Why Bolton Wanderers Have So Much Debt

Although this is the most open Premier League for many years, it is still somewhat of a surprise to see Bolton Wanderers sitting proudly in fifth place after just over a third of the season has been completed. Not only that, but they have achieved this with a brand of passing, attractive football that most fans thought beyond them. It’s a far cry from this time last year when Gary Megson’s team was being pilloried by Bolton’s own supporters for the awful combination of poor results and an ugly, negative playing style.

This inevitably resulted in the “Ginger Mourinho” being sacked in a desperate attempt to stave off the threat of relegation and the club replacing him with Owen Coyle, whose move from local rivals Burnley was highly controversial, not to mention acrimonious, but the change has paid off in the best possible way. Bolton steadily moved up the table for the rest of last season, ultimately finishing in a comfortable 14th position, while this year’s start has been the club’s most promising for some time.

Moreover, this has not been accomplished via the attritional football long associated with the Trotters, but with an attacking approach and a sense of panache that has the purists purring in appreciation. As the club’s accounts drily explained, “Owen has embarked upon a programme of evolutionary change to the playing style.” The manager has certainly worked a minor miracle with forwards Kevin Davies and Johan Elmander, whose transformation from lumbering plodders to skilful tyros has been nothing short of remarkable. Indeed, this led Barney Ronay in the Guardian to gush, “Bolton are a beautiful thing these days.”

"The dynamic duo"

Of course, Bolton have not been without success in the past, but they have not won much in their long history, even though they were one of only 12 founder members of the Football League. You have to go back all the way to the 20s for their most successful era, when they won the FA Cup three times, with their only other trophy coming in 1958, when they again won the FA Cup by beating Manchester United 2-0 with two goals from legendary centre-forward Nat Lofthouse. More recently, they qualified twice for the UEFA Cup in 2005 and 2007, but their real success has been to survive in the Premier League for ten consecutive seasons.

However, all that glitters is not necessarily gold and, in stark contrast to Bolton’s fortunes on the pitch, the club’s finances have seen better days. A couple of weeks ago the 2010 accounts revealed a huge loss of £35 million plus a significant rise in the net debt to £93 million, thanks to an unhealthy mixture of low turnover and an inflated wage bill. Just as Bolton’s side appear to be on the verge of great things, it looks as if it will have to be broken up by selling its best players, maybe as soon as the next transfer window.

Chairman Phil Gartside admitted that star defender Gary Cahill and Elmander may have to be sacrificed if the right offers come along, “If a Champions League team knocks on the door in January, that’s the best time to sell an asset, because those teams will pay the money.” This could be particularly relevant for Elmander, as the Swede is out of contract at the end of the season, so could leave for no fee, unless his contract is extended. Coyle has insisted that he is under no pressure to sell, stressing that the chairman and owner were already well aware of the financial situation in the summer, and they did not force his hand at that stage. He has a point, but cynics might feel that he is merely talking up the price and someone will still have to be sold in January to balance the books.

So just how bad is the debt?

If you look at it in purely numerical terms, quite frankly, it looks terrible. In fact, the net debt of £93 million is an astronomical sum and is the sixth highest in the Premier League. Outside of the Big Four of Manchester United, Chelsea, Arsenal and Liverpool, only Fulham have more debt than Bolton and it is arguable that two of those clubs will soon be in a better position, as Liverpool’s previous acquisition debt is being repaid by their new owners, while Arsenal’s debt is rapidly falling due to proceeds from property sales.

What’s even worse is that Bolton’s debt is increasing at a rate of knots. Having held steady in 2005 and 2006 at around £29 million, since then it has more than tripled, rising 45% in the last year alone from £64 million to £93 million. That’s worrying by anyone’s standards, as it indicates a business model that isn’t working.

At least there is no immediate pressure from the banks, as the composition of the debt has changed in the last 12 months with almost all of it (£85 million) now owed to the club’s owner, Edwin Davies, via his company Moonshift Investments Limited, leading Gartside to emphasise, “We are in a fortunate position in that a small percentage of our debt is owed to the bank” – though subsequent to the release of the accounts, Gartside has stated that the club has now agreed new banking facilities with Barclays.

"Cheer up, Phil. The team is in 5th place"

In the meantime, last year’s financials clearly indicate how much Bolton rely on the backing of their owner, as he has covered their increasing losses over the last few years. As Gartside put it, “Without Ed’s support, we would be watching a very different standard of football. He is the only reason we are in the Premier League. He has given us a huge amount of money.”

Actually, Davies has not exactly “given” the money to the club, as Bolton have to pay a price for his generosity. Last year, his company was paid £3.6 million in respect of “arrangement and guarantee fees” for the £85 million loan, which is linked to an interest rate of 5%. It’s also repayable on demand, though the directors have received assurances that repayment of the loans will not be demanded within 12 months of signing the financials statements. In fairness, these terms are an improvement on the previous year, when the interest rate was a very high 10% on a £23 million loan, which produced a £2m payment to Davies.

The loan is also secured by a floating charge on the club’s assets, while Moonshift is owed a further £2.7 million by the club for what is mysteriously described as a “player success fee”.

In short, it is clear that Davies’ funding has been vitally important to the club, but it is equally clear that this is a commercial investment that has provided the owner with a healthy income stream during a difficult economic climate. The club’s chief executive, Allan Duckworth, acknowledged that the owners’ loans charged interest “at a premium which reflects risk, which is high at a football club.” As a result, the club has been paying £4.5 million a year in interest, which is not massive, but it is a sizeable burden when the turnover is only around £60 million.

"Will Cahill be off in the next transfer window?"

In contrast, Mohamed Al Fayed has lent almost £200 million to Fulham interest-free, which makes a significant difference to the West London club’s financials. Furthermore, much of this debt is unsecured, which means that Al Fayed has no guarantee of repayment.

To be fair to Davies, Bolton were in dire straits when he paid £2.25 million in 2003 to increase his shareholding from 29.7% to 94.5%, effectively taking over the club and taking his total outlay at that stage to £14 million. The club had almost collapsed under the burden of debt accumulated from building the Reebok stadium and the adjoining hotel and offices with one of its banks, the Co-Op, seeking to force repayment of its loan. With other banks unwilling to lend, Davies was the only man to come forward and provide the money needed in order to avoid entering administration. For taking that risk alone, Bolton fans should be grateful, so he has arguably earned his reward.

