Review of the 2008 accounts

[Bluedell 5,624]

Part 1

 

Overview

 

In a year when Rangers qualified for the group stages of the Champions League and then went on and reached the UEFA Cup final the club made a loss, before the sale of players, of �£1.1 million. The sale of Alan Hutton was required to show a profit for the year. This highlights the financial plight of the club, being as successful as we were in Europe we still need to sell players to make a profit.

 

Why did we not make a higher profit?

 

Income increased by Ã?£23 million over 2007 ââ?¬â?? This including Ã?£11 million from UEFA for the Champions League/UEFA Cup and Ã?£10 million in additional gate receipts due to the number of games played.

 

Net Operating expenses increased by �£13.7 million - This is mainly due to a �£10 million increase in staff costs (see next section).

 

Amortisation (write-off) of playersââ?¬â?¢ values increased by Ã?£3.2 million ââ?¬â?? the cost of players is written off over the period of their contracts and the purchase of players costing over Ã?£10 million at the start of the season resulted in an increase in the write-off over the prior year.

 

With the increase in income being offset by the higher operating costs and higher amortisation of players it resulted in the prior yearâ��s operating loss of �£5.1 million becoming an operating profit of �£641,000.

 

Interest payable of �£1.7 million, an increase of �£454,000 over the prior year due to the increase in debt, is then deducted which results in a loss before the sale of players of �£1.1 million.

 

The sale of players, primarily Hutton, generated a profit of �£7.7 million which meant that we made a profit before tax for the year of �£6.6 million.

 

The bottom line is that profits were lower than everyone predicted due to higher wages paid to the players.

 

Staff costs

 

Staff costs increased by �£10 million, from �£24 million to �£34 million, with Wages and Salaries increasing by a whopping 60%!

 

The reasons for this are that average salaries were increased when the squad was strengthened (the new players must be on relatively higher salaries), and there were huge bonuses allegedly totalling �£7 million paid to the players due to the successful run in Europe.

 

The club apparently made practically no money from one of the rounds in Europe as most of the cash generated from the financially hard-pressed fans had to go in bonus payments.

 

Murray and Bain must take a large degree of criticism for this as it suggests that the bonus levels were allowed to be negotiated at too high a rate, possibly because their own expectations of success were low.

 

The accounts try and justify this by pointing out that wages to turnover ratio fell from 58% to 53%, but with turnover increasing by 54%, I would expect a much larger fall in the ratio, and the relatively poor results have to be partly blamed on the badly negotiated players� bonuses.

 

Net debt

 

The net debt has increased by �£5 million to �£21.6 million. Why did this happen when we made a profit for the year?

 

There are a number of factors, but the main reason is that we spent more on players than we received.

 

In terms of actual cash incomings and outgoings we spent �£10.6 million on players and only received �£3.9 million. The Hutton deal is spread over a period to June 2010.

 

Part of this is due to timing with a most 2007/8 purchases being included in this year�s accounts, but they also include 2008/9 buys of Lafferty, Miller and Velicka.

 

The sale of players

 

Alan Hutton and Filip Sebo were sold during the year. It was widely reported that Hutton was sold for Ã?£9 million and Sebo was sold for Ã?£1 million. The clubââ?¬â?¢s website states that ââ?¬Å?It is understood that the (Hutton) transfer fee could top Ã?£9millionââ?¬Â.

 

The strange thing is that the proceeds reflected in the accounts only come to �£8.7 million. What has happened to the missing �£1.3 million?

 

Perhaps the widely reported ââ?¬Å?pay-offââ?¬Â to Hutton of around Ã?£1 million was made by Spurs as a ââ?¬Å?golden helloââ?¬Â and they reduced the transfer fee by that amount? Perhaps the actual fees were previously exaggerated, or there were payments to third parties which required to be netted off? There are no further amounts to be added to the Ã?£8.7 million dependent on games etc, as there are no contingent assets disclosed in the accounts.

 

Any payments to anyone in the club, Hutton pay-off bonuses to directors relating to transfers received would be included in Staff Costs and not netted off against income. If there were such payments then it shows the income from transfers in an even worse light.

 

Whatever the reason, it appears that we got less than was expected.

