BCFC: The League One Financial Challenge (Part II)

The last week or so has been incredibly busy for Blues; a new manager has been appointed, season ticket prices have been confirmed and the new first team kit has been launched. While all of this noise is going on in the foreground, the new financial reality of League One continues to govern just what Knighthead and Blues need to do to remain in the black and on the right side of the rules.

Finances and BCFC

Two weeks ago I wrote this piece where I examined the chief issue for League One clubs – player wages and the Salary Cost Management Protocol (SCMP).

Since then there has been an announcement from the EFL that SCMP rules may be revised ahead of the new season as League One and League Two clubs continue to lose money.

In this follow up piece I wanted to look into the implications of what new rules might be brought into play, as well as look at the longer-term future and discuss what impact relegation might have on the complete purchase of Blues by Knighthead.


New Rules?

I have to admit, the announcement that the EFL were looking into changing the SCMP rules somewhat caught me off guard.

There had been no indication that I had seen that this news was coming.

Indeed with the impending general election on July 4 and subsequent delay of a potential introduction of an independent football regulator by the Government, I had honestly thought that the football authorities might have taken their foot off the gas from enacting their own reforms.

The announcement gives precious little insight into what the changes might look like other than that there had been agreement to revise the rules and that “clubs are committed to implementing change”.

The current rules allow for clubs in League One to spend 60% of their turnover on player salary costs (as well as no more than 100% of “football fortune income”).

As a relegated club, Blues are allowed 75% of turnover for the first season that they are in League One.

Taken at face value, it would appear that clubs are committed to reducing those figures to tighten the amount that can be spent on players and thus to reduce losses.

However, as a cynic I’m not sure how much I believe that there will be any serious changes.

One of the reasons that there has been calls for an independent football regulator is because the EFL is essentially owned by the clubs, and as such any regulation has to be approved by the very entities are being regulated.

With that being the case, one cannot believe clubs will call for too stringent changes in the same way that turkeys are unlikely to vote for Christmas.

Regardless of that, I think this is another aspect of ownership where Tom Wagner and Knighthead can show their professionalism in comparison to what has come before them.

If I was in the shoes of Wagner, or Garry Cook for that matter I’d be doing my best to make my voice heard on the inside with regard to any potential changes.

Rather than taking the position of ignoring it like former CEO Ren Xuandong tried to when the club first faced a transfer embargo; or fighting a long and in the end losing battle against the EFL in the arbitration process, I’d like to see the club be proactive.

With intelligent and charismatic leadership, I believe it’s possible for the Blues board and ownership to push for more pragmatic solutions to the financial woes the league faces; solutions which will not punish a club that has the potential for huge financial backing along with bringing in massive revenues.

I guess only time will tell but like everything else this summer, I’m looking at this situation with hope rather than fear.


The Revenue Paradox

The day after Blues were relegated to the third tier, ZO Future Group (what was Birmingham Sports Holdings) made a voluntary announcement to the stock exchange of Hong Kong warning that due to relegation, there will be a decrease in revenue earned by Blues over the next financial year along with a potential impairment in the value of assets of the club.

Before the Knighthead takeover, there would have been absolutely no reason to disbelieve this statement.

I still dread to think what would have happened to Blues had we gone down at any point while under the previous ownership regime.

Yet, under Knighthead things are very much different.

Despite season tickets being launched in June, Blues confirmed in a Twitter post that sales of season tickets in the first ten hours totalled more than the previous five seasons put together.

Across Blues social media, I’ve seen lots of talk of fans coming back into the fold to buy season tickets after a period away. Blues might have been fell through the relegation trap door last season, but hope abounds in B9.

Normally, this kind of news would be good not only for the club but also for the holding company.

While ZFG have no financial control whatsoever over Blues, the money earnt or lost by the club is still on their balance sheet due to ZFG still holding a 51% stake.

Increased revenues means a possibility of profit for the group as a whole, which means for confident shareholders and a booming share price.

Yet increased revenues for the club also comes with a slight drawback for ZFG with regards to untangling themselves from the club permanently.

As I’ve said many times before, HKSE rules make life difficult for any listed company trying to divest itself of an asset which makes up the majority of its revenues.

If revenues from the club do indeed continue to increase, it means that ZFG also have to build revenues from their other ventures if they are to sell the remaining 51% to Knighthead.

As of the interim accounts in February, Blues still made up 81.88% of the revenues earned by ZFG despite them having absolutely no control whatsoever over the club.

We won’t know until the end of September how much that changed over the remainder of the financial year, but my suspicion is that Paul Suen, Vong Pech and co really need to get things moving with ZFG’s new businesses.


The Price

One of the questions I’ve had asked by a few people is how relegation affects the price Knighthead have to pay for the remaining 51% of the club.

In some ways this is a difficult question to answer because there is absolutely nothing public about a price or a timescale for the second part of the purchase.

All we know is that Knighthead intend to purchase the remainder in due course – and that the big hold up really is how legally possible it is for ZFG to sell that 51% rump.

Having a look through the documentation issued to shareholders when Knighthead bought the initial stake in the club, there is only one thing I can say for sure which shows how Knighthead have saved some money on the deal.

On page five of the original sale announcement, there are details of a promotion bonus to be paid out if Blues reach the Premier League, totalling up to £15M.

Unfortunately for ZFG, that promotion bonus is only payable if Blues get promoted to the Premier League on or before June 30, 2025 – something that is no longer possible due to relegation.

This means that Knighthead definitely won’t have to worry about paying that money out.

While I don’t know the cost of purchasing the remainder of the club, it’s my belief that relegation won’t have made any difference whatsoever to the price.

The reason for this is something that Tom Wagner talked about in a Masters of Business video, which I wrote about last June.

In that video, Tom Wagner said:

… the investment that we made in the football team in the UK was structured as a secured loan with the ability to eventually gain full control. A lot of the investing we have pursued has been structured in that way…

As I discussed at the time, this confirmed to me that the way that Knighthead were going to force ZFG into selling the second half was basically by taking the club as payment for loans made to keep cash coming into the club.

From this, my feeling is that the price will be somewhat immaterial, because Knighthead won’t actually be handing over any more cash.

My hope is that as ZFG get their arses into gear in the next twelve months with their new electric car business, things can continue to progress to a point where Knighthead can trigger the takeover of the remaining part of the club, and I can finally forget about the HKSE once and for all.


It’s worth noting that there are still some niggles in all this financial joy; complaints from club class season ticket holders who have been forced into moving due to the extension of hospitality areas, along with some moans about the increased prices for said hospitality next year.

And while on a macro level progress and revenue is good, some of the individual stories in relation to those complaints present a challenge for the club to show that even with all this new-found commercial strength there can still be a place for compassion.

The question now is how long the club can maintain the general feelings of hope and optimism.

Wouldn’t it be great if we could go a whole season feeling this on top of the world?