The Choices of Chairman John

The reports from a couple of weeks ago that the ownership situation at Reading FC was "critical" will have rung alarm bells for many Loyal Royals, and especially those who breathed a sigh of relief in February when it was announced that Sir John Madejski was back at the helm after the apparent disappearance of Anton Zingarevich. There's a school of thought that says "Sir John won't let us down, he always has the best interests of the club at heart..." and whilst that viewpoint is widespread, I think we need to ask just how realistic that is – or rather what Sir John can actually do. No-one doubts that his heart is in the right place, but is the situation so bad that there’s now no way out for him and the club?

As we all know, Sir John rescued Reading from lower-league obscurity in 1990 and invested largely in infrastructure, with the club's rise in profile and league status coming on the back of that "brick by brick" strategy. But throughout their rise to become established in the top two tiers of the English game, "prudence" was always pretty much to the forefront. Although the club sustained losses over the years - that's the nature of football - these were comparatively modest, and the club's policy of living within their means was much admired across the football world, where unimaginable levels of debt and football clubs suffering "insolvency events" became everyday happenings.

This policy, however, infuriated many supporters, who became frustrated at the inevitable loss of star players to bigger, more free-spending clubs, who could offer much larger wage packets, Premier League football, or both. This policy was derided as "lack of ambition" by many, and at the same time was applauded by others as being part of a sensible "Reading Way" by others, and was also out-of-step with the "spend, spend, spend" philosophy prevalent across much of football. But, notwithstanding any arguments about how this policy damaged the team’s competitive changes, it did keep Reading in pretty good financial shape for many years. Although losses weren’t eliminated completely, they were comparatively small compared to many other clubs similar to Reading.

Because the reality for such clubs is that, if you’re not one of the European "super-brands", with the riches of UEFA TV revenue virtually guaranteed (David Moyes-permitting!) financial management is a question of steering a tricky course between two dangerous reefs – at one extreme you can spend whatever you want to buy – or keep – whichever players you feel you want or need, and at the other extreme you can sell any players you develop and stay in the black but hardly ever compete for success on the field.

And personally I think Reading steered this course pretty successfully over the past ten or so years – mainly thanks to a steadfast refusal to give in to players’ excessive wage demands, extremely astute signings (for example Kevin Doyle and Shane Long) and an uncanny ability to sell players for high prices just at the time they stopped being any good (here I’m thinking of the likes of Dave Kitson, Ibrahima Sonko and Stephen Hunt).

But at the same time as all this prudence, it was always clear that Sir John was ready to sell the club to someone with deeper pockets – he had become all too aware that owning a football club is like an old car – it needs constant injections of cash just to keep it ticking over. And he had also no doubt discovered that the higher up the football pyramid a club goes, the higher the sums involved become, and that despite the massive increase in income that comes from being in the Premier League, there’s a corresponding increase in costs – costs which tend to linger on like a bad smell even after relegation and costs which parachute payments only reduce rather than completely cover.

So it’s well known that Sir John had been looking for a buyer for many years – he famously said "The only way to make a small fortune from owning a football club is to start with a large one" and followed this up in late 2006 by saying "The brand is getting stronger all the time and if there is a billionaire who wants a nice accessory down the M4 then come and talk to me. Apart from Manchester United, unless you've got a sugar daddy with really deep pockets, you're wasting your time." But despite regular rumours of new owners, nothing happened, until in January 2012 it looked as though Sir John’s dreams had come true.

Sir John initially sold a 51% stake in the club to Anton Zingarevich who was purchasing this through a Gibraltar-registered consortium, Thames Sports Investments, and this deal was ratified in June 2012 after investigations carried out jointly be the Football League and the Premier League. The involvement of the latter was because in the meantime Reading had won the Championship titles and so were promoted to Tier One, for the second time in their history.

At this point, everything looked rosy for the club, about to start the new season as a Premier League club with a new Chairman saying all the right things about "ambition" and seemingly prepared to back that with money. In fact, Zingarevich’s biggest signing was Russian Pavel Pogrebnyak, who he is reported to have pursued relentlessly in order to win a battle against Fulham to secure the striker’s signature. It’s clear that Zingarevich saw this as his "marquee signing" – his personal statement to supporters, and one which he was clearly determined to achieve. In fact, the club’s official publicity stated that this signing was "a major coup for the club - and simultaneously a signature of intent."

