What Leicester City’s finances mean for Nigel Pearson’s future

There have been a lot of figures to absorb in the last seven days. A record loss of nearly £30m. Wages soaring to nearly £28m. The club’s debt to its Thai owners rising to an estimated £100m.

But without more information these numbers are often difficult to put into context. Is the loss that big? Are the wages that high? Is the debt that significant? And what does it all mean for Nigel Pearson? Here are some indicators to help you make up your mind.

The above chart shows the club’s headline profit and loss figures since Leicester City were relegated from the Premier League. In that time City have recorded a profit just once. Boosted by parachute payments from the Premier League, the club’s books in 2005/06 looked healthier than they have at any time since.

From 2006/07 to 2011/12 the Foxes have posed cumulative losses totalling £78.3m. More than half of that total, £44.9m, has come in the two seasons since the Srivaddhanaprabha family took control. Whilst the club was by no means running a tight ship before King Power arrived, the acceleration in losses is striking.

Much of the increased losses have come from higher player wages. Whilst high as a percentage of turnover, salaries did not peak at much more than £15m for seven years. Then in 2011/12 they rose by more than £11m.

There have been significant rises before (see 2007/08, Milan Mandaric’s first full season at the helm) but never on this scale.

The high salaries and the losses they have generated are being financed through a series of loans, £67.5m from the owners was on the books at the end of 2011/12. A further £15.4m had been injected into the club upto the end of November this season. Whilst it is not clear if this money is a loan – it seems a reasonable assumption.

Meanwhile £17.2m was owing on the stadium before King Power bought the debt. As with the loans it seems likely that, in time, the owners will want back the reported £17m which was paid to Teachers to put the stadium in their hands. All that takes the total owing to the King Power Group of companies to around £100m.

To put it another way, Leicester’s debt is almost five times bigger than their turnover.

There has been talk of some of this debt being turned into equity – something which would significantly boost the club’s balance sheet. But there are no guarantees this will happen. Meanwhile the loans have already accrued nearly £4m in interest.

So how can the club stem the losses? One way is to bring more money in. As the chart above shows, turnover is improving. This has been largely due to increased sponsorship deals with King Power, Air Asia and Amazing Thailand.

Other revenues though have been broadly flat. Ticket prices rose in many areas on the King Power Stadium at the start of 2011/12, but the club raised £150,000 less in ticket revenue than it had a year earlier. Results like that may cause the club to think again with its season ticket and match day ticket strategy.

Retail, one of the more noticeable overhauls at the King Power Stadium, has also seen revenues stay virtually the same.

On both counts the club will need to do better as it fights to meet the Championship’s new Financial Fair Play requirements.

Meanwhile despite this clubs extensive coverage on Sky Sports this season, the Football League TV deal is with 26 per cent less this year

Financial Fair play kicks in with penalties from next season. The first sanctions for finishing 2013/14 with a loss of more than £8m will be applied in January 2015. That could mean a transfer embargo if the Foxes are (heaven forbid) still in the Championship, or a Financial Fair Play Tax if they have been promoted.

Just how difficult it will be for Leicester City to comply with the new rules should they fail to get promotion this year is pretty clear.

In short, Leicester City will have to cut wages back to near 2009/10 levels to have any hope of meeting the cap, and whilst some big earners have gone, their replacements do not play for free. Nor do the many players who remain at the club having signed contracts during Sven-Goran Eriksson’s time in charge.

With the aforementioned £15.4m already injected into the club this season – there does not appear to be the slowdown in spending necessary to comply with the Financial Fair Play limits yet.

Financial Fair Play also means loans from related companies are banned from next season.

It all leaves the Srivaddhanaprabha family with a choice. Promotion is necessary as soon as possible so that Leicester’s finances can begin to recover, and likewise King Power can begin to recoup their investment.

So do they stick with Nigel Pearson and cross their fingers knowing that;
a) Leicester’s promotion chances are fading,
b) If Leicester do not get promoted the club has a real job on its hands to meet Financial Fair Play,
c) To have a hope of meeting FFP they would have to invest around £5m in equity next season – money which they would not get back unless or until the club was sold.

Or do they twist?

It is unlikely to have gone unnoticed that Milan Mandaric sacked Gary Megson last season with 13 games to go and saw Dave Jones lead his side to automatic promotion with 10 wins and 3 draws.

Only a Premier League pot of gold will even begin to bring Leicester City’s finances back towards the black.

It might be an easier decision to make when it isn’t your £100m at stake.

What we know for sure is the very clear statement made within the club’s accounts.

“The directors also monitor the performance of both management and players and have a proven track record of making changes where required.”