How do you value a football club?
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How do you value a football club?



Matt Slater,  Jan 14, 2022- Imagine you are looking for a new house. You want something modern and you know what part of town you would like to live in — somewhere central and with growth potential.



You are not quite ready to start traipsing around places yet, so you start your search online and you quickly find something that looks right up your street and is just about within budget.

Hold on, what’s this? The same place on a different website for 15 per cent more? Oh no, it’s on this other website for 70 per cent more? Woah, here is something saying the owner will only listen to offers of twice as much as the first price! How much does this place cost? Can I choose the price I like?

Now imagine you are a Gulf state, hedge-fund boss or oligarch and you want to buy Tottenham Hotspur. Well, the club’s price tag follows the same path as your dream home.

In its most recent club valuation report, published last January, global financial services firm KPMG used its “proprietary algorithm” to give Tottenham a value of just under £1.5 billion, making them the ninth most valuable in world football.

But three months later, US business magazine Forbes released its annual list of the 20 most valuable football clubs. It had Spurs in 10th place but for a price closer to £1.7 billion. Pretty close.

However, a year before, using numbers not skewed by COVID-19, the University of Liverpool’s football finance expert Kieran Maguire applied a bespoke valuation method to all 20 teams in the Premier League. This equation spat out a valuation of almost £2.7 billion for the north London side, making them the most valuable in the league and Spurs chairman Daniel Levy a very happy man.

Same club, give or take a season, three different prices, with a range of £1.1 billion. Blimey, you could buy two West Hams or four Southamptons with that… wait, are we saying West Ham are worth twice as much as Southampton?

No, that would be silly… they are worth closer to three times as much. And we know that because we can apply the best possible method of valuing businesses to those two clubs: how much somebody actually paid for them.

When Czech billionaire Daniel Kretinsky bought a 27 per cent stake in West Ham, he did so at a price that would value the whole club at close to £650 million. But when Serbian billionaire Dragan Solak bought 80 per cent of Southampton this month, he did so at a price that values the club at around £230 million. Kretinsky, by the way, has built his fortune by spotting value where others have missed it and some think he is the Habsburg Empire version of renowned American stock-picker Warren Buffett. He is no mug.

So what does explain the £400 million-plus difference between Southampton and West Ham?

The first thing to say is all of the club values mentioned in this piece are enterprise values, which is a pretty common concept on the business pages but appears to trip up some football fans and reporters. Enterprise value is a company’s equity value, the cost of the shares, plus its net debt. In a nutshell, you add the debt.

Now, this can seem counter-intuitive, because being in debt is bad, right? You might think you should take that off the price but you would not take whatever someone owes on their mortgage off the price of their house, would you?

The best way to think about enterprise value is you are buying an entire business, not just its good bits. In the example of Southampton and West Ham, the former has net debts of about £80 million, while the latter’s are more like £130 million.

Now, if we look at the good bits, they are both in their 10th straight season in the Premier League, having been promoted together — Southampton in second, West Ham third — from the Championship in 2012. Southampton enjoyed a four-year run between 2014 and 2017 when they finished eighth, seventh, sixth and eighth. And they have also made good money from selling players, mainly to Liverpool.

Those two selling points were probably what tempted Chinese businessman Gao Jisheng to spend more than £200 million on acquiring 80 per cent of the club in 2017. But recent seasons have seen the Saints slip back in the table to the nervous territory between the relegation zone and mid-table. The profits from player trading dried up, too, and Gao quickly lost interest.

West Ham, on the other hand, appear to have climbed the Premier League’s social-class ladder, as they are currently fourth, having finished sixth last season. There has been a big change off the pitch, too. In 2016, they swapped the much-loved but value-leaking confines of Upton Park for the sweetest of rental deals at the stadium built — at huge public expense — to host the 2012 Olympics. Now known as the London Stadium, until someone wants to pay to put their name on it, the venue is twice the size of West Ham’s old ground and with much better transport links to the club’s large suburban following.

In 2019, the last season before the pandemic, West Ham’s turnover was £191 million, compared to Southampton’s £150 million. Southampton have not filed their accounts for last season yet but West Ham posted theirs last month and they revealed the club’s revenue had grown to £192 million, despite playing a season behind closed doors. The gap to Southampton is likely to have grown.

But enough to justify the £400 million gap? And what about the most high-profile Premier League sale of the season?

“West Ham was the one that did surprise me a bit, particularly if you compare what the Saudis paid for Newcastle United,” says Maguire. “There is a London premium to these things, and West Ham have that amazing deal with the stadium (annual rent of £2.5 million a season), but that’s still a very big gap between the two prices.”

The Saudi-backed group that took Newcastle off British retailer Mike Ashley’s hands paid £305 million for the privilege. A steal for a club in a one-team city, which owns its 52,000-capacity stadium and had the eighth-highest turnover in the Premier League in 2020. But an illogical, trophy-asset price for a loss-making team in the Championship that has not won a major trophy for 67 years.

See, a club’s value, like its beauty, is all in the eyes of the beholder.

