Yesterday in the first part of this article I talked in general terms about the four unique factors surrounding Reading FC which enabled Sir John Madejski to work a miracle and make money out of owning a football club. These were that the club was relatively run-down and without significant debts so could be bought relatively cheaply; the presence of a co-operative local council which would provide land and planning permission without significant difficulties; a suitable location in an affluent area; and taking a long term view and investing in infrastructure.
Today, as promised, I’ll delve more deeply into this, and look at the actual numbers involved so we can get an idea of just what this investment was and its likely value now.
Let’s start with the cost of the purchase of Reading FC in 1990. When Roger Smee sold up the club was reported to have debts of between £600,000 and £800,000, and the outlay required for John Madejski to purchase an initial 51% share in the club was £306,000. He’s currently built his shareholding up to over 90% by purchasing all other shares as they became available, so let’s extrapolate that 51% up to 95% and call the total cost of shares £570,000. Add this to paying off the debt and the outlay so far has been £1.37M.
Then, of course, came the club’s on-going losses. At the time of the purchase in 1990 these were reported to be in the region of £11,000 per week, and for Madejski’s first season in charge, 1990-91, the club reported losses for the year of £964,858, with reduced losses of approx £320,000 the following year, so that in 1992 the club’s debt had risen again to around £1.4M. In the six seasons up to the move to the MadStad in 1998, losses varied on a year to year basis. In 1994-95, when the Royals missed out on promotion to the Premier League by a whisker, losses were just £150k – as full-houses and play-off receipts increased but so did win bonuses. In these two seasons transfer dealings helped off-set losses, as bigger clubs asset-stripped players like Shaka Hislop, Simon Osborne and Scott Taylor following the heartbreak at Wembley, and in fact in 1995-96 transfers helped the club make a small profit of £201k.
But as the move to the new stadium grew closer in the 97/98 season and relegation threatened, so a rash of big money transfers – including Tommy Burns’s “magnificent seven” – meant over £3M being spent on transfers in a single season, and in 1997-98 the total loss was £4.1M . But losses in 1997 were relatively small (£503k) so let’s total up the total of losses for the years 1990 – 1998 and that comes to around £7.2M. Add this to the initial purchase costs of £1.37M and we’re looking at a total investment up to that point of around £8.6M.
Of course, with the move to the MadStad the sums of money involved get much, much, higher, and the sums of £37M to build the stadium complex is often quoted. This figure is accurate, but there’s slightly more to the story than just the costs spent – as frequently the income to offset this isn’t mentioned. So let’s clarify how much the MadStad actually cost John Madejski.
The land was purchased for just £1, with the condition attached that it be decontaminated at the buyer's expense, since was an old toxic waste disposal site. This process cost £6M, and another £6M was made as a contribution towards the construction of the A33 Relief Road, another condition from Reading Borough Council. These outgoings, together with the actual costs construction of the Stadium and hotel, make up the total cost of £37M, but there are a couple of significant income items. Firstly, the Elm Park site was sold for housing development, for which the sum of £3.25M was received. (As an interesting sidenote, the instant that Reading FC relocated, property prices in the immediate vicinity of Elm Park reportedly rose by 25-30%). Sales of land surrounding the new stadium site for business use also contributed substantially to the pot, and in 1998 it was well-publicised that the overall shortfall was £10M, which John Madejski guaranteed himself.
So if we add this £10M to the total investments so far, we’re talking about a total investment in the club of approximately £18.6M up to 1998 when the MadStad opened. The years prior to promotion show the kind of losses that the club was running at, a total of £24.1M in 8 years (£2.5M to 2000; £4.5M in 2001; £2.7M in 2002; £1.6M in 2003; £1.8M in 2004; £4.5M in 2005 and £6.5M in 2006) – not all of these losses were directly subsidised by Sir John, though. After promotion in 2006, the two Premier League seasons brought a profit of just over £13M, some of which was used to offset previous losses and some to further improve facilities – such as substantial improvements at the Hogwood Park training ground and the construction of a Premier League standard media centre.
This ties up with the last couple of published accounts, which show total indebtedness (including creditors payable within one year) of £50.8M in 2010, compared with £56.9M the previous year - the major difference between these two figures is the repayment of the bulk of the club’s £7.5M bank overdraft. From these accounts the total indebtedness on paper to John Madejski, in the form of a Chairman’s loan, is £25.8M – money on the accounts which Sir John has put into the club and can technical demand repayment of. There are no signs of him looking to demand this, though, and the terms of this loan are massively weighted in favour of the football club – for instance some years he has taken no interest on this whatsoever, and even when interest is accrued this is on very favourable terms - two thirds of the loan is interest free with the remaining third payable at 1% below the HSBC bank rate. Most other football club chairmen charge interest at 3 or 4% above standard rates.
After all this number crunching – which I’ve tried not to make too heavy but there’s no way to avoid an awful lot of numbers, I’m afraid! – we can see that the club’s total debt at the end of the 2010 financial year was £50.8M. However, this is a snapshot, and much of the way football finance works is in arrears and by instalments. So if we take out all sorts of other accounting niceties, such as future wages, trade creditors, deferred income and add in other stuff such as stock held and what’s owed to the club, a much more realistic figure of the club’s actual debt is £30.2M, of which £25.8M is owed to Sir John.
So, this has been a long-winded way of retelling the financial story of how we got to here over the past 20+ years. In part three of this article, to be published tomorrow, I’ll look at how much all this is potentially worth, what Sir John’s options are for turning this £25.8M figure on paper into a real method of realising his investment and making a profit, as well as discussing what the implications of this are for Reading FC and the future of the club and its supporters. And it won't be full of numbers, either!