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Interview (Part One): Charlie Methven lays Sunderland’s finances bare - past, present & future

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Charlie Methven very kindly sat down in his London office with Roker Report’s Ken Spours for an in-depth conversation specifically about finances. Today, in part one, Charlie gives us an overview of the steps our new owners are taking to get the club operating at a sustainable level, and explains how they’re dealing with some of the issues they inherited from the previous regime.

Sunderland AFC

Charlie on... the Murray and Drumaville/Short years

The club has experienced massively contrasting economic cultures over the past 25 years – respectively the Bob Murray (1987-2006) and Drumaville (2006-2018) eras.

Although there were cultural differences (Niall Quinn was far more engaged with supporters than his successors, for instance), economically the Drumaville era can be seen as a single period during which the Quinn chairmanship gave way to the years of Ellis Short, Margaret Byrne and Martin Bain.

Up until Drumaville, the club had long been run as a viable business would be; what might be described as an old-fashioned approach, in which every penny counted and cloth was cut. Whilst adopting this approach to day-to-day matters, Bob Murray and John Fickling built a nationally-admired platform to take advantage of what became the 21st century footballing boom - a 50,000-seater Stadium (arguably the best in the country); an Academy which is top ten in England in terms of infrastructure, and the Foundation of Light, which is unsurpassed. So between those three ‘bits of kit’, the Murray approach left SAFC with – taken as a whole – probably the best infrastructure of any club in the UK, for relatively little debt.

By the time that Bob left, the club therefore was in pole position. Whilst other clubs had blown fortunes on players and not replaced creaking infrastructure (Leeds United, for example), Sunderland had done things the right way and built this wonderful platform. What was then required was a bit of judicious management, with perhaps an extra bit of economic juice in tank to help things along now that the platform was right.

But what happened instead was that the club fairly quickly slid into a new model, if you can call it that - what might be described as the ‘money-pit’ approach. Basically, spending money it didn’t have, and would never have, in an attempt to achieve short-term success, without a coherent strategy, thereby losing unsustainable amounts in the process and starting a culture of wastage.

From what I can tell from reading back a bit, at the time a significant majority of fans welcomed this approach. As a success-hungry fan myself, I can totally ‘get’ that it must have felt good to be spending big on players, after years of caution under Bob. The problem, though, is that this ‘sugar hit’ had consequences: by the time that we took over the club twelve years later, it was spending more than £8 million a year just on interest payments on the debt accrued over the years! And, beyond that, the culture of “spend today, think about it another day” had led to an atmosphere around the club that many fans have told me they subsequently found distasteful: managers and executives were paid vast sums and in turn signed a team of multi-millionaires who seemed to care very little about the club. Meanwhile, and shamefully, despite the cash being splurged on short-term gambles, the infrastructure was being neglected. How can you justify yet another unproven £50k a week player whilst failing to replace faded seats?

The culture of wastefulness and neglect was doubly horrendous given the nature of the area and its economic deprivation. And the really sad thing is that – contrary to the beliefs of some fans - it really doesn’t have to be this way when you are as big as Sunderland. Even clubs like Tottenham Hotspur are run and represented by people who care deeply about that club. The care that Harry Kane has for Spurs has grown in an environment of respect for the institution that comes right from the top, where Daniel Levy treats every pound as sacrosanct. Ten years ago, were Spurs really all that different from SAFC in terms of status? No. But they are now – yet in the interim, SAFC has spent and lost a fortune, whilst Spurs have been consistently profitable. The idea that frivolous spending is the only way to success in football is something that Stewart and I strongly disagree with.

Sunderland AFC via Getty Images

Charlie on... the economic legacy

As I say, by the time we came to look at the club in April 2018 it was spending £8.5 million a year on interest payments, and the operating loss was widening all the time.

In fact, the legacy of the Drumaville era was absolutely disastrous in every way – a giant £160 million debt, huge interest repayments and a structural operating loss of £35 million annually. In the true sense of the word, the club was bankrupt.

