Clubs feel the pinch as TV money dries up

Leicester City is football's latest financial injury, yet clubs always manage to find a deep-pocketed saviour

Financially speaking, lower division football is having a bit of a nightmare. Leicester City, which collapsed into administration yesterday, is not the first non-Premier League club to suffer such a fate this season following the well-publicised demise of ITV Digital earlier this year ­ and football experts say it will not be the last. Barnsley put itself in the hands of the receivers earlier this month and Bradford City has only just emerged from administration under new ownership.

Other clubs with high debts include Coventry City, Derby County and Sheffield Wednesday. Elsewhere Watford's players agreed to a 12 per cent pay cut last month and the club is seeking a further £9.5m to stave off administration. Nottingham Forest delisted from the stock market earlier this year after failing to file its accounts in time. It is hardly a roll-call of honour.

John Moore, a football analyst at the Edinburgh stockbrokers Bell Lawrie White, says: "Are more clubs going to go bust? The answer is probably yes. I suspect there are at least three or four clubs out there feeling the pinch. This season will be a year for cutting costs, and further restructurings as clubs adapt to the new environment. Ten to 15 clubs should probably have gone into administration straight away after ITV Digital went down. Instead it's been death by a thousand cuts."

ITV Digital collapsed owing £190m to the 72 clubs in the Nationwide Football League. But while this has been the single biggest cause of financial grief to the clubs below the Sky-fuelled money machine of the Premiership, it is by no means the only one. The transfer market has also collapsed, meaning lower division clubs cannot rely on selling players to their wealthier brethren. Indeed, Premiership clubs such as Leeds United and Sunderland have said they will sell players themselves during the January transfer window. Heavily indebted Chelsea plans to concentrate on home-grown talent.

Another factor is soaring player wages which becomes a severe burden once a club, such as Leicester, drops out of the top flight. A further blow has been the end of the City's love affair with football, meaning clubs find it almost impossible to raise money through the equity markets. Two or three years ago, the reverse was true. There was a bubble in football stocks just as there was in internet and technology companies. Television groups such as BSkyB snapped up stakes in top clubs such as Manchester United believing they would provide the valuable "content" in the internet age. But share prices have fallen relentlessly and media companies have retreated to their core businesses.

Meanwhile, the gap between the Premiership and the Nationwide League has continued to widen. One cruel statistic shows that every Premiership club receives more in television money (£25m each) than all 72 Nationwide clubs put together.

One football analyst sums up the dilemma: "Wages for footballers have grown at a phenomenal rate, and there has been heavy spending in the transfer market just at the time when several clubs were taking on debt to build new grounds. Now they have little room for manoeuvre and the outlook looks bleak. Their top line [turnover] is under pressure and they've signed players on long-term contracts but transfer values are falling."

If football was like any other market, there would be a huge shake-out going on. The oversupplied, fragmented industry would see many businesses cease to exist or merge with other companies to strip out costs. But that doesn't happen in football. An English club has not gone into liquidation since Aldershot and Maidstone went to the wall more than a decade ago. The reason is that there is usually a self-made entrepreneur willing to step in at the last minute to save the local team. Football clubs are a trophy asset which do not abide by the usual economic rules.

It is the same with mergers. Such is the tribal nature of football supporters that any chairman who dares to suggest a merger with a local rival (Robert Maxwell tried it once), is immediately vilified.

Also, demand for football is about as inelastic as you can get short of something genuinely addictive such as smoking. The fans hand over their money week in week out, often regardless of the quality of the product on offer. For example, the average attendance in Division Three last year was 4,000 and the Nationwide League claims its three divisions are the most watched leagues in Europe.

Football is attempting to put its financial house in order. The Football League yesterday presented a proposal to the Premier League, the Football Association and the Professionals Footballers Association designed to soften the blow to clubs which are relegated from the Premier League. It is proposing that relegated clubs should cut player wages by a certain percentage. The Football League says it has already held discussions with the other parties but stresses that it would need to be an industry-wide standard. "There would be no point in it if some clubs broke ranks as it would give them a competitive advantage," a spokesman said.

Another trend is towards ground sharing, which lowers costs without resorting to a merger. Half a dozen clubs are now co-habiting with rugby clubs, with Watford sharing with Saracens, Wycombe Wanderers with Wasps and Reading with London Irish.

Only a handful of teams share with other football clubs (Crystal Palace and Wimbledon, and QPR and Fulham) as these tend to be unpopular with fans.

One development is the trend towards securitisation, a financial instrument which enables companies to sell bonds against the value of future income. This has started to spread to football as clubs seek new ways to raise money. Leicester City raised £28m against future media revenues and sponsorship to help fund its new stadium. Manchester City is negotiating a £44m cash injection backed by future gate receipts.

This trend could be regarded as a positive as it shows banks and other financial institutions are confident that football clubs' cash flows are resilient enough to lend against. But it could backfire as it increases debts which must be paid off somehow. Analysts say securitisation is fine to fund the development of long-term assets such as stadia but not if it it is blown on players. Mr Moore at Bell Lawrie White is against it: "You're selling the family silver and it's the wrong thing to do."

But there may be a longer-term positive to emerge from the wreckage of ITV Digital. Some analysts say football needed a shake-up and that the current cash crisis has forced a shambolic industry to manage itself more efficiently. Mr Moore says: "Scotland had a miserable time after failing to qualify for the World Cup and failing to get a deal with Sky [Scottish football signed with the BBC instead] but the clubs have cut costs and any future increase in revenue should drop straight through to the bottom line."

He also points out that there has been significant director buying of publicly quoted football shares in recent months at clubs including Newcastle United, Manchester United, Leeds United and Southampton. "[Board members] are probably seeing value there," he said.

In the longer term, then, the ITV Digital fiasco, might prove to be a blessing in disguise, if football clubs emerge leaner, fitter and better managed than before. How long this new-found maturity lasts is another matter.