Financial Management Of The Tottenham Hotspur Plc Finance Essay

Tottenham Hotspur is one of the famous Football clubs in England; the club had huge fan base reaching 20 million people worldwide and almost 2.1 million in UK, how ever the current stadium capacity is only 36,500 fans.

The “one Hotspur membership” scheme the club created attracted over 70,000 fans.

Since one of the revenues sources is attendance, the club starts thinking of expanding or building new stadium to increase the number of fans attending the games.

The quality of the strikers are also critical, and usually clubs loses some of their players during the year, therefore need to replace them with better quality if possible and that costly too.

The current Enterprise value of the club is 156 million, with Net Debt / EV of 0.12 and revenue of 75 million, in addition to that, the club Avg.net Goals ( 1998-2007) was -1.9 (December 31, 2007) [1] 

Such situation ranks the club 6 among other clubs.

Mr. Daniel the chairman is about to take a very important business decisions which will drive the success of the club in the coming 13 years. The chairman has to “decide if the stadium development plans made sense, and how best to proceed in the player acquisition market as well” [2] 

It goes without saying that any further investment should be justify by the return on investment, therefore the chairman should take in to consideration all the financial aspects such as revenue and cost.

“As one of the most a manager can make is the capital decision. This key decision requires spending now in order to acquire long-lived assets that will be source of cash flow in the future a successful capital investment program will contribute to the firm’s financial performance for many years.” [3] 

Executive Summary:

In this case analysis I will try to answer three important questions which can be considered as the base of above mentioned capital investment program Mr. Daniel can set for Tottenham Hotspur club for the coming years.

Is Tottenham at the current stock price of ₤ 13.80 fairly valued? And to answer such question financial evaluation using DCF should be conducted assuming that Tottenham continues in its current stadium.

What will be the value of the chairman decision to build new stadium? And also a DCF should be conducted taking in to consideration the increase on Revenues and capital expenditure.

What will be the value of the chairman decision to sign a new striker? Taking in to consideration the cost to be paid to the formal striker club and the running cost of the striker him self once he join Tottenham.

Since the purpose of an investment is to get more back, over time, than you put in. One of the most common valuation criteria, which satisfy the above condition, is called NPV.

Net Present Value (NPV) (NPV =Present Value of Cash Inflows – Present Value of Cash Outflows

Decision Rule: [4] 

If NPV>0, then accept the project

If NPV=0, then indifference position, go no go situation

If NPV<0, then reject the project,

Based on the above, and my deep analysis my findings and recommendations are as follows:

Tottenham Hotspur current stock price is over valued, Their Enterprise value as a result of DCF is 107.14 Million ₤, therefore the Value per share is 9.73 ₤, [5] 

Tottenham Hotspur Enterprise value of 107.14 Million ₤, confirm it’s rank as No.6 Just after Newcastle United and before Everton, [6] 

Investing ₤250 million in building new stadium is not visible or profitable , DCF based on incremental increase in revenue and operating cost due to Stadium resulted in negative NPV (-60.12) [7] 

Investing ₤20 Million as a cost of acquiring new striker in addition to his high running cost also is not visible or profitable. DCF based on incremental increase in Broadcast and others, and operating cost due to acquiring new striker resulted in negative NPV (-23.5) [8] 

All these questions and comprehensive analysis and recommendations will be included in the main report.

The main report and questions Answers :

Part one:

“At its current stock price of ₤13.80, is Tottenham fairly valued?”

To answer this question we should conduct a company valuation, and calculate the Enterprise value (EV) of the company then divide the EV on the total Number of shares.

In addition to the available data mentioned in both the balance sheet (Dec.2007) and income statement of Tottenham [9] and in order to be able to calculate the change in working capital, the following major assumption has been taken during the evaluation, “In order to calculate the change in working capital i calculate it for the first year, then calculate it as % or revenue then I apply the % for the remaining years,” [10] using this assumption enable me to calculate the Free cash flow and then discount that cash flow using the discounted factor 10.25, to reach Enterprise Value (NPV) of ₤107.14 million out of that the Terminal Value and the PV were calculated.

Since the company under long term debt of ₤43.08 million and having ₤26.29 million as Cash and equivalent their Equity value is ₤90.35 million and accordingly their share value is ₤9.73. [11] 

It is clear that Tottenham share value is over valued and may be that because of commercial issues related to stock market.

As a recommendation the management should start looking to find solutions where by the revenue can be increased with a strict control in operating Expenses, in order to increase the cash inflow versus the cash outflow. This will be reflected on their Annual net Income, and consequently on their share price.

Part 2:

One of the major resources of Tottenham Revenue is the attendance, and their current stadium capacity is limited to 36,500 fans only, however they have about 2.1 million fans in UK, in addition to that they launch an incentive program to their fans “One Hotspur Membership” scheme which attract over 70,000 fans. [12] That is why the club start thinking to build a new stadium which will cost ₤250 million to be paid in two equal installments over two years, such a decision need to be challenged in term of the return as revenue and Net profit , therefore New stadium DCF analysis was conducted to obtain the NPV of the project.

The whole scenario was built on the following assumption:

Since the cash out (₤250) will be paid to generate cash in as revenue, so I only took in to consideration the INCREMENTAL increase in revenue( Attendance and Sponsorship only) and the INCREMENTAL increase in operating Cost using the forecasted growth as mentioned in the case [13] due to the new stadium.

The (₤250) million were considered as cost of constricting new stadium distributed equally, 2008 and 2009; the increase in capital expenditure was taken as it is forecasted in the case. Since the construction will take two years, the cash in as revenue will start by (2010) [14] 

The DCF result was not satisfactory, NPV is negative (-60.2) [15] .

My recommendation to Mr. Daniel is not to go with this option based on the given cost of construction, how ever he can think of other solutions to increase the capacity of the stadium at lower cost and I can suggest one of two options”

The first one is do some expansion to the current stadium if possible to increase the capacity to almost 60,000 fans and definitely this could be at lower cost,

The other suggestion is to go in partner ship with one of the small size clubs as to share the cost and benefit from the revenue.

Part 3:

Do the club has to acquire new striker at the acquiring cost of ₤20 million and salary of 2.6 million in the first year to reach ₤6.13 million in ten years or not? And what will be the impact of the new striker on Tottenham revenue and net income?.

It goes without saying that answering these questions will depend on the financial analysis of the cash inflow as revenue versus cash outflow as cost. DCF

To go with such Analysis I also took major assumptions in addition to what already mentioned in the case, the assumptions are:

To consider only the Incremental revenue generated from Broadcast and others. [16] 

The new striker will enhance the team rank and then earned a greater share of league television broadcast revenue. “The each moves up in the standings worth an estimated ₤670,000” [17] . So The club will move one rank up during 2008 season and another move every three seasons due to the strong completions

Based on the above data and assumptions, the result of the DCF was not encouraging and the NPV negative (-23.5) therefore the club should not sign with the new striker at these conditions and instead I have the following suggestions:

Knowing the importance of acquiring professional strikers Tottenham should negotiate better deal with the formal club of the striker and the striker him self.

They can spend some of that money in developing their current strikers and enhancing their performance.

An aggressive incentive scheme based on profit sharing could be established to motivate the existing team to enhance their Avg. Net Goals which is currently (-1.9) [18] .

“Because Investment tie up cash, their value is based on the amount of future cash flows that will accrue to investors” [19]