Sunderland's Finances Explained...
Stewart Donald’s busy day last Thursday left much to be pondered and plenty to be excited by. The day had started with him consuming the fixtures that his new club would face in the very new environs of the third tier, before welcoming A Love Supreme into the bowels of Black Cat House for an exclusive interview.
Much of what Donald said on what represented a seminal day for the club – the announcement of those fixtures certainly helped the new path upon which we are about to embark feel all the more real – had those listening and reading cooing in agreement.
In particular, his no-nonsense approach when discussing wantaway players and their agents left plenty nodding along with glee. It is not a new refrain from Donald, as both he and Charlie Methven have consistently sought to showcase their displeasure with those intermediaries they clearly view as a scourge upon the beautiful game. To many Sunderland fans, hearing such utterances is music to the ears.
Donald said plenty more last week, much of which has been pored over at great length. Yet the new owner’s remarks around a variety of issues concerning the club’s finances have been given surprisingly little coverage when we consider both their volume and their importance. Donald helped clarify plenty that had appeared murky before Thursday, and it is worth taking the time to unpack those things in more depth.
Old Debt Or New Investment?
Excitement swelled last Tuesday when information appeared at Companies House showing an enormous increase in the club’s share capital (i.e.. the number of shares issued by the club). The number of shares in issue seemingly shot up from a mere £86,000 to a mammoth £152m. This seemed fairly likely to constitute the conversion of the club’s old debts into shares, done as it was on the day of Ellis Short’s departure from the club, but hopes were stoked by the likes of Kieran Maguire – an expert on football finances, no less – declaring with confidence that this represented sizeable new investment in the club.
Both clarity and confusion arrived the following day when documentation became available. The club had indeed received a significant equity injection but, in a move befitting the outgoing regime, had filled the share allotment form in wrong. Thus whilst £152m had been converted into shares, that only corresponded to an increase of the issued share capital of Sunderland Limited (the club’s parent company) to £1.52m – the 152m shares have a nominal value of just 1p, with the excess going to the club’s share premium account.
In the grand scheme of things, this is by the by. But it did tie in with another document that had appeared earlier in the week, whereby the club had resolved to potentially increase its issued share capital up to £2m – thus paving the way for new investment in the not so distant future (the shares must be taken up within the next five years or the conditions of the resolution will lapse).
What was already fairly evident was confirmed by Donald on Thursday: this injection of funds represented Short converting the club’s debt into shares, thus confirming what had been promised when news of the takeover was first announced. Some had quibbled with the figure given that the club’s net debt had previously stood at £126m, but the numbers always added up. That net debt included the club’s cash figure; gross debt stood at £161.7m. A £23.2m bond held with SBC reduced that figure to £138.5m and given that we know Short has had to fund significant losses across the 2017/18 season, it stands to reason that the extra £14m or so has arisen in the time that has elapsed since the club’s most recent reporting date.
No new investment then, but at last some confirmation of what had been promised back in April. Donald, when asked by ALS, confirmed that “the banks didn’t move as quickly [as would have been liked]”, but that Short had completed the deal “on the proviso” of clearing the debts. When exactly the bank will (or perhaps now has) get the necessary paperwork in order remains to be seen, but this does at least provide reassurance that the club is, at least for the time being, free from debt.
The Art Of Our Deal
Donald also offered some insight into the machinations of the deal he and Methven had struck with Short when purchasing the club. It has been known for a while now that the consideration to be paid for the club is in the region of £40m, but Thursday’s pursuit of confirmation actually served to make the deal that little bit more confusing than it had already been.
In one sense, at least, no confusion is present. Documents detailing the charges now held by Drumaville Ltd (in effect, Ellis Short) over club assets emerged a few weeks ago and were covered here at ALS back then [https://www.a-love-supreme.com/single-post/2018/06/12/Deal-Becomes-Clearer]. Our understanding of the situation was fairly solid already, but it was nice to get confirmation from the horse’s mouth. Donald confirmed that these securities were “over-cautious” and detailed how Short had insisted upon holding charges over both property – Black Cat House and the Academy of Light (Donald and Methven refused Short’s request of holding a charge over the Stadium of Light as well) – and over cash – the parachute payments.