Obviously much of the credit for the club’s progress must go to the players and various managers, not to mention old-fashioned attributes like good coaching, tactics and team spirit, but it is difficult to believe that Bolton would have done as well without Davies’ money. Indeed, Gartside stated, “That this achievement corresponds with Eddie’s investment in the club is not coincidental.” The importance of this funding is evident when examining Bolton’s financials.

The last time that the club made a profit was back in 2006 when they just about broke even, but since then the losses have been steadily rising: 2007 £2 million, 2008 £8 million, 2009 £13 million and 2010 £35 million. The widening of the loss in the last year, when it very nearly tripled, is most shocking, and cannot simply be ascribed to the £4 million cost of restructuring the management team. The truth is that there are fundamental flaws in Bolton’s operating model. Even the relatively small loss in 2007 was boosted by the once-off £3.5 million sale of naming rights for the training ground.

When Gartside recently raised the possibility of a wages cap in the Premier League, he exclaimed, “We keep upping the income and we keep losing money. It’s ridiculous.” Well, he’s half right, if you examine how Bolton moved from a £4 million profit in 2005 to a £35 million loss in 2010. Yes, there has been some revenue growth, but not much – and almost all of it has come from television. Gate receipts have actually fallen in that period. On the other hand, you can see why Gartside is concerned about wages, as these have grown by £21 million, which is almost double the gain from TV. On top of that, player amortisation has risen £14 million and other costs £10 million.

In short, Bolton’s small revenue growth has been eaten up and then some by the cost growth, mainly due to investment in the football team. They have eased their financial indigestion by reaching for the pill bottle named “Debt”.

In similar circumstances, other clubs have opted to redress the balance with the sale of players, but that is not the case for Bolton. In fact, profit from player sales actually dropped from £8 million in 2009 to just £0.1 million last year. As Gartside explained, “We are not a selling club, but a trading club. One of the problems we’ve had over the last three or four years is that we’ve not done much trading.” That’s true, but one of the other problems they have is that it will require a lot of player “trading” to make a meaningful dent in the losses. For example, Bolton averaged profits on player sales of £8 million in both 2008 and 2009, but that did not prevent overall losses of £8 million and £13 million in those years.

Nor are Bolton assisted by their ancillary activities. This analysis is based on the accounts of Burnden Leisure PLC, which is the parent company of the football club (Bolton Wanderers Football & Athletic Company Limited), but also includes the joint venture for a hotel (Bolton Whites Hotel Limited). Some see this as the saviour of the football club, but the reality is that this operation also loses money. The segmental analysis in the accounts reveals that the hotel produces annual revenue of around £8 million, but does not contribute anything to the bottom line, as it has reported losses for the last six years. In 2010, the loss was just under £2 million with trading conditions being described as “extremely testing”.

Given the size of Bolton’s turnover, they are almost bound to struggle financially. If we look at the Premier League revenue from 2008/09 (the last season when we have comparatives for all clubs), we can see that only four clubs reported lower revenue than Bolton (£52 million from football income) – and two of those (Hull City and WBA) ended up being relegated.

You would expect Bolton to be significantly behind the Big Four (Manchester United £279 million, Arsenal £224 million, Chelsea £206 million and Liverpool £185 million), but they also earn a lot less than clubs like Aston Villa (£84 million) and Everton (£80 million), while even Stoke City generated more income (£54 million). In the 2009 annual report, Gartside voiced his concerns, “Addressing this polarisation of clubs and increasing revenue differentials will be the major strategic issue for the Premier League over the coming years.”

Given these limited resources, Bolton’s lengthy tenure in the Premier League has to be considered a fantastic achievement, though it can be looked at in two contrasting ways: either they are punching well above their weight, or they are spending way above their means and are only propped up by a generous benefactor.

The revenue mix is particularly revealing. Match day revenue of £5 million is pitifully small, while commercial revenue of £9 million is actually inflated by including £3 million of unexplained “other football income”, leaving the underlying balance as a tiny £6 million. What this analysis also highlights is the enormous reliance on broadcasting revenue, which represents over 70% of Bolton’s total football income.

If we again look at season 2008/09, we can see that only Wigan are more dependent on TV revenue than Bolton. It’s little different in 2009/10 with Bolton earning £39 million of their £54 million total revenue from the small screen. As such, their turnover is heavily influenced by the timing of broadcasting deals, with the £8 million increase in 2008 revenue being almost entirely due to the new Sky deal.

Happily for Bolton, they can anticipate a similar increase in revenue from next year, as the central payments from the latest three-year deal, which kicked off in the 2010/11 season, will climb by about a third, largely thanks to the increase in overseas rights. TV really has become football’s equivalent of the goose that lays the golden egg, but that fable did not have a happy ending and some believe that the next sale of TV rights in 2013 might bring in less money, due to a number of threats (market saturation, competition, legislation, technology).

At present, Bolton are one of the beneficiaries of the Sky revolution with £37 million of their £39 million broadcasting income emanating from Murdoch’s empire. Surprisingly, Gartside has argued that clubs like his should receive even more from the central distribution pool, even though the Premier League already distributes TV revenue more fairly than any other major European League with 50% of the domestic rights and 100% of the overseas rights allocated equally.

However, not all of the money is allocated in this manner. Merit payments account for 25% of the domestic rights with each place in the final league table being worth £800,000. In addition, the remaining 25% of the domestic TV rights comes from the facility fee, which is based on how many times Sky broadcast a club’s matches live. Each team must be broadcast a minimum of ten times a season with a maximum of 24, but this tends to benefit the big clubs. For example, in each of the last two seasons Bolton have been shown the minimum ten times, while we have had the pleasure of watching Manchester United the maximum 24 times.

So, the difference between Manchester United’s TV allocation of £53 million and Bolton’s of £37 million is around £16 million, of which £9 million is due to merit and £7 million comes from the number of live matches. That does not seem too unreasonable to me. In fact, given that the overseas rights have become a far larger proportion of the total deal, in relative terms the smaller clubs are receiving more than ever before. Of course, the real differential in terms of TV revenue comes from the Champions League, which in fairness is outside the control of Scudamore and Co.

