Valuing Newcastle United Part II

In the last post we looked at the methods professionals use to value a business.

We deliberately didn’t calculate using one method,  known as the discounted cash flow method, because (a) it relies on clubs generating positive cash flows, which they traditionally have struggled at, and (b) designing the model involves a lot of nerding out on a spreadsheet.

Some people have rightly pointed out though that with the latest TV deals, clubs are now far more cash rich than they used to be, and so perhaps such a model is worth attempting.

Furthermore, being nerds here at the PriceOfFootball, the temptation to produce something that gives a value was too much to resist.

As many Newcastle fans are aware, there are interested parties involved in due diligence at present at the club. This is the equivalent of having a survey when you are buying a house, and getting to see more detail than is included in the glossy brochure produced by the estate agent.

We don’t get to see such information (my name isn’t Amanda) but we have looked at the recent accounts produced by Newcastle, tried to identify some trends, and used these to crunch a lot of data. We don’t, for example, have the 2016/17 financials from the Championship winning season.

This has resulted in budgets and projections for the next ten years, using assumptions which seem reasonable to us (you may feel they are a load of rubbish, and that’s your perogative).

We have assumed, for example, that Mike Ashley will gradually take his loan out of the club at £18 million a year, which was his original intention according to the accounts.  Similarly we have assumed an average place in the Premier League of 10th.

The assumptions clearly show that we need to get out more, but the aim is to show the nature of the calculations that interested parties will be undertaking (and in far more detail than us).

Having crunched the numbers,  we have ended up with a valuation of £268 million. Not far away from our previous gut feelings.  If Newcastle’s position rises to 9th, the value goes up by about £11 million.

The calculation is however very sensitive to issues such as the extent of growth in future TV deals,  wage control, player spend, and final position in the table.

With that in mind, we have stuck the model up on Google Drive, and you can have a go yourself at working out the numbers.

https://drive.google.com/file/d/0B91KHPCzixvvaHhaSnZCYkN6VXc/view?usp=sharing

All you have to do is change the figures in the yellow boxes on the intro worksheet, and see what you end up with. 

 

The aim of all this is simply to show that there’s an awful lot of guesswork going into the numbers.  Ultimately the price is the figure that leaves Mike Ashley and the buyer both feeling they’ve done well from the deal.

Good luck valuing the Toon!

Newcastle: What’s The Colour of Money?

Newcastle: What’s the colour of money?

Newcastle United are officially up for sale.

http://www.espn.co.uk/football/english-premier-league/23/blog/post/3236029/mike-ashley-puts-newcastle-up-for-sale-but-can-club-be-great-again.

That’s not significantly different from the position over the last few months, where they were unofficially up for sale.

There are many interested parties, but the most important one is Mike Ashley, as the price that he’s prepared to accept that will determine whether recent noises from the club are to be taken seriously.

Stories abound of prices being asked of about £350-400 million. Which begs the question, how do you value a football club? We’ve looked at a variety of methods, to try to determine a range of prices that might be acceptable to both Ashley and a buyer.

We’re not Newcastle fans, (love the city, love Viz and a Saturday night out in the Bigg Market should be on everyone’s bucket list before they die, and indeed, could coincide with the night you die), so we are not going to praise Ashley, neither will we set out to bury him either.

Method 1: Balance sheet values

A balance sheet shows three things, assets (stuff owned by the club), liabilities (what is owes to third parties, such as suppliers, other clubs, tax, loans) and equity (the amount of invested capital from owners, plus reinvested profits).

The balance sheet is based on a simple equation

Assets minus liabilities = Equity

A look at the most recent Newcastle United Limited balance sheet shows the following:

It would therefore appear that Ashley’s equity investment in NUFC is just under £31m at 30 June 2016. With football clubs, (and to be fair, many other businesses) these figures are to a large extent meaningless, and often blurred.

The sum that Newcastle received for the shares when they were issued is £75.599 mill (£6.655m share capital plus £68.944m share premium). This is not the amount that Ashley paid when he took over the club in 2007, the quoted figure being £134.4 million.

Assets are measured by accountants at cost, less depreciation (for wear and tear of tangible assets such as the stadium) or amortisation (which is deducted from player signings over the life of the contract he has signed).