Donald advised that he was happen to accede to Short’s demands because there was no reason to believe the outgoing chairman would not be paid in full. The primary reason for not paying a higher sum upfront now was put down to the significant liabilities the club has to cover in the short-term (more on those later).
However, where some confusion arose was when Donald raised the notion of a “player sheet” being present as part of the negotiations when buying the club. This, seemingly, was a document that detailed both confirmed and expected amounts due in and out of the club for current and former players, with the figures therein helping to form a valuation for the cost of the club.
Donald highlighted the example of Didier Ndong as one where not all had gone according to plan. Ndong was expected to sign for Watford for £8m, a deal which evidently didn’t materialise. Given that this was money expected into the club’s coffers to fund imminent liabilities, this now represented a hole in the finances that would have to be filled. Donald therefore confirmed that he had reduced the amounts initially due to Short, with an agreement that Short will subsequently be due the amounts receipted for Ndong upon his eventual sale.
The details here were somewhat woolly and further clarification would be welcomed. Our presumption is that Donald reduced the amounts due to the old owner in order to ensure he could make payments owed by the club out of his own pocket. Such payments were expected to be funded by player trading (i.e.. Ndong’s sale) rather than by the new owner. Hence, Donald pays off amounts he was never expected to cover with the money that was due to go to Short, then uses the incoming money for Ndong replace the latter, therefore still resulting in him paying £40m for the club. Donald confirmed that the likelihood of selling Ndong for £8m is now slim, and that either he himself or other player transfers would likely have to cover the shortfall.
The new owner also confirmed that some liabilities have now appeared that he and Methven were not initially aware of. Chief among those items is a £5m fee due with respect to the Ricky Alvarez legal case, an amount which has emerged on top of the £9.7m the club already knew it had to pay.
Moreover, Donald confirmed to ALS that “a large chunk” of that initial amount was still to be paid. Ellis Short had been under the impression that the full initial figure had been paid off, which is both a sign of the old owner’s distance from the day-to-day workings of the club but also an example of the perils of undertaking minimal due diligence before buying a business. We know that Donald and Methven were generally conversing solely with Short prior to sealing the deal, so it is hardly surprising that things have now begun to emerge from the woodwork.
As mentioned above, the club recently resolved to allow for the increase of its issued share capital to £2m. These are nominal figures and do not represent the actual amounts of equity held by the club; Short’s conversion of debt to equity had a nominal value of £1.52m but came to that £152m by the old owner paying a 99p premium on every share.
Those £1.52m worth of shares are now fully held by Madrox Partners Ltd, Donald and Methven’s investment vehicle for the purchase of the club. That leaves scope for a further £480,000 worth of shares to be issued, shares which look confirmed to be set aside for Juan Sartori.
Last Thursday Donald confirmed to ALS that, subject to EFL clearance, Sartori will obtain a 20% holding in the club. If the entirety of the available shares (£2m) are issued, Madrox’s £1.52m would constitute 76% - leaving 24% for Sartori to pick up. The figures do not quite tie in, but it makes sense regardless; holding over 75% of shares allows Madrox to retain control of any special resolutions that may need to be passed in the course of business, and it is also entirely possible that when Donald talked of “20 percent” he was simply speaking in rounded figures.
Whatever the case, one slight confusion arose due to the consideration Sartori will pay for his 20% (or even 24%) holding. This was confirmed to be a mere £3m, which would value the club overall at just £15m (or just £12.5m if the holding is 24%). Given that Donald has only recently bought the club for £40m, such a drop in value seems odd.
Reading between the lines, it would seem that Sartori has been given a foot in the door at a low cost with a view to significant future investment should the club rise up the league structure. Donald confirmed that Sartori’s undoubted wealth is “not currently needed”, and that his involvement has been allowed with a view to the longer term. That seems fair enough on the surface, although it does raise the question of why Sartori has bought in at all now if his funds aren’t needed, when surely he could act in an advisory function (Donald made reference to the Uruguayan’s knowledge of youth football in South America) without paying anything until the time suits.
That being said, it will at least boost the club coffers by a further £3m. The expectation is that they will bolstered by a significantly larger amount should all go well in the next season or two.