Whilst Pogrebnyak’s signature may not have been obtained "at all costs" it’s obvious that winning a bidding war must mean that the Russian is on extremely good money for a club like Reading, although numerous reports at the time that Pogrebnyak’s salary would be £65,000 a week were all strenuously denied. What level of influence Zingarevich had in other transfers isn’t public knowledge, but it’s almost certain he will have had significant input into other transfers – Royston Drenthe and Danny Williams are the most likely - and also that he defined salary levels for other staff within the club, not just those on the field.

All of the above will be familiar history that holds no surprises to Reading supporters, as will the sorry tale of how things have gone wrong in the last twelve months to get us to the situation we’re now discussing. 2013 was an annus horribilis for Reading FC as the club failed in the Premier League, leading both to the sacking of manager Brian McDermott and eventual relegation back to the Championship, followed by the news that the purchase of the final 49% of the club had not been completed. This was initially due in March but was delayed until September, but that deadline came and went and subsequently Sir John has resumed full control of the club, aggressively looking for a new buyer. You would suppose that he is effectively acting as a broker for Zingarevich for the initial 51% sold in 2012 although there is speculation that he may not have actually been paid in full for that stake – it’s beyond doubt that Zingarevich has not been seen at the club since September though and all the indications are that he’s tired of his brief spell of playing real-life Championship Manager. No-one knows why, but it seems common knowledge that we’ve seen the last of him.

It’s a sad and familiar tale, but retelling it is necessary in order to properly understand the situation Sir John now finds himself in. Because although on the surface he may appear to be in a very similar situation to the one he was in two years ago when he sold the club, there are a number of crucial differences which mean things look considerably bleaker now than they did in January 2012.

Because although the total of debt hanging over the club is up slightly, from £34.8M in June 2011 to £38.1M in June 2013, the big worry is the cost-base, and more significantly the flexibility to change it. Those in charge at the club always had real pride in the level of control they had over the club’s finances – at a meeting I was at about 5 years ago I remember being told in glowing terms that the Senior Management team at the club had complete control over the club’s expenditure, in minute detail, and that they were proud that all of the contracts gave them the control to make whatever changes were required to keep the financial ship afloat.

Whether they have that level of control and flexibility now has to be very much in doubt – we just don’t know what effect Anton Zingarevich’s negotiations, and the contracts he authorised, will have on the club’s finances, but I’m not optimistic that in his desire to make "marquee signings" he would have exercised the same strength of character and desire for flexibility that the previous regime felt was so important. But, of course, he’s no longer on the scene to back up any financial promises he may have made…

So, to get to the choices available to Sir John, there are fundamentally just two available – barring anything cataclysmic. He can sell the club, or he can keep it running.

Of course, his preferred option would be to sell the club, and to hand over the running to someone else, someone prepared to put in the necessary money to keep this "old car" ticking over in good running order. There’s a certain level of irony here, with Sir John having made his fortune from Auto Trader Magazine but now desperately trying to off-load an old-banger of a football club.

And this weekend's season-end has made things so much more difficult for Sir John. I can never understand just why anyone in their right mind would ever buy a football club in the first-place, because all you get is something that gives you grief, pain and hassle and is a never-satisfied drain on your money – one where you will never meet ever do enough to meet the expectations of success-hungry supporters. But for those who do bite the bullet and buy a club, with the possible exceptions of life-long supporters who’ve somehow amassed a fortune, they can only really do through a desire for prestige and publicity.

And, let’s face it, the vast majority of the prestige and publicity available in football comes with the Premier League and its worldwide profile and coverage. It’s a much harder task to sell a Championship football club that a Premier League one, of course, and that’s before you even start to look at debt and liabilities. Because when you buy the club you buy the debt as well, so if Sir John sold Reading to someone for just £1M that would be an effective cost of £39M to that buyer – the £1M paid plus taking on the liability of £38M, which puts the price up to a point where potential buyers may well be easily put off.

All the good stuff that we as supporters know about, like the superb academy products coming through and the strength of the club’s infrastructure, become less attractive to a potential buyer when viewed in the shadow of that level of debt. They’re all about potential, whilst a buyer after prestige and glamour will want it now, so potential will be of little interest.

Sir John could, of course, try to write off the debt in order to help get rid of the club – but why should he? It would cost him £38M of his own money to clear it, and as 51% of the debt technically belongs to Anton Zingarevich he’d be mad to do that. But can anyone really see Anton suddenly reappearing to pay off "his" £19.4M?