At that point, Ellis decided to pay off the debt - out of the goodness of his heart and, I guess, some guilt about what had happened on his watch. No-one would have bought the club as a going concern, and no decent manager would have come near it, had this not happened. As the major creditor, Ellis would have been best off putting it into administration, with a points deduction and probably another relegation to follow.

In summary, by April 2018 the club was at death’s door but was saved, just as the undertakers were being summoned, on the whim of a wealthy man. That situation must never again be allowed to develop.

Wiping the debt was a massive move because it cleared the interest payments and therefore reduced the operating losses, even though those losses were still huge. However, beyond the interest payments, what we saw when we first looked at the books was so much waste that – counter intuitively - we thought that we had a chance to turn it around. If the waste could be eradicated and we could get back to a tight-run business, the basics were still phenomenal – infrastructure; a fantastic and loyal fan-base; a broad financial platform with thousands of exiles and huge numbers engaged with the club on social media, buying merchandise and tickets from time to time.

Sunderland v Manchester United - Premier League Photo by Michael Regan/Getty Images

Charlie on... Sunderland becoming an economic possibility

So….. in a weird way these awful economic circumstances presented a once-in-a-lifetime opportunity for English boys to buy a top 10 English club; something which is almost impossible these days.

But – over and above the money we paid Ellis – we were acutely aware that we were buying a distressed asset: our entry price included the blood, sweat and tears involved in reducing the overall SAFC costbase from £45 million to somewhere closer to £20 million. A colossal restructuring by any measure.

If we could do that and increase the revenue from £15 million to somewhere close to £20 million then we’d have a more or less balanced club, economically speaking. But we had to work hard and quickly enough to beat the cost ‘egg timer’. If we did not act swiftly enough, we would have lost £25 million in the first year and we did not have £25 million to spend on top of what we had paid Ellis for a club in League 1.

So we had to make tough decisions straightaway, just to stem the bleeding. The first set of cuts were obvious, but still not pleasant. For example, Sunderland was employing twice as many people as Newcastle United - a similar-sized club.

To be honest, getting the costbase down from £50 million to £30 million was hard, un-rewarding work but relatively straightforward for Stewart and his restructuring team. However, the final bit – reducing costs further to circa £22 million a year involves tougher choices that come with consequences. For instance, our retail operation had a club shop in Debenhams – closing it might have saved £100k of costs, but maybe cost us £30k of net revenue too and a presence in the city centre.

Given that the club cannot rely on Premier League TV revenue (the final parachute payments are smaller and finish in about 18 months) you actually have to run the business with a psychology/ mindset that every little counts. Each block of revenue moves you gradually towards the £18.5 million target revenue - £250,000 from getting extra games on TV; £500,000 from concerts; £100,000 by sharpening up retail; £100k working harder with the caterers to bring in conferences; and so on, and so on and so on.

Through hard graft, gradually we have moved the £15 million of revenue we inherited to £17.5 million, where we are now, and upwards again from there to the £18.5 million we are confident that we will reach. And likewise with the cost. I know that the plastic plant pots got a lot of publicity, but they were just one of hundreds of little ways in which the club had allowed wastage to grow and become institutionalised. We were paying 150 phone line rentals, but only 70 were being used; and so on and so on.

Sunderland v West Bromwich Albion - Premier League Photo by Clive Brunskill/Getty Images

Charlie on... the skeletons that are still in Sunderland’s cupboard

While Ellis paid off the debt and we are getting costs under control, the club still faces a number of outstanding legal cases and minor commercial disputes.

One in particular did not go the way we had expected, and the £4.5 million judgement in the Ricky Alvarez case came as a hammer blow because we had been told by the club’s previous management that it was a shoo-in for us.

There are still other outstanding cases against the club, and when you add all these things up there’s probably been a maximum total of about £12 million worth of potential skeletons. We also found out that the first quarter of 2018/2019’s season tickets, collected in April 2018 but surely supposed to cover costs in June and July, had already been spent before we got the keys to the house. That made for a very tricky summer, with no revenue at all coming in!