 

Martin Bain

 

Martin Bainâ��s emoluments for the year were �£668,000, an increase of 87% over the previous year! In last yearâ��s review, I commented that his salary was too high based on the size of the company, but this point is obviously being ignored by SDM. It continues to be far too high for the size that Rangers are.

 

Peter Lawwell earned �£393,000 in 2007, which was a big increase on 2006, possibly because of a comparison with Bainâ��s package, with Lawwell arguably having greater responsibilities and autonomy.

 

It is presumed that the large increase in Bain�s salary is due to a performance based bonus. It is rumoured that this is based on income (which would appear to make sense as his large bonus in 2006 appears to have been due to the JJB deal), which implies that it is due to the Hutton transfer. If that is the case I fail to see why Bain should get a percentage of it as he is only doing his job, and had nothing to do with the vast majority of the amount received.

 

If Murray is serious about wanting to keep expenditure under control, he should start by reviewing the package of his Chief Executive.

 

Fixed assets

 

Over the last few years the freehold property owned by the club (the Stadium and Murray Park) have been valued based on a ââ?¬Å?depreciated replacement costââ?¬Â basis. While this is allowed under accounting standards, I have been critical of this approach. Imagine you owned a house that you could sell for Ã?£100,000, but it would cost Ã?£150,000 to rebuild it. The cost to rebuild it is fairly irrelevant to you, and you would generally think of the house as being worth Ã?£100,000 but itââ?¬â?¢s this approach that has been used in previous years.

 

There has been a change this year, with the property being valued based on its ââ?¬Å?recoverable amountââ?¬Â (although this value is exactly the same as the amount in last yearââ?¬â?¢s accounts). I do not know much about property, but I would not be confident in the ability to sell the stadium and Murray Park for Ã?£120 million.

 

A valuation was carried out using last year�s method, but this was not used in the accounts. It is not known whether this showed a (likely) increase in value which the directors have decided to hold back for another year or a decrease in value that they did not want to put through as it would weaken the balance sheet.

 

JJB deal

 

It appears that the club only received their standard �£3 million from JJB in respect of the ongoing agreement, which is surprising following the huge amount of shirt sales in the run-up to Manchester. How many more strips need to be sold for the bonus payments to kick in? It looks like it is an impossibly high target, despite the optimism given by the Rangers Board at the time of the initial announcement.

 

Related party transactions

 

This section of the accounts highlights the amount of business that Rangers do with the other parts of the Murray Group. Murray has been criticised in a number of quarters for this over the years, but it should be noted that services provided this year of �£1.2 million are less than the prior year of �£1.9 million, and this has been a steady trend of reduction in services from the peak of �£4.3 million in 2004.

 

The services provided relate to call centre (tickets) and mail order but I am unaware of why there is a reduction in the charge in a busy year, other than the fact that IT services were mentioned last year but not this year.

 

It should also be noted that Rangers would have to pay someone for these services and as long as we are paying what we would be charged by a third party then I do not see an issue with it being done by a company within the Murray Group.

 

Share issue

 

There were �£50,000 of shares issued during the year in respect of the Rangers Supporters Trustâ��s Gersave scheme.

 

Five year summary

 

The average attendance is shown as 46,278, which is a drop of 2,239 from the previous year. This is the lowest average attendance since 1995/96. This is surprising but appears to be due to the low attendance at domestic cup games resulting from financial pressure put on fans following the record number of games that were played last season.

[Bluedell 5,624]

Part 2

 

HBOS

 

Despite the takeover of HBOS, who are the clubâ��s bankers, it is believed that there will be no immediate change to the finance available to the club. The credit facility of �£15 million is reviewed every November but it is unlikely that this would be reduced as the Murray group are still available to act as backers of it, and the new Lloyds Halifax bank are unlikely to annoy a large proportion of the Scottish public by withdrawing the facility. However if the club reached the stage of having to negotiate an increase in the facility then difficulties may arise unless the economic climate has significantly improved.

 

HBOS own 11.5% of Murray International Holdings and due to that and the fact that the large bank loans that MIH have from HBOS are secured on prime commercial property, it is unlikely that the takeover of the bank will have any serious consequences on MIH that would affect Rangers.

 

The one area where it is believed that the current worldwide economic problems have had an effect on the club is in the area of redevelopment of the stadium and the surrounding Hinshelwood estate. Murray said that he would probably make an announcement on this in May. A revised announcement was then due to be made in June. Yet another announcement is due soon, apparently with significant cut back from the original plans.

