Newcastle: Opportunity Knocked

Introduction

Regular reference is made about the ‘Big Six’ clubs in the Premier League and the disproportionate amount of wealth, transfer spend and media exposure that they generate.

These clubs (Manchester United and City, Spurs, Arsenal, Liverpool and Chelsea) seem to have created a glass ceiling which is almost impenetrable to break (with the notable exception of Leicester in 2015/16 as they jostle for Champions League (CL) positions, having taken 60 out of 62 places in the CL since 2004/5.

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One of my chums on Twitter, called @TheGingerPirlo_ , asked about Newcastle United, a club who had been successful in the early 2000’s, and an assessment of Mike Ashley’s reign of terror, misery ownership on Tyneside compared to what has happened at Spurs during the same period. Should Newcastle have been one of today’s ‘Big Six’ instead of Spurs?

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The guv’nor of football finance, Kieron O’Connor at the Swiss Ramble, has already given his always brilliant assessment of the two clubs’ monetary performance and position on Twitter, but here’s further analysis for those who want any additional information.

Ashley acquired control of NUFC on 15 June 2007, after initially acquiring 41% of the club the previous month.

On that momentous day Rihanna (and Jay Zed) were number one in the pop charts with Umbrella, Tony Blair was prime minister and still reasonably popular, Sid the Sexist in Viz was a virgin and Michael Owen was Newcastle’s record transfer signing…some things haven’t changed since then.

Spurs’ record signing at the time was Dimitar Berbatov, a signing that has since been exceeded 18 times.

Finances pre Ashley

In the eleven years prior to Ashley taking over Newcastle, the club’s league position compared to that of Spurs was as follows.

Newcastle’s average league position was 8th, compared to that of Spurs’ 10th, and the Toon had had four top four finishes during that time period, whereas Spurs highest finish was 5th. Newcastle finished above Spurs on seven occasions during the period in question.

Since Ashley took over, the situation has reversed.

Newcastle have finished below Spurs in each of the 11 seasons since Ashley took over, with an average position of 14th, compared to 5th for Spurs.

When Ashley acquired Newcastle, the key financial figures for both clubs for the previous year was as follows:

Income

Spurs overall had revenue of £103 million compared to £87 million for Newcastle. The main reason for this was that Spurs had a higher league finish coupled with decent cup runs (UEFA Cup QF, League Cup SF, FA Cup QF) as well as the attraction to commercial partners of being based in London. Newcastle’s additional capacity at St James’ Park meant that they had an advantage in terms of matchday income. The retirement of Alan Shearer and a major injury to Michael Owen meant that Newcastle had a relatively poor season on the pitch.

Costs

The main operating costs for a club relate to players in terms of wages and player amortisation (transfer fees spread over the contract term, so Berbatov signing for Spurs for £11 million on a four-year contract works out as an amortisation fee of £2.75 million a year).

This may cause Newcastle fans to drop their bacon sandwiches (this is of course less likely to be an issue for Spurs fans) but in 2006/7 their club’s wage bill was 43% higher than Spurs at £62.5 million. There was little difference in the amortisation charge.

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Spurs therefore only spent £42 in wages for every £100 of income, whereas for Newcastle it was £72.

Spurs had a successful time in the transfer market and made a profit on player sales of £18.7 million, mainly due to the sale of Michael Carrick to Manchester United, whereas Newcastle lost £1.9 million.

Newcastle also had a number of additional expenses that year. The sacking of Glenn Roeder cost £1.1 million in compensation, the takeover by Ashley led to a number of directors leaving the club, which added a further £2.2 million to expenses, and £2.9 million in relation to some aborted takeover bids and financing a stadium expansion took one off costs to £6.1 million. This was however offset by a £6.7 million compensation claim against FIFA and the FA relating to Michael Owen suffering an ACL injury in the previous year’s World Cup.

What is clear is that Spurs, under the astute leadership of Daniel Levy, controlled their costs well and this meant that the club was profitable, unlike Newcastle, where the Hall/Shepherd era was coming to its final throes, which made losses under practically every performance measure.

Profits/losses

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Of the above profit measures, we believe that EBIT and EBITDA are the most relevant ones, as they exclude one off transactions such as profits on player sales and compensation for sacked managers. Spurs were making broadly £30 million more than Newcastle in 2006/7 under both these measures, so Ashley was inheriting a club that whilst it had been more successful on the pitch in the previous decade compared to Spurs, had some warning signs in its finances.

The Ashley Years: 2008-17

Income

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Newcastle continued to have an advantage in terms of matchday income for the first two seasons under Ashley, but relegation in 2008/9 reversed this picture and Spurs have reinforced this ever since. This is mainly due to participation in UEFA competitions, combined with increasing prices for matchday packages as White Hart Lane is a popular destination for football tourists.