At least TV revenue has been increasing, but this is not the case for gate receipts, which have been declining and now account for only 10% of football income. Despite a slight increase in this revenue stream in 2010, thanks to three more home matches, gate receipts have fallen 45% from their peak of £9.8 million in 2006 to £5.4 million in 2010. Most of this can be attributed to average attendances plummeting from 26,000 to 22,000, but even when there was a temporary increase in crowds in 2009, the money still diminished, as Bolton have reduced ticket prices in an attempt to entice fans back, including the introduction of cheaper season tickets, £49 for children and £299 entry level for adults.

A couple of years ago, the club admitted that falling attendances were a real concern, pointing to factors such as price, kick-off times and levels of TV coverage, but it may simply come down to the effects of the recession, which have hit the north-west of England very hard. It should also be noted that their catchment area includes plenty of other clubs, so there’s a lot of competition for the floating fan.

"Welcome to Planet Reebok"

Whatever the reasons, the fact remains that Bolton’s average attendance last season was the fourth lowest in the Premier League and was actually smaller than seven clubs in the Championship and one in League One. This obviously causes them huge financial problems when competing against other clubs. OK, the likes of Manchester United and Arsenal may be out of sight with their match day revenue of over £100 million, but Bolton’s competitors for European qualification also generate much higher gate receipts than their £5 million, e.g. Spurs £40 million, Aston Villa £23 million and Everton £22 million.

There should be no issue with the ground, as the Reebok Stadium is a modern, all-seater with an appropriate capacity of just under 29,000, though some would prefer the location to be nearer the town centre, as opposed to Horwich, a suburb of Bolton. The club moved to the new stadium in 1997, after playing at Burnden Park for over 100 years, with a view to generating more income, not just from football, but other facilities including a hotel, conference centre and restaurant.

Ever since the new stadium was built, Reebok have been an important part of Bolton’s commercial revenue. They acquired the stadium naming rights, which have been extended until 2016, continue to provide the club’s kit and were the shirt sponsors until 2009, when they were replaced by betting specialist 188BET in a two-year agreement.

"The Flying Finn"

Gartside described this as a “fantastic and lucrative deal”, but the reality is that the £750,000 they receive annually is one of the smallest in the Premier League and is actually lower than the £950,000 that Reebok used to pay. This is part of an innovative “two for the price of one” purchase from 188BET, who also sponsor Wigan for £650,000. Clearly, you would not expect Bolton to match the £20 million earned by the likes of Manchester United and Liverpool, but they could certainly aspire to get the same as neighbours Blackburn Rovers, who earn twice as much (£1.5 million) from their contract with Crown Paints.

Corporate hospitality has also suffered, down 25% in 2010 as a result of the business downturn, while merchandising and licensing sales might have grown by an “encouraging” 16%, but it’s still only worth £1.4 million.

It remains to be seen whether the club can drive growth in these areas, but there may be some hope if Bolton can continue to deliver success on the pitch, while “re-branding” themselves as an exciting team. Gartside alluded to this a couple of years ago, “Commercial success of a football club will to a large extent reflect longer term success on the field.”

So Bolton suffer from structural revenue challenges, but the 2010 £35 million loss was primarily blamed on “further investment in the football team”, resulting in an increase in player wages and amortisation. In order to “improve the quality and depth of the squad”, the likes of Chung-Yong Lee, Zat Knight, Paul Robinson, Sam Ricketts and Sean Davis were added, while loan agreements were taken out for Jack Wilshere, Ivan Klasnic and Vladimir Weiss. As a consequence, the wage bill increased by a hefty 14% last year from £41 million to £46 million.

However, this was far from an isolated incident as wages have risen by over 80% since 2005, while in the same period revenue only increased by 20%, contributing to a very high wages to turnover ratio of 86%. This is not only way above UEFA’s recommended maximum limit of 70%, but has been described by chief executive, Allan Duckworth, as “unlikely to prove sustainable in the long term.”

In fairness, it’s not as if Bolton’s wage bill is excessive in absolute terms, as they currently lie 12th in the wages ranking for clubs in the Premier League. As we speak, they could actually be even lower, as they could easily be overtaken by Blackburn, Fulham and Wigan when those clubs publish their 2010 accounts, while newly promoted Newcastle certainly pay more.

Moreover, the club is well aware that the wage bill is too high, as they have been adversely impacted by two important factors, one of which is specific to Bolton, while the other has affected all clubs. First, the consecutive changes in management have “led to the club carrying a larger than optimum playing squad and backroom team.” Second, the club wanted to shed players in the summer, but the transfer market has died with far fewer deals taking place.

This meant that no senior players left the club during the season, resulting in the senior squad increasing in size from 24 players to 30, while the full squad of players averaged 57 compared to 45 in the previous season. Gartside promised that the club’s wage position would recover next summer when nine players will be out of contract, “If you took four or five players out of the squad, you’ve probably got £8 million of salaries that you don’t need.” It’s an obvious area to target and one that should not be too difficult to improve.

You would have to believe that the board directors were capable of addressing the financial issue, given that they are very comfortably rewarded for their efforts. Last year, the highest paid director (most likely Gartside) trousered a hefty £584,000, including a £156,000 bonus, while the other director (presumably Duckworth) received £483,000, including a £178,000 bonus. If they make this much money, when the company reports a record loss of £35 million, heaven knows how much they would be paid if the club actually made a profit. Nice work if you can get it.

"The boy can play after all"

The logical result of the club’s recent transfer policy has been a significant increase in player amortisation from £2 million in 2006 to £16 million in 2010 with this expense rising 33% last year alone. The concept of amortisation confuses many people, but it is simply how accountants handle player transfers. Instead of booking 100% of the player’s transfer price as a cost in the year of purchase, accountants treat players as assets, so the cost is capitalised and written-down (amortised) over the length of his contract. At the end of the contract, he is considered to have no value, because he can then leave the club on a free transfer.

