[Part two of this series can be found here]
In a quiet moment over the Christmas break, and being a fun guy, I had time to sit down and go through some of the documents published as part of the planning review process for the new Spurs stadium.
Spurs, normally quite circumspect in how they go about their business, have been quite transparent in publicising information on the new stadium. But there is nothing like a public review process to impell companies to truly let the light in on their plans.
I’ve always been curious about how Spurs are going to actually fund such a massive project, and what repercussions this could have on the team we see once the stadium finally opens.
Among the documentation bundle available to the public was a Viability Report on the scheme.
This report was produced by accountancy firm KPMG for Haringey Council and the Greater London Authority. It does exactly what it says in the tin — assesses whether a planning applicant such as Spurs has a feasible plan to ensure their project is completed.
Having gone through it, it is fair to say this is an interesting document. As the report states, its primary source is information provided by the club.
The report highlights the huge financial challenge facing Spurs, and details the commercial assumptions that are underpinning the project. It also offers some hints about the long-term strategy that may be in play by ENIC.
In this post, I’m going to look at the key financial questions surrounding the stadium scheme. In part two, I’ll look in detail at the most eye-grabbing part of the whole scheme — the NFL provisions.
1 Project Cost and risk
The Viability Report lays bare the immense cost of the project that Spurs have embarked upon. While Daniel Levy, at the recent fan forum, put the final stadium cost at £500 million, KPMG estimates the cost of the entire scheme at between £675 million and £750 million. This includes the development of the land at the south of site — where the apartment blocks, hotel, climbing wall and scuba tank (indeed) will be located.
Whichever way you shake it, this is a lot of money, particularly in comparison with other stadium projects. Per the report, the Stadium of Light cost just £15 million to construct, helped tremendously by the fact it is located in Sunderland and presumably built from cardboard. West Ham are chipping in a derisory £16 million of the £194 million cost of the Olympic Stadium refit. I’ve struggled to find an accurate figure for the Emirates Stadium — on Wikipedia, it cites both £390 million (the commonly held figure) and £440 million. Either way, the cost facing Spurs is significantly above any of this.
The report notes the relative decline in importance of the increased match-day revenues a new stadium would generate amid soaring TV income. “The financial benefits of a new stadium could be less than the merit payments attributed to finishing a few places higher (in the Premier League),” it states.
I’d add on that point though, TV rights may be soaring now, but there is no guarantee they will continue to do so — the Premier League deal is revisited every three years. A world-class stadium, so long as you can continue to fill it, offers secure long-term revenues.
But it just shows how the huge influx of TV money is transforming the environment. The TV income is so high it is seen to be creating an argument AGAINST expanding stadia, even as it provides the finance that should be enabling every club to build for the future like Spurs are doing.
2 The £300 million funding gap
A key area of consideration in the KPMG viability report is the “funding gap” — the difference between what Spurs have already invested and the commitments they have been able to secure, and what still needs to be found. The gap is considerable.
So far, Spurs have spent around £100 million — including in purchasing land. They have also found three banks willing to loan £350 million towards the project. This is no mean feat — the KPMG report notes there has been “little recent appetite to fund stadia projects” This loan is £90 million more than Arsenal secured, more than 10 years ago (more on them later).
This still leaves between £225 million and £300 million to find.
The report lists the potential funding options as public sector contribution, junior debt, equity investment, sales from the southern development, and advanced sales of naming rights and hospitality/season tickets.
I’ll talk about equity investment shortly, but the report shows that Spurs are facing a delicate balancing act. For example, it states securitizing future naming rights and hospitality sales could restrict options when it comes to issuing new debt.
A key to this balancing act is the “bridge loan” that the three banks have offered. Essentially, the banks will advance Spurs £200 million of the £350 million total loan, enabling the club to push on with construction. Levy has spoken previously (I can’t recall exactly when so I can’t find the link) about the naming rights issue — how typically, agreements are reached once construction is well advanced. This removes the risk of a brand being associated with a heavily delayed project such as Wembley, for example.
The report also sets out the likely financing terms: the £350 million loan (including the bridge element), will be a five-year loan that will then be refinanced. This is important guidance for us fans — for five years money will be tight due to high interest payments, but then the burden should soften. This is similar to the Arsenal experience — after they refinanced they were able to push the boat out and make signings like Ozil and Sanchez (Arsenal now have both a massive cash balance and massive debt).
The report stated that the “bridge” loan could have been in place by the end of December 2015. I’ve seen no announcement of this by the club yet. Approval is still needed by the Mayor of London and Secretary of State before construction can advance at full speed, which should be a formality.