Without a buyer, Sir John is left still holding the baby. And that means that he doesn’t really have any realistic choices left – I can’t see him contemplating walking away and letting the club plummet, so his only remaining choice is to keep the club running. But even this won’t be as easy as it once was.

Firstly, he’s no longer as young as he once was – he was 73 last week – but he also no longer as rich as he used to be, since the recession and the internet have made heavy dents on his property and printing interests.

In the Sunday Times Rich List of 2009 Sir John was 222nd with an estimated fortune of £250M, but by 2012 he was down to 501^st and last year to 777^th, with his estimated wealth down to £100M. This year’s Rich List is due out in the next week or so, and it will be very interesting to see if Sir John does still feature in it.

All of this supports the premise that Sir John will not bail out the losses that Reading makes – if he didn’t pump money in when his fortune was much larger, he’s hardly likely to now when he is much less flush. He understands, and has all along, that you can’t "invest" in football – all you can do is sign-up to pump more and more money in with no return, something he’s not prepared to do and something I don’t think he can reasonably be expected to do.

So how will the financial circle be squared? Reading clearly need to make sure the books are balanced, and without a new buyer there’s no hope of external money coming in. Yes, there are three years’ worth of parachute payments still to come in – the second year’s payment after relegation is approximately £20M, with the third and fourth years both yielding £10M. But that only reduces the problem, and doesn’t eliminate it. TV revenue for a Championship club is only around £6M, so that’s a total of approximately £26M plus ticket and commercial income, which looks to compare favourably with our wage bill in the Championship when we went up two seasons ago of £26.5M, and £46.1M in the Premier League last season.

Whilst our wage bill this season certainly won’t be anywhere near Premier League levels, I’d expect it to be substantially higher than it was the previous season. Because we have the great big unknown of just how much damage has been done to the club’s wage structure by the year in the Premier League and the promises made by Anton Zingarevich – promises which he didn’t hang around to honour.

Whilst talk of Pogrebnyak being on £60,000 a week in the Premier League might have been an exaggeration, it’s hard to imagine him now being on a contract which is close to the average Championship wage of £4,000 to £5,000 a week, or even to the top-end Championship wage of £8,000 to £9,000 for top earners (Source: The PFA, Sept 2013.) And, of course his wage level will have dragged up the wages of most other players at the club too. An indication of just how tight things must be our decision to not give Chris Baird fan extension to his six-month deal in March because we weren’t able to pay his wages for the rest of the season.

Whichever way you look at things you come up with depressing answers, and I think it’s sadly inevitable that we’ll see a return to the days of "prudence" as the club try to get the club’s finances on an even keel – in as far as they can.

But this is likely to be prudence with a twist, thanks to Anton. The high-earning players who the club’s accountants will most want to leave are, paradoxically, the players who are most likely to leave – high-earners are unlikely to agree to a move which means taking a pay-cut, but on the evidence of this season they’re unlikely to find a club prepared to offer more for their services than they’re currently on, so I fear that we’re stuck with them until the end of their contracts.

And that means a whole great big chunk of wages tied up in just a few players, and much less flexibility for the management team trying to sort out the finances – just about the worst possible situation. Because economies will have to come through the rest of the squad – and that means sales of promising players and no money spent on replacements.

It’s bleak, it’s depressing, and it will anger lots of supporters who want to see "investment" and "ambition"- the two most misused words in football! But it reflects the reality of the situation, and the lack of choices Sir John is left with now.

For he finds himself back at the helm of an expensive asset that no-else wants, one which burns money at an alarming rate – a rate much faster than is healthy, thanks to a now-absent Russian. And as Sir John is understandably not prepared to keep throwing his own money into the money-furnace that is a football club, something has to give inside the club.

In conclusion, I have to say I feel real sympathy for Sir John for the unenviable situation he finds himself in. It’s horrible – for him as well as the next few years are likely to be for Loyal Royals, and for Nigel Adkins too, who came here with promises of a decent playing budget but instead finds himself hamstrung by financial problems and likely to face the loss of vital players.

I wish I could end this on an optimistic and upbeat note – but I’m afraid I can’t. Reading and Sir John have been well and truly stitched up by Anton Zingarevich – and by the lack of effective rules on club ownership and governance in English football which allow a ludicrous situation like this to come about.