know how hard it is to stay there.” You can say that again. Until this season’s impressive recovery, Albion had only once spent two consecutive seasons in the top division – and that was due to the near miraculous escape in 2004/05, when they became the first club to survive in the Premiership after being bottom at Christmas, albeit with the lowest ever points total for a team not relegated.

Many have attributed the reasons for the club’s continual ups and downs to its cautious financial approach, which is very clearly explained each year in the chairman’s statement in the accounts. For example, in 2008 he said, “We endeavoured to strike the right balance between organising the club’s finances in a sensible way and giving ourselves the best possible chance of establishing West Bromwich Albion in the top flight.”

The message is hammered home virtually every time that Peace makes a public pronouncement, “Since I’ve been at the club we’ve modeled our budgets on the worst case scenario of going down, then finishing seventh and seventh (in the Championship) and not coming back up. The rationale is: if we go off the edge of a cliff, we have to survive.” Or, more pithily, “We are not going to go mad and bankrupt this club.”

There’s no doubt that West Brom are a very well run business, but there are two sides to every story and the result of this prudence is a low transfer budget and wage bill. The focus appears to be more on survival off the pitch rather than survival in the Premier League.

"Youssouf Mulumbu - a bargain buy"

Nothing wrong with that, many would argue. Indeed, refusing to break the bank makes perfect sense when the fate of less conservative clubs is considered: just look what has happened to the likes of Portsmouth, Hull City, Sheffield Wednesday, Crystal Palace, Bradford City, Derby County, etc. The list of clubs that have become financial casualties after attempting to “live the dream” (© Peter Ridsdale) is a long and sad one.

On the other hand, while Albion’s policy might be applauded by Michel Platini, it also makes it very difficult for the club to compete with clubs that are a little more cavalier with their spending. This risk averse stance has prevented Albion from moving to the next level, in contrast to clubs like Stoke City and Bolton Wanderers, and places them firmly among the favourites for relegation every season.

This is, of course, the eternal dilemma for clubs like West Brom that lack the natural financial resources of the leading clubs: Do they splash the cash in order to improve their chances of survival while risking their long-term financial future? Or do they take fewer chances with their money, thereby making it more likely that they will struggle on the pitch?

Clearly, West Brom got the balance right this season, as they ended up in a very respectable mid-table position, but they have not been so lucky in the last few years, leading to many fans questioning whether this safety-first strategy is the right one for the club.

"Scott Carson - an all too typical pose"

The man behind this frugal course of action is Jeremy Peace, who was appointed as a director in December 2000 and subsequently became chairman in June 2002 after a power struggle with the former incumbent Paul Thompson. As befitting a man with a background in corporate finance, there have been quite a few corporate reorganisations since then, the most recent of which saw the whole of the share capital of the club’s parent company, West Bromwich Albion Holdings Limited, being acquired in September 2010 by West Bromwich Albion Group Limited. The offer document stated that Pearce wished “to increase his control of the group” and the resulting movements left his shareholding at just under 60%.

When defending Albion’s transfer policy last year, Peace claimed that since he had become chairman in 2002, the club had invested a net £38 million in transfer fees plus a further £12 million in infrastructure developments at the Hawthorns stadium and the training ground. That’s a fair bit of cash for a club the size of West Brom, but the counter argument is that if they had increased their outlay, they would have got this back and more through a longer stay in the lucrative Premier League.

Even those at the club have been a little confused over whether Albion’s firm control on spending is the correct approach. Former manager Tony Mowbray first argued that it could work, “The teams with the biggest budgets and the best players in the world invariably win, but there’s got to be teams out there that break that mould”, citing the examples a few years ago of Villarreal in Spain and AZ Alkmaar in Holland. Later on in his tenure, after results turned sour, he referred to West Brom’s “very, very tight financial ship” with more than a degree of exasperation.

"Brunt and to the point"

There have been accusations that Peace is more interested in protecting his investment, rather than investing in the club’s development. While I have no way of understanding the chairman’s intentions, there is no doubt that he has done well financially out of his time at the Hawthorns, making a huge return of his initial investment of less than £3 million. Not only is the club estimated to be worth around ten times that amount now, but he has received a very healthy regular income stream.

Although dividends were last paid out in 2005, Peace’s remuneration is very good for a company with a turnover of just £28 million. According to last year’s offer document, Peace has a basic salary of £500,000 plus a discretionary bonus. He would certainly struggle to get a similar package at companies the same size in other industries.