You can clearly see Levy’s strategy in terms of ensuring a “train” of money rolling steadily onwards to ensure that adequate finance is in place through the phases of the project.
The £100 million that has already been spent (a proportion of which came from equity investment from ENIC, more later) has enabled Spurs to complete the first phase of the redevelopment (Lilywhite House), and reach the “shovel ready” stage on phase two, the stadium itself. (In fact, it is more advanced with some groundworks already done). The £200 million bridge loan will enable Spurs to go full-speed as soon as it gets the final of the many green lights required. This would include expensive items such as purchasing raw materials. The next £150 million of the loan will then be paid out in installments as the project moves towards completion.
Accepting the £500 million cost for the actual stadium build, with £100 million already spent and £350 million already committed, Spurs are getting there. It is funding the final phase, the southern development, that is more uncertain. However, by then the stadium will be up and running, a naming rights deal will have kicked in, and increased match-day revenues should be rolling in.
3 Lessons from Arsenal
The closest terms of reference for what Spurs are embarking upon comes from Arsenal, understandably. And Arsenal offer some valuable lessons, in particular in funding the project.
Arsenal pushed ahead with their stadium project without adequate funding in place (they had a loan of £260 million), forcing them to halt work at one stage when the money dried up. They were required to issue fresh debt and equity, securitize commercial revenues and curtail transfer activity at a greater level than initially planned, according to KPMG.
I suspect, the cash crunch also limited what work they did on the stadium, in particularly the finishing touches that can give it that unique feeling of “home”. Subsequent to completion, The Emirates had to undergo an “Arsenalisation”, which is a little embarrassing.
Money from the redevelopment of Highbury only started to roll in after the stadium was completed. This will be the same for Spurs, who will finish the stadium then work on the redevelopment of the south of the site. So, it must be noted, the stated idea of funding for the scheme potentially coming from this redevelopment appears optimistic.
Failure to have money in place when required would be doubly painful for Spurs as we are having to play away from White Hart Lane for one season during construction.
The deadlines appear quite tight for the magnitude of the project, and from what I am aware, Premier League rules dictate that you can only play in one “home” stadium per season. One year in Milton Keynes (we need to start accepting that Wembley isn’t likely to happen as Chelsea have more money than us) will be bad, two will be very annoying for fans and cost the club millions in lost revenues.
4 Naming rights, and the assessment of a length of a piece of string
As stated, Spurs will need to find between £225 million and £300 million to complete the stadium scheme. The first priority in bridging the gap will be securing naming rights.
So how much can Spurs expect to receive from naming rights? There is a “how long is a piece of string” aspect to the question, as the report notes, but Spurs have put a clear figure on how much they think they can get from from naming rights and some other related commercial income streams: £30 million per year.
The report states: “Key drivers of commercial revenue growth in the new stadium are expected to be stadium and cornerstone naming rights, and income in respect of increased merchandising and conference events, which together will give annual incremental income of approximately £30 million per year.”
Obviously, I can’t divine how much of this £30 million would be naming rights, and how much conference or merchandising income. But is this even realistic?
Arsenal signed a £90 million, 15-year deal with Emirates, for both shirt sponsorship and naming rights, in 2004. Per The Guardian’s Daniel Taylor, the naming rights were valued at just £2.4 million per year. In 2011, Manchester City signed an FFP-busting £400 million, 10-year deal with Etihad, again for both shirt and stadium rights. In recent naming rights deals in the US, MetLife paid $400 million (£275 million) over 25 years for rights to Meadowlands, home of both New York NFL franchises. Levi’s paid $220 million over 11 years to sponsor the home of the San Francisco 49ers.
The KPMG report makes clear this £30 million figure is the club’s, and it came from an external report. But the huge disparity between what Arsenal achieved in 2004 and Manchester City engineered in 2011 provides few clues, while the rights deal in the US may suggest what Spurs are after is optimistic.
One thing I would also note is that Spurs’ shirt sponsorship with AIA runs until the end of the 2018/19 season, which may rule out a joint shirt and stadium sponsorship deal unless there is a break clause in the contract, or unless AIA is interested in a more comprehensive sponsorship.
The key in Spurs’ negotiations once the club begins marketing the rights will be twofold: securing as big a deal as possible, obviously, but also ensuring that it is “frontloaded” to as great an extent as possible to ensure finance is in place through the later stages of construction.
