Meltdown?

An interesting read from the Sun...seems like an oxymoron doesn't it?

"THE fine balancing act which clubs have to perform is how to reduce their cost base whilst maintaining performance on the pitch. It is certainly not a quick fix with clubs looking at a two-to-three-year consolidation period whilst a number of contracts unwind and costs are reduced to match revenue."

This dry accountant-speak was not contained in last week's FT, nor in a company report, but was part of the first programme notes of Trevor Birch, Chelsea's new chief executive. In Birch, the London club, who top the European debtors' league at £96m in the red (and rising), might just have the right man for the job: before moving to Stamford Bridge, he was an insolvency practitioner.

The signs at Chelsea have been grim for some time, but after a summer when the European transfer market collapsed, the club's conduct has verged on the desperate. First, Jimmy Floyd Hasselbaink, the 25-goal-a-season Dutch striker who was bought two years ago for £15m, was offered to Barcelona for £25m. Then Eidur Gudjohnsen, Hasselbaink's flamboyantly-skilled attacking partner, was told that he would not be offered a new wage deal, and that he might be off-loaded, too, if the price was right.

With a £5m loan from the family of the late Matthew Harding, the former Chelsea vice-president, due for repayment on July 31, and the £5m balance of the Emmanuel Petit and Bolo Zenden transfers still due to Barcelona, Chelsea were, suffering a short-term cash-flow deficit, as Birch might put it.

When Chelsea opened the season at Charlton, there had been more off-season signings at the Valley than by the big spenders from west London. Deals for Real Madrid's Flavio Conceicao and Geremi were cancelled on instructions from the Chelsea board. "It was all fixed with Real, but the club rang me and said that we would have to pull out of the deal because we could not afford it," said Claudio Ranieri, Chelsea's increasingly bemused-looking coach.

The apparent keenness of the club to rid themselves of Hasselbaink's enormous wage bill, reputed to be £40,000 a week, saw them - with the transfer window about to shut for four months - ready to part with the Dutchman for a relatively-modest £7m. In the end, Barcelona declined the offer, leaving Chelsea saddled with Hasselbaink's wages, at least until Christmas.

So, where has it all gone wrong for the high-rollers of the King's Road?

The answer lies in the multi-million-pound 'Chelsea Village' redevelopment that has hemmed in the pitch with two hotels, a series of restaurants, a museum and fitness centre, plus the leisure complex that has been the dream of Chelsea chairman Ken Bates for years - or at least since the local authority made it clear that planning permission would never be granted to turn the ground into more lucrative offices or apartments.

Before Bates was a football chairman, he was a property developer, building a chain of hotels in Rhodesia in defiance of trade embargoes. But a building firm in the north of England went bust, and involvement in a bank in Ireland failed. Then, in 1982, Bates bought Chelsea FC for £1, and took on their debts of more than £2m. Today, he presides over a crumbling financial empire from a £1m penthouse overlooking the ground, with the club carrying debts nearly 50 times greater than when he took charge.

It has been a troubling summer for Bates. His old business partner, Stanley Tollman, is on the run from the FBI after some property deals - involving hotel developments - floundered. Soon after this became public, Swan Management, a mysterious Channel Islands-based company who owned 26% of the shares in Chelsea Village, sold their holding, Bates using up a large chunk of his cash to take up most of the shares.

Bates strikes an increasingly-lonely figure. His hotels are well below capacity occupation - he blames September 11 and "cowardly" Americans - while the restaurants and bars are rarely busy, except on match days. What they appear to offer is three-star accommodation at five-star prices, while the restaurants hidden off the Fulham Road are far less attractive than the more fashionable King's Road establishments five minutes away.

One Irish-themed bar, Arkles, lost a large amount of punters when it opened - and they found it did not sell Guinness. Bates' "tourist attraction", the World of Sport, comprises a few mementoes of club history plus an exhibit from the Science Museum that is three years old.

The week before Christmas is traditionally the busiest time of year in the hotel trade. When we phoned the Chelsea Village Hotel, seeking at least 40 rooms for a conference for two nights in the week before Christmas, the reply from the reservations desk came back: "Yes, we can do that for you, no problem at all." And if we wanted more than 40 rooms? "No problem at all, sir."

The £160-a-night room rate - "that includes VAT, but not breakfast" - was discounted to £105 per person.

Bates has no qualms about describing Chelsea Village as a dream which has taken him 20 years to complete. The concern for many stalwart Chelsea fans is that his dream may take them many more than 20 years to pay for it.

Bates' arguments with Harding five years ago, before the insurance multi-millionaire was killed in a helicopter crash, centred around the direction in which the two men wanted to take the club. Harding, a die-hard Chelsea supporter, wanted to put all the club's resources into the playing staff. Bates, who claims that he had a trial at Arsenal when a youngster, long before he sat on the boards of Wigan and Partick, argued that using Chelsea's real estate to generate revenue throughout the year would ultimately help to pour money into the football club.

Like the ghost at the feast, Harding's fears have become reality, and for the past six years it has been the football side that has subsidised Bates' failing leisure projects.

If Manchester United's midweek Champions' League match was worth £30m to the club, then imagine how Bates must be feeling after two years when Chelsea's only revenue from European football amounted to early exits from the low-rent UEFA Cup. A £60m hole in the club's finances is tough to plug.

Whatever else you may think of Chelsea's chairman, Bates' notes remain one of the few 'must-reads' among the football programmes available at the country's grounds. Before one game, there was a picture of Bates' face leering over a glass of white wine - no doubt from the Chelsea Village vintners - under the headline: "Crisis? What Crisis?"

Apparently, neither Bates, nor the programme editor, realised that this famous headline contributed to Labour Prime Minister James Callaghan's downfall in the late 1970s. It was attributed to him when he was sunning himself in the Caribbean, while back home Britain suffered the Winter of Discontent. Soon after, Margaret Thatcher won the 1979 election for the Tories.

Bates used his column to repeat claims that there was an anti-Chelsea campaign in the media; to threaten to sue one paper (a regular feature), and to refute suggestions that Tore Andre Flo was being sold to Rangers for £12m to help to balance the books. "What," Bates exclaimed, "with £43m in the bank?"

Within two months, Flo had joined Rangers...for £12m.

Bates has continued to argue that the club's assets far outweigh liabilities: trouble is, his valuation of the assets being worth £250m includes the hotels, bars and restaurants that few seem to wish to patronise.

"It's a very risky policy," observes Simon Banks, a football business analyst with Soccer Investor. "The team is generating money, but the businesses have not been very successful. All it takes is for an unsuccessful season, and there could be serious financial problems. You have to ask: what do people who run a football club know about hotels and the travel business?"

Chelsea have a £70m Eurobond loan, used to build the new west stand, which must be repaid in full in 2007. That's £70m, plus about £7m every year in interest over the course of 10 years. In 1999, every penny earned by the football team in qualifying for the second phase of the Champions League effectively went to pay off that year's interest payment. For the past two seasons, Chelsea have missed out on such income. With the transfer window now closed, total meltdown is imminent