Assuming that Peace was the highest paid director, he received £712,000 in 2010, up from £513,000 the previous year. In fact, he has trousered £1.8 million in the last three years. OK, this is not as high as some of his peers earn, e.g. David Gill at Manchester United, Garry Cook at Manchester City and Ivan Gazidis at Arsenal all earned a similar amount last year alone, but with the greatest of respect to Albion, they manage significantly bigger businesses.

In fairness (giving Peace a chance), West Brom’s financial performance in the period under his control has been very good with the club being profitable in four of the last six years. That included three years in the Championship, where it is extremely rare for clubs to thrive financially, but Albion still reported a £2.3 million profit last season. If non-cash items are excluded, EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) including profit on player sales was actually positive every single year.

This is very largely due to the operating profits, as the once-off profits on player sales have not been that significant, e.g. only contributing £2.9 million in 2009/10, though a further £1.7 million compensation was received after the management team of Tony Mowbray, Mark Venus and Peter Grant moved to Celtic. The only time this made a substantial difference to the results was in 2007/08, as the club faced a second year in the Championship, when profit on player sales was £18.1 million with Peace commenting, “My attitude changed then from not allowing players to go to saying we’ll let them go for the right price.”

However, one advantage of Albion’s conservative policy is that they don’t need to hold a fire sale of their star players if they are relegated. When Mowbray was confronted by this situation in 2009, he said, “We are not in a position where we have to get £20 million into the club quickly because of any shortfall of revenue after relegation.”

All these figures are from the accounts of the football club, but the differences with the financials of the holding company are very small. No accounts have yet been published for the new company, WBA Group Limited, but we can see from the accounts of the former parent undertaking, WBA Holdings Limited, that in the three years between 2007 and 2009 the differences were not higher than £1 million, mainly operating expenses.

One point that is striking about the club’s accounts is the excessively prudent accounting treatment of impairing (or writing down) the value of the players’ registrations each time the club is relegated. In particular, this reduced the club’s reported profits by £17.8 million in 2009 and £9.4 million in 2006. If these adjustments had not been made, then West Brom would have reported a large profit in those years too instead of losses. In other words, without these non-cash accounting entries, the club would have been profitable in every one of the last six years.

Although the chief executive, Mark Jenkins, has claimed, “it’s what a lot of clubs choose to do”, this is actually the exception rather then the rule. Although there is some merit in the argument that players would have to be sold a little cheaper after relegation, it seems absurd that they would lose so much value. Indeed, part of this adjustment has often been reversed when players have been sold for more than the revised value. The suspicion is that this accounting treatment is more about lowering fans’ expectations in the transfer market rather than a reflection of reality.

The fact remains that West Bromwich Albion have been a consistently profitable operation, whatever the accounting creativity might suggest, which is something that very few others manage in the demanding world of football. Indeed, they were one of just four Premier League clubs that made a profit in 2009/10, their profit before tax of £0.5 million only surpassed by Arsenal, boosted by hefty player sales and property development, and their Black Country neighbours Wolverhampton Wanderers.

Granted, Albion were in the Championship that season, but it’s the same story in the lower division with only four clubs making a profit (Burnley, Leeds United, Reading and Swansea City), so the club’s ability to run its business well is no mean feat and should be duly recognised, as it’s an achievement that few others have accomplished.

This is particularly impressive if you consider the club’s revenue disadvantages. In 2009/10, their revenue was only £28 million, which might have been one of the highest in the Championship, but pales into insignificance compared to the big hitters in the Premier League, where six clubs generated more than £100 million. The top four in the Money League, in particular, appear to be on a different planet: Manchester United £286 million, Arsenal £224 million, Chelsea £210 million and Liverpool £185 million.

This helps to better explain West Brom’s prudent policy. As Mark Jenkins explained, “If you don’t have the huge resources of the teams in the top half, you must make the money you have go as far as you can.” Like many other clubs these days, Albion are hugely reliant on television revenue. In the Championship, this accounted for 61% (£17 million) of their total turnover with match day income only worth £6 million and commercial revenue less than £5 million.

In the Premier League, this trend will be further exaggerated, as the TV deal is worth substantially more. My estimate for Albion’s 2010/11 revenue is £61 million, largely based on £48 million of TV income, which is a fairly safe assumption, as the Premier League has already released figures for the distributions last season. This would bring Albion’s dependence on TV money to just under 80%, a very large figure, but no worse than the likes of Wigan Athletic and Blackburn Rovers.

Obviously, West Brom’s revenue has been on a rollercoaster ride in the past few years, moving up or down, depending on whether the club has just been promoted or relegated, e.g. leading to a £20 million increase in 2009, followed by a £19 million decline in 2010. These movements are very largely down to the differences between the TV deals in the Premier League and Championship, though the blow has been softened by parachute payments.

