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Tottenham Case Essay

I. Introduction

Tottenham Hotspur Football Club is an English football club that founded in 1882 and located in Tottenham, London. Tottenham has been playing in the English Premier League and was one of the oldest teams ever played in the Premiership. Tottenham was the first English football club to achieve the League and FA Cub Double by winning the competitions in the 1960-61 season. Tottenham’s history shows a successful career with the trophies for the past six decades. Tottenham own a home stadium called White Hart Lane with capacity 36,500 audiences. In 2008, Daniel Levy, chairman of Tottenham Hotspur Football Club is considering some possibilities to bring his football club to the upper rank of the British Premier League. Achieving this goal requires Levy to consider about two things: First is building a new stadium and improving the team’s quality by building a new practice facility or training ground.

Following other competitors such as Arsenal, Manchester United, and Chelsea that being able to get some added revenues and gain a competitive advantage in the player acquisition market provided by developing a new stadium. Levy as a chairman of Tottenham Hotspur football club who understands the dynamics of football clubs and ran the club to endure financial stability and longevity focused on three pillars that he felt could help establish a foundation of consistent, long run success: 1) the development of a new stadium, 2) the building of new practice facility, and 3) the continual improvement of the club through prudent player acquisitions during the various “transfer windows.” The club already had an agreement to build the new training ground just outside the London.

The club viewed the training ground as also crucial to the third pillar, which was to continually improve the quality of team. Having a state-of-the-art training ground was a major selling point in recruiting new players, both young players whom they hoped to develop, as well as star players from other clubs or countries whom they hoped to acquire. For this case, 3 alternatives have been analyzed using DCF financial analysis. Those alternatives can be seen below:

1. Operating the existing current stadium with 36,500 seats and keeping Pavlyuchenko as a single goal-scorer.

2. Building a new stadium with 60,000 capacities.

3. Building a new stadium and signing in a new player in the new stadium.

II. Discounted cash flow (DCF) analysis for current operation a. Cash Flow

This assumption has been made in the estimation of cash flow where interest payment is not included. Net capital spending (NCS) is gotten by maintenance capital expenditure. Workin capital is based on the difference between current asset minus cash and equivalents and then minus with current liabilities. In this calculation, we assumed that working capital is proportional to Revenue growth of 9%, except in the last year’s prediction (2020) the growth become 4%.

b. Net Present Value

The Net Present Value for Tottenham is showed to be at £184.93. The positive of this NPV suggest that the shareholder can decide to keep the current operation. Chart below shows the NPV and the comparison with other key measures.

The payroll accounts for 81% of the operating cost while stadium operation only use 17% of the operating cost. Broadcast become the highest income (39%) followed by Attendance (23%), Sponsorship (21%), and Merchandise/Other (17%). With this high operating cost, surely that EBITDA is only 9% of Revenue and Net Income only 2%.

III. Tottenham Hotspur – Team Evaluation

The performance charts below show the rank and position of Tottenham compared to other premier league’s football clubs.

The Enterprise Value (EV) has been used as a reference value to rank the teams. EV is usually used to compare other companies with varying levels of debt. However, enterprise value by itself is not a exact indication of the company’s financial position because the EV can be created by large quote of Debt. A more accurate analysis would have required comparing the same data during a certain period of time. With the nature of scale of measure that’s being used to plot the data, the different metrics has been divided in different charts. The large difference that occurred making us to easily divide them into two different groups. The first group that can be characterized by medium to high EV, Net debt and revenue over £100M are from Manchester to Liverpool.

The second group includes Tottenham, with medium low Net debt and Revenue below £100M. Tottenham seems having a healthy financial in comparison. The value of Revenues is far ahead compared to the value of the Net Debt with positive operating incomes. The operating profit margin’s percent looks healthier than other teams in same group. The EV to Revenue shows how Tottenham’s revenue is being valued by the market. Because revenue is not affected by the interest income/expense line item, the suitable value comparison should also remove the effects of capitalization, as EV does. The EV/Revenues of 2.08 seems in line with the performances in the same group. EV to EBIT shows that the market has valued Tottenham at 31.20 for its operational result. The ratio becomes the highest in its group. Tottenham also shows that good operation against its revenue in relation to the average net goal. The team seems really good at taking good advantages of their goal-scorers.

IV. Tottenham – Stock Price and Seasonal performance Information

V. DCF – Build a new Stadium

A new stadium will take 2 years to be finished and it may result in significant economies of scale. The revenue will increase 40% from 2010 and keeping going same in a row till 2019 and 4% for 2020. Sponsorship will increase by 20% from 2010 and it also keep growth of linear 9% till 2019 and 4% for 2020. Stadium operating cost will be increased by 14% from 2010 and keep growth of linear 4% till 2020. In addition, a tax incentive allows offsetting depreciation of £250M over 10 years and the cost of new stadium of £250M has been allocated during the first 2 years. £120.17 NPV shows that this decision will be welcomed by the shareholders.

VI. DCF – New Stadium and New Player

For the rights to a goal scorer of the caliber that Tottenham had in mind, the club need to pay a transfer fee around £20M. The club also anticipated negotiating a 10-year contract that would pay the player £50,000 per week for the 2008 season with scheduled increases of 10 % each year. Tottenham expects to increase its number of goals per season by 12. It will effect to increased ranking which will increase the revenue. £132.32 NPV shows that this decision will be really agreed by the shareholders. Adding the new player we can see that the NPV increased around £12.15M.

VII. Comparison 3 situation

VIII. Recommendation

1. Increasing the ticket price can help Tottenham in increasing the Revenue.
2. Reduce direct and indirect cost and overhead expenses
3. Get the loan for building a new stadium. With the financial support from outside can help Tottenham to make the cash flow become positive.
4. Scout young talented football player to reduce payroll.
5. Based on the NPV above, choose the 3rd alternative will be the best way to invest.
6. If the Tottenham get the financial support to build a new stadium, they better consider recruiting more goal scorer to increase the NPV.
7. If they don’t get any external financial support, they better stay at the current operation, which is operating with the current stadium.

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