Sustainability, Wigan Athletic and the EFL
On the 2nd of July, Wigan Athletic fell to administration and its operations were passed to Begbies Traynor to handle the fallout of the club’s financial mismanagement. The organisation holding Wigan Athletic released a statement through its General Partner Mr Au Yeung Wai Kay which stated that the holdings company could no longer fund the club. Two years ago, International Entertainment Corporation, a Hong Kong based hotel and casino operator controlled by Stanley Choi bought Wigan Athletic for £22 million from David Whelan. On June 4th of this year, IEC (International Entertainment Corporation) sold the club to the Next Leader Fund for £40 million, netting an £18 million profit from the transaction. The man controlling IEC, Stanley Choi, had a stake in NLF (Next Leader Fund) which he had cashed out on the 24th of June. On July the 1st, a week after Choi cashed out his stake, NLF called in Begbies Traynor and said that the pandemic had “fundamentally undermined [their] ability to fund the club”. However, the reasoning for sending the club into administration has come into scrutiny. Firstly, the EFL said that it fundamentally disagreed with the owner’s account since the effects of Coronavirus had been being felt since March, months before the change in ownership had taken place. Moreover, scrutiny also came due to a secret recording that emerged of Rick Parry, the chairman of the English Football League (EFL), discussing a rumour that Wigan was put into administration to settle a bet in the Philippines where Choi owns a hotel and where he wants to upgrade it to include a casino. This rumour was accentuated by supposed relationship between Choi (chief of IEC) and Yeung (General Partner of NLF).
However, Choi denies any sort of relationship with Yeung other than communications conducted in the sale of Wigan to NLF from IEC and says that he was forced to sell the club due to financial losses. Moreover, Choi claims that he received legal advice that claimed that regulators in the Philippines would not allow him to upgrade his hotel into a casino whilst he had part ownership of a football club. This coupled with the fact that football club ownership is seldom profitable meant that he sold the club due to the fact that shareholders did not approve with the ownership and sub-optimal returns that were being attained as a result of the ownership of Wigan. For reference, Wigan netted a net loss of £9.2 million for the 13-month period to the end of June 2019.
Pictured is Stanley Choi. Source: WTP A club enters administration due to the fact that it can no longer pay its bills and all control of the company is passed to an administrator. Creditors cannot take action as there is a statutory moratorium in place, whilst the administrators find a buyer or repay creditors through the sale of assets, otherwise the club is forced into liquidation. There are preferential creditors which in this case are the staff (including players), the PFA and other affiliate football organisations. The Wigan Athletic scandal has shed light on two systemic problems in English football, especially in the lower divisions. Firstly, comes the issue of ownership tests and how to accurately gauge whether prospective owners are fit to run a club. As a result of the scandal, the EFL has said that it will run an investigation on how to tighten ownership rules as well as what led Wigan into administration. In a press statement, they said that “should any breaches of football regulations or company law be discovered, action will be taken either by the League or the body with the relevant jurisdiction to do so”.
In order to pass the ownership test, evidence of the required source and sufficiency of funding to be invested in or otherwise made available to the club was provided as part of the recent change of control process. However, after the disaster that unfolded at Wigan Athletic, one must question both the efficacy and the rigour of these ownership tests. Wigan was plunged into administration due to the fact that it was unable to pay £6 million in bills, however, given these ownership tests, surely there would have been the necessary foresight and due diligence in order to foresee the impacts of COVID-19 and therefore make the rational financial judgement on the acquisition of Wigan Athletic by the Next Leader Fund.
Rick Parry, EFL Chairman. Source: Action Images Rick Parry, the Chairman of the EFL, has argued that there is a larger structural issue at play, which is the unsustainable finances of lower league football clubs. A popular book that covers economics within football, Soccernomics, co-written by Simon Kuper and Stefan Szymanski, argues that since the creation of the football league, very few clubs have been noticeably profitable. The logic goes that in order to earn more money, be it via ticket revenues or broadcasting fees, the team must perform. In order for the team to perform, it must spend the adequate amount on salaries (in their book they show that higher transfer spending has a negligible positive regression with better results). However, clubs in the lower leagues of english football are spending an average of 107% of their income on wages.
The EFL have insisted on implementing a wage cap of £2.5 million in League 1 and £1.5 million in League 2 in order to ensure viability. Some clubs have applauded the move, whilst others (typically larger, richer clubs) have criticised the initiative. Nevertheless, in order to ensure sustainability of lower league English clubs, something must be done about the erratic nature of the financial side of the game. This is coupled with the need to tighten ownership tests and for the English Football League, who has benefitted from foreign spending despite the bankruptcies, must place higher scrutiny on foreign owners whose interests are usually aligned with a profit incentive rather than the long-term success of the club. As for the story of Wigan Athletic, they have been relegated following their 1-1 draw to Fulham on Wednesday, mainly caused by the 12-point deduction as a result of the fall into administration. Their future cash flow will be harmed by the relegation and thus their situation has been worsened. Begbies Traynor are insisting that the new owners that buy the club must pay £1 million in wages owed, given that staff are preferential creditors. On the 23rd of July, talks with the front-runner in the bid to buy the club broke down and administrators are looking for another potential buyer.
Although a short-term solution for Wigan Athletic may be found, long term issues are still present within the lower divisions of English football and without swift and comprehensive intervention by the EFL, clubs may always be engaged in a cycle of avoiding administration and hardly getting by.