In fact, Albion’s TV revenue of £17 million in the Championship in 2009/10 largely consisted of the Premier League parachute payment of £12.4 million. The Championship fixed distribution only amounted to £3.5 million (£2.5 million from the Football League and £1 million solidarity payment, again from the Premier League), though there were also £1.3 million fees for cup games and being shown live.

This is the reason why talk of a £90 million bonanza after promotion to the Premier League is a bit misleading for clubs like West Brom. This is normally calculated based on a minimum of £40 million TV money (for the club finishing bottom) plus £48 million future parachute payments and at least £2 million from higher gate receipts and improved commercial deals.

However, two points should be made here: first, the incremental growth in TV income for West Brom is “only” a minimum of £24 million (£40 million less £16 million); second, the parachute payments are spread over four years: £16 million in each of the first two years following relegation, £8 million in years three and four. That’s still a tidy sum, but it’s not available all at once.

Nevertheless, the impact of the Premier League TV deal can be clearly seen in West Brom’s revenue growth, as their TV revenue rose significantly every time a new deal was signed. This was the case in 2009, following the 3-year deal for 2008-10, and then again in 2011, thanks to the 2010-13 deal, which grew a lot on the back of a substantial rise in overseas rights.

The distribution methodology of the Premier League TV revenue is therefore of particular interest to Albion. Much of it is shared out equally, namely 50% of the domestic rights and 100% of the overseas rights, but the rest of the domestic rights money is allocated differently: (a) 25% is for merit payments, where each place in the final league table was worth £757,000. Its importance can be seen by looking at the difference between the £7.6 million Albion received in 2010/11 after coming 11th against the £0.8 million received in 2008/09 when they finished 20th. (b) The remaining 25% comes from the facility fee, which is based on how many times Sky broadcast a club’s games live. Each match is worth around £500,000, so Albion actually received £1 million more in facility fees in 2008/09 (12 matches) than 2010/11 (10 matches).

This is one way in which the rich get richer in the Premier League, as the leading clubs tend to earn more by consistently finishing in higher positions and are broadcast more frequently than the “lesser lights”. That said, the range between the TV earnings of the top club compared to the bottom club in England is relatively narrow, so last season Manchester United received £60 million, while West Ham got £40 million. However, the top clubs’ total TV revenue is usually much higher, mainly due to the money those teams earn from the Champions League.

Match day revenue of £6 million declined £0.7 million in the Championship, as the average attendance fell from 25,800 to 22,200. This was fairly typical of the trend in previous years of the attendance being around 25,000 in the Premier League, falling to 22,000 in the lower division. Indeed, in 2010/11 the crowds again climbed back to 24,700, though this is still one of the lowest in the Premier League, only ahead of three clubs: Bolton, Wigan and Blackpool.

West Brom’s gate receipts may be a little low, but they are about the same level as clubs like Blackburn, Bolton, Birmingham and Wigan. To place this into context and highlight the size of Albion’s challenge, both Manchester United and Arsenal receive more than 15 times as much match day income at £100 million and £94 million respectively. Perhaps more pertinently, Wolves earned 75% more than Albion with £10 million.

Another reason for the decrease in gate receipts is due to Albion cutting ticket prices by a third since 2007, partly in recognition of the difficult economic conditions in the West Midlands. Furthermore, the club has frozen the price of season tickets for the last two years with an adult season ticket giving a saving of up to 34% (the equivalent of approximately six free games). As of 1 July, West Brom had sold 17,500 season tickets and they were well on course to beat last year’s tally of 18,000.

In fairness, Albion’s crowds are close to the full capacity at the Hawthorns of 26,484. After investing around £4 million in stadium refurbishment in the last couple of years, notably the West Stand, Jeremy Peace recently announced plans to increase the capacity to 30,000 by 2014, regardless of which division the club finds itself in, though, true to form, he could not resist mentioning the “apparent financial insanity of such a move.”

Commercial income is also on the low side at only £5 million, a figure that is comfortably surpassed by virtually every other Premier League club. While it is undoubtedly a tough market, it is quite telling that Wolves generate more than twice as much commercially as their local rivals. Merchandising has held steady at around £2 million a year, but sponsorships and other commercial income fluctuate, so were £3 million in the Championship, but £1.5 million higher in the Premier League.

The club has advised potential investors that it faces strong competition in the West Midlands in attracting sponsors, particularly as many of its local rivals also play in the Premier League, which helps explain why it went without a principal shirt sponsor for two seasons between 2008 and 2010, having different sponsors on a game-by-game basis. This uncertain situation changed last season when Homeserve paid £750,000 and the club has recently inked a two-year agreement with Bodog, an online gaming company, for a club record £1 million a year.

