Tottenham Hotspur Football Club founded in 1882 and this is one of the oldest teams in the Premiership. The club had an old stadium called White Hart Lane with a capacity of 36,500 fans. The club had good successful and winning records in past six decades. The club also becomes the first public-owned football club in England and in 1983; it listed on the London Stoke Exchange. ENIC international Ltd., an investment company established by Joseph Lewis is the main shareholder of the team since 1981.
Source of revenue for football clubs
Main source of revenue for a football club's comes from winning prize of a championship. UEFA Cup and UEFA Championship League are the two football tournaments has high value of prize money and England's football clubs always want to participate and would like to win the championship cup. Another source of revenue is the broadcasting rights, which comes from the agreements, signed between the clubs and the league or tournaments organizers. Therefore, if the club will play and win more matches so they will receive more broadcasting revenue. In addition, the sales of tickets of the matches as well as selling of merchandize and transfer fee of players.
Decision of building stadium
In early 2008, Daniel Levy, chairman of Tottenham Hotspur Football club announced plan to build a new stadium with a capacity of up to 60,000 fans where as club's old stadium capacity of hosting 36,500 fans. During games at White Hart Lane all the tickets was sold out and over 20,000 people are on waiting list. The old stadium maintenance capital expenditure was £3.5M in 2007and expected to grow at 4% and depreciation cost was £2.2M in 2007 and expected to grow at 4%. There is no revenue generated from the stadium except matches. On other hand the key competitors such as Arsenal, Manchester United and Chelsea had newer and larger stadium with a capacity of above 50,000 fans. Robbie Keane and Dimitar Berbatov, leading goal scorers of Tottenham decided to move high profile clubs i.e. Liverpool and Manchester United respectively.
Levy felt that a significant investment needs in physical assets, which could be development of new stadium was a crucial component of long-run success in the premiership and leads to future success of the club. The proposal will be good news to the fans but it could also create financial pressure to the club. They mainly finance the establishment of new stadium by loan. They have to limit the budget for signing players carefully in the next few years implying probable drop in the team competitiveness.
CASE ANALYSIS
Tottenham Hotspur Football Club one of the oldest teams in the Premiership and founded in 1882. It's a successful history of winning trophies in the past six decades. Tottenham currently played at their own old stadium called White Hart Lane with a capacity of hospitality of 36,000 fans. The club becomes the first public owned public-owned football club in England and it was listed on the London Stoke Exchange in 1983. ENIC International Ltd has been the main shareholder since 1981. ENIC International Ltd is an investment company established by Joseph Lewis and Daniel Levy is partner at ENIC and had served as chairman of the club since 2001. Later, by June 2007 ENIC had acquired share of 82% of the club and take the management control of the club.
Denial Levy, chairman of Tottenham Hotspur Football Club, in early 2008 announced plan of developing new stadium for the club beside the old stadium "White Hart Lane". The new stadium will be complete in 2 years with estimated cost of £250M. Stadium will be able to accommodate up to 60,000 fans. He felt that a significant investment needs in physical assets, which could be development of new stadium was a crucial component of long-run success in the premiership and leads to future success of the club. This is a strategic move and a long-term plan to be top team in the premier league and be successful champion club.
Many factors are involved to take a decision for Denial Levy to build a new stadium beside White Hart Lane.
The old stadium capacity is 3,600 fans while during games all seasons tickets are sold out and over 20,000 people are on waiting list. The Spurs fans base is around 20M people around the world, including 2.1M in United Kingdom. Fans are very significant part of a club's success. A huge amount of revenue came from sales of ticket and merchandise. The key competitors such as Arsenal, Manchester United and Chelsea had newer and larger stadium with a capacity of above 50,000 fans. So their earning revenue will be higher than Tottenham, which will attract the investors, develop or upgrade the infrastructure and help the club in acquisition of high profile players. For Arsenal, its revenue exhibits stability over the past 4 years, especially from 2004 to 2006, where its revenue ranges from £137M to £157M. In 2007, however, there is a sudden increase in its revenue, due to the increase of gate receipts in the new stadium. They also earn a positive net income all over the four years which cannot be achieved by Manchester United and Tottenham.
White Hart Lane stadium was old, the renovation cost will be higher to restructure the stadium and it will be difficult to restructure to accommodate capacity of 60,000 fans. The maintenance cost of the stadium was £3.3M in 2007 and was expected to grow at 4%. Depreciation cost was £2.5M in 2007 and was expected to grow at 4%. The club cannot earn revenue from the physical structure of the stadium. Whereas the new stadium of Arsenal stadium Emirates Stadium has just completed last year, with a great capacity of 60,355 seats, 22,000 more than the old one. This significantly increases the sales of the gate receipts of the team, leading to an increase of revenue from £137.2M in 2006 to £200.8 in 2007. Specifically, the revenue from the gate receipt nearly doubled from £42M to nearly £90M, and earning of revenue from the physical structure of the stadium through advertising, stadium name and other sponsorships.