“It’s not in good shape, there’s no two ways about it.” Donald has been wildly positive for the most part but his admission to ALS was a sign of a man who is honest about the task facing him. The new owner detailed that the club has delayed payments across the 2017/18 season, such that a sum in the region of £20m is now required to be paid to clubs at the end of August 2018. The club receives a parachute payment of around £17.5m (being half of the amounts due this season) prior to that, but given that Short holds a security over these amounts it is possible that they will struggle to funnel these amounts towards those liabilities.
As a result, Donald was clear about the difficulties that face the club even with the debt cleared and new owners on board. He stated that budgets had been drawn up which expect the club, after excluding parachute payments because they will cease soon enough, to trade at an annual loss of around £5m. Donald advised that those projections had been “cautious on player trading”, meaning the club took a pessimistic view of the amounts recoverable for outgoing players, but “aggressive on bringing other costs down.”
That aggression can be seen in the vast cuts to backroom staff that have taken place in recent weeks. Donald confirmed the wage bill stood at around £27m – which in a way is testament to the efforts of Martin Bain, who found himself in possession of a £35m bill as recently as January – and believed that, following cuts and the departure of some players on hefty wages, that was likely to be slimmed to at least £16m.
Donald expects the club’s income this year, ignoring those parachute payments, to hit around the £17m mark. The departure of as many high earners as possible would therefore increase the amounts available to recycle into the playing squad. The new owner expects Jack Rodwell and Bryan Oviedo to depart soon enough, but Lee Cattermole, who makes up that trio of the squad’s highest earners, will prove much harder to move on. Cattermole’s wage, £42,000 a week, would make up at least half the salary bill of a sizeable proportion of clubs in League One.
Donald was adamant that should a few high earners leave then they will be able to retain others who are trying to make life difficult for the club “out of principle”. That is admirable but it is difficult to wonder whether a complete new slate might be more worthwhile. There seems little point in refusing to release a player and continuing to pay their wages until their contract runs out just because the requisite transfer fee is not forthcoming, particularly when the club’s finances remain in need of rectifying.
Donald did at least seem wholly realistic about the amounts that should be dispensed upon new players. The new owner recognised that wages in League One tend to span the £3,000 to £5,000 a week bracket: “If we sign 16 players of £5,000 a week, that’s £4m of players. That will put you pretty high on the list [in terms of amounts spent in the division].”
Unsurprisingly, given the club’s recent willingness to pay bog-standard footballers extortionate amounts, Donald confirmed that stumbling blocks had arisen in negotiations with potential new signings. In numerous instances, players were said to have asked for a doubling or tripling of their weekly wage should promotion to the Championship be achieved. Donald’s response – that the club’s revenue will only go up 30%, so the cannot afford to increase wages 200% - was tremendously reassuring.
The new owner confirmed to ALS that one potential transfer target had had his offer pulled from the table because of demands that showed the player felt he could come to the club and simply extract more money. The player in question had been offered £4,000 a week to sign for a Championship club, an offer which Sunderland were willing to match. But then said player had demanded £8,000 a week should promotion be achieved; despite the fact he was entertaining an offer of half that from a club already in that division. It is hard not to think that the old hierarchy would simply have given in.
Donald advised that “we need to see whether the club can function without me continually feeding it every year”, a statement which is fairly telling. It seems that the plan is to get the club on an even financial keel as soon as possible, then look at significant investment some way down the line. Certainly, any hopes fans might have had when Donald spoke of the “biggest budget” the division has seen may prove to be misdirected; the club will have a huge budget for this level, but it also has hefty outgoings that will eat up a large amount of it.
All in all, the new owner’s honesty and willingness to talk allows us to draw far more informed conclusions than have previously been possible. His ALS interview last week gave up plenty to consider and analyse in a financial sense, and a clear plan is emerging: Donald and Methven will cut costs whilst also seeking to build a squad strong enough to attain promotion at the first attempt, before then seeking to invest any savings they have made this year (though they look likely to be small) into a further push forward once in the Championship. Then, when the time arises, they will take their leave and investors with deeper pockets will assume the reigns.
It is a long way off and, as with most things in football, it is unlikely that everything will fall into place as hoped. But we know a bit more now and, more reassuringly, we can see that the new ownership at least has a strategy in place to try and right the good ship Sunderland.