Much has been said about the role of Trevor Hemmings in North End’s pursuit of Premier League football. Does he really want it? Does he care enough? Is he prepared to move with the times? There are strong arguments both for and against Hemmings’ ownership of the football club, but that’s an argument for another day.
Here, I have looked at the financial health of the Preston North End Football Club as a whole rather than focusing too much on Trevor Hemmings. This is a piece modified from a University submission (shout out Kieran Maguire, @PriceofFootball on twitter), so please excuse any jargon.
All of the figures are taken from North End’s most recent accounts showing the 2017/18 season. Enjoy…
North End’s turnover in 2017/18 was £13.3 million, a decrease of 1% on the year previous. Most of the turnover (53%) was generated by the broadcasting payments making up £7.1 million, a 5% increase on the previous year. The £7.1 million figure is the 5th lowest figure in the Championship, with many other clubs in higher demand for televised games and many clubs in receipt of parachute payments, showing instantly what we’re up against.
Since promotion in 2015, PNEFC’s broadcasting revenue has increased by 412%, showing the huge gulf in TV money between tier 2 and 3. Matchday revenue fell by 7.5% to £3.4 million, the second lowest in the Championship. This fell despite an increase in average attendance (12,611 to 13,776) in part because there were 3 fewer games at Deepdale compared to 2016/17.
Revenue was also lost due to the introduction of free season tickets for u11s, and the extension of the youth category from 16 to 21. This caused a reduction in the number of full paying adults to around 3000, which is surely a huge concern for the top brass at the club moving forward.
Commercial revenue is very low, only £2.8 million (5.7% decrease) because the club have got very few commercial deals with any partners. The club’s sponsor for 2017/18 was Tempobet, who also sponsored Burton Albion, which proves that the contract is small fry compared to most of the other clubs in the Championship.
We also have fixed contracts with caterers and merchandisers, preferring to outsource and accept a low level of guaranteed income rather than being creative and trying to maximise revenue. The club did introduce electronic advertising boards on 3 sides of the ground in 2017/18 so the next accounts may show an improvement as advertising within the ground has increased.
North End’s main source of expenditure, wages, rose by 12% to £15 million in 2017/18, due to the increased size of the “footballing staff” from 73 to 78. The club also awarded new contracts to some of their more valuable players, renewing 7 contracts, which added upwards pressure to the wage bill.
The wage to turnover ratio is 113%, which is above what it had been, with the figure exactly 100% for the previous 2 seasons, with wages rising in line with revenue. The new figure indicates that the club are being less frugal now as they are a more established Championship club. So, for every £1 of income, the club spend £1.13 on wages, which is a slight worry as there are also other overheads to take into account as well.
We currently sit 20th in the wage table, with ¼ of Aston Villa’s wage bill, highlighting the uneven playing field in the Championship. Post these accounts, the club have renewed contracts with more key players, so with turnover looking stagnant, the wage control is likely to continue rising. Around half of the clubs in the league spend more on wages than their turnover because of the desperation to reach the Premier League, so our position is far from unique.
The Club paid out £5.4 million on player acquisitions in 2017/18, more than the previous 5 seasons combined. This level of spending is still comfortably within the bottom half of the division. Post these accounts the club spent £4.1 million on 5 new players in January 2019, taking spending on players to £9.5 million over an 18-month period – a drastic increase in recent history, but still very modest by comparison. Perhaps though this shows that maybe the club are starting to scale up things on the transfer side, and hopefully we will see a continuation of that in the coming weeks.
An explanation for the increased spending on players may be the £10 million sale of Jordan Hugill to West Ham. Also, the club were still owed £8 million by multiple clubs as of May 31st 2018 – this has allowed the club to spend knowing that they have guaranteed income coming in at a future date.
Player amortisation rose by 46% as a result of the increased spending on signings, as the cost of the new, larger fees are spread over the contract lifetime. However, this only totalled £2 million, which is another small figure at Championship level. By comparison, Middlesbrough’s amortisation cost £24 million.
Another expense was a £1.5 million purchase of land that is planned to be used for a new training ground, as capital expenditure – this is proof that North End have made at least some movements on that front but we are being kept in the dark about the next step, with some saying that the original plans have been scaled down and others saying that work won’t start for another 18 months. Where we actually stand on that, who knows?
The Club’s earnings before interest and taxes has been negative for years, the most recent figure showing a loss of around £4 million (stripping away player sales and non-cash items), essentially an operating loss – losing around £75,000 per week on day to day operations, mainly as the club can’t generate revenue. A £2.6 million profit was posted but that was largely due to Jordan Hugill’s sale to West Ham United.
This highlights the importance of Hemmings’ interest-free loans, as the net debt owed to him (via Grovemoor Limited) is now at over £36 million. This level of debt is not high by Championship standards, because many other clubs throw money at the promotion dream.
There is no interest on the debt and also no set repayment date, so the club is in no immediate financial danger, and are well within FFP regulations. Our strategy in the last half-decade of recruiting young, talented players may soon begin to offset our operating loss, as we’ve already seen with Jordan Hugill. In this sense, perhaps we should be grateful to Trevor and Peter Ridsdale for laying down a clear strategy, and, to be fair, it has worked well for us in the last few years.
The club has not used a bank loan since 2012 and owes no interest to any party. We are 1 of only 4 clubs in the Championship not to owe interest, so the risk of immediate financial distress is fairly low which, after the winding up petitions of the past, is sure to be a relief for some.
Our player reinvestment ratio in 2017/18 was 270%, a sharp increase from 194% the previous year because spending on players rose by much more than the amortisation fee. This indicates our increasing willingness to invest more heavily in the playing squad. The squad ageing ratio was 67% in 2017/18 again showing a level of investment on new player registrations.
