The Mysteries of Company Finance
How much money did you make last year? Easy, add up your wages (or look at your P60). How much do you owe? Easy, mortgage plus credit cards plus loans less anything that¹s in the bank. But for companies it isn¹t so straightforward. Even when they produce a nice 30+ page Report and Accounts as Rangers do it still needs a bit of explanation and interpretation. So the accounts tell us that Rangers made a loss of £35m after all charges and has Net Debt of £52m. We can all see that that isn¹t good, but just how bad is it?
Do Rangers need to make a Profit?
There are a few different levels in a profit and loss account, especially for a football team, and for RFC the first important line comes at the trading profit or in our case the Trading Loss. £45m came in from ticket sales, TV, advertising, replica shirts, pies, Rangers News etc. However, we then start off with a wage bill of £37m and a whole host of other costs which bring the total cost of running the club to almost £64m giving us a trading loss of £19m. TV revenues will be down this year and if we fail to stay in Europe beyond Christmas, then that will also hit revenues.
It¹ll take the sale of a lot of Tangerine jerseys to fill the TV gap. The wage bill should be down, as Kanchelskis, Flo, Vidmar, Wilson, and the other departures were being paid more than Arteta and Muscat get, but closing a £19m gap in the current environment looks an impossible task. To get to the next level Operating Losses of almost £32m we need to deduct ³Net charge for player registrations², which is not as simple as cost of players bought less cash from players sold.
Player Registrations
The way this works is that if we buy a player for £12m and put him on a four year contract, then he goes into the balance sheet at £12m, and in each of the four years of his contract, £3m comes out of the balance sheet and goes into the player registration charge. If we sell that player after two years then he is in the books at £6m and so that £6m will need to be written off. As an example the sale of TAF would lead to a £6m charge to player registrations and £6.75m in. So in the accounts he will not help the trading profit and will only reduce player registrations charge by £0.75m.
Selling Gio for £8.5m when he is in the last year of his contract is far more lucrative, but even that still left the charge for player registrations at £13m. The players are now in the books (as intangible assets) at under £26m so this charge looks set to fall unless something unexpected goes on in the transfer market.
More Losses
Including interest of over £3m leaves RFC with pretax losses of £35m and as no tax is paid, £35m is the after tax loss as well, more than double last year¹s £17m.
Net Debt
Last year in Follow Follow, I pointed out that Rangers published debts of almost £52m exaggerated the size of the problem as the £8.5m Rangers Bonds and the £15m from the NTL deal were not normal debt. The bill for my consultancy fee to RFC is in the post as I write, as the club has decided to ignore these numbers. In fact it has now restated last year¹s debts at £28m, which makes this year¹s figure of £52m all the more worrying. Using the same treatment as last year would have seen it rocket to around £75m.
Debts rising by £24m could be a disaster for any company but the bulk of this has been funded by increased bank borrowings which now stand at £41m. The good news is that over £37m of this does not need to be repaid within the next five years. However, it does go some way to explaining the new Ibrox economics sell before you buy. If I had just lent someone an extra £20m then I¹d want a say in how they spent the money. It looks that financial prudence is the idea of the banks and not the chairman.
There are two big loans from the banks, one for £15m which gets repaid over 18 years starting in 2004 (but less than £3m before five years) and another for £25m where repayments don¹t start until 2017. Debt is high but no-one is knocking on the door looking for money.
Shareholders Funds
Non-accountants may wish to skip this bit, but at the bottom of a company balance sheet is a number called Shareholders Funds. Essentially, this is what would be left if the company sold all its assets (players, stadium, Auchenhowie) for what they are in the books for, collected all money owing and repaid all its debts. The RFC accounts call this number £12m or 21p for each share in the club, but unlike last year this includes the £8.5m bonds which would not go to shareholders if the club was wound up. I believe a truer estimate of shareholders funds would be £3.5m or 6 pence per share. A far cry from the share price of 115p. Now few companies share prices bear much resemblance to shareholders funds, but in the absence of positive profits or cash flow, or an asset value we need to look somewhere to value the club. This number is only really relevant if a company is being wound up, but as a word of warning another loss like last year and shareholders funds would be negative.
So what does this all mean?
1. There is no immediate crisis at Ibrox as the banks appear happy to lend the club the money to keep it trading. But as I said above, they are probably imposing strict financial constraints on how the club operates.
2. At some point, the banks will expect to see Rangers make a profit, which will need some radical changes on the cost side. Last year the interest charge was £3m but this looks set to rise along with debt. With TV revenues down, it may be that the sale of Bazza has been delayed not cancelled.
3. Rangers could do with some new money. This does not come from either ENIC or David Murray selling shares as that would go to them not the club. It means selling new shares to rich Bears, but the experiences of recent investors, and the uncertainty over football funding in general make this look an unlikely source of new money in the near term.
4. The bottom line is that in order to support a player pool of the size and quality we have today, we need to be playing in competitions that TV viewers (and hence TV companies) will pay money to watch. This is probably what the banks are hoping for.
Is David Murray to blame?
Yes and no! He gambled on Walter Smith, on Gazza, on Brian Laudrup, on Dick Advocaat, on Ronald de Boer, on Tore Andre Flo, on Sky TV, on European ticket prices, on the SPL, on Alex McLeish, on the willingness of the fans to buy three strips a year, etc, etc. But all his gambles appear to me to have been made with the interests of Rangers rather than David Murray at heart.
However, the gambles have not paid off, and Alex McLeish and John McClelland will have to live under the constraints that this will bring. But Rangers are not alone. Football in general is in financial crisis, and this will inevitably lead to change. The tiny ten resigning from the SPL is a help rather than a hindrance to the reconstruction which is inevitable.
Serious new TV money will only come from presenting viewers with something new. Rangers is a box office draw, sadly a bigger one in cahoots with Celtic, and therefore we will be part of something different in the future.
Brock Stoker