Cost is, as any football fan knows, are not a barometer of value (Angel Di Maria cost Manchester United £60 million and stank out Old Trafford for a year, Scholes, Butt, Giggs, Beckham and the Chuckle Brothers cost nothing, only the former appeared in the balance sheet).

Furthermore, the balance sheet is based on past costs, so ignores the wealth likely to arrive in future years from enhanced broadcasting and commercial deals, and fan loyalty, which brings in money year in year out to the club.

A closer look at the balance sheet shows that as well as the face value of Ashley’s equity investment, he is also owed £129 million in loans at 30 June 2016.

Ashley lent the club a further £15 million in December 2016 via one of his many tentacles, taking the total sum lent to £144 million.

If Ashley is going to get his money back, then he would need £134 million for the shares, and his loan of £144 million repaid too, a total of £278 million.

But for the reasons listed above, this is a case of getting his money back rather than any meaningful value of the club.

Method 2: Comparable valuation methods

If you are buying a house, one way to work out how much to pay is to look at recent prices for other houses in the same street, and use that as a starting point.

If the houses are different sizes, then a metric such as cost per square foot of house space, and use that to produce an initial figure.

Football clubs are different in terms of fanbase, commercial partners and so on, but could be compared in terms of income, profitability and so on.

The most recent Premier League deals have been in respect of Southampton, where an 80% share was sold for £210 million in August 2017, valuing the whole club at £262 million. Everton were sold to Farhad Moshiri in 2016, and he paid £87.5 million for a 49.9% share, valuing the club at £175 million.

The premium in respect of Southampton may seem surprising, but the club has a relatively new stadium, compared to Everton’s charismatic Goodison Park, which is in need of replacement. Everton also owed lenders over £57 million, compared to the Saints debts of £31 million.

Income multiples

Comparing those teams to Newcastle shows that they had very similar income in 2016 of between £121-125 million. Newcastle had higher gate receipts and commercial income (which may surprise many of Ashley’s detractors), but its TV income was lower due to the club being relegated.

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We could therefore work out the price of Everton and Southampton as a multiple of total income.

This gives a revenue multiple of 2.11 for Southampton (£262m sale price divided by income of £124.3 million) and 1.44 for Everton (£175m/121.5m).

On this basis, Newcastle, with revenue of £125.6 million, are priced between £181-£265million. My gut reaction is to go at the top end of that range given that the Southampton deal is more recent.

With these calculations there is an elephant in the room, which is relegation. Newcastle have been relegated twice in the last ten years. Relegation brings an immediate loss of about £50 million in terms of TV income, and can make a nonsense of asking prices. Randy Lerner of Aston Villa was touting the club for sale in 2015 for £150-200million, but accepted £60 million when the club was relegated to the Championship a year later.

The above figures are distorted to a degree by TV income, which can vary considerably from season to season, as each position in the league is worth an extra £1.9million. So finishing five places up the table from one season to the next is worth £9.5 million.

If we strip out TV income, then the income of the three clubs is

Newcastle £53.1 million
Southampton £33.9 million
Everton £39.0 million

Southampton were therefore sold for a non-TV multiple of 7.72 (262m/33.9) and Everton 4.49 (175m/39).

Applying these metrics to Newcastle gives a price range of £238-£410 million.

Profit multiples

Income multiples are flawed in many respects, especially as it ignores the ability of the business to control costs, which in the case of football clubs, is mainly wages and player transfer amortisation (transfer fees paid spread over the life of the player contract).

Profits are therefore seen as a better measure at valuing a club when using multiples.

Mike Ashley has proved to be very good at controlling wage costs for Newcastle. Wages only increased by 6.7% between 2008 and 2016, compared to a rise of 26% in income. That may be linked to the struggle the team has had to maintain competitiveness during that period, as Everton’s wages grew by 89%, Arsenal 93%, Manchester United 93%, Liverpool 132% and Manchester City 264%

This period has coincided with Ashley taking over a loss-making club (loss after tax £33 million in 2007) and converting it to a profitable one (profits after tax of £100 million since 2011).