It’s probably easier to understand with an example. Bolton bought Fabrice Muamba for around £6 million on a four-year contract, so the annual amortisation is £1.5 million. After two years his net book value in the accounts would be £3 million (the original cost of £6 million less two years amortisation at £1.5 million per annum).

Whatever the accounting treatment, what is indisputable is that Bolton have somehow transformed themselves into a buying club in recent times. Whether this cavalier approach makes sense, only time will tell. Gartside told supporters, “We have spent more money on players than we have in the past in the last three or four years” and the figures endorse this view. Up until 2003, Bolton made good money from their activities in the transfer market, generating a net surplus of £25 million in the preceding five years, but in the subsequent eight years they have incurred a net spend of £37 million. Apart from 2007/08 when the club’s purchases were funded by the sale of Nicolas Anelka to Chelsea for a club record fee, every year in that period has seen outgoings.

Of course, none of this would have been possible without their benefactor providing the cash, which was explicitly acknowledged in the 2007 annual report, “Once again the ongoing support of Edwin Davies and parties connected to him has enabled this investment in the playing squad.”

As the club understands that future “investment levels must be managed within the overall capacity of the business”, they have committed themselves to a new philosophy whereby “young, promising players will be acquired as rough diamonds to be polished and cut. Some will be kept to secure the backbone of the team, but others will be sold to finance further investments.” This youth strategy will benefit from the “Bolton Wanderers Eddie Davies Football Academy” in Lostock, which became operational at the start of the 2008/09 season and features a number of high quality grass pitches and an all weather training facility.

Whether this bold new vision is pursued is a matter of conjecture, because the very same report also states, “ongoing investment in the playing squad will remain a priority.” In a way, this is perfectly understandable, as this is their best chance of fulfilling their primary objective, which is “simply to retain the club’s Premier League status” – pretty much at all costs. Gartside has talked of a “fear factor beginning to emerge amongst top clubs outside the top few” surrounding relegation, due to the financial gap between the Premier League and the Championship, which tempts clubs to over-spend in order to keep their seat at the top table.

"Keep your eye on the ball, Kev"

Granted, the parachute payments paid to clubs dropping out of the Premier League have been increased to £48 million (£16 million in each of the first two years, £8 million in each of years three and four), but this would still represent a drastic reduction for Bolton. They can expect around £45 million revenue from the Premier League next season, so they would have to somehow cope with a £29 million reduction in their total revenue. Unless Davies provided even more funding, the club would be unable to meet their payroll, so would have to offload players in a fire sale, making it more difficult to be promoted back into the top division – a vicious circle.

This has lead to Gartside, also a Football Association board member, making a series of proposals for a two-tier Premier League with 18 teams in each. Although this theoretically might have some merit (winter break, fewer matches), you don’t have to be the world’s biggest cynic to detect a healthy degree of self-interest in the plan, as one of the primary objectives is clearly to give clubs relegated from the Premier League a softer financial landing.

His initial plan included the awful idea of doing away with promotion and relegation, though this has since been watered down to allow limited scope for teams moving up and down via some sort of “size and finance threshold”. In other words, replacing a meritocracy with a franchise system. Maybe he’s forgotten that this would have prevented his own beloved Bolton from climbing from the old Fourth Division in 1988 to the Premier League in 1995. Fortunately, these proposals have so far been rejected, but you get the feeling that won’t stop Gartside from knocking at the door again.

The extent of the chairman’s nervousness is all too easy to appreciate when you read the going concern warning in the latest accounts, where the club advises that it has a shortfall in its cash flow projections and is “in discussion with lenders regarding potential further borrowings in order to provide the company with adequate working capital facilities.” There was a similar warning in last year’s accounts, the only difference being that it spoke of “the potential securitisation of future guaranteed broadcast revenues”, i.e. borrowing against the Sky TV money. It is evident from the cash flow statement that the business has only been maintained through financing, either with bank borrowing or loans from the owner, which has amounted to £64 million in the last four years.

This benefactor model works fine while Davies is there to provide support, even though some might accuse the club of benefiting from a form of financial doping, but it does beg the question of how strong his commitment is. Although he was born in Bolton and grew up in the town, Davies, who made his fortune from the manufacture of thermostatic controls for kettles, moved away in his early twenties. When he bought the club in 2004, a former director, Brian Scowcroft, expressed the fans’ concerns, “Now we’re owned by an Isle of Man tax exile via his Bermudan trust. It leaves us feeling very vulnerable and with many unanswered questions.”

"Tonight, Matthew, I'm going to be..."

That said, nearly seven years later Davies is still at the club and has continually made funds available. Gartside, for one, has no doubts over the owner’s dedication to the cause, “We have no indications from Eddie whatsoever that he wants to exit the club. He still enjoys the games and is a massive supporter of the club.” However, there must always be some misgivings when a club is so reliant on one individual. He might get bored, suffer ill health or run into financial difficulties. Such a scenario may be unlikely, but it has afflicted a number of clubs, e.g. Portsmouth, Rangers. Even if the spirit is willing, the bank account might be weak. According to the 2009 Sunday Times Rich List, Davies’ net worth is £65 million, which might be more than enough for you and me, but does not leave him much more to invest in the football club.

Although the club claims that it is trying to wean itself away from relying on financing from Davies, we have seen that this is easier said than done. Nor would it be a straightforward task to find a new investor. Indeed, Gartside admitted, “I’ve been chairman for 12 years and on the board for 21. We’ve never had an approach to buy it in all that time.”

The club might own its ground and other assets (including the hotel), but it still has net liabilities of £56 million, though much of this shortfall would be made up by putting a real world value on the players (intangible assets). These are reported in the books at £24 million, but the directors estimate the market value to be approximately £64 million. This provides some under-pinning of the debt, but does not help to release cash to make loan repayments - unless players are sold. This is the sate of affairs facing the club (and Owen Coyle) right now.

"Owen Coyle - plenty to think about"

So Bolton may not be the most compelling investment, either from a yield or growth perspective, but there could be some light at the end of the financial tunnel via a couple of developments in football governance. Firstly, the introduction of Premier League squad limits should reduce the numbers required for the playing squad. Then, the advent of the UEFA Financial Fair Play Regulations should theoretically reduce the inflationary wage pressure from the top clubs. Of course, the latter is a double-edged sword for Bolton, as they are a long way from break-even and have less revenue potential than the larger clubs. It would be a horrible irony if Bolton did manage to qualify for Europe again, but found themselves excluded for financial reasons.