In 2006/7 Spurs generated £863 per matchday fan per season, compared to £608 at Newcastle. By 2017 Spurs had increased theirs to £1,433 per fan, helped by four matches at Wembley in the Champions League & Europa Cup. Newcastle, playing in the Championship made only £458 per fan, as the likes of Burton and QPR were clearly less attractive than Monaco and Bayer Leverkusen.

With Spurs new stadium coming on stream in 2018/19 at eye watering prices, and another year in the Champions League, expect the gap here to grow even further.

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Broadcast income was neck and neck between the two clubs in Ashley’s first year of ownership, but again relegation in 2009 changed the dynamic between the two clubs and that has been magnified ever since by Spurs.

With BT Sport paying huge sums for Champions League rights, along with approximately a £2m increase per domestic place in the Premier League, Spurs are likely to generate £100 million a year more from broadcasting than Newcastle as long as they continue to qualify for Europe.

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In terms of commercial income, Spurs have a geographical advantage due to being London based, and therefore more appealing than Newcastle to global brands and partners. Newcastle have suffered too due to the Sports Direct and Wonga factors. Other sponsors are reluctant to be seen alongside the logo of the carrier bag of choice of those who like to wear velour onesies and use payday loans to fund their daily purchases of wifebeater from Bargain Booze.

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Spurs generated total income of £616 million in the decade before Ashley arrived, compared to £709 million for Newcastle.

In the decade since Ashley took control, the reversal is depressing for Toon fans. Spurs income has risen 175% to £1,696 million whereas Newcastle’s has increased only 39% to £986 million, representing a huge lost opportunity.

I

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Costs

Spurs have overperformed in terms of on the field performances compared to the wages they pay. The other ‘Big Six’ clubs pay substantially more, so it is credit to the negotiation skills of Daniel Levy in agreeing wages with staff that are lower than that of Spurs peer group (except for the pay of the highest paid chief executive in the Premier League…Daniel Levy, who earned £6m in 2017/18)

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In Mike Ashley’s first season as owner Newcastle’s wage bill was 32% higher than that of Spurs. His reluctance to invest in players (and pay them accordingly) as new TV deals were agreed resulted in a reversal of this situation, even when compared to the relatively parsimonious (compared to the rest of the Big Six) wage levels being paid at White Hart Lane.

Overall Ashley has paid out a beastly £666 million in wages over the decade compared to £950 million at Spurs. You pay peanuts, you get Xisco, Titus Bramble and Stephane Guivarc’h…and relegated twice.

At the same time Spurs have keep their wages relatively low compared to income, but by boosting income levels it allowed them to increase the wage total.

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The same reversal of spending had arisen in relation to player amortisation.

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Ashley’s reluctance to invest in the transfer market is very evident. There was a £3m difference between the two clubs in the year before he took over, but since then Spurs have had a total amortisation charge of £364 million, nearly twice that of Newcastle’s £192 million.

If clubs fail to invest in player recruitment, then this has a knock on effect when it comes to selling players at a profit.

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Spurs have benefitted from signing the likes of Modric and Bale and then selling them to Real Madrid, but they were prepared to invest in the first place. Newcastle, by rummaging around the bargain bins on a more regular basis, were more likely to struggle to make a return on those players as many failed to make the grade. Overall Spurs have made a profit of £324 million whereas Newcastle have only made £180 million.

One area where Newcastle have benefitted from Ashley’s ownership is that he paid off the club’s loans and lent the club money interest free. This has resulted in Newcastle only paying £8 million in interest over the decade compared to £55 million at Spurs.

The downside of this is that because it is his own money he had been lending, Ashley has been overly cautious in financially supporting the club once his initial enthusiasm waned.

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Spurs have borrowed money most years, and this has been used to fund infrastructure projects as well as the transfer market. Under Ashley, Newcastle have borrowed a net £4 million in the last 7 years, and this was mainly in 2016/17 as the owner needed the club to return to the Premier League to have a chance of selling it for his desired price of £400 million.

Transfer Market

Both clubs have a reputation for caution in the transfer market and this is reflected in the figures. Newcastle have outspent Spurs in terms of recruitment three times in the last decade (and this is likely to be repeated in 2018/19 too), but overall Spurs have spent £564 million in the period compared to just £331 million by Newcastle.

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Net spend is a topic that gets many Newcastle fans into an anti-Ashley frenzy, and here they have some justification.

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In the first eight years of Mike Ashley’s ownership, there was a net overall spend of just £5.6 million, whereas Spurs net spend was £81 million, despite the sales of Bale and Modric.