There then comes a problem. Which profit should we use for a football club?

In theory we could use either:

Operating profit (profit before interest and tax)

EBIT (operating profit after stripping out non-recurring costs, such as sacking managers)

EBITA (EBIT adjusted for amortisation of player registration fees)

EBITDA (Same as above but also adjust for deprecation)

In practice negotiators look at all of the above when trying to determine a price range.

If we apply those relationships to the Southampton and Everton deals (if the profit figure is a negative them then ignore the figures) we end up with a value of somewhere between £126-968 million, which is of little help.

Sale price Op Profit EBIT EBITA EBITDA
Everton 175.0 (20.6) (9.3) 5.3 7.1
Multiple (8.5) (18.8) 33.1 24.6
Southampton 262.0 8.6 (16.4) 14.6 17.3
Multiple 30.6 (16.0) 17.9 15.1
Newcastle 4.1 0.9 29.2 32.0
£’m £’m £’m £’m
Using Everton multiples n/a n/a 967.4 784.7
Using Southampton multiples 126.0 n/a 523.9 483.4

Discounted cash flows

This method involves calculating the cash that Newcastle would generate in future years, and working out how much you would be prepared to pay now for that cash flow.

There are two big problems.

Cash flows for football clubs are very erratic, they are significantly influenced by relegation, position in the league, and sales of players.

Secondly, which interest figure should we use to work out today’s value of future cash flows? This is a similar procedure to determining a credit score when lending money, but is as much art as science. It is highly unlikely that the Manchester clubs, or the big London clubs would be relegated, so they would have a better credit score than the likes of Newcastle, who have been relegated twice in the last ten years. Working out a precise figure is very difficult though.

For many clubs future cash flows may be negative (almost certainly the case for those in the Championship, where wages have exceeded income for the last three seasons).

Therefore a discounted cash flow approach is unlikely to work for a club, unless there is greater predictability of income.

Markham Multivariate Method

Dr Tom Markham, in his PhD thesis, came up with the following formula for a club valuation.

If we plug the figures into Newcastle for 2016, it gives a valuation of £568.2 million. The method has a lot of merit, but assumes that the club continues to be a member of the Premier League. We have already seen that Ashley is good at wage control, and so the wage ratio % (wages as a proportion of income) for Newcastle is relatively low. This has a significant impact on the valuation, but also increases the likelihood of relegation.

If, for example, Newcastle’s wage control was 71% (the average of the non ‘Big 6’ clubs in the Premier League), and adjusting for Ashley’s loans to the club then the value would drop to £259 million.

This still looks an appropriate value for the club.  Any new owner wanting to make Newcastle competitive with the Big 6 and challenge for a place in Europe would have to increase the wage bill still further, and that would still give no guarantee of success on the pitch.

Summary

Trying to value a club is far more complex than for many other businesses, due to the volatility and unpredictability of the income and costs. What a club like Newcastle needs is not an investor who will use the above methods, but a sugar daddy who will transform the club in a similar way to Chelsea under Abramovic or Manchester City under Sheik Mansour. If anyone has the phone number of a bored billionaire, direct him to Sports Direct as quickly as possible.

However it is difficult to see anyone who will be willing to pay Ashley’s asking price. If he wants someone to fund player recruitment in January then the price needs to be right for any interested party to conduct due diligence. Recent HMRC raids and Ashley’s colourful public image won’t help him maximise the price, which is why a £260-280 million tag seems about right, based on the mid point of the above analysis. Add on a premium for the potential growth and you are looking at about £300 million at a push.

Football and the party manifestos

What does the figure one billion, nine hundred and twenty-two million, nine hundred and forty-one thousand pounds mean in terms of football and politics? (and before you ask, is isn’t Diane Abbott’s answer to the question, “If I buy two pints of lager and a packet of crisps, how much change will I get from a twenty-pound note”).

This is in fact the money generated by Premier League football clubs in 2015/16 from broadcast income. (see breakdown in Appendix 1).

The Labour Party has generated publicity with a proposal in its manifesto that the Premier League should commit 5% of this sum to grassroots football.

We have therefore looked at the manifestos of all the major parties (and UKIP) to assess their views on our national game, and sport overall.

