Case Study on Tottenham Hotspur plc PDF

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Introduction to Finance Case Study 1 Anqi Hou, Danyu Wang, Jiaqi Wang November 8, 2020

Introduction As one of the most popular clubs of the British Premier League, Tottenham Hotspur Football Club was considering a bold decision in developing. To attract more fans and reach better records, the chairman of Tottenham Hotspur faced a investment problem on whether they should construct a new larger stadium or sign another goalscorer. We will analyze and compare the Discounted Cash Flow of each scenarios to decide which step should take. Following are some useful formulas for our DCF analysis accroding to the financial report from Tottenham Hotspur: EBIT = Revenue − Cost − Depreciation Net Working Capital = T otalCurrentAssets − CashandEquivalents − CurrentLiability − Investmentsavailableforsale Free Cash Flow(F CF ) = EBIT (1 − T axRate) + Depreciation − CapEx − ∆W orkingCapital F CF2020 Terminal Value2019 (T V ) = DiscountRate − GrowthRate T X F CFt TV NPV(Firm) = t + T (1 + rT ) t=1 (1 + rt )

Financial Analysis Scenario 1: Following Current Strategy 0 2007

1 2008

2 2009

3 2010

4 2011

5 2012

6 2013

7 2014

8 2015

9 2016

Total Revenue 74.10 Total Cost 69.10 EBIT(1-Tax Rate) 1.82 Depreciation(Old stadium) 2.20 WC (43.25) ∆WC CapEx(Old Stadium) 3.30 FCF Continuation Value(Perpetuity) Discounted FCF

80.77 74.92 2.32 2.29 (47.14) (3.89) 3.43 5.06

88.04 81.28 2.85 2.38 (51.39) (4.24) 3.57 5.90

95.96 88.22 3.42 2.47 (56.01) (4.62) 3.71 6.81

104.60 95.82 4.03 2.57 (61.05) (5.04) 3.86 7.79

114.01 104.13 4.69 2.68 (66.55) (5.04) 4.01 8.84

124.27 113.21 5.38 2.78 (72.53) (5.99) 4.18 9.98

135.46 123.15 6.12 2.90 (79.06) (6.53) 4.34 11.20

147.65 134.03 6.89 3.01 (86.18) (7.12) 4.52 12.50

160.94 145.94 7.71 3.13 (93.93) (7.76) 4.70 13.90

175.42 158.98 8.57 3.26 (102.39) (8.45) 4.88 15.39

191.21 173.27 9.46 3.39 (111.60) (9.21) 5.08 16.98

4.59

4.86

5.08

5.27

5.43

5.56

5.66

5.73

5.78

5.80

5.81

Year

NPV Market Value of Equity Share Price

10 2017

11 2018

12 2019

13 2020

208.42 216.76 188.92 196.47 10.39 10.80 3.52 3.66 (121.65) (126.51) (10.04) (4.87) 5.28 5.49 18.67 13.84 221.40 74.44

133.99 117.20 12.62

In the Scenario 1, Tottenham Hotspur did not do any steps to change their financial management. So we approach the free cash flow step by step. 1) Calculate the revenue from four main resources(Attendance, Sponsorship rights, Merchandise sales, and Broadcast rights) and other. In our assumption, these revenue resources will increase by 9% and later by 4%. 2) Calculate the cost from two main reasons(Payroll and Stadium operating expenses). In our assumption, the salary for players will increase by 10% and later by 4%. At the same time, the operating expenses will increase by 4%. 3) After get the value of revenue and cost, we then calculate the EBITDA with Revenue minus cost. As for the depreciation, we assume that growth rate is 4%. 4) Subtracting depreciation, we get EBIT. The tax rate is assumed as 35%. If the EBIT is negative, we could get tax refund.

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5) To adjust, we just add depreciation and minus capital expenses. 6) As for the net working capital, we use the balance sheet of Year 2007. We use the formula mentioned above. Since we do not know the value of NWC before 2007, so we dismissed the change in NWC of 2007. Then we minus the change in NWW to get free cash flow of each year. 7) We also made assumption that the free cash flow grow in perpetuity at the rate of 4% after Year 2020. So we also calculate the terminal value for our DCF analysis. 8) We assumed that the discounted rate as 10.25% and get the discounted cash flow value. Sum them to get the net present value for the decision. 9) We also use the cash and debt in balance sheet for computing equity value and share price with 9.29 million outstanding shares. To answer the question, the enterprise value of Tottenham Hotspurs FC is £133.99 M. And share price is estimated as £12.62, which is lower than the current £13.80. We could conclude that the current price is overvalued.