Maybe we should just enjoy the moment. Bolton have made enormous progress on the pitch since they were voted the seventh most hated club in English football in 2008. They are now playing some delightful football, eradicating the memory of the dismal fare served up by the teams sent out by Megson and Allardyce, and few neutrals would begrudge them their lofty position in the Premier League. If they maintain this level in spite of their financial constraints, it will be a simply stunning achievement. The odds are against it, but stranger things have happened.

Why Ajax Are No Longer Dutch Masters

For football fans of a certain age, the name Ajax resonates with history, bringing back memories of the early 70s when the famous club from Amsterdam won the European Cup three years in a row, displaying a brand of “total football” that also inspired the Dutch national team in its dazzling run to two World Cup finals.

Guided by the prodigious talents of the legendary Johan Cruyff and ably supported by the likes of Ruud Krol, Johan Neeskens and Arie Haan, Ajax established themselves as one of the foremost clubs in European football with the distinctive white shirts with the vertical red band down the front becoming the epitome of “cool”. It wasn’t just the fact that they won so much, but the striking manner of their victories, as they exhibited a unique blend of individual creativity and progressive tactics.

Although Ajax have never quite regained those dizzy heights, Louis van Gaal’s young side, featuring the precocious skills of Clarence Seedorf, Edgar Davids, Patrick Kluivert, Marc Overmars and the de Boer twins, did reach the European Cup final two years in succession in the mid-90s, winning the trophy in 1995 by beating Milan 1-0 with a late goal from Kluivert.

In fact, Ajax are the most successful Dutch football club of all time, not just in the various domestic competitions, but also in Europe. They have won the Eredivisie (the national league) a record 29 times and the Dutch cup 18 times, while they are one of only three clubs (Barcelona and Juventus are the others) to have won all three European trophies: the European Cup (now the Champions League) on four occasions, and the UEFA Cup and Cup Winners’ Cup once each. In short, this is a team with impeccable pedigree.

"The one and only"

However, that was then, this is now and Ajax’s star has been on the wane for many years. The cold, hard facts are that they have only won the Eredivisie twice in the last 12 years, the most recent occasion being way back in the 2003/04 season, while PSV Eindhoven have won the league seven times in the same period. Before this year, the last time that Ajax qualified for the Champions League group stage was 2005/06, when they reached the last 16. Their best performance in Europe in the last decade came when they reached the quarter finals in 2002/03.

This decline has not just hurt the club’s professional pride, but has also damaged them financially, as they have been running a Champions League budget without actually managing to qualify for the competition. Like all Dutch clubs, Ajax suffer from very low television money and a high wage bill, so their operating strategy is based on two uncertain factors: (a) playing in the lucrative Champions League; and (b) making money from player sales.

That is why it was so important that the club qualified for this year’s Champions League, which they managed to achieve with hard-fought victories over PAOK Salonika and Dynamo Kiev, an impressive feat, given that their preparations were disrupted by the late return of key players who participated in the latter stage of the World Cup in South Africa.

That said, Ajax’s financial performance is even more dependent on the extent to which they are able to make profitable transfers, which traditionally has been a significant revenue stream. In the six years up to 2008, the club generated a net surplus of €76 million in the transfer market, but there has been a dramatic change recently, so that the last two years’ activities have resulted in a net spend of €6 million. They have actually reduced their spending, but the striking difference is that Ajax have stopped selling their best players, retaining them in the hope that this will give the team a better chance of honours.

From a financial perspective, this is a gamble, as there is no guarantee of success, but it may partly be in response to strong criticism in the Amsterdam press after prolific striker Klaas-Jan Huntelaar was sold to Real Madrid in the January 2009 transfer window, when the club was lambasted as being little more than a “trading company”.

In a way, the change in policy is understandable, if you consider the team that Ajax could field from players that they have sold in the last few years, including Wesley Sneijder, Rafael van der Vaart, Zlatan Ibrahimovic, Ryan Babel, Nigel de Jong, Thomas Vermaelen, Steven Pienaar, Christian Chivu and Maxwell. That’s an amazing list of talent, but necessity is the mother of invention and, as we shall see later, these sales were essential for the club’s financial well-being.

On the other hand, Ajax’s forays into the transfer market for new players have not always worked out so well. In truth, they have bought some spectacular flops, such as Dennis Rommedahl, Kenneth Perez, Albert Luque and Kennedy, so much so that an internal management report published in 2008 said that the club had not bought a single player in the previous five years that had improved the team.

"The running man"

While the club may not be particularly good at buying players, it does have a worldwide reputation for developing them. As an example, 19 of the players who participated in the 2010 World Cup spent time at the club’s training complex De Toekomst, while the “special one” himself, Jose Mourinho, ascribed Wesley Sneijder’s qualities to the fact that he was coached in Amsterdam, “Ajax players have excellent technical skills, thanks to the club’s youth programme.”

Ajax’s golden years were based on a highly successful youth policy, which has been a crucial part of the club’s wider strategy, namely developing young players, progressing them through the club structure into the first team, and then transferring them for large fees that help sustain the club’s finances. This production line has produced countless internationals over the years, but the key point is that as one great player was sold, another one would step up to replace him, so when the sublime Marco van Basten was sold to Milan in 1987, Dennis Bergkamp was ready to fill his boots – and importantly the team kept winning.

"We've got Dennis Bergkamp"

However, it’s fair to say that Ajax’s youth system is not shining quite as brightly as it did before, partly due to the influence of the 1995 Bosman ruling, which allowed professional players in the European Union to move freely to another club at the end of their contract and removed the restrictions on the numbers of foreigners that a team could field. This judgment hit Ajax especially hard with the majority of the team that was victorious in the 1995 European Cup leaving for small fees or no money at all, e.g. Kluivert, Davids, Reiziger and Bogarde went to Milan for the grand total of €2 million.