Labour

The Labour party has a full page dedicated to sport, summarised as follows

  • Accredited supporters’ clubs to appoint and remove at least two club directors
  • Improvements to access provision for fans with disabilities
  • Invest 5% of Premier League TV money into grassroots game to help develop next generation of players and coaches.
  • Implement the Waterson Review into secondary ticketing to reduce ticket touting.

https://www.gov.uk/government/news/independent-secondary-ticketing-review-published-today

These proposals initially appear laudable, but upon further inspection seem more populist than pragmatic.

  • Many clubs have foreign ownership, so board meetings could be held overseas, and so difficult to attend in person. There is a further issue of many clubs have many supporters’ clubs. There could be squabbling between them, or the football club could deliberately choose a ‘tame’ supporters’ club, that is unlikely to rock the boat, as the one that has board representation.

It seems anomalous to have board representation for customers at football clubs, but not other businesses. Whilst fans don’t see themselves as customers, and football plays a unique part of our culture, singling out football from other sports again seems unusual.

  • Whilst the Premier League generates a lot of income, income is not the same as profit. The Premier League lost money overall in 2015/16, both on a club level (Appendix 2) and, due to the fall in sterling following Brexit, at an entity level (Appendix 3).

It is therefore difficult to see how the 5% funding for grassroots could be made. The Premier League have committed to paying out significant sums to grassroots football, and whilst this may not reach 5%, it still amounts to many millions of pounds.

https://www.premierleague.com/communities/programmes/facilities/pl-fa-facilities-fund

Richard Scudamore, the Premier League’s £3m a year chief executive, points out that other industries do not help smaller businesses to the same extent as football, so feels the game is being singled out because of its success in negotiating lucrative broadcasting deals.

It seems odd that small clubs such as Crystal Palace, for example, should lose out on TV revenue simply because the Premier League has successfully sold its rights to a broadcaster.

Part of the reason why so many clubs make losses each year is that they pay out large sums in wages. This is turn generates large sums of income tax for the Treasury, as the average Premier League salary now exceeds £2.2 million, so 45% of a large chunk of this will be handed over by clubs.

If money is diverted to grass roots, then presumably less will be paid in wages (and thus taxes) so the proposals will result in the government taking with one hand and giving with the other.

Conservative

Type in the search word ‘football’ into the 88-page Conservative Party Manifesto for 2017, and you get no responses.

Perhaps Theresa May thinks that our national game, a bit like putting the bins out, is a ‘boys job’ and so she has no interest in it.

Typing in ‘sport’ gives 10 answers, 8 of which are in relation to the word ‘transport’. The others merely say that the government will support schools sport.

Liberal Democrats

The LD’s only mention of football mentions a move towards safe standing at stadia, and that’s about it.

UKIP

Neither football or sport get a mention, although leader Paul Nuttall seems keen to introduce waterboarding, which you could consider to be a sport, although it wasn’t on the list of Olympic medal events when we last checked.

Greens

Again, no mention of football or sport, although they seem keen on cycling.

SNP

No mention of football. The only mention of sport is in giving the Scottish Parliament the right to choose which sporting events are shown free to air. This presumably will be of little interest to Scottish football fans, given their national team’s failure to qualify for the World Cup since 1998.

Conclusion

The almost complete disregard of our national game in the 2017 manifestos suggests that football (and sport in general) is closer to the public than the politicians who lead us.

Labour appear to be the only party to have given the game much thought, but its suggestions don’t make sense financially, and seem to be targeting a successful industry for the sake of things.

Having three guardians of the game, in the form of the Football Association, Premier League and Football League, with different aims and ambitions is a contributory factor to the lack of success of the national team. Perhaps the politicians should realise this and stop using the Premier League’s success in selling TV rights as a political football.

Broader issues of a school curriculum that places sport as a secondary issue to learning irrelevant facts, a national obesity crisis, prohibitive pricing for those who want to qualify as coaches, restricted access to facilities and reductions in local and national funding for sport, have far more impact than trying to extract more money from the Premier League.