Scenario 2: Build a New Stadium only 0 2007

1 2008

2 2009

Total Revenue 74.10 Total Cost 69.10 EBIT(1-Tax Rate) 1.82 Depreciation(Old stadium) 2.20 Depreciation(New stadium) WC (43.25) ∆WC CapEx(Old Stadium) 3.30 CapEx(New Stadium) FCF − Continuation Value(Perpetuity) Discounted FCF

80.77 74.92 2.32 2.29

88.04 81.28 2.85 2.38

(47.14) (3.89) 3.43 125.00 (119.93)

(51.39) (4.24) 3.57 125.00 (119.10)

(108.78)

(97.98)

Year

NPV Market Value of Equity Share Price

3 2010

4 2011

5 2012

6 2013

7 2014

8 2015

109.04 118.86 129.55 141.21 153.92 167.77 90.80 98.51 106.92 116.12 126.17 137.17 (6.00) (4.70) (3.27) (1.74) (0.09) 1.69 2.47 2.57 2.68 2.78 2.90 3.01 25.00 25.00 25.00 25.00 25.00 25.00 (63.64) (69.38) (75.61) (82.42) (89.84) (97.92) (12.26) (5.73) (6.24) (6.81) (7.42) (8.08) 3.71 3.86 4.01 4.18 4.34 4.52

9 2016

10 2017

11 2018

12 2019

182.87 149.20 3.60 3.13 25.00 (106.74) (8.81) 4.70

199.33 162.37 5.66 3.26 25.00 (116.34) (9.61) 4.88

217.27 176.80 7.85 3.39 25.00 (126.81) (10.47) 5.08

236.83 192.59 10.22 3.52 25.00 (138.23) (11.42) 5.28 44.87 499.56 168.81

30.02

24.75

26.64

28.66

30.88

33.26

35.84

38.64

41.64

22.40

16.75

16.35

15.96

15.60

15.24

14.89

14.56

14.23

13 2020 246.30 200.29 27.53 3.66 (143.76) (5.53) 5.49 31.22

108.03 91.24 9.82

In the Scenario 2, Tottenham Hotspur Football Club decided to build a new stadium only. Therefore, we need to make the following assumptions and calculate the changes from Scenario 1 based on the given conditions: 1) The new stadium would take two years to be built in 2008 and 2009, after which the attendance revenue, sponsorship revenue and stadium operating expenses are expected to increase by 40%, 20% and 14% respectively compared with the old stadium. 2) After the new stadium is built, in each year there will be an additional depreciation of £250M/10 = £25M over a 10-year period from 2010 to 2019. 3) A construction cost of £250M would be paid equal in 2008 and 2009, that is, in each year there will be an additional capital expenditure of £250M/2 = £125M for the new stadium. 4) Declared in the assignment that working capital increases in proportion with revenue when analyzing the building of a new stadium or the purchase of the player, so the working capital needs to be adjusted according to the new total revenue in Scenario 2,3 and 4. After calculation, the NPV of building a new stadium only is £108.03M and is £25.96M less than Scenario 1 which is continuing in its current stadium with its current player strategy. We can conclude that although building a new stadium is a positive NPV project, it is not advisable because this project would bring a loss of £25.96M for the club’s present value.

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Scenario 3: Sign a new striker only 0 2007

1 2008

2 2009

3 2010

4 2011

5 2012

6 2013

7 2014

8 2015

9 2016

Total Revenue 74.10 Total Cost 69.10 EBIT(1-Tax Rate) 1.82 Depreciation 2.20 WC (43.25) ∆WC CapEx 3.30 FCF − Continuation Value(Perpetuity) Discounted FCF

84.81 97.53 (9.76) 2.29 (49.50) (6.25) 3.43 (4.64)

92.45 84.15 3.85 2.38 (53.96) (4.46) 3.57 7.11

100.77 91.39 4.49 2.47 (58.81) (4.86) 3.71 8.10

109.84 99.29 5.18 2.57 (64.11) (5.29) 3.86 9.18

119.72 107.95 5.91 2.68 (69.88) (5.77) 4.01 10.35

130.50 117.42 6.69 2.78 (76.17) (6.29) 4.18 11.58

142.24 127.77 7.52 2.90 (83.02) (6.85) 4.34 12.94

155.04 139.12 8.39 3.01 (90.49) (7.47) 4.52 14.35

169.00 151.53 9.32 3.13 (98.64) (8.14) 4.70 15.89

184.21 165.14 10.27 3.26 (107.52) (8.88) 4.88 17.53

191.21 173.27 9.46 3.39 (111.60) (4.09) 5.08 11.86

(4.21)

5.85

6.05

6.22

6.36

6.45

6.53

6.58

6.60

6.61

4.05

Year

NPV Market Value of Equity Share Price

10 2017

11 2018

12 2019

13 2020

208.42 216.76 188.91 196.47 10.39 10.81 3.52 3.66 (121.65) (126.51) (10.04) (4.87) 5.28 5.49 18.67 13.84 221.46 74.46