Revenue earning in football industry fluctuate every season or financial year and prediction of cash flow projection is very difficult. Results, a club may earn highest revenue among all clubs while the same club will be at the bottom next year or lost a huge amount and the net income in negative. The performance and the winning momentum in the league will decide the earning for the season. Especially England's football clubs, they usually aim for the UEFA Cup or the UEFA Championship League because of high value of prize money. The football club have high success rate in the premier league have chances of earning of higher revenue from broadcasting rights, and high demands merchandize. The revenue gained from the gate receipts is also crucial. Arsenal, Liverpool and Tottenham among the 3 football clubs, Arsenal and Liverpool football club enjoy a broader fan-base than Tottenham due to their more glorious history. Liverpool has won Premier League for 18 times, a record for English clubs. It also won European Championship League for five times. Nevertheless, Arsenal won the Premier League for 13 times, especially in 2003/2004 season they remained unbeaten for the whole season, which may be so incredible that can never be paralleled in the future. All these marvelous results help the team capture die-hard fans. This guarantees the steady, and fortunately increasing, sales of merchandize. Despite the fact that Tottenham also has a long history (125 years at 2007), their incapability in winning the Premier League for years and failures in European competitions limit their reputation and hence their fan-base. This explains why the sales revenue of Tottenham is much lower than that of the other two clubs. The total sales revenue increases from 2004 to 2006 an average of £70,338 but the new profit is loss an average of -54.3333 from 2004 to 2006 (please see Exhibits 1 & 2 for details).
Another key stakeholder in determining the performance of a club is the trading of player. Signing a top player not only helps a team by having a strong member in the team in order to remain competitive, but also creates a positive brand name effect to the team. Yet one must not neglect the fact that it may also create severe financial burdens to the club once over-contracting players. Leeds who once entered the semi-final of UEFA Championship League is currently playing in the Football League only, which is two levels lower than the Premier League. The main reason for its failure is its over-expansion. It used to aim at qualifying for the European Championships League and therefore allocated a generous amount of fund for signing top-class players. Its "investments" were financed by borrowing but sadly, they failed to enter the UEFA Championship League. As a result, it was forced to sell its players at a cheap price because it didn't have enough cash to repay the debt and the players' payrolls.
Famous or good players would like to play for high profile clubs. The club should good infrastructure, good trainer and training facilities, large fans support, good records of winning and has financially sound. In this case, two leading goal scorers Robbie Keane and Dimitar Berbatov have decided to move high profile clubs i.e. Liverpool and Manchester United respectively. This is an indication for the club to think strategically to avoid such incident in future as well as attract or transfer high profile players from other club. High profile players have die-hard fans and they attach with the individual players not the clubs. Therefore, in case of transfers of the star player to another club there will be huge loss of revenue such as decrease sells of merchandise, sponsors also move with the player and gate receipt. Ultimately, loose of premiership leagues matches.
FINANCIAL ANALYSIS
the analysis requires evaluation of two main scenarios. The first evaluation scenario is based on financial information as of 31 December 2007. The fair value of the company may be found using DCF model. The second scenario involves changes suggested by Daniel Levy: construction of stadium and acquisition of new players. As a result of comparative analysis we may see the feasibility and resources for each scenario.
Discounted Cash Flows model implies calculating the fair value of the company on the basis of Aggregate Free Cash Flow for a particular period. Taken that Tottenham Hotspur plc is a company with high potential which operates in a restricted-access environment we may use 10 year income projection, or 13 year given the reliable forecast. The first step in the model is calculating the discount rate (WACC).
WACC = re (E / (E+D)) + rd (1-T)(D /(E+D)), where
re-cost of equity capital;
rd-cost of debt capital;
E- equity, amount of stock;
D- debt;
T- corporate tax.
The discount rate is 10.25%; therefore, the last step remaining is to calculate Free Cash Flow for each period Exhibit 1.
Using this data, we may calculate the present value of accumulated cash flow for thirteen years. We may use NPV formula or Excel function. It is necessary to adjust calculation to terminal value of perpetual cash flow. Present value of Free Cash Flows is £57.8M.
Terminal Value = (Final Projected Year Cash Flow *(1+Long-Term Cash Flow Growth Rate))/(Discount Rate - Long-Term Cash Flow Growth Rate);
Assuming that a long-term growth rate is 4%, terminal value is £110.6M. The employment of "terminal value" theory supports the idea that the club is going to continue effective operation after a period of 13 years.