The main problem with Bosman for a club like Ajax is that it makes them doubt the wisdom of investing in youth, as young players can simply leave the club for nothing at the end of their contract. The alternative is to offer the player a longer contract on higher wages, so that if another team comes in for him, it has to pay a reasonable transfer fee, but the quid pro quo of this approach is that it increases the club’s cost base. Even this does not always work, as some players will refuse to extend their contract, accepting a lower salary for a couple of years in order to go to a bigger club for free at the end of their current deal.

In response to the damage caused by Bosman, Ajax decided to go public in 1998 (they are still the only Dutch club listed on a stock exchange), which raised €113 million. However, in a strange way, this only made matters worse, as this sudden influx of funds tempted the club to try to buy instant success via ready-made players from elsewhere, instead of following their tried-and-trusted in-house development strategy, and most of the funds have now been frittered away.

"Houston, we have a problem"

Possibly the worst example of this came during Marco van Basten’s unhappy managerial reign in 2008, when “San Marco” spent an enormous amount of money for no discernible success. Although idolised by Ajax fans for his performances as a player, his brief stay as manager was an altogether different story. Even though he had never before been in charge of recruitment, the board foolishly decided to give him carte blanche in the transfer market and he proceeded to make a series of disastrous buys that served only to eat into the club’s limited financial reserves.

He almost doubled the previous Dutch transfer record when he splashed out €16 million on Serbian striker Miralem Sulejmani, who is the very definition of the term “one season wonder”. Indeed, Ajax tried to loan him to West Ham this summer, but the move collapsed when he failed to secure a work permit. Other big money purchases that failed to set the pulse racing included Argentinian forward Dario Cvitanic, who cost €7 million, but was loaned to Mexican side Pachuca just over a year later; and midfielder Ismail Aissati, who was bought for €4 million, but has also been loaned out (to Vitesse).

In fact, few of van Basten’s hapless acquisitions ended up playing many times for Ajax. All they did was help to wreck the club’s balance sheet. Let’s take another look at the Sulejmani transfer, which cost about 25% of the club’s annual turnover. To put that into context, it would be like Manchester United spending £70 million on a new player. As Sir Alex would no doubt say, that doesn’t exactly represent good value.

The importance of player trading to Ajax is immediately apparent when you look at the club’s profit and loss account over the years. In essence, the club has only been profitable when it has sold its most important assets, namely its best players. The last time the club made a profit (€8 million) was in 2008, when the figures were boosted by €48 million profit on player sales (mainly Sneijder, Babel and Heitinga). Similarly, a small profit of €3 million in 2005 was reported on the back of €16 million profit from player sales (mainly Ibrahimovic and van der Vaart).

What is of concern is that large profits on player trading no longer appear to be enough to cover the operating shortfall, so €29m from player sales in 2009 could not prevent a €3 million loss that year. This is because in the last five years revenue growth has virtually stalled, while costs have grown by nearly a third, most of which occurred in 2008 with a €20 million (26%) jump.

This means that there is a significant deficit at the operating level of €33 million. Even if we exclude the non-cash player amortisation, as some analysts do, the club still made an operating loss of €13 million. In fact, the last time that the club reported a cash operating profit was in 2006.

Equally worrying is that the 2010 post-tax loss of €23 million represents a steep increase over the previous year’s loss of €3 million, and would have been even worse without a €4 million tax credit. This once again highlights the value of player sales, as there were hardly any made last year. In relative terms, a €23 million loss on revenue of €69 million is hideous. To demonstrate how scary that is, if we were to apply the same proportion to Real Madrid, that would imply a loss of €114 million for Los Merengues.

Ajax’s biggest challenge comes from their low revenue. In the 15 years since Deloittes started their annual Money League, based on football clubs’ revenue, Ajax have only featured once and that was many years ago. In fairness, the Money League is only likely to see any representatives from outside the Big Five European leagues (England, Spain, Germany, Italy and France) in exceptional circumstances, as there is such a notable difference in revenue, e.g. Real Madrid, Barcelona and Manchester United generate over five times as much revenue as Ajax. That may be a spurious comparison, but what really emphasises Ajax’s problem is the comparison with the Premier League, when you have to go down to teams like Stoke City to find a comparable level of income.

Nevertheless, Ajax’s revenue of €69 million is still the highest in the Netherlands - €17 million more than PSV Eindhoven’s €52 million. The problem, of course, is that revenue growth is restricted by the relatively small Dutch market (population 16 million), which is a drop in the ocean compared to their larger neighbours, e.g. Germany (population 82 million).

Despite these limitations, Ajax targeted revenue growth of “5 to 6% per annum” in their 2006 annual report. Clearly, this has not been achieved. In fact, the 2010 revenue is actually €5 million lower than 2006, mainly due to the lack of Champions League revenue. This can be seen in the above graph, which also visibly demonstrates yet again how the results are influenced by profit on player sales, especially in 2008.

Looking at Ajax’s revenue mix, what really hits you in the face is the extremely low television revenue of €7 million, which is feeble compared to the major leagues. If we compare that with the clubs that earn most from broadcasting income in those leagues, we can see that it’s less than 5% of Real Madrid’s TV revenue, but it’s also miles behind the others. Although many top clubs are over-reliant on TV revenue, I’m sure that this is a problem that Ajax would like to have, as only 10% of their revenue is sourced from broadcasting. While other countries’ TV revenue has powered ahead, the Dutch league has been left behind. You might almost say that “video killed the Eredivisie star.”

Of course, part of this shortfall is due to Europe, as Ajax only received €1.7 million from the Europa League, while the others all earned at least €20 million from the Champions League. People don’t often appreciate the huge disparity between the two European competitions from a financial viewpoint, but it’s very clear here. As Ajax have only qualified for the Champions League twice in the last six years (back in 2004/05 and 2005/06), they have received a relative pittance from their European adventures: just €22 million in all that time. That compares to the €16 million and €26 million that the last two Dutch Champions League representatives (AZ Alkmaar and PSV Eindhoven) received in a single season.