Things seem to be looking up commercially, as chief executive Mark Jenkins commented, “Following our most successful Premier League campaign, there was a great deal of interest in becoming our club sponsor.” Similarly, Adidas have replaced long-serving Umbro as kit supplier in a deal worth £1.5 million a season, an increase of £0.5 million.

There’s still a long way to go before West Brom can secure sponsorship deals at the exalted level of the leading clubs, such as Manchester United and Liverpool, who both receive £20 million a year in shirt sponsorship, but at least they’re now on a par with clubs like Sunderland, Stoke and Wolves.

However, Albion fans should not expect their club to suddenly go crazy with the board promising to “continue to control costs in a prudent manner.” As with all other football clubs, the most significant expense is the wage bill and West Brom managed to cut this by 26% (or £8 million) in 2009/10 from £31 million to £23 million following relegation. Although this was one of the highest in the Championship, the club admitted that even this was “only sustainable whilst we benefit from the Premier League parachute payments” and the point is that they managed to reduce it from a level that was one of the lowest in the Premier League.

This sensible approach was explained by Jeremy Peace, “We dovetail our players' contracts to fit (our) three-year model. We don't want to be liable for contracts we can't pay if the parachute money runs out. We also flex contracts downwards by between 25% and 40% if we go to the Championship.” Indeed, Albion are one of the few clubs that mention the total wage liability for the remainder of player contracts, which was estimated at £33 million in the Championship, though it was acknowledged that this would increase during a Premier League season.

Even with the lower wage bill in the Championship, the wages to turnover ratio was quite high at 80%, a fair way above UEFA’s recommended 70% upper limit. That said, according to the latest Deloitte study, the average in that division was 88%, as clubs extended themselves in order to reach the riches of the Premier League, so Albion are still better than most in that respect. Albion’s wages to turnover ratio is also (naturally) dependent on the turnover, so it averages 73-80% in the lower division and 57-65% in the Premier League with its higher revenue.

Pearce has noted an obvious issue with the wages to turnover ratio, namely that it effectively means different things to different clubs: “If Manchester United have £200 million of revenue and they spend 55% of it on player wages, you have £110 million. If you have about £50 million and you spend the same percentage, you have about £25 million (sic), so the budget isn’t as big.”

This is reflected in West Brom’s position in the wages league. It would be unfair to compare the £23 million that they paid in the Championship in 2009/10 with the larger amounts spent in the top tier, as the club acknowledged that they would have to pay higher wages “in order to be competitive and therefore have a longer presence in the Premier League.” However, even if we were to assume a 50% increase to £35 million (£4 million more than the last time Albion were in the top flight), this would still leave them in the bottom three, only ahead of Wolves’ £30 million and Burnley’s £22 million.

The challenge faced by Albion was outlined by former manager Tony Mowbray, “Historically the money you spend relates to where you finish in the league. The teams with the biggest budgets finish at the top. The teams with the smaller budgets finish at the bottom.” This theory has been borne out over the years, including last season when the five teams with the highest wage bills (all well over £100 million) finished in the top six of the Premier League: Chelsea £173 million, Manchester City £133 million, Manchester United £132 million, Liverpool £114 million and Arsenal £111 million.

Having said that, the total wage bill was inflated last season by an innovative bonus scheme for staying up, whereby each player in the 25-man Premier League squad was given £5,000 a point, resulting in a payment of £235,000 (for 47 points), which worked out at a total cost of nearly £6 million.

Player amortisation, the cost of writing down transfer fees over the length of a player’s contract, is normally an important expense at football clubs, but it is very low at West Brom at only £3 million last season, partly due to the club’s aggressive impairment policy and partly due to the relatively low amounts spent in the transfer market.

West Brom’s net transfer spend in the last decade is only £28 million and it’s actually been falling in that period, as only £10 million was spent in the last five years, compared to £18 million in the previous five. Indeed, last season, when you would have expected some major investment after the team’s return to the Premier League, the net expenditure was only £4 million, which was one of the lowest in the division, meaning that Di Matteo had to largely “keep faith” with the existing squad.

In the past, Peace has explained his transfer philosophy: “A club has to bring in the right type of players with half an eye on where we might end up whether that be the Premiership or the Championship.” In fairness, this is where Albion’s reputation as a yo-yo club must hurt them, as players are wary of joining them for fear that their time in the top flight will be brief, while players are also tempted to jump ship after relegation.