For the first scenario with determined cash flow schedule and 10.25%, discount rate the sum of Free Cash Flow is £168.4M. This indicator is also considered the fair Enterprise Value, which may be used to compare Tottenham to its main competitors.
Team
EV
Manchester United
934
Arsenal
588
Chelsea
345
Liverpool
291
Tottenham Hotspur
168
Newcastle United
167
Everton
106
Aston Villa
90
As a result of fair value calculation the Tottenham has moved one position higher, and has taken over its competitor club Newcastle United. The position of the club in comparison with higher league clubs such as Manchester United and Arsenal is still rather weak.
In order to evaluate the potential of Tottenham's shares for growth we need to clear the Enterprise Value from the company's Net Debt. Net Debt = Total Debt- Cash & Cash equivalents. As a result of calculation Net Debt is equal to £107.48M and Fair Value of Equity is £60.92M. Given the quantity of outstanding shares (9,29 millions) the price per share is £6.56. We may therefore conclude that Tottenham's shares are overpriced by almost 100%. This conclusion is only valid under the basic circumstances without implementing the improvement plan suggested by Daniel Levy.
The Free Cash Flow schedule for the second scenario involving stadium construction and acquisition of one more player implies both additional revenues and costs is described on Exhibit 2. If Daniel Levy implements the plan of stadium construction and acquisition of a player the club incurs the following additional expenses:
Stadium construction: £125M each year of construction;
Depreciation at £25M per year;
14% increase in stadium operating expenses;
£20M transfer fee and an average of £3.5M of additional payroll expenses;
At the same time, such changes would result in higher income:
40% increase in attendance revenue and 20% increase in sponsorship revenues;
12-point net goal increase is going to raise position of Tottenham in a list, and as a result, it will raise the broadcast income by £760,000.
Obviously, there is no sense to consider a scenario of acquiring a new player without building the stadium, for the club is not going to be able to monetize their success. The increase in broadcast income is going to be offset by transfer fees and payroll increase. Regarding the fact that £760000 income increase is the only direct effect of the acquisition, the plan does not seem feasible.
The Enterprise Value calculated on the basis of second scenario data is equal to £231.76M. The value of the company has jumped significantly but not enough to gain stronger position than the one under basic circumstances (£168M). The Equity Fair Value of the company as of the beginning of 2008 under assumption of second scenario implementation is £124.28M. The share price may then reach the level of £13.38, still under its current market value. It is also necessary to mention that the club needs to collect £224M in investments. If the company makes an additional stock issue at a current market price, the quantity of shares is going to increase by 16.2 millions. The increase of quantity is certainly going to bring the value of share down to £4.87. It takes much longer than 13 years in order for the project to become profitable.
The Enterprise Value of the club without purchasing a new player is £298.48M, which puts it right above Liverpool on the respective scale. The Fair Value of Equity is £191M, and the share price (without taking the stock increase into consideration) is £20.56. In this case, market analysts may deem Tottenham's stock undervalued. This analysis has many limitations. It is clear that a company with current market capitalization of £128M and annual net income less than one million should not undertake such a grandiose project as a new stadium. The Enterprise value of a club with a comparable project (Arsenal) is currently 4 times higher than the one of Tottenham Hotspurs. However, from a strategic point of view stadium construction seems to be a promising long-term investment due to a scaling and expansion effect. The company will have to dissolve some of the existing shares as a result of new shares issue and adjusted Fair Value. Anyway on the basis of the analysis acquisition of a new player cannot be considered an effective way of finance allocation, for it does not generate an increase in company value (based on the notion that new player will only indirectly increase broadcasting income). There is also a 20% possibility that a player is not going to contribute to team score (net-goal) because of injury. In this case, expenses associated with acquisition of a player are not going to be offset by an income increase. Regarding the fact that the stock of the company is currently overpriced, the company management should look out for investors escape caused by some event (several consecutive losses, player injury ETC.). The risk is rather high due to relatively high beta of the club's equity.
CONCLUSION
The club has only £26M extra cash while need £250m for the new stadium. Due to rescission the company will going to save approximately £40M. Special tax incentive to depreciate of £250M of construction cost over a 10 years period following completion. Getting huge revenue from market or loan from bank during recession period will be difficult for Denial Levy. Due to financial strain, the club has difficulty to sign of new player (striker). According to my analysis, this is very short term or temporary difficulties have to face the club. Otherwise, if the club unable to generate huge revenue as compare to key competitors the investors will move from Tottenham to other clubs who have new big stadium.