Appendix 1: Premier League Clubs TV money 2015/16

Appendix 2: Premier League Clubs Net Profit/(Loss) 2015/16

Appendix 3: FA Premier League Losses 2016

Deloitte Football Money League: Manchester United now the biggest earning club.

The business consultants Deloitte have just produced their annual football money league table, which reveals that Manchester United generated $635 million in 2015/16, the highest in the world. Real Madrid, who topped this table in 2014/15, dropped to third place with $572 million, but they did win the UEFA Champions League.

Whilst the monetary success will no doubt delight the Glazer family who own the club, and the shareholders who have bought United on New York’s NASDAQ market, Uniteds fans are likely to be less impressed.

The last time Manchester United won the Premier League was in 2012-13, when Sir Alex Ferguson was manager. Since then they have finished 7th, 4th and 5th, and have had ignominious exits from domestic cup competitions at the likes of MK Dons, as well as failing to qualify from a Champions League group in 2015-16.

One of the reasons why United have generated so much extra money (up an incredible 63% since they last won the Premier League) is the contribution made by United’s commercial deals.

Revenue sources

Football clubs make their money from three sources, Matchday (ticket sales), Broadcasting (TV and media deals), and Commercial (Kit manufacturing, shirt and other sponsorship).

United are limited in terms of matchday income as Old Trafford has sold out every ticket of the 76,000 available for many years, and the club has not raised ticket prices significantly during that period.

So the only way to increase matchday revenue is to have more games at home through good cup and European campaigns. This was true to a degree in 2015/16 as Champions League qualification and winning the FA Cup helped boost matchday income by 18%.

Broadcasting income is determined by the collective deals signed by the Premier League rather than clubs themselves in England. Whilst this has produced some bumper contracts, these are usually for three year periods.

Where United have the most flexibility is therefore in terms of commercial deals. The club’s business strategy is to exploit the huge fanbase (estimated at 659 million by United), and negotiate some global deals. This includes the $925 million ten-year kit sponsorship with adidas, and a $559 million seven-year short sponsorship deal with Chevrolet.

In addition to this United’s commercial whizzkids have signed a number of local partnership deals with companies in individual countries. It therefore has seven separate mobile phone partners (Azerbaijan, Belgium, Caribbean, Hong Kong, Korea, West Africa and China), four alcohol partners, and so on. Last week it signed a deal with Uber, to offer a variety of fan benefits, including a dedicated pick up point at Old Trafford.

Trophies or partners?

All of this has resulted in United’s commercial income increasing by 116% since the reign of Sir Alex Ferguson ended, but has this impacted upon the club’s performance on the pitch?

With an increasing number of commercial partners (now over 70), come an increasing number of demands. Players and management are required for TV and new media commercials, photo shoots, and exhibition matches all over the world.

This means that the opportunity to train, bond and develop, both individually and as a team, especially prior to the start of a season, is compromised. At a time when the sole focus should be on starting the season in peak physical and mental condition, United have been lacking in this regard in recent seasons.

Sir Alex used to run United as a personal fiefdom from top to bottom, and always put the interests of the team ahead of the money men wherever possible.

His successors at Old Trafford, David Moyes, Louis Van Gaal and Jose Mourinho, have not had the same iron control over the activities of the club. Having their stars jet off to appear in photographs and adverts is great for United’s bank balance, but does appear to have affected the club’s early season form.

The distractions caused by the demands of the commercial department pre-season have given United a disadvantage compared to their peers in the Premier League. This has meant that they have been playing catch up during the rest of the season.

So despite United spending big in the transfer market, breaking the English transfer record with the likes of Angel di Maria and Paul Pogba, United have struggled at the start of each season since Ferguson left.

The average points of Premier League champions since it commenced in 1992/93 is 86, or 2.26 points per game. In the last four seasons United have earned a total of 31 points in the first five games of the season, or 1.55 per game.

In the current season, despite a long unbeaten run, United lie in sixth position, twelve points behind leaders Chelsea and four off a Champions League spot.

Real Madrid fans wouldn’t swap a Champions League trophy for being top of the money league. It appears that fans at United may have to settle for a less impressive title, that of the highest money earners, unless the club’s top brass give Mourinho’s men fewer distractions from winning games.