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.

Leicester City Profit-Loss 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.

Screen Shot 2013-03-09 at 23.05.23

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.

Screen Shot 2013-03-09 at 23.05.13

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

Screen Shot 2013-03-09 at 23.05.40

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.”

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6 Responses to What Leicester City’s finances mean for Nigel Pearson’s future

  1. Mike Saints says:

    I’m not an accountant, just a fan of Leicester City since the 1950’s. I do also have an GCE “O” level in maths, or was it called “Sums” in those days?
    According to figures from various sources and granted they are not all are verifiable, on the back of an envelope I’ve calculated the following:
    The owners in the form of Vichai Raksriaksorn loaned leicester City £100 million up to May 2012.
    The Club made a loss of £30 million up to 2012 and possibly something similar this season.
    According to Forbes, who compile a well-known list of the richest people in the world, Vichai Raksriaksorn was worth £160 million in August 2012.
    When I look at the bottom line on my envelope, there doesn’t seem to be too much money left.
    Another concern is that the loan attracts interest of 8%. That’s £8 million a year.

    Is any other fan worried?

  2. Steve Morris says:

    I’m not worried because there is no point worrying either way.

    While Vichai Raksriaksorn may have a personal fortune of £160 million, the club isn’t financed from this. The club is part of K Power International, which has a turnover of £1 billion a year. I don’t know how much of that £1 billion is profit but it does seem like they can run a football club out of petty cash.

    Also, I would consider the mention of ‘debt to equity’ in the club accounts as pretty reasonable evidence it is likely to go ahead. To not do it would mean the Thai owners would lose face and also, I think the club is effectively bankrupt if they don’t.

    Lastly, after many years of watches Leicester languishing with unambitious Leicester businessmen running the club, I am delighted the Thai owners are here and trying to make something happen. There are risks, yes.
    But in my opinion they are risks worth taking.

  3. Brad Johnson says:

    Great article as always.

    I have always been a big supporter of Nigel Pearson but recent performances have had me despairing. It really is looking as I we are going to fall out of the play offs at this rate so maybe a change is the answer? It really is a tough call for the owners. Especially with their track record for dismissals.

  4. Rural Fox says:

    This article has covered everything I have been pondering and worrying about for a couple of years.

    Lets be realistic if this company was a standard Ltd company it would be classed as insolvent and probably be trading illegally.

    The basic facts are if we fail to get promotion within the next couple of years we will ourselves be insolvent. As our debts will outway any possible future investment. In other words we would not be a viable proposition for any investment regardless of who invests. current Thai owners or anyone else.

    Ive tried to do digging on K power holdings but struggle to get info other than they are ran from the cayman islands?

    To look at it simply. If you bought a business traded it at a loss for 5 years you would eventually after taking out a business loans an overdraft and borrowing off your family still run out of money!
    This is just a larger version of that. I wish more people could see that.

    Buying the stadium !!! We haven’t bought it at all as far as I can see. A limited company now has a mortgage on it. Its the same as your house. You don’t actually own it until the final payment.

    Richard Branson wouldn’t be stupid enough to burn millions a year and neither are these Thai owners.

    We are in financial mess and need some answers. I would strongly suggest that whoever posted this original blog should start a pressure group.

    Even promotion to the premiership would not put us financially straight. The wage bill needs cutting in half next season or we will be another Portsmouth F.C.

    The press slate Arsenal for there lack of ambition, i find this ridiculous they have a cash reserve of £120 Million. Whats our cash reserve?

  5. Rural Fox says:

    And just to add………

    The answer we are looking for is simple. We need to see actual projections. So 2 sets of projections/accounts.

    The first set is for scenario 1 We gain promotion.

    The second set is for scenario 2 We are still in the championship in 2015/16 season.

    With Scenerio 2 we want to see actual evidence that all our debt can be covered by these two Thai business men who have drifted into our club. Not by loans. Only by cash reserves or assets.

    Its time for answers not spin. I would love to meet the chief executive with the fox blogger and actually get some facts.

    • foxblogger says:

      Thanks for the kind words, but for many reasons this blog is not a campaign site. The Foxes Trust is actively seeking meeting with the club on this subject.

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