One reason why Champions League revenue is so important is the pitiful amount of money received from the domestic TV deal, which works out at around €5 million for Ajax. Although the Eredivisie has the seventh highest TV rights deal in Europe at €300 million for the three years 2008/09 to 2010/11, this is a long way behind the largest leagues, as media values are low in such a small country. At €100 million a season, it compares very unfavourably to others: England €1.2 billion, Italy €900 million, France €700 million, Germany €400 million, Spain €500 million and Turkey €250 million. Again to put this into context, Portsmouth finished rock bottom of last season’s Premier League, but still received around €35 million, which is seven times higher than Ajax, the runners-up in the Dutch league - and the Premier League TV money will increase this season.

At least Ajax can still count on great support with average attendances of over 48,000, including 42,000 season tickets, which means that Ajax have the 13th highest crowds in Europe, according to a recent survey by the German newspaper Bild. That produced gate receipts last season of €30 million, comprising season tickets €10 million, corporate boxes and seats €9 million, domestic gate receipts €6 million and Europa League gate receipts €4 million. This is not at the same levels as clubs like Manchester United and Arsenal (both well over €100 million), but it is higher than nine clubs in the Money League top 20, which is very impressive. In fact, it represents 44% of the club’s total revenue, which is only behind one club, Arsenal.

"The spectacular Amsterdam ArenA"

Of course, this reliance on gate receipts is a double-edged sword, as there is a risk that a continued lack of success would lead to lower crowds. Having said that, attendances have actually increased by 2,000 in the last five years, so the Ajax fans have demonstrated strong loyalty, though it would be foolish to take this for granted, as crowds have declined at both Milan and Celtic, two teams whose magnificent history is also not reflected in current day performance.

Ajax are lucky enough to play in a modern stadium, the Amsterdam ArenA, whose 52,000 capacity is much higher than the homely old De Meer ground that could only accommodate 29,500 spectators, though some would argue that this move to the outskirts of the town in 1996 has led to a loss of the club’s identity. In addition, the new pitch has been awful and not conducive to attractive football, due to the retractable roof not letting in enough sunlight. It had to be changed every few weeks (much like Wembley), though the problems have been much less since an artificial lighting system was installed in 2009.

Ajax only rent the ArenA, paying just under €10 million a year for the privilege, though they do own 13% of the company (worth €5 million, having impaired the valuation by €4 million in 2006). On the other hand, they only had to provide €20 million of the funds to build the stadium, which they raised by selling the De Meer land to the city for housing development, leaving the vast majority of the money to come from the state, the local council, sponsors and individual shareholders.

Commercial revenue is at a record high at €32 million, made up of €25 million sponsorship and €7 million merchandising, which represents 46% of the club’s total revenue, a proportion only surpassed by German clubs, which are masters of the marketing game.

In 2008, Ajax signed a seven-year shirt sponsorship deal with AEGON, an insurance company, that is worth up to €12 million a season (guaranteed €10 million plus €2 million based on performance), which represents a significant increase on the €7 million previously paid by ABN AMRO. This stands up very well compared to the top sponsorship deals in the big leagues: only €8 million less than Real Madrid, the same as Milan and more than Lyon (and Champions League winners Inter, whose deal with Pirelli is worth only €9 million).

Merchandising revenue has also never been higher, though a survey by leading German sports market research company, PR Marketing, suggested that Ajax (“a big club in a small league”) could only sell 100,000 shirts a season. That might not seem too bad, until you consider that the likes of Manchester United and Real Madrid have annual sales of 1.2-1.5 million.

Clearly, commercial income is an area where Ajax would hope to grow revenue, but this will largely depend on future sporting success. Even though the club’s brand is still strong globally, it mainly owes its reputation to its past. As marketing expert Frank van den Wall Bake explained, “international credit for the Ajax brand has just about run out, so it is important for the club to do well at international level in the next couple of years.”

Despite the lack of revenue growth, Ajax have adopted a “balls out” approach to their costs, especially wages which have grown by over 50% in the last five years to €49 million. This includes €33 million for players, €8 million for coaching and medical staff and €4 million for bonus payments. Wages increased by an amazing €6 million in the last 12 months alone, due to investment in the squad, contract increases and changes in the coaching staff. Headcount has also risen for the last 2 years from 197 to 237, largely through more youth players and support staff on the commercial and admin side.

This has brought the wages to turnover ratio to 70%, up from only 49% just four years ago, which is much higher than the 60% guideline issued by the KNVB (Dutch football association). Although in absolute terms, the wage bill is not that high, it’s evidently not sustainable without Champions League football. Individual salaries are not excessive by the standards of other leagues (Maarten Stekelenburg is the top earner at Ajax with €1.75 million a year), but the total wage bill is still too much for the club’s revenue to comfortably bear. This is a common problem in Dutch football, as admitted by Frank Rutten, chief executive of the Eredivisie, “Clubs are pushing each other to madness over salaries. It’s idiocy.”

Little wonder that Ajax have promised in their latest annual report to take a critical look at their costs, including “reducing the number of players under contract”. There is little doubt that there is some dead wood to clear from the payroll, but it has proved difficult to do this, as other clubs would not meet their high wages, though a few have left this summer (including Rommedahl, Kennedy, Pantelic and Gabri), so next year’s salaries should be lower.

"Vertonghen - going the same way as Vermaelen?"

The trend in player amortisation, namely the annual cost of writing down the cost of buying new players, also reflects the modified approach to the transfer market. In the three years between 2005 and 2007, it fell from €16 million to €13 million. However, in 2008 it leapt to €23 million and has now settled at around €20 million. This is still considerably lower than those sides that have spent really big in the transfer market, such as Manchester City €83 million, Barcelona €71 million, Real Madrid €64 million and Chelsea €57 million, but again it’s too high for a club with Ajax’s limited resources.

Normally, when a club reports losses year after year and does not have a wealthy benefactor to bale it out, debt levels increase and earlier this year few were surprised when there were widespread reports that the club was facing major liquidity problems. However, this was denied by Ajax finance director Jeroen Slop, who backed up his confidence by stating that the club did not need to sell players and “could afford to reject a €15 million offer for Luis Suarez.”

