22nd May 2020

Blog – 30th April 2020

30th April 2020

What do you get if you put Boots and Deloitte together in an amusement park car park? A HM Government Covid-19 test centre, apparently. Strange times indeed.

The incidence of obtuse and, frankly, head-scratching combinations will no doubt crop up with increasing frequency as odd bedfellows find themselves locked into relationships of necessity rather than choice as the evolution of life carries us all away from what we previously viewed as ‘normal’.

Indeed, in the world of commerce the financial hit has been of seismic proportions. One quote which made us pause for breath was the conclusion that the UK economy faced a drop in GDP which had not been seen for 300 years – as a matter of interest and by way of background, back in 1720, George I was King and the speculative South-Sea bubble was the financial scandal of the day.

Today, social distancing has brought a new kind of consciousness where every human outside of the home is a potential threat to life. Commerce, if it is conducted at all, is dominated by online services. Isolation is key, socialisation is death, economies are on life-support.

Roger Bell, one of the co-founders of vysyble, was recently interviewed by the Turkish football website www.futbolarena.com . He was asked about the financial hit that our new viral co-habitee would inflict on the Premier League revenue stream. His initial ‘guesstimate’ was perhaps as high as 25%.

You may ask ‘how so?’

First of all, let us assume that English football will not be able to finish the 2019-20 season. The hit from TV has been widely reported to be in the region of £762m. We estimate that the loss of matchday revenue is around £126m given no further games. The difficult element is trying to assess the hit to commercial revenues. Some contracts will no doubt have clauses relating to TV exposure, and/or crowd sizes and/or home games played. Without a crowd, many clubs will also lose out on commercial sales on matchdays in the areas of catering, hospitality fees and other incidental sources of revenue.

With advertising and sponsorship contracts, some payments will have been made up-front, others may be staged and perhaps a further tranche will be paid upon ‘completion’. Given the financial hit inflicted on club sponsors and advertisers, it should come as no surprise that there is likely to be some intense horse-trading over payments, if they can make any payments at all. We suspect that there will be a significant number of defaults on such contracts over the coming months along with numerous instances of both parties engaging albeit remotely to renegotiate terms.

With 18 clubs having reported their 2018-19 accounts, it looks highly likely that the revenue from commercial activities will be around £1.45bn. Since 2016, the average increase in commercial revenues for the division as a whole is approx. 9% per year. Therefore, the 2019-20 commercial total may come in at around £1.58bn.

So, an arbitrary approach might be to subtract 15% of the £1.58bn 2019-20 estimated value ie £237m. For this season alone that would make the combined hit to be around £1.12bn, which comes in at around 21% if overall club revenues for 2019-20 land at around £5.20bn. The amounts may be higher, they may be lower, but it is not entirely inconceivable to see another £100m or so in lost commercial revenues given the dire and evident circumstances we all find ourselves in.

The picture becomes more opaque when we begin to look at the 2020-21 season. All those big sponsors and multi-national companies will have issued their half-yearly results with some very likely poor numbers as Covid-19 tears through balance sheets like a 1967 version of George Best. No doubt a number will have walked away or be in the process of walking away from football-related financial commitments on the back of mass redundancies, factory shutdowns, reorganisations, mergers and administrations as opposed to acquisitions.

Thus the wider economy will also be in poor shape. Unemployment is likely to have increased sharply over the spring and summer with all the financial hardship and problems that come with it. Household discretionary spend will drop as a consequence. Items once seen as acceptable will become surplus to requirements. The sports TV subscription, the football season ticket, the new season’s shirt, the trip to the pub to watch big screen football and the regular betting accumulator over a weekend will all begin to seem like a distant memory.

The left hook of the impact of delaying the end of 2019-20 season or even cancelling it in order to try and get the 2020-21 season off to its scheduled start may prove to be just the start of a financial beating with a further right cross to come from playing behind closed doors for the rest of the year.

Of course, this would depend on direction from HM Government. However, it seems inconceivable to allow crowds into grounds if mass population testing is not in place and localised viral outbreaks and/or a potential second wave were to proliferate without the necessary levels of control.

Our own calculations estimate a matchday revenue drop of some £290m for Premier League clubs in the 2020-21 season if stadium doors are closed up to the end of December. Thus, the total impact of closed-door Premier League football throughout 2020 could be as high as £416m in lost matchday revenue alone. If crowds are denied access all the way to the end of next season, then lost matchday revenue could be as high as £878m. And that alone should be ringing plenty of alarm bells in club boardrooms.

Now, if you are a senior TV executive and your ability to deliver the product that you had signed up for was somewhat curtailed, you would, or should, be looking to either reduce your financial exposure or get out of the contract altogether. Mindful that your subscriber base has shrunk largely as a result of unaffordability, the pressure is on to get some sort of compromise in place. The football clubs are trying to use every trick in the book to preserve the fees that they have become accustomed to but you know that they need you more than you need them…

The above scenario is a very distinct possibility. A closed-door game is the basement grade version of what we all understand a top flight game of football to be. And if social distancing is in place, then the trip to the pub to watch the big game being played in another empty stadium will not happen either so there goes a sizeable source of subscription revenue for the TV companies in terms of non-performing pub licences. Advertisers, if there are any left, will not pay anything near the rate card for slots in and around the broadcast, not that they ever did. Thus, the broadcaster is getting squeezed from both sides of the financial line. The only option is to squeeze the clubs.

As a result, we can foresee the Premier League’s £3.1bn TV revenue (as of 2018-19 based on available data) being challenged but how it might be resolved, if at all, is anyone’s guess. UEFA and other competition rights holders will want to ensure that their games are played but if the schedule is being compressed due to government restrictions then the lesser competitions such as the EFL and FA Cups will have to go and may never come back for the bigger clubs as they look further towards Europe.

As Ed Woodward of Manchester United remarked earlier this week: ‘Nobody should be under any illusions about the scale of challenge facing everyone in football and it may not be ‘business as usual’ for any clubs, including ourselves, in the transfer market this summer’.

The final uppercut is that of commercial revenue. As we have stated, there will be defaults and renegotiations. Again, the football offering in a closed-door arena does not compare to the pre-Covid-19 version. Whilst Manchester United fans may mock the ‘Emptihad’ across town, the reality of playing in a truly empty Etihad Stadium is likely to be of little appeal to most, including Manchester City and its fanbase. Club sponsors may feel the same and seek payment reductions.

Equally, those companies that have been hit hard from sectors such as travel and general manufacturing but also some of the prolific shirt-sponsors from the world of gambling may feel that football might be a step too far given current conditions. For the betting companies, the nation’s legislators might make the decision for them as gambling debts and hardship spirals upwards on the back of increased penury throughout the population. The summer months may indeed reveal more pain than we might currently anticipate.

Looking into the Championship and beyond where matchday revenue is crucial to financial solvency, we suspect that if the closed-door policy is enforced to the end of this year, then a number of clubs have likely already played their last game of football.

And if further proof of football’s perverse financials were needed, then consider this. Harry Kane has been widely touted in the media as seeking to ply his trade away from Spurs. The price is a reputed £200m. Southampton FC was put up for sale just before Covid-19 took hold at a reported price of £250m. Maybe there is some negotiation to be had on the club sale price. If so, you could conceivably buy either a football club or a player (who, incidentally, plays for a club just 6 places above the club that is for sale…) with perhaps the same amount of money.

At around £200m or so, a very odd pairing indeed.

Edited: 11th May 2020.