Various numbers have been put forward for the price of buying Chelsea football club, which was put up for sale by Roman Abramovich for £3bn prior to the UK government freezing his assets.
Lots of bidders came forwards before the deadline of 19th March 2022, and some were close, but did not match, the quoted asking price.
Analysts use a variety of methods to value businesses, so here is an attempt to work out how some of the numbers mentioned in the media would have been calculated.
Does that mean that these figures should be relied upon…valuation is part art, part science, and a lot of salesmanship, so always treat figures with caution.
Method A: Comparative Analysis
If you were trying to value your house, one method is to look at the price charged for similar properties nearby, and then adjust for condition, different number of bedrooms, bigger/smaller garden etc, and the same can be applied to company valuations.
Manchester United are a good comparative company because their shares are quoted on the New York Stock Exchange and so an up to date value can be determined.
In the case of United, the present price is $13.71 per share, and if this is multiplied by the number of shares (approximately 163 million), this gives a total of $2.24bn (£1.70bn) for the company’s equity.
Relating back to a house, its value is usually split between the lender (mortgage holder) and houseowner, and this principle applies to companies too, so the net debt (borrowings less cash) of the company is added to that of the equity element.
Putting the two figures together for Manchester United gives net debt of £495m plus equity of £1.70bn to give a total enterprise value (estimated value of the business as a whole) of £2.195 million.
United had revenue of £494m in 2021 (or could use their £627m in pre-covid 2019) and an EBITDA profit (cash proxy figure) of £91m (£186m in 2019).
Therefore United have the following multiplier figures for the club
|Revenue multiplier||3.5 x||4.4 x|
|EBITDA multiplier||11.8 x||24.1 x|
If we apply these figures to Chelsea we get the following
|MUFC Revenue Multiplier||3.5 x||4.4 x|
|EBITDA Multiplier||11.8 x||24.1 x|
Notwithstanding that there are differences in the figures from the different years, the EBITDA valuations can be ignored as Roman Abramovich claimed he did not run Chelsea as a profit making business, and these figures tend to back up that claim.
Having a revenue multiple valuation of somewhere between £1.56bn-£1.93bn seems intuitively in the right ball park, given Chelsea’s smaller stadium and fanbase compared to Manchester United.
A bigger and/or stadium though, which has greater capacity been suggested by some of the interested parties and this may be why some of the bids are higher than £2bn.
Should a new owners acquire Chelsea, they also would pay what is called a ‘control premium’ which is an additional amount over the current market price for a single share, on the grounds that owning 51% or more of the company gives you the right to make strategic and operational decisions.
Markham Multivariate Model (MMM)
A few years ago, Dr Tom Markham created a bespoke valuation method for Premier League football clubs.
Specifically, this method took into consideration elements such as revenue, profit, net assets, wage control and popularity (measure by the proportion of available seats actually sold by the club).
Markham’s thesis put these items together to produce the following:
((R+A) x (P +R)/R x W)/C
Where R = Revenue
A = Net Assets
P = Net Profit
W = Wages/Revenue
C = Ave attendance/stadium capacity
Adjustments have been made by myself to this model to remove the volatility caused by individual player sales in a single season and replacing it with an average player sale profit over a three year period.
Losses made by a club (such as Chelsea) therefore reduce the value (as losses are negative net profits) which makes sense.
Likely new owners of Chelsea include a few US based franchise owners who might however decide to change the business model and try to make profits, which could mean that the MMM understates what these owners believe to be the long term value of the club.
Putting these figures into Chelsea’s accounts for 2018 and 2019 (the impact of Covid in 2020 and 2021 makes the calculations too unreliable) gives values of £1.61bn and £1.23 respectively.
Discounted Cash Flow
Every potential owner of Chelsea will say they are more interested in the money the club can generate in the future, rather than what was earned in the past under Abramovich, and so discounted cash flows are used as another basis for valuing the business.
No one knows for sure what the future holds in terms of club cash flows, but you can use historic figures and trends, and make assumptions based on them to estimate figures going forwards.
In financial maths we use something called the time value of money, which takes the view that £1 in a years’ time is worth less than £1 today, due to a combination of inflation and uncertainty.
Spreadsheets are used to calculate both the future cash flows and present values of those amounts, using assumptions for a variety of figures and interest rate, and assuming Chelsea continue to qualify for the Champions League and their player trading model (which involves significant sales) is maintained gives a value of £1.497 billion (the spreadsheet is not attached).
Looking at the models used gives the following
Revenue comparables £1.56-£1.93bn
DCF £1.50 bn
Therefore anyone bidding £2.5bn-£3bn for Chelsea is assuming that the business has been poorly run historically OR there are substantial untapped revenue sources (SuperLeague Mark II or NFT’s?) or cost savings to be achieved in the future…or the prospective owners simply want a trophy asset and are willing to pay a premium to acquire it.