Summary

First of all credit should be given to Spurs for having a plan, they wanted to move to the next level in the Premier League, and through excellent recruitment and good cost control they’ve managed to become a club that is expected to challenge for UEFA cup competitions each year.

Ashley’s ownership of Newcastle is baffling. If he wanted to make a fortune by selling the club at a healthy profit, then refusing to invest in the assets that generate the best return, in the form of players, has come back to bite him in the bum.

When he acquired the club in 2007 it was in a prime position to challenge for the top four regularly. Whether he took the eye off the ball (Daniel Levy’s investment in Spurs is 24/7) due to the other elements of his business empire, or a belief that his successful methods in running his retail empire could be transferred to a football club, is unclear.

With the Big Six clubs being worth at least £1 billion each, and Ashley hawking Newcastle around for about £350 million, his period of ownership has cost him hundreds of millions due to his focus on spending as little as possible to keep the club in the Premier League instead of one of ambition on the pitch.

The last decade has been a lost one for Newcastle, and the problem is it is a situation that cannot be seen to be reversed under the present management, and even a new owner, given the wage constraints of the Premier League’s STCC rules which are aimed at reinforcing the status quo in terms of the Big Six, will face an almost impossible task at breaking through the glass ceiling.

The Ashley Years Table

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Newcastle 2017: Lovely Jubbly

Introduction

Mike Ashley, Newcastle’s colourful owner, has finally submitted the club’s accounts for the year ended 30 June 2017 for public scrutiny.

In first announcing a selected set of information from the accounts on the club’s website Ashley has laid himself open to accusations of trying to massage the message from the club’s season in the Championship.

Kind words are in short supply in Tyneside for Ashley, who bought the club in May 2007 and has overseen two relegations during that period.

Easy to criticise, and hard to love, but is Ashley as bad as some make out, given that he has lent the club over £140 million interest free, and invested a similar sum in buying share in the club too?

A look at the accounts suggests that the bleak picture painted by the press announcement last weekend perhaps overegged the pudding in terms of just how big a gamble the club took last season in incurring record losses of over £90 million.

Income

Starting at the top of the income statement, Newcastle had total revenue of £85.7 million, a record for a club in the Championship, but nearly a third less than the previous season in the Premier League.

Having a lot of money is one thing, and Newcastle have earned exactly £900 million under Ashley’s ownership, but putting it to good use is another, and Toon fans will question a lot of the decisions made in how that money has been utilised.

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Looking at the breakdown of the income total, the biggest contributor is broadcast income from the Premier League in the form of parachute payments.

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Earning Newcastle £40.9 million in 2016/17, parachute payments, which worked out at 55% of the Premier League’s ‘Basic Award’ (the part of the broadcast deal that is split evenly between clubs, aim to cushion the blow of relegation when clubs have players on Premier League contracts which otherwise would be difficult to fulfil in the Championship (or, in the case of Sunderland, League One).

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Year by year parachute payments fall, from 55% of the basic award in the first year outside the Premier League, to 45% in year two and 20% in year three.

Income from broadcasting in the Championship for non-parachute payment clubs is a basic of about £6.5 million a year, plus £100,000 for every home match shown live on Sky.

Some of the Championship broadcasting income (about £2.3 million per year in the Championship) comes from ‘solidarity payments’ from the Premier League, which is an annual handout to the 72 clubs in the Football League.

A huge gap therefore exists between those clubs in the Championship earning parachute payments and those that do not.

Fans of parachute payments point out that it allows clubs to negotiate long term contracts with decent players who might otherwise go elsewhere if there are large wage reductions clauses in their contracts.

Allowing clubs three years (or two if they are promoted and immediately relegated, such as happened to Middlesbrough in 2016/17) means that there doesn’t need to be a fire sale of player of the calibre of JonJo Shelvey if a club goes down.

This allows a club relegated to regroup and familiarise itself with the financial constraints of the Championship and reduce the risk of going into administration.

Critics of the parachute payment system claim that it gives clubs relegated from the Premier League an unfair advantage over their rivals.

Only one club in receipt of parachute payments in 2016/17 was promoted though, and that club was Newcastle, Norwich finished 8th and Villa 13th, despite also receiving nearly £41 million from the Premier League.

Commercial income for Newcastle in 2016/17 was £14.8 million, down from £28 million the previous season.

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Knockers of Ashley will point out he uses St James Park as an advertising vehicle for his Sports Direct cheap and cheerful sports emporium, and he should be generating more commercial income than any other club in the division.

Newcastle fans take the view that they should be earning far more commercial money given the history, heritage and size of the club, but it already is fairly competitive with many in the Premier League whose matches are broadcast around the world each week and who generate vastly bigger viewing figures than those teams in the Championship.

