Tottenham Hotspurs Case Memo PR and NG v F PDF

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Tottenham Hotspurs Case memo Rodriguez,

Pablo

Nikhil George 1) Assume Tottenham Hotspur continues in their current stadium and follows their current player strategy. Perform a discounted cash flow (DCF) analysis using the cash flow projections given in the case. Based on this DCF analysis, what is the value of Tottenham Hotspur, plc.? According to the DCF analysis the enterprise value of the Tottenham Hotspurs is £134 million and equity value is £118 million. See Figure 1 in the Appendix. Major assumptions made were: - Maintenance capex and depreciation of maintenance Capex growing at 4% per year - Working capital is -58.4% of total revenues - Discount rate of 10.25% - We assume 2007 is year 0 and discount all cash flows back to their 2007 values b. At its current stock price of £13.80, Tottenham fairly valued? The price per share at the calculated DCF valuation (using equity value) is £12.68, indicating the current stock price is slightly over valued by ~8% (See Figure 1). 2) Using a DCF approach, evaluate each of the following decisions: Scenario 1: Build the new stadium and do not sign the new striker The major assumptions behind building a new stadium include: - We assume 2007 is year 0 and discount all cash flows back to their 2007 values - Increase of attendance revenue by 40% vs forecasted in base case scenario - Increase in sponsorship revenue by 20% vs forecasted in base case scenario - Increase in stadium opex by 14% vs forecast in base case scenario - We assume the stadium starts getting built in 2008 and as a result capex depreciation of the stadium begins from 2010 (i.e., once the stadium is completed) and depreciates to 0 by 2019 (10 years from completion) - Maintenance capex and depreciation of maintenance Capex growing at 4% per year- same as base case scenario Given the EBITDA is positive every year, the tax credits that Tottenham hotspurs have will not come into effect in this scenario. Modelling the cash flows around these new assumptions gives us a new equity NPV of £92 million (incremental NPV difference of -£25.94M). Since NPVBase Case > NPVScenario 1 it does not make sense to  build a stadium alone. The team is better off operating as is than investing in stadium expansion. The main driver of the reduced NPV is the negative cash flows in 2008 and 2009 due to stadium CAPEX, which is not offset by additional revenues in the future. Scenario 2: Sign the new striker but do not build the new stadium The major assumptions behind building a new stadium include:

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Tottenham Hotspurs Case memo Rodriguez, -

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Pablo

Nikhil George We assume 2007 is year 0 and discount all cash flows back to their 2007 values The capped revenue increase of 5% due to stadium size limit (¼ of 24% * 80%) during the years the player plays. We also multiply this by the probability of having a healthy player to get the expected revenue. 52 week year with a the player salary increasing at 10% per year from 2009 A tax deductible transfer fee of £20M

Modelling the cash flows around these assumptions yields an equity NPV of £114. I.e., a slightly lower value than the base case and higher than Scenario 1. This indicates that recruiting a new striker without having a new stadium, is not a viable option. This is mostly due to the fact that the revenue increases are capped by the limited stadium capacity. Scenario 3: Build the new stadium and sign the new striker The major assumptions behind the scenario of building a new stadium and recruiting a new striker include the following: - We assume 2008 is year 0 and discount all cash flows back to their 2008 values - A full overall revenue increase of 24%* 80% (We also multiply this by the probability of having a healthy player to get the expected revenue) during the year the player plays. - Increase of attendance revenue by 40% vs forecasted in base case scenario - Increase in sponsorship revenue by 20% vs forecasted in base case scenario - We use the same two Capex and capex depreciation assumptions from scenario 1 - A tax deductible transfer fee of £20M Modelling the cash flows around these assumptions yields an equity NPV of £144 (incremental difference to the base case of +£26.48). I.e., An NPV higher than all the other scenarios. This indicates that recruiting a new striker alongside building a new stadium is the best option for the team.

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Tottenham Hotspurs Case memo Rodriguez,

Pablo Nikhil George

Appendix Figure 1. Base case scenario cash flows

Figure 2. Scenario 1: New stadium without a new player has a lower NPV than base case and is not viable

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Tottenham Hotspurs Case memo Rodriguez,

Pablo

Nikhil George Figure 3. Scenario 2: New player without a new stadium has higher NPV than stadium 1 but lower than base case

Figure 4. Scenario 3: New player with new stadium has higher NPV than base case

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