What Price For Newcastle United?
Long-time Newcastle writing contributor Rexn, gives his take on the takeover talk enveloping Newcastle United.
As takeover talk flourishes in the media, several prices are being bandied around. Is it important? Who should be most anxious, Ashley or the supporters?
Assuming that Newcastle United genuinely are for sale, it might be that price is critical to future expectations on the field. If potential buyers have a rigid investment budget, a higher purchase price means less to be spent on new players. Too low might mean that Ashley stays.
A starting point would be to look at Newcastle United as a mid-table Premier League team. Football finance experts, Deloittes, suggest a valuation based on a prospective P/E ratio of around 14, so what does that mean?
In simple terms, the club`s theoretical value is 14 times the level of profit likely to be produced. This leads us to trying to work out profit levels over the financial year, put another way, revenues minus costs.
We are still waiting for the accounts to be produced for last season, the Championship year. This is not entirely relevant to future years as a Premier League club but could affect prospects for investment under Financial Fair Play rules. It is likely, given transfer activity, that NUFC did not make a loss in the Championship, largely due to sales of highly priced players, albeit on credit.
Instead, the previous season in the top flight might be a better guide.
Back then, operating revenues were about £126 million. This is broken down into gate receipts, commercial income and TV revenues. With sell out crowds this time around, combined with a new shirt sponsor and wider exposure, there should be an increase for 2017-18.
The biggest increase comes from TV income where even last place provides a significant boost. Based on a mid table finish, there should be an increase from the relegation season, from £73 million up to around £120 million. In round figures, turnover should be £50m or so more.
The flip side is costs. The largest part of those two seasons ago was in wages, running at around £75m. Some of the highly paid players have since left, including the highest paid, Coloccini. The others we shall come to in a moment. It is reasonable to assume that wage costs have not risen significantly, if at all given suggestions of a wage cap allegedly affecting recruitment policy.
Moving on, the next biggest components of costs are player purchases. For the uninitiated, these are written down over the life of a contract. As an example, if Dwight Gayle cost £10m and was signed on a 4 year contract, his cost is applied at £2.5m per year. This is known as "amortisation".
The amortisation figure was around £28m in the last Premier League season but will have reduced. Those players whose fees were into 8 figures include: Cabella, Townsend, Thauvin and Wijnaldum.
This leads us to a projected profit in the region of £50-60m for the current season. Using the Deloitte criterion, the value placed on the club becomes £700-840m.
Back in the real world, Ashley can not expect to reach that sort of level. His management style is to cut costs, a dangerous path in the current climate as evidenced by 2 relegations in his 10 years. Other Premier League clubs have invested to protect their incomes. With higher priced players come increased costs, therefore reduced profits. Player valuations have escalated with TV deals.
Newcastle`s net spend was well below average last summer, at around £10m plus the subsequent purchase of Merino. The net figure will have been funded from instalments on other sales such as Sissoko and Thauvin. In the meantime, even the other promoted clubs have spent 3.5-4 times that of NUFC.
Additionally, Ashley has provided the club with an interest free loan. His benefit comes in the way of free advertising for his retail operation. There is the question of whether this should be built into the final price paid or at least a repayment schedule for Ashley to consider the club as his piggy bank.
It is becomes easy to see why the price of the club, according to Deloittes` criteria, can be halved with the loan subtracted. A revised estimate brings the value to something in the order of £300m with a proportion of the debt to remain.
This brings us to what price we can expect a trade.
Any market brings together potential buyers and sellers. Each will look at risks and what else they can do with their money. Are there any other clubs for sale?
Ashley could still keep the club. If he does, he knows he has to invest to keep pace, even with clubs like Crystal Palace and Swansea. That will give him access to the lucrative TV deals, at least until 2019 when they might rise further but could fall. He has the opportunity to spend any value from the sale on growing his retail empire and still be able to buy another club, such as Sunderland, for a fiver.
In any event, now could be a good time for Ashley to take his profit. Given that his major source of wealth has taken a battering on the stock market, his capital gain will be offset for tax purposes. This might be supporters` biggest hope.
There may be question marks over the value of the stadium, the land on which it is built being owned by the City of Newcastle, therefore not a saleable asset on its own.
On the other side of the equation are potential buyers. The prospect is buying into a Premier League brand with global exposure. Commercial opportunities add value as well as prestige. Significant investment could see a further leap in revenues and profitability to those of UEFA, even Champions League exposure and riches.
How much more than £300m depends on many things; the wealth of the buyer, the number of bidders, perceived needs to invest oil revenues in service industries of the future and even vanity.
We could end up with a Yorkshire lass, fronting a Middle East syndicate. We could end up with a Russian tycoon. We could end up being backed by new Chinese wealth. We could end up with an American who knows how to grow a sporting brand.
Alternatively, if Ashley`s own valuation is not met, we could end up with a gambling cockney retailer who employs people on zero hour contracts, cuts costs and enjoys the rush of trying to avoid relegation.
Rex's article can be found on his blog. Here.