Earnings from matchday sales were maintained due to Newcastle fans turning up every week and average attendances at St James Park were an amazing 51,108, beaten by only five teams in the Premier League.

You must give respect to Newcastle fans for turning up in numbers as matchday income at St James’ Park was twice that of any club in the Championship as crowds averaged 51,000.

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Costs

Wages are a club’s biggest expense, and Newcastle spent a record amount of £112.2 million in 2016/17, up 50% from the previous season in the Premier League, but this headline sum includes some one-off costs.

A sizeable chunk of the wage bill (£9.9 million) was paid for promotion bonuses and a further £22 million was for players who were not considered part of the first team and so had their contracts paid up or went on loan with NUFC picking up some or all the wage bill.

Nevertheless, even if these figures are excluded the wage bill would have been over £80 million, compared to the average Championship figure of £29.8 million.

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Kowtowing to Mike Ashley as Newcastle United Ltd.’s only director is Lee Charnley, who earned ‘only’ £150,000 for his services in the year and waived his right to a bonus.

Every club needs a front man and Charnley acts as the interface between unhappy Toon fans and the Ashley.

Rightly or wrongly, Charnley is seen in as bad a light as Ashley on Tyneside but his pay is far lower than that of other football executives, with the average in the Premier League being £1,008,000 a year and some other CEO’s in the Championship earned seven figures too.

The other major cost is transfer fee amortisation. This is how clubs deal with the sums paid for player transfers. This is achieved by spreading the cost over the contract life. So when Matt Ritchie was signed in the summer of 2016 from Bournemouth for £11million on a five year contract, this works out as an amortisation charge of £2.2 million (11/5) a year.

The total amortisation cost incurred by Newcastle was £35.8 million, far higher than that of any other club in the division. This also reflects ‘impairment charges’ which is when the club writes down player values in the accounts when they are a bit rubbish. The sum involved within the amortisation figure is not shown, but I’m sure Toon fans can name the players and the manager(s) who signed them.

Amortisation is not however a cash cost, so there’s a case for treating it cautiously when looking at the figures.

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Profits

Profits are income less costs, and here the club has been disingenuous by promoting in the press release a £91 million loss figure. However, this is before considering gains on player sales of over £42 million and includes the non-recurring costs from promotion bonuses and the contract write ups.

If you strip out the one-off costs and income and exclude amortisation claiming it is a non-cash expense, we get to something called EBITDA (Earnings Before Interest Tax Depreciation and Amortisation). This is the profit most focussed on by analysts, at it is a sustainable cash equivalent of profit.

This gives a figure of £19.8 million, still sizeable but far less than the sum being touted by the club to the media when the results were announced.

Newcastle made substantial EBITDA profits in previous years so were able to absorb this loss reasonably easily.

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There is no chance of Newcastle being subject to Financial Fair Play sanctions from the Football League as promotion bonuses are excluded and gains on player sales included when calculating FFP losses.

Player trading

Mike Ashley’s reluctance to spend money in the transfer market is legendary. In the period since he bought the club he has spent £308 million on players (less than what Mourinho and Guardiola each spent in their first 15 months in charge) and raked in sales income of £244 million.

This gives a net spend of just £65 million over the period.

Last season in the Championship Newcastle bought players for £41 million in the shape of Ritchie, Gayle, Yedlin and Clarke, but managed to rake in £70 million from selling Sissoko Wijnauldum and Townsend.

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Compared to the rest of the division Newcastle certainly spend big, but it was less than half the sums paid by Villa, who finished far down the table.

Debts

Mike Ashley lent the club a further £15 million during the year, taking his total interest free loans to £144 million. The club also had an overdraft at 30 June 2017, presumably used to pay the promotion bonuses, but this overdraft would have been wiped out when the Premier League broadcast income for 2017/18, which eventually totalled £123 million started to flow to the club.

In addition to the loans Ashley has invested a further £134 million in shares in the club, taking his total investment to £278 million. Rumour is he is trying to sell if for £400 million, but this price looks optimistic for a business that realistically has a 1 in 4 chance of losing its main source of income (PL TV money) at the start of each year.

Conclusion

Newcastle under Mike Ashely did take a gamble in investing in players in 2016/17 to engineer a return to the Premier League, but not as much as the club has claimed.

The motive of this spending is however unclear, we estimate the value of NUFC as a Championship club to be £80-100 million, but as a Premier League club it is £270-£800 million.  Ashley could therefore be seen to be protecting the value of his investment in the club by funding the promotion push, and once back in the Premier League returning to his more stingy spending style.

Astute management from Benitez combined with canny signings on players who have a good resale value during the season helped them bounce back.

What happens next with Mike Ashley at the helm is unknown, he is the football Fog on the Tyne and it won’t lift until he leaves.

The data

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.