A Nottingham Forest blog with a concern for the wider game
This is the third in my series of articles looking at the finances of the three biggest East Midlands clubs. As Leicester City were the last to issues their accounts for 2011/12 they are also the last to be reviewed.
So far Nottingham Forest have shown how it is possible to consistently lose money over time and amass a very large debt without making progress in the league. Although they managed three playoff semi-finals during Nigel Doughty’s ownership their only period outside of the Championship was when they fell through the trap door and spent three years in League One. Now under new ownership their debts have been reduced to a much smaller but still substantial £20M as they once again try to mount a new challenge for promotion. (Read article here)
Derby County meanwhile whilst seemingly trying to manage their costs better and take a more youth focused approach to squad development are starting to amass debts as they find it difficult to make ends meet in the Championship since their Premier League parachute payments dried up in 2010. They now have a £34M bank debt which can only be reduced by player sales, owner bail outs or promotion. (Read article here)
So, on to Leicester City who on the surface are the most extravagant of the three clubs, buying a lot of players in an effort to get a quick promotion. All of the East Midlands Big 3 are now in foreign ownership but during the period under review, 2010-12, Leicester seemed from the outside at least to fit the stereotype best.
Recent History of Leicester City
Leicester City were sold by Milan Mandaric to Asia Football Investments on 12 August 2010 and so this seems like a good point to start looking at the financial performance of the club.
In the season prior to the takeover, 2009/10, the club reached the Championship Playoffs (finishing in 5th place) before losing out at the semi-final stage to Cardiff City on penalties. Announcing the sale of the club Chairman Milan Mandaric said that the takeover would help Leicester “push forward to compete harder for a place at the top table of English football” and the expectation was certainly to kick on with the new financial strength the transaction would bring.
In the summer of 2010 Nigel Pearson left the club to become manager of Hull City and was replaced by Paulo Sousa who led them into the new season under their Thai ownership. A very poor start to the season, however, saw Sousa depart in favour of much travelled former England manager Sven-Goran Eriksson in October. He made an immediate impact and lifted the team to 10th place by the end of the 2010/11 season, still well below the playoff spot achieved the year before despite significant financial investment from the new owners.
Another slow start to the 2011/12 season saw Eriksson deposed after just 13 games as the club convinced Nigel Pearson to return, arriving on 15 November 2011 and leading the club to a 9th place finish. With the financial statements to 31 May 2012 now available it is these two seasons that I will focus on, using the one before as a base comparator.
Financial Review 2010-12
Leicester City is a good sized Championship club with revenues of £17.4M in 2010/11 which rose to £21.4M in 2011/12 as a result of increased sponsorship from a combination of Air Asia, Amazing Thailand and King Power. This increase in revenue has been dwarfed, however, by increases in costs which have more than doubled from £18.3M in 2009/10 to £39.8M in 2011/12.
Staff costs in 2011/12 were £27.7M, more than twice that of Derby and £10M more than Forest, and although Leicester finished higher in the league than their two local rivals a 9th placed finished meant they took no part in the playoffs never mind achieving promotion.
Non staff costs have also risen sharply from just £3.8M in 2009/10 to £12.1M in 2011/12. Although no explanation is given in the accounts as to what has caused this sharp increase. The result is that operating cash losses have grown from £2.0M in 2009/10 to £11.2M in 2010/11 and to £18.5M in 2011/12 and that is before transfer activity is taken into account.
In 2010/11 the club had a reasonably modest £2.3M net cash spend on transfer fees but in 2011/12 they invested heavily with a net spend of £11.5M. In addition the accounts note that a further £8.5M could become due on past transfers based on appearances and the overall success of the team. The notes to the account also advise that the owners provided £15.6M additional funding between 31 May 2012 and 30 November 2012 (after the date of the financial statements) to further invest in the playing squad.
All of this means that the club’s debts have risen substantially. As at 31 May 2012, so not including the £15.6M referred to above, the club’s net debt stood at £85.4M. This is made up of £67.5M owned to the parent company, £17.2M in finance leases and £1.0M in external loans offset slightly by £0.3M of cash at the bank.
It is no wonder that there is a sense of nervousness around the team’s recent performances on the pitch. Whilst at one stage they seemed to be on track for promotion recent results have seen them looking over their shoulder at teams outside of even the playoff places. With a £33.9M cash loss last year, a brought forward debt of £85.4M and confirmation of significant further funding since that date failure to win promotion could be devastating.
It may be that the club’s owners are happy to continue funding huge losses in the Championship but having taken over the club when it had finished in the top 6 three years of failure following an enormous financial outlay are surely unlikely to be greeted with indifference.
From an outsiders perspective the financial position of Leicester City is quite galling, after all this was a club that went into administration as recently as 2002 and as a pioneer in football financial meltdown avoided football sanctions for doing so. Since then other clubs have received points penalties but Leicester were able to pick up where they left and have apparently done exactly that.
I know that this will not make me popular with Leicester City fans who will see this as an attack from a Forest fan but that simply isn’t the case. It is one of the reasons that I have been uncomfortable with Forest’s financial management over recent years and why I have some respect for Derby’s attempts to bring their finances under control..
It is not entirely the club’s fault. The huge imbalance between Premier League and Championship revenues makes it very difficult to put together a promotion challenge in the short term but very few clubs are prepared to take a long term view, preferring to gamble now than build for the future. Fans demand that their club is ambitious and spends money on big name signings, but they cannot then complain if the club is bankrupted by failure – indeed the cost of failure should be higher than a few points deducted from your total.
Maybe Leicester will be promoted this year, they remain in the playoff places at the moment, and if they do their fans will celebrate, but if they fail are they prepared to face the consequences?
Photo: James William Edmund Doyle [Public domain], via Wikimedia Commons