“Broadly speaking, there are two approaches to valuing a club,” says Roger Bell, the co-founder of consultancy firm Vysyble.

“The first is a relative valuation, where you might say because club X sold for five times its annual revenue, all clubs are worth five times their revenue. It seems to make sense but it can lead to some strange results, as it’s a bit like saying I bought some wellies in Marks and Spencer for £20, so the wellies in Harrods should cost £20, too. OK, it works as a rule of thumb but it can be very misleading.

“The second approach is to make an economic valuation, where you almost do the valuation in reverse. You say, ‘If you’re going to pay £100 million for a club, what should that club be doing to justify the price?'”

Tim Bridge is a director at Deloitte’s Sports Business Group and he is frequently asked to put prices on clubs by clients thinking about buying or selling one.

“Compared to other industries, the valuation approach in football is quite immature — we still don’t have a fixed model for doing it. If we were talking about a ‘normal company’, you would do a discounted cash-flow analysis, where you estimate future cash flows, discount the cost of capital and bring it back to a present-day value.

“But most football clubs are not run like normal companies — their revenues are inconsistent and they make losses — so the discounted cash-flow approach doesn’t work. It doesn’t reflect the intrinsic quality of clubs as community assets and that is why we always come back to revenue multiple as our starting point.

“We typically use a revenue multiple of 1.5 to 2.0 for a mid-tier Premier League club. We’d then look at net assets, the club’s brand value, the stadium. That type of thing. It is more art than science but starting with a revenue multiple makes the most sense.”

If we apply Deloitte’s quick and dirty calculation to the five Premier League clubs that have experienced significant merger and acquisition treatment in the last year or so — BurnleyCrystal Palace, Newcastle United, Southampton and West Ham — all apart from West Ham fit this “mid-tier” approach. West Ham, for whatever reason, get a multiple more in keeping with the “big six”, three to four times revenue.

“You never use one method, you use three or four, but I think you always start with a revenue multiple, then you look at EBIT or EBITDA (earnings before interest and tax, or earnings before interest, tax, depreciation and amortisation, ie all the bad stuff), but the problem with football clubs is those numbers are often negative, so you need something more football-specific,” says Maguire, the man behind the Price of Football podcast and blog.

When he did his last report for the University of Liverpool he used perhaps the only football-specific method anyone has been brave enough to publish, the Markham Multivariate Model: (revenue + net assets) x (net profit + revenue)/revenue x (stadium capacity %)/wage ratio %. Simple!

That formula, which is actually less scary than it looks, was the brainchild of Dr Tom Markham, a PhD student at the University of Reading’s business school in 2013. If you are thinking “who cares what a student thinks?”, you should know that Dr Markham went on to become head of business development for the makers of Football Manager and was a key advisor to the Bahraini group that bought Wigan Athletic. He also advised several Premier League sides on their business strategies.

He came up with the method because he looked at Forbes’ estimates, which appeared to be based on methods better suited to the more certain environment of North American professional sport, and realised they were miles off for European teams. He could see the obvious problems with a discounted cash-flow method (what cash flows?) and he thought revenue multiples were a bit, well, subjective (which club gets what multiple?).

But just to demonstrate that nothing has really changed since 2012, the example Markham used to show just how scattergun club valuations can be was Tottenham.

At that time, it was a publicly listed company, which should mean you can just multiple the share price by the number of shares issued to get a value, or market capitalisation. For Tottenham, a decade ago, that was just under £84 million. But if you applied the Deloitte revenue multiple, you got to £245 million. Forbes, though, had it at £351 million. No wonder nobody has bought them.

Perhaps this is all too theoretical for you, though.

“No one we know on the buying or selling side uses anything more than a simple revenue multiple minus enterprise value divided by EBITDA, or revenue before player trading,” says a source who has invested in several clubs in recent years.

“You can add net transfer receivables (instalments in minus instalments out) to the enterprise value, if you like, but all of our deals have been for less than one times revenue.

“If the club owns a modern stadium, you might go a bit higher on the revenue multiple, maybe to 1.5 x, but in lots of countries the stadiums are so old they’re the problem. Owning them would actually bleed cash and reduce value, so you prefer it if the town owns them.

“The multiple you use depends on how much revenue the league shares. In Germany, where the governance is strong, most teams trade for more than 2.0 x, while in England it is often below 2.0 x. In France, where there have been governance issues, the multiple is less than 1.5 x.”

But a quick glance at the latest Forbes and KPMG lists will tell you nobody is applying such a measly multiple to Europe’s elite, no matter which league they are in. The usual suspects are all there, in mainly the same order, all valued at £2 billion and above, or four times annual revenues.

That, of course, is more like the ratios applied to teams in North America’s professional leagues and what the European aristocrats share with those franchises is a near guarantee against relegation, the ultimate value-shredder.

Of course, a near guarantee was not enough for most of those elite teams last year, which is why they tried to create the European Super League. That star-crossed competition would also have had a strict salary cap, a value-creating mechanism that would have bumped up the revenue multiple even more.

Oh well, never mind.{jcomments on}

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