131.54 114.75 12.35

In the Scenario 3, Tottenham Hotspur Football Club decided to sign a new striker only. Therefore, we need to make the following assumptions and calculate the changes from Scenario 1 based on the given conditions: 1) The club’s net number of goals per season is expected to increase by 12 if the new player remained healthy, whereas the injury probability is 20% in average, so the expected increase in net goals is 12 ∗ (1 − 20%) = 9.6. Assume that each additional net goal increases the average total points by 0.7, so the expected increase in average total points is 9.6 ∗ 0.7 = 6.72. In Exhibit 2, the average total points of Tottenham Hotspur from 1998 to 2007 is 51, so expected percentage increase in average total points is 6.72/51 = 13.18%. 2) As assignment indicates, 1% increase in average total points increases 1.52% in revenues, so expected percentage increase in revenues is 13.18% ∗ 1.52% ∗ 100 = 20.03%. However, without a larger stadium, Tottenham would only capture 1/4 of the anticipated revenue improvements, so expected percentage increase in revenues within old stadium is 5.01% until the end of 2017 for a 10-year contract. 3) Transfer fee is ₤20M included in cost in 2008. 4) New striker’s salary per week is ₤50,000 and total salary for year 2008 is ₤2.61M which increases 10% each year until the end of 2017 for a 10-year contract. After calculation, the NPV of signing a new striker only is £131.54M and is £2.45M less than Scenario 1 which is continuing in its current stadium with its current player strategy. We can conclude that although signing a new striker only is a positive NPV project, it is not advisable because this project would bring a loss of £2.45M for the club’s present value.

Scenario 4: Building a New Stadium and Simultaneously Signing a New Striker 0 2007

1 2008

2 2009

3 2010

4 2011

5 2012

6 2013

Total Revenue Total Cost EBIT(1-Tax) Depreciation WC ∆WC CapEx FCF Continuation Value Discounted FCF

74.10 69.10 1.82 2.20 (43.25) (6.25) 3.30 −

84.81 97.52 (9.74) 2.29 (49.50) (4.46) 128.43 (129.64)

92.45 84.14 3.85 2.38 (53.96) (22.43) 128.57 (117.88)

130.88 93.95 6.15 27.47 (76.39) (6.88) 3.71 52.34

142.66 101.97 8.53 27.57 (83.27) (7.49) 3.86 39.12

155.50 110.72 11.11 27.68 (90.76) (8.17) 4.01 42.27

169.49 120.30 13.91 27.78 (98.93) (8.90) 4.18 45.69

184.75 130.78 16.95 27.90 (107.83) (9.70) 4.34 49.41

201.38 142.23 20.24 28.01 (117.54) (10.58) 4.52 53.43

219.50 154.78 23.78 28.13 (128.12) (11.53) 4.70 57.80

239.25 168.50 27.62 28.26 (139.65) 12.83 4.88 62.52

217.27 176.80 7.86 28.39 (126.81) (11.42) 5.08 18.33

(117.58)

(96.98)

39.06

26.47

25.95

25.44

24.95

24.48

24.02

23.56

6.27

NPV Market Value of Equity Share Price

174.44 157.65 16.97

Year

7 2014

8 2015

9 2016

10 2017

11 2018

12 2019 236.83 192.59 10.22 28.52 (138.23) (5.53) 5.28 44.88 499.50 168.79

13 2020 246.30 200.29 27.52 28.66 (143.76) 5.49 31.22

In the Scenario 4, we assume that Tottenham Hotspur Football Club decided to build a new stadium and and to sign a new striker at the same time. Thus, we need to combine changes in Scenario 2 and Scenario 3. Comparing this Scenario to the Scenario 1: 1) The club hired the new striker from 2008, but the club used the new stadium from 2010. In 2008 and 2009, the revenue increase rate with the new player would be limited to 5.01%, because Tottenham would only capture 1/4 of the anticipate revenue without the new stadium. From 2010 to 2017, the revenue increase rate would be 20.03% with the established new stadium. After 2017, the revenue returns back to the revenue without the new player, because the club signed a 10-year contract. 2) In year 2010, changes in attendance revenue and sponsorship revenue caused by the new established are the same

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as in Scenario 2. 3) In year 2010, changes in stadium operating expenses caused by the new established are the same as in Scenario 2. 4) Changes in the new stadium’s depreciation and Capex are the same as in Scenario 2. 5) Comparing to the Scenario 1, we need to add the new play’s payroll expenses and the transfer fee expense. This change is the same as in Scenario 3. After calculation, the NPV of building a new stadium and simultaneously signing a new striker is £174.44M which is £40.45M higher than continuing in its current stadium with its current player strategy. £174.44M is also £66.41M and £42.9M higher than the Scenario 2 and Scenario 3. We can conclude that building a new stadium and simultaneously signing a new striker.

Conclusion From the above 4 tables, we can compare the NPVs in the four Scenarios: Scenario 4 > Scenario 1 > Scenario 3 > Scenario 2 £174.44M > £133.99M > £131.54M > £108.03M This indicates the best decision is to build a new stadium and to sign a new striker simultaneously. The benefit of both investments is depend on each other. Signing the new player can improve the club’s performance; building the new stadium can increase the club’s revenue but with a huge capital expense. Only signing the new player would improve the club’s performance, and without the new stadium, the club’s NPV would be only slightly lower than investing in nothing. That is to say, Roman Pavlyuchenko and the new player can almost compensate for the lose of the two leading goalscorers. However, only investing in the new stadium without signing the player would lead to a huge loss for the club. The share price would drop from £12.62/share to £9.82/share due to the huge capital expenses and the lose of the two leading goalscorers, comparing to the Scenario 1. Thus we suggest the club either to invest in the two programs together, or not to invest in any of the two programs.

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