On 24/4 when the club delayed their accounts, Giles Mooney wrote this article explaining why that might be. He thought there was probably about £20m missing. This evening's news back that up. Here’s the original explaining where the difference comes from.
Three things are certain in life: death, taxes, and Sunderland AFC breaking our hearts. Accountancy puns over, Giles Mooney delves through our finances and tries to explain the reasons why SAFC have chosen to defer publishing their accounts.
I keep reading articles, tweets and statements about the financial position of the club and its value that are clearly garbage. We’re either about to go bust or the best run club in history. We’re worth nothing or £40m. And, this week, the failure to publish the accounts apparently prove all of the above statements. It can’t all be true so let’s have a look at what we know and, from that, where we probably are.
And, if you want to cut to the end, I think the club is in a relatively good position for anyone with a bit of money behind them who wants to come in and buy it. But I think it should be valued at a little over £12m.
The business has huge potential to move back up into the money-making world of football and, thanks to the extreme generosity of Ellis Short, our debt position is nothing like as horrific as it was a couple of years ago. Obviously, if we are left in League One for much longer that completely changes. The income levels in this division are tiny compared to the Championship which are miniscule compared to the Premier League. And it becomes a kind of self-fulfilling prophecy, if you change your ways to exist in League One, that makes it less likely you ever leave it but, let’s be optimistic and say we’ll get out soon.
So where are we on value? Well, let’s start at the beginning. If I have a bank account with £1,200 in it and a loan due of £1,000, I’m worth £200. But if the person I owe that money to writes it off, I’m immediately now worth £1,200.
The club was bought, we are told, for £40m but this was after Short had agreed to write off all of the debts. The reason that matters is it’s impossible for the current owners to claim to have bought the club and then dealt with the debt. It was in the deal from day one.
And then the Madrox accounts were published and we learned two important facts. First, the value wasn’t quite £40m. It was £37m. And secondly, as at July 2018, £27m of that was owed to someone outside the structure and £10m was owed to the club itself by the new owners (or rather by their company, Madrox). Based on the accounts, it would appear, that the total amount risked by the owners at that point was a mere £1,000.
We learned quite soon after that that £25m of the £27m was money that Short hadn’t written off or paid off himself and that was therefore still owed by the club (or rather the owners) to lenders.
That money was then paid by the club (from parachute money) to Madrox and then on to the lenders and, as explained by Charlie Methven and Stewart Donald in various interviews, this is exactly what parachute payments are designed to cover, clearing Premier League levels of business debt and similar by a club who are relegated. I don’t actually have a problem with that, it was a business decision taken by business owners.
Some will argue it was too careful, too prudent. Whether it was or wasn’t is irrelevant now, it gives us greater financial security longer term but means it wasn’t splashed on players or wages in the short term. The reason it matters is that, to go back to my original example, the answer isn’t £200 or £1200 if some of the money is still owed. As far as the purchase is concerned, we have to deduct the £25m from the £40m (which is really £37m remember) which gives us an actual purchase price for the club of £12m.
Now, let’s make it a little worse. Go back to the £200/£1200 example. We’ve agreed I’m going to buy for £1200 after all debts are cleared. The problem is, I haven’t got £1200. So, I’m going to borrow it… from the bank account. What you then have is a bank account worth £1200 plus an IOU from me saying that I owe it £1,200 or, for an outsider, something worth £0.
The majority of the remainder of the £12m was a loan by the club to Madrox of £9.6m, basically the IOU I’ve explained above. We’ve been told by the current owners that that debt has been cleared. That news came at the same time as we were told that some wealthy Americans had lent the owners $12m (which using exchange rates at the time is approximately £9.6m). It would appear that, while the club have been paid back the money, the owners now just owe someone else. But at least it’s not owed to the club? Well, yes, but the security offered by the owners is, effectively, the assets of the club so we’re not completely free of the risk.
The publication of the accounts will tell us the true position at July 2019 but remember that the majority of the accounting tidying up at Companies House and the loan from Dell’s colleagues didn’t happen until after that so, if I’m right, the July 2019 accounts will show that the owners owe the club £36m which will make the Madrox accounts really quite ugly. The sort of accounts that, whether you’re trying to attract investors or keep fans onside, you wouldn’t want published until you absolutely had to. I’m suggesting no wrongdoing or mismanagement in this, I’m just saying they won’t be pretty.
Anyway, at the time the club changed hands, it was worth a debt free £12m but since then, what has changed? Remember we can’t cling to the loans being paid off, we’ve already included that. And we can’t say our potential as a club is greater or smaller than it was before so let’s discount that.
What I will say is that the cost cutting has been extraordinary and that enhances the value of the club. As does the ending of a number of potential court cases and liabilities hanging over us. The problem is that, in the meantime, our final parachute payments have been used up on paying Short, clearing the cases and meeting those other liabilities. So, one positive nets off the negative and we’re back to our starting point of £12m or thereabouts.
I’m not knocking the efforts of the current owners to try and tidy up the mess that they acquired. I’m just pointing out that they bought the club for £12m and not the £37m that keeps being thrown around. Have they added value to what they bought? Maybe. Let’s go wild and say they’ve enhanced the value by 10%. That makes the club worth £13.2m. But it certainly doesn’t make it worth the sale price of £35-40m that keeps being mentioned.
I would like to say again that I don’t think the club is in trouble. Far from it, I suspect the club balance sheet today would be healthier than it has been in some time. A more stable, debt free, no losses, money in the bank position. But a balance sheet is a snapshot at a given moment and, to move forwards, the club needs investment in various places and a business plan to get us back into the top two divisions in the very near future. The only alternative is becoming stable in a division we really don’t want to be in.
With no disrespect intended, I can’t see how the current owners would be able to do anything to help with that without borrowing themselves and, as they already have securities over all their company’s assets, I can’t see that is possible anyway.
My conclusion is therefore simple. The club would be a good buy for someone who has the money to risk, acquired as a standalone company (separated from Madrox). It has been stabilised and is ready to be bought. But its value is nowhere near £40m. It can only be worth £12m, or slightly above that.
If the investor has £40m to risk, the extra £28m could be spent getting the club back up towards the top half of the Championship which in turn would increase its value to, perhaps more than £40m. That’s good business and adds to the idea that the club could be worth £40m+. But it isn’t at the moment. Based on what we’re told, Donald is valuing the club based on it’s potential, not its current position.
You’d hope he has experts around him telling him that can’t be done when valuing things. People who understand these things telling him what something is worth and advising him not to say silly numbers. To do otherwise would be like buying a player for £3m while the experts all told you he wasn’t worth £1m. And I just can’t imagine a businessman as capable as Donald would do that.
I think the decision to delay publication of the accounts is nothing too worrying for the football club. I don’t think it will tell us anything we aren’t expecting. But I suspect they will confirm that any claims the business as a whole is worth £40m is laughable. The sooner Donald accepts that, the sooner we can all move forwards.