The accounts would seem to bear him out, as the club did not in fact have to extend borrowing facilities with the bank. Moreover, total liabilities have reduced from €64 million to €57 million, though cash balances have also fallen from €19 million to €8 million. Indeed, the liabilities figure is a little misleading, as most of this is just incurred in the normal course of doing business: accruals & deferred income €26 million, other creditors €8 million, provisions €8 million, trade creditors €7 million and tax & social security €3 million. The only bank debt that I can identify comes to under €5 million.

"El Hamdaoui flying to the Champions League"

However, that does not mean that the balance sheet is particularly robust, as the losses have instead been charged to reserves, which are now down to €39 million from the highs of €110 million in 1999. Clearly, this cannot go on for ever, so if the club does not start making profits, it will have to raise funds somewhere: going back to the market for new capital, taking on debt or bringing a new investor onboard.

Of course, it’s not only Ajax that is struggling financially in Holland. Everywhere you look, clubs are in trouble. Founder member of the Dutch league, HFC Haarlem went bankrupt last season and BV Veendam narrowly avoided the same fate. The winners of the 2009 Eredivisie, AZ Alkmaar, have been run by administrators ever since the owner’s bank was declared bankrupt, while PSV Eindhoven’s 2010 loss is almost as high as that reported by Ajax after a couple of seasons out of the Champions League. Feyenoord are also in a terrible state, not just because they were recently thrashed 10-0 by PSV, but more significantly they are one of the 13 professional clubs that have been classified as being “in serious financial difficulty” by the KNVB.

It is clear that Dutch football as a whole is enduring a structural crisis with the Eredivisie reporting a combined loss for its clubs of €31 million in 2008/09 and warning that the deficit will be even higher in 2009/10. As Henk Kesler, the KNVB president, commented with commendable understatement, “The association is aware that the situation is not exactly rosy.”

"The Night of the Hunter"

The KNVB has belatedly tried to put its house in order and in April a working party published a report with 20 recommendations, the most important of which is a pledge by clubs that they have enough cash to reach the end of the season. For the first time, the KNVB has also implemented a licencing system that punishes financial irregularities with a points deduction. Furthermore, clubs under supervision like Feyenoord have three years to get their finances in order or face losing their licence.

In order to improve matters, UEFA President Michel Platini suggested a merger between the Dutch and Belgian leagues, but most fans have given this idea a frosty reception. In any case, although such a move would increase the market size and presumably lead to more money from the sale of TV rights, it is unlikely that this would boost revenue enough to challenge the larger leagues, so this may well be a non-starter.

Ajax had already undergone their own internal soul searching in 2008, when they published the Coronel Report (named after chairman Uri Coronel), which reviewed the many years of mismanagement since the club’s flotation. Grandly entitled, “Ajax – the road to victory”, the report was extremely critical, concluding that the club’s management structure was seriously flawed, leading to lack of clarity and perennial power struggles between the coach and technical director.

The report also suggested that the appointment as coach of former Ajax players with little experience was doomed to failure, citing the examples of Jan Wouters and Danny Blind, though that did not prevent the club from repeating the mistake when they recruited van Basten.

"Stekelenburg - a safe pair of hands"

Another example of lack of managerial focus came with the decision to invest substantial funds into a series of foreign affiliates in countries like South Africa, Belgium and the USA. These have not exactly been a great success (Ajax America filed for bankruptcy), so these activities have now been scaled back, leaving only a 51% investment in Ajax Cape Town.

So what does the future hold for Ajax?

We have seen how vital qualification to the Champions League is to the club’s finances. Indeed, last year’s annual report forecast that participation in the 2010/11 tournament would improve profit by “at least €10 million”, but it could be even higher if they somehow manage to progress past the group stage. As coach Martin Jol enthused, “This is so important for Ajax and for Dutch football” – though, to be fair, he may not have been thinking about the balance sheet.

The problem is that they need to achieve this year after year, but they are no longer the dominant force in Dutch football, as the Eredivisie has become very competitive with the rise of “provincial” teams, as shown by three different winners in the last three seasons (Twente Enschede, AZ Alkmaar and PSV). In other words, qualification cannot be taken as read, even though the Netherlands do have two places available (one of which has to go through two qualifying rounds).

"Martin Jol - time to get serious"

If Ajax do not consistently reach the Champions League, then the only other option is to sell players. The club has hinted at this in the annual report, “transfers may lead to a positive net result in 2010/11,” but this will become a virtual certainty if Ajax are eliminated at the group stage. This handily concludes just before the January transfer window, when players like Uruguayan striker Luis Suarez, goalkeeper Marten Stekelenburg and defenders Jan Vertonghen and Gregory van der Wiel will inevitably once again be the subject of intense speculation.

The problem is that it is unlikely that players will command significant transfer fees in the future, owing to the double whammy of the economic recession and the impact of the UEFA Financial Fair Play Regulations. The first means that clubs do not have much money to spend, while the second requires clubs to balance their books, meaning that costly purchases (with the associated player amortisation) are to be avoided. Only this week we saw an example of this with Barcelona agreeing a deal for PSV’s Ibrahim Afellay for a low fee of around €3 million, when his price had been quoted as high as €10 million.

No, the only real solution for Ajax is to get back to their roots and once again focus on youth development. This has always been a cornerstone of the Ajax ethos, but they have dropped the ball in recent years. As the latest annual report stated, “The academy is good, but could be better.” This strategy requires investment and the club has set aside a budget of €5 million with the objective of having half of the first team squad developed at Ajax.

"Christian Eriksen - the future boy"

If this policy works, it will obviously reduce the number of players that have to be bought from outside the club, so it can make sense both from a technical and financial perspective. However, other Dutch clubs have also embraced this approach, so Ajax will have to raise their game in order to attract the best youngsters.

There is a new air of realism around Ajax’s ambitions these days. Five years ago, the club’s annual report proclaimed, “the ultimate ambition of Ajax is to win the Champions League”, but this now seems hopelessly optimistic considering their low budget and the financial gap to the major football leagues, which they have described as “unbridgeable”. That is why last summer Martin Jol considered moving away from a club that has won the European Cup four times to Fulham, a mid-table English club with a far less illustrious history.

The sad truth is that money talks, so Ajax will need to manage their limited resources better than the leading clubs in Europe to have any chance of success. They might have all the Dutch courage in the world, but will this be enough?