Johnny Nic on rugby: Clubs overspending on wages

Date published: September 12 2018

CVC Capital Partners had their proposal to buy a 51% holding in Premiership Rugby for £275 million rejected this week, even though it’d give all the clubs a £17 million windfall, wiping out their debts in the process.

Bath‘s owner Bruce Craig believes the Premiership is worth around £800 million and feels the bid radically undervalues it. However, it is thought this was merely an exploratory bid and CVC will return with more cash at some point. That being said, I have no idea how Craig has arrived at this figure.

Bath actually lost £2.6 million in the 2016/2017 and paid 58% of their turnover out in wages and simply could not survive without Craig, the sole shareholder, bailing the club out. This isn’t untypical and leads us to an even more serious question. Exactly why are all but two Premiership rugby clubs making a loss and given that, can they be trusted to invest any windfall money with any degree of responsibility? Because the reason almost all of them make a loss has one basic cause: they pay players far too much.

The headline numbers of the 2016/2017 accounts of each club were released at the end of last month. The percentage of turnover committed to wages is little short of ridiculous and entirely without justification.

For example, Newcastle Falcons spent £7.9 million on wages. That was a massive 81% of their turnover. 81%!! This ensured they made a £3 million loss. Let’s put that wage bill into a more simple context. Imagine if you ran a sole trader corner shop, turned over £100,000 per year and decided to pay yourself £81,000 for this pleasure and made a huge loss as a result? Well, it wouldn’t be sustainable for long would it?

It gets worse. Worcester Warriors spent £11 million on wages, which was an incredible 101% of turnover. Can you imagine paying yourself £101,000 wages on a £100,000 turnover? No.

Obviously, you can only run any business at a loss for so long before someone will call the debts in and take you under. Clearly, in rugby, some have benefactors who make loans to clubs that are not required to be repaid. But why not just pay the wages your turnover can allow?

By not doing this, some clubs are paying huge interest payments on borrowings. Worcester paid £1 million in interest payments, despite only having that £10.8 million turnover. I’m no mathematics professor but I have run my own business since 1985 and I’m here to tell you, that is a great way to go bust. 10% of your turnover being paid out purely in interest is a terrible situation to be in and it should never have happened.

Exeter, one of only two clubs to make a profit, did so by paying 56% of its turnover in wages, which still seems overly high, but still made a £1.1 million profit on a £17 million turnover. So it isn’t impossible to trade in the black. Therefore we have to assume it is down to mismanagement that this isn’t commonly the case.

From the outside, this all looks like so much financially profligacy. What is to be gained by spending so much on wages? Wales Online reported Owen Farrell at Saracens as earning around £750,000 with others on £350,000 or more. Esportif Intelligence have estimated the average wage is £200,000. Now that’s a lot of money. OK, you’ve got a lot of whey protein, gum shields and creatine to buy, but even so.

Possibly because top footballers are paid this per week, it makes the amount seem much less than it would in any other walk of life. But regardless of that, the fact is, quite clearly, the clubs cannot afford it, so why is it happening? What is to be gained by breaking the bank in this way? Is it in pursuit of success? If so, it’s not working.

Newcastle Falcons finished in eighth in the 2016/2017 season that these numbers cover. In other words, if they were spending 81% of their turnover on wages in order to acquire and pay the best players and thus win the league, they were nowhere near achieving that. Not even close. They wasted all that money. Worse still, Worcester Warriors finished eleventh in the 2016/2017 season after splurging all of their turnover and more on wages. Is anyone taking responsibility for this?

It all looks like financial profligacy, the likes of which no small business would survive. Indeed, even if this CVC takeover ever happens, can we trust the clubs to spend the consequent windfall wisely? Judging by these numbers, absolutely not. In fact, if you were putting money in, you’d insist that the financial officers currently in situ be replaced by people who can add up, or more pertinently by those who can resist a club that wants to spend more a lot more money than it can afford.

Given the acreage of red in club accounts and the absence of black, you have to question exactly how accurate their estimation of the value of the Premiership really is and I’m sure CVC know that only too well when they return with an improved bid.

by John Nicholson