The market value of the playing staff is guaranteed to be much higher than the net book value of £4.8 million, with a number of youth academy products being highly valued by the club despite not being included on the balance sheet, as they had no original cost. We have purchased and developed many young players whose book value will remain very low. For example, Jordan Hugill was purchased for £25,000 and sold for £10 million. It was estimated last year that the squad’s market value was £77 million.
PR: “The owner is putting in anywhere between five and seven million pounds a year for us just to survive. We have to be smarter than most in this market given, our squad has recently been valued at £77m. We are looking to progress every year within our financial means.” #pnefc
— Preston North End FC (@pnefc) September 17, 2018
Our tangible assets have a net book value of £39 million. The club recently purchased land for £1.5 million in order to build a new training ground. This should increase the book value of tangible assets once built, making the us more saleable to any potential buyers as well as increasing the price that Hemmings can expect to receive.
Trade debtors stand at £8 million, up from just £350,000 in 2016/17, largely because of the instalments owed by West Ham for the £10 million sale of Jordan Hugill. Trade creditors stand at £2 million (100% increase on 2016/17) because our spending on player acquisitions has increased as previously mentioned, however, this figure is still low.
The club are in a healthy position in terms of being net trade debtors, and this may explain the decision to increase their spending on players as well as the purchase of land.
PNE has deferred income of £1.4 million from season ticket sales. This is because clubs cannot guarantee the income until all fixtures have been fulfilled – Bolton Wanderers are a current example of why this income cannot be guaranteed until all games have been fulfilled. This is a relatively small figure, showing the Club’s difficulty in bringing money in.
Our net debt technically stands at £35 million, however, the loans from Trevor Hemmings are interest-free and have no repayment date, so whilst there is a reliance on him, we are in no immediate financial danger. The club confirmed that “sufficient additional funds will be available if required”, and forecast that around £7 million will be loaned in the coming financial year.
There are 3 cash flows effecting football clubs – operating, investing and financing.
Our net cash from operating activities is down nearly £5 million from the previous year, mainly because of the club’s £4 million operating loss.
Net cash expenditure on investment activities fell by over £3 million due to the acquisitions of both tangible and intangible assets, causing around £7 million to flow out, being offset in part by £3.4 million cash flowing in from player sales.
Net cash from financing activities is up by over £6 million, mainly all down to the issue of share capital.
Overall the net effect of the 3 cash flows resulted £1.4 million net cash, down from £3 million the year before. Whilst still positive, the fall in the inflow is mainly down to the club’s operating loss.
The valuation of Preston North End Football Club is particularly relevant with rumours that Trevor Hemmings is open to offers. I will use a couple of methods to find a valuation and then find an average to value the club at.
Comparable Transaction Analysis
It is difficult to find a club of similar size to Preston North End that has been sold recently enough (as most other Championship clubs have been in the Premier League and are thus more attractive).
I have decided to use Ipswich Town as a comparable. They are one of only 3 other clubs in the Championship not to have played in the Premier League, and the recent history of the two clubs is comparable, as well as a similar sized fan base. Whilst they haven’t been sold recently, Ipswich are rumoured to be up for sale for £35 million – a figure I will use to compare.
As EBIT is negative, I will not use it as a comparable, however using Ipswich’s most recent accounts (Ipswich Town Football Club, 2019), I will compare revenue, wage expenditure and net debt.
Using the revenue-based approach, Preston North End Football Club are worth £27 million. The main difference between the clubs is commercial revenue (Ipswich’s is 100% larger). Using the wage expenditure approach, we are worth £28.4 million. Ipswich’s wage bill is slightly higher, but the clubs are in the market for similar players. An EBITDA comparison values us at £23.9 million. Importantly, comparing the net debt values Preston North End Football Club at £95.2 million. This is due to North End’s net debt being almost a third of Ipswich’s. The valuation is unrealistic however it shows the importance of having little debt, as it makes us more attractive.
Averaging all 4 values shows North End being worth £43 million. The club generally operates at a slightly smaller scale than Ipswich, but they are in a healthier position in terms of lower net debt. Therefore, I think this is a fair valuation.
Markham Multivariate Model
This model relies only on the club’s own data, rather than comparing to a similar sized club. This model estimates us to be worth £38.825 million. The average attendance is only 58%, so this figure constrains the club’s value. The wage ratio (1.13) also negatively impacts the value, however, this type of figure is common in the Championship but not as common in other leagues.
Averaging the valuations from both methods shows us as being worth £40.9 million. This appears fair considering the we are in good financial health compared to a lot of other clubs, especially in the Championship, with relatively little debt and low costs, although the our difficulty in generating revenue could deter investors. Neither calculation takes into account the intangible value of the club – a founder member of the Football League, and the first ever League winners. We are a well-respected, historic football club.
Post Balance Sheet
Since the 2017/18 accounts, Trevor Hemmings has injected £4.1 million into 5 new signings in January 2019, again showing a newfound willingness to spend on new players.
Preston North End are clearly a sensibly run football club, operating on a small scale by Championship standards. Despite our difficulty in generating revenue, the club appears to be loosening the purse strings as we become more established at Championship level, with wage control increasing and transfer acquisitions dwarfing recent trends.
We are well placed financially and would be a sensible investment for investors willing to give the us the push we need to genuinely compete for promotion. Any potential investors would need to be willing to finance the club, because it is not self-sufficient, mainly due our difficulty in generating match day and commercial revenue as we aren’t a particularly ‘fashionable’ club.
Our current position of only 3000 adult season ticket holders is limiting us and needs to be rectified if we want to carry on expanding. The reality is however, that the situation is unlikely to change unless we reach the Premier League, where we’d become less reliant on the owner and would entice more paying fans through the gates.