On the other hand, a few good unexpected things have happened. There are some clauses in historic transfers out that have come good and FIFA payments during the World Cups made the club an extra £500,000 we hadn’t budgeted for.

But the overall situation is that the 2018/2019 parachute payments had already been promised away on another historic mess - buying players on tick had led to a £22 million overhang on players, many of whom were no longer at the club - on paying down the last bit of debt until it was cleared, as had already been planned, and on the court cases. It’s all kinda what parachute payments are supposed to do – help a former Premier League club sort itself out – but the previous management had been kicking cans down the road to prevent the need for a major restructure… whereas by the time we got here everything simply had to be paid… and if we hadn’t done the big restructure then an administrator surely would have had to do so not long after.

Fulham v Sunderland - FA Cup Fourth Round Replay Photo by Clive Rose/Getty Images

Charlie on... reducing our losses for a sustainable future

Reducing operating losses is something everyone really should understand about.

Because of the cuts we have already made, Sunderland’s annualised losses are projected to be £10-11 million over our first year: June 2018- June 2019. But by the time you get to June next year, the annualised operating loss for the following twelve months should be around £4 million, and that does not include cup runs and player sales - a televised third round FA cup tie at the Stadium of Light could bring in an extra £400,000 and a run to the Checkatrade final could make us close to £1 million.

Of the £4 million projected losses for next season, £2.5 million is effectively the cost of running the Academy. If you view the Academy as a semi-separate medium term investment business, then the operating loss for the rest of the club is, as it should be, not all that far from break even at about £1.5 million. That is sustainability, given that Cup runs and player sales do happen from time to time.

Over the next five years, £13 million invested in running our Cat 1 Academy costs should – judged by the last ten years, which have averaged around £6 million a year in player sales - be recouped by occasionally home-grown players moving on. But, with true sustainability, there’s no pressure to realise value from those players unless it’s absolutely the right time and price for the club.

To reassure anyone who imagines that we are having to sell young players now, we have made excellent offers to our academy players who have broken through to the first team squad – both in terms of good wages and, of course, the opportunity to play under a progressive manager who develops young talent to reach its full potential.

I guess that, overall, the gospel Stewart, Juan and I are trying to preach is that by being stable and sustainable the club can make grounded, logical and strategical decisions rather than lurching from one panicky crisis to another. This is our short-term aim: to get the club into the right state as swiftly as possible.

Southampton v Sunderland - Premier League Photo by Harry Trump/Getty Images

Charlie on... the fans playing their part by understanding

Stewart and I are – and I say this from my heart - constantly humbled by the passion and loyalty of Sunderland fans. On a personal human level, we have had a fantastic, warm reception to the north east. Not only are we grateful, but we are so impressed as well.

Six months in, if we were to enter one plea, it’s that the fanbase gets on board – as much as is possible – with the theme of building strength through sustainability and strategically-grounded decisions. Please understand that showing Bob Murray the Red Card for not “investing” was followed by a spending spree that came within an inch of breaking the whole club. Potentially forever. The Football League told me that they had barely ever seen a club in such a state by the time that we went to see them in May 2018.

So if asked to revisit the same Drumaville “plan” we will decline. Both because it’s the wrong thing to do for the club, but also because we do not believe that risking the club’s future on a short-term punt is an ethical and responsible way to run a civic institution (which is what SAFC effectively is). If we are going to succeed, then this time it needs to be done properly: building revenues, keeping a rein on costs, driving a great culture through the whole club and making it an attractive place for the right people to come to, and a horrible place for opposing teams to come to! It’s not easy, or swift, but as plenty of other smaller clubs have shown it is the approach that brings proper, nourishing long-term success rather than the Haribo-style sugar hit of a random splurge.

We haven’t got everything right so far. Nor will we get everything right in the future. But this is a competitive sport, and – given Sunderland’s natural advantages – if we make more good decisions than bad then the sky is the limit. We just have to have a viable plan, hire good people and not get suckered into unsustainability.