This is one of the reasons why Albion recruited Dan Ashworth in 2008 as Sporting and Technical Director with responsibility for recruitment, the other being “to ensure our limited resources are invested wisely.” An indication that this policy was beginning to bear fruit came when West Brom was represented by three players at the 2010 World Cup, but Roy Hodgson has warned that the scouting staff will find it increasingly difficult to unearth unpolished gems for small sums of money like the Cameroonian playmaker Somen Tchoyi and Scottish midfielder Graham Dorrans.

It’s also fair to say that Albion have not always been successful with their purchases (Luke Moore and Scott Carson at £3 million apiece come to mind), but this is perhaps inevitable, given the budget restrictions placed on them. As Mowbray lamented, “Invariably we are in a market where we can only afford young or inexperienced players.”

Where Albion have been quite astute is in the timing of their sales with many players leaving initially on loan deals with a view to a permanent sale afterwards, which has helped them in their tax planning. This was the case for Curtis Davies’ big money move to Aston Villa, but also applied to Jonathan Greening. Paul Robinson and Tomasz Kuszczak.

As a natural consequence of Albion’s parsimonious approach, their debt is very low at just £10 million, which is a bank overdraft secured on the club’s assets, though this has been steadily increasing since the club had net funds of £6 million in 2005. This is attributed to “continued infrastructure improvements at the stadium and the training ground” plus “investment in the playing squad.”

The balance sheet also includes £10 million owed to group undertakings, but this may well net out to zero on consolidation in the holding company (as in previous years). I note that last year’s offer document mentioned the possibility of debt increasing to finance the cash offer, but it was stated that this would not exceed £6 million.

The cash flow statement is quite revealing. In the years that Albion compete in the Premier League, they generate a reasonable amount of cash from their operating activities, but this is then used up by expenditure on player registrations and other assets. As Mark Jenkins commented in December 2009, “Compared to other clubs we’re relatively strong, but we are nearly £7 million in debt. We have had one season in the Premier League and yet the cash position has hardly changed.”

This means that the cash flow over the past six years is slightly negative at £10 million, though this has been boosted by the issue of new capital to existing shareholders and loans in 2005. However, the club has still managed to pay off some of those loans since then. The question the fans might ask is whether it would have been preferable to maintain those loans (or even take on a bit more debt) in order to strengthen the squad.

The club should be praised for improving its facilities, especially the academy and training ground, which should pay dividends (in football terms) in future years and boosts the value of the club’s assets. In fact, the balance sheet is fairly robust with net assets of £6 million, though it also has a couple of hidden reserves. First, the land and buildings are almost certainly worth more than the value in the accounts, while the book value of the players of under £7 million (largely due to the impairment policy) is absurdly low. The respected Transfermarkt website gives a market value of over £60 million for the first team squad.

"Put your hands up for West Brom"

It’s therefore a little surprising that the club received no firm offers in 2008 when it invited “proposals ranging from a long-term relationship with a new substantial shareholder all the way through to someone who may want to take the club over.” While Peace accepted that “the reality is that to be successful in the Premier League a club of our size needs significantly more financial backing”, Albion did not really give prospective investors much of an opportunity, as the process only lasted six weeks, so some have questioned whether he really is a willing seller.

Of course, even if the price paid for the club were quite low, any purchaser would still have to put in substantial funds, in the same way that Steve Morgan had to pledge £30 million when he bought Wolves, so it’s hardly a no-brainer investment. That said, it could be an attractive buy, so long as it remains in the richest league in the world.

Indeed, every season that the club survives in the Premier League is worth well over £50 million in revenue, which should generate a healthy surplus with Albion’s strategy. This will be a challenge, but the club has consistently topped The Times’ Financial Fair play league, which identifies those clubs that obtain the best results per money spent.

"James Morrison - rider on the storm"

West Brom are not a million miles away from getting the balance right, hence the splendid result in last season’s Premier League. If Hodgson can maintain his record of outperforming his budget for a couple of seasons, the financial gap between Albion and less well-managed clubs will increase, giving them more room to manoeuvre. At the moment, the club is caught in a “chicken and egg” situation, where frequent relegation supports the prudent approach, but that policy might well be the reason for those relegations.

Jeremy Peace encapsulated his ethos, when he stated, “The problem is ambition, a terrible word which means spending money. It can wreck a club.” You can see where he’s coming from, but this might be the moment to up the ante. Although spending money is clearly no guarantee of success, a gentle loosening of the purse strings might make a big difference to West Brom’s prospects. There’s no need to go mad, but it should not be beyond the wit of a savvy board like Albion’s to find a happy medium.

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