 

I would speculate that the original plans had to be shelved and heavily revised due to the proposed finance drying up following the problems in the American sub-prime market and the knock-on effect that was felt by most banks worldwide who cut back on new lending. There are other possibilities (lack of council support or that there was never any serious intention to announce anything) but it is my belief that the funding issue that has been the main issue.

 

The future

 

Since the end of the financial year, we have bought Bougherra, Mendes, Davis and Edu for a reported �£11.2 million and brought in a reported �£9.3 million for the sales of Cuellar and Cousin, so these purchases are almost self-financing. However it is unlikely further cash will be spent in the winter without players leaving the club first.

 

What sort of loss will we make in 2008/9 following our early exit from Europe? If we take the 2007 loss of �£6.3m as our base and account for the fewer European games, the increased amortisation of the players, the apparently increased payroll and higher interest payments, but offsetting the profit from Cuellar and Cousin then we could be looking at a loss in excess of �£12 million.

 

Given this size of loss, we could see the net Debt in excess of �£30m which is quite frightening given that it was only �£5.9m two years ago.

 

The fact that we can make little money even in successful years is the principle reason why the club has not been sold, and it is very unlikely whether Murray will be able to find a buyer in the near future either due to this.

 

The directors do not appear to have any way of stemming the ever increasing level of debt. If we are unable to have a consistent run of years of qualifying for the Champions League and continue to make money in transfer dealings then we could see the club�s financial position moving back towards 2004 levels unless something drastic or innovative is done.

[Frankie 8,562]

Tremendous analysis mate.

 

Some worrying trends there and I hope some searching questions are asked within the finance section of the AGM in two weeks time.

[Frankie 8,562]

http://www.newsnow.co.uk/A/301441415?-11344

[ascender 352]

That's a great write-up, thanks for taking the time to do that.

 

There's more than just a few worrying things in there, particularly in light of how successful we were last season. Quite a few of them seem to demonstrate that the club is still being run with ideas above our station in a financial and practical sense.

 

If we're not careful, our debt is going to spiral again to dangerous levels.

[Tannochsidebear 2,406]

Excellant analysis.

 

The debt is the one thing I am worried about, and I argued with other bears about on other forums who told me the debt would be reduced to almost zero from last year's "success".

 

It guarantees me only one thing. There will be a fire sale in January 2009, with nobody coming in for a fee and anybody being sold that a decent bid comes in for.

 

Look out for Murray spin in late December about the global credit crash and our Euro exit making things difficult, when it is really just another year of complete and utter mis-management from the top 2. And another year, and another..........

[Bluedell 5,624]

The debt is the one thing I am worried about, and I argued with other bears about on other forums who told me the debt would be reduced to almost zero from last year's "success".

I think the accounts have surprised a lot of people. Too many believed the hype about the extra cash forgetting that we have expenses as well.

 

I would agree about the debt. I never felt the debt was ever going to be down at zero, even before I found out about the bonuses and we bought the additional players in June although I did think it may have been under �£10m. Some people say it's not a problem as long as we trade profitably, but we don't and it is.

[Tannochsidebear 2,406]

Agreed, I regularly recount what Bain told top sponsors and advertisers at a club function a year or so ago, that we have to play CL group football in 3 out of every 5 seasons just to break even. No transfers taken into account, just club running costs.

 

Scary stuff indeed, and is the reaping of the sell-offs of income streams in recent years.

 

Can anyone tell me that had we been in charge of our own merchandise, given our run to the UEFA final, that we would not have made a profit of over �£3M last season? In the weekend before Manchester, our one and only Rangers shop, at the ground, was selling ONE scabby looking t-shirt with a picture of the COM stadium on it, whilst outside the queue was long and deep with bears buying various t-shirts, scarves and flags off the vendors on Edmiston Drive.

 

Will it be this January the DM supporters finally wake up, or do we have to wait another few years of mis-management?

[pete 2,499]

Excellent analysis BD.

 

I didn't see any mention of TV monies from the SPL\Setanta are they hidden in there or did i look over the top of them?

[ascender 352]

Its strange that bonus payments were so high for the UEFA Cup when we all know that its the CL which brings in the real money.