Exhibits -1
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Sales revenue
80.77
88.04
95.96
104.6
114.01
124.27
135.46
147.65
160.94
175.42
191.21
208.42
216.76
Operating Costs
74.92
81.28
88.23
95.82
104.13
113.22
123.16
134.04
145.95
158.99
173.28
188.92
196.48
Taxes
0.38
0.59
0.82
1.05
1.30
1.57
1.85
2.13
2.43
2.74
3.05
3.37
3.50
Depreciation
2.29
2.38
2.47
2.57
2.68
2.78
2.90
3.01
3.13
3.26
3.39
2.52
3.66
Capital Expenses (maintenance)
3.30
3.40
3.60
3.70
3.90
4.00
4.20
4.30
4.50
4.70
4.90
5.10
5.30
Change in working capital
-
-
-
-
-
-
-
-
-
-
-
-
-
Free Cash flow
4.46
5.12
5.81
6.59
7.40
8.25
9.17
10.15
11.17
12.25
13.39
13.57
15.16
Exhibits -2
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Attendance
26.56
28.94
31.54
34.38
37.48
40.85
44.53
48.54
52.91
57.67
62.86
68.52
71.26
Sponsorship
20.53
22.38
24.40
26.59
28.99
31.60
34.44
37.54
40.92
44.60
48.61
52.99
55.12
Broadcast
32.04
34.86
37.93
41.27
44.92
48.89
53.22
57.95
63.09
68.70
74.82
81.48
84.71
Merchandise
5.67
6.18
6.73
7.34
8.00
8.72
9.51
10.36
11.29
12.31
13.42
14.63
15.21
Other
7.74
8.44
9.19
10.02
10.92
11.91
12.98
14.15
15.42
16.81
18.32
19.97
20.77
Total revenue
92.54
100.80
109.79
119.61
130.31
141.97
154.68
168.53
183.63
200.09
218.03
237.59
247.07
Operating Costs
77.31
83.76
90.81
98.50
106.92
116.12
126.18
137.18
149.21
162.39
176.81
192.59
200.30
Payroll additional
22.40
2.64
2.90
3.19
3.51
3.87
4.25
4.68
5.14
5.66
6.22
6.85
7.53
EBITDA
-7.17
14.40
16.07
17.91
19.88
21.98
24.26
26.68
29.27
32.05
35.00
38.15
39.24
Depreciation
2.29
2.38
27.47
27.57
27.68
27.78
27.90
28.01
28.13
28.26
28.39
27.52
3.66
EBIT
-9,46
12.02
-11.40
-9.66
-7.80
-5.80
-3.64
-1.33
1.14
3.79
6.61
10.63
35.58
Interest
2.46
2.69
2.93
3.19
3.48
3.79
4.13
4.50
4.91
5.35
5.83
6.36
6.61
Taxes
0.00
3.26
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.27
1.49
10.14
Capital Expenses
128.30
128.40
3.60
3.70
3.90
4.00
4.20
4.30
4.50
4.70
4.90
5.10
5.30
Change in working capital
-
-
-
-
-
-
-
-
-
-
-
-
-
Free Cash flow
-133.18
-114.92
39.97
41.77
43.70
45.75
47.98
50.35
52.88
55.61
58.23
59.10
27.47
Exhibits -3
Net Sales
2004
2005
2006
Average
Arsenal
156,887
138,395
137,237
144,173
Liverpool
91,576
121,054
119,499
110,710
Tottenham
66,324
70,550
74,141
70,338
Exhibits -4
Net Income
2004
2005
2006
Average
Arsenal
8,152
8,293
7,902
8,115.667
Liverpool
-18,220
7,533
-4,257
-4,981.33
Tottenham
-2,692
4,104
-1,575
-54.3333
Exhibits -5
Merchandise Revenue
2004
2005
2006
Average
Arsenal
6,885
8,389
10,218
8,497.333
Liverpool
11,701
12,312
16,322
13,445
Tottenham
4,381
4,739
5,182
4,767.333
Exhibits -6
Cash Ratio
2004
2005
2006
Average
Arsenal
0.25
0.66791
0.21227
0.376727
Liverpool
0.00452
0.0104
0.00623
0.00705
Tottenham
0.351
0.824
0.473
0.549333
Exhibits -7
Financial Leverage Ratio
2004
2005
2006
Average
Arsenal
2.546
3.3265
4.96
3.610833
Liverpool
3.13
3.26
3.6
3.33
Tottenham
1.7786
1.696
2.465
1.979867
Exhibits -8
Profit on Disposal of Player Registrations
2004
2005
2006
Average
Arsenal
2282
2894
19150
8108.667
Liverpool
415
10559
6216
5730
Tottenham
-381
5632
12299
5850
Exhibits -9
Ratio of Payroll/Net Sales
2004
2005
2006
Average
Arsenal
0.39086731
0.4090177
0.5022625
0.4340492
Liverpool
0.53166769
0.4708312
0.5084059
0.5036349
Tottenham
0.46171823
0.418781
0.4886095
0.4563696