Can Levy pull a rabbit out of the hat, and land a £225 million to £300 million naming rights deal to cover the gap? We’ll see. But it appears likely that Spurs will need more funding to complete the scheme.
5 That £80 million profit
At this point, it should be noted that Spurs is a profitable club, stonkingly so in the last financial year. Per football finance blogger Swiss Ramble, Spurs booked a cool £80 million profit in the last set of accounts.
This figure was helped by the sale of Gareth Bale to Real Madrid, but Spurs reinvested much of that money in the transfer market.
I suspect, the accounts were polished shinier than the silverware at Buckingham Palace in the last financial year as Spurs knew that they would soon be securing financing for the stadium — the better shape the club is in, the lower the initial rate of interest on the £350 million loan. This financial year, the wage bill will have decreased with some big earners gone, and the wage bill should still be relatively low the following financial year when the new TV deal kicks in, due to the age profile of the squad. Depending on the degree of deferment of certain costs away from last year’s accounts (for example you can do smart things with player amortisation, i.e how you write down the cost of purchasing a player), Spurs could still be quite stonkingly profitable in the next couple of seasons, too.
There is a big difference between flogging the crown jewels to fund a stadium, and reinvesting profits to build the club’s future. In fact, Spurs have been doing this with little complaint for years — the club invested £45 million on the new training facility, for example.
Daniel Levy has been clear there will still be money available to strengthen the squad through construction, and he has no intention of selling any players. He appears to have an ally in Mauricio Pochettino, who doesn’t like to spend unless necessary and is the Premier League’s “Mr Youth Development”.
It would appear that there may be profits from the club in the next couple of seasons that could be poured (almost literally) into building the new stadium.
6 Equity sale: ENIC’s last resort
For what remains, the KPMG report gives some interesting detail on the final likely source of funding: an equity sale.
(As far as I’m aware, there is no public funding for the stadium itself, and KPMG doesn’t give any further details on junior debt issuance).
Talks on an equity investment have already taken place, although the report notes that these are at an earlier stage than talks with banks over a loan. It continues: “The club have verbally indicated that they have received expressions of interest from credible counterparties, including entities with significant experience in financing similar sports stadia construction projects.”
A while back, Spurs confirmed an approach from an investment company named Cain Hoy, a London-based outfit apparently focused on real estate that was set up by several executives of Guggenheim Partners, a major investment company. The approach was serious enough that Spurs were forced to open their books so Cain Hoy could conduct due diligence. Per @ztranche, a Spurs-supporting finance professional, things never went further. The club subsequently put about a figure of £1 billion needed to buy the club. As some noted at the time, this seemed extremely high.
Currently, ENIC’s control of the club is very secure — per the last annual report, ENIC held over 182 million shares in the club, representing 85.46 percent of those in issue. I don’t know who owns the other 14.5 percent — filings to Companies House simply state “other”. Regulations mean any shareholdings over 3 percent must be disclosed. Per Tottenham Hotspur’s annual reports, the last time someone blipped above this mark was in 2009, when Michael Ashcroft (Lord Ashcroft for those who follow British politics) upped his stake to about 4 percent. Polys Haji-ioannou (the older brother of the EasyJet fella Sir Stelios) previously owned just over 9 percent, through his HODRAM vehicle, but it would appear he sold down his stake at the same time that Alan Sugar sold his remaining stake to ENIC in 2007, as it is no longer disclosed as a substantial holding.
By the way, Daniel Levy and his family are “potential beneficiaries of a discretionary trust that ultimates owns 29.41 percent” of ENIC — I always think this is important to remember. He may drive us crazy at times, but he is a Spurs fan and has serious skin in the game.
I picked the brains of @ztranche on ENIC’s strategy, and we held a similar hunch: ENIC view an equity sale, now, as a last resort.
Simply put, the value of Spurs should soar once the stadium is built. The club is making a huge, and risky, investment in a new stadium, dragging down its value. While debt will increase tremendously, revenues will soar once the stadium is built.
By extension, you can see why investors such as Cain Hoy may fancy taking a stake in Spurs now — hence a figure of £1 billion being bandied around to deter them.
The last time Spurs issued fresh equity, it was almost all bought by ENIC itself — this occurred in 2009 and enabled Spurs to press ahead with land purchases, I believe. Could this happen again? I don’t know enough about Joe Lewis or his finances beyond what is in the public domain — but safe to say he has significant means. Forbes puts his net worth of $5.2 billion, and his Tavistock portfolio has a long list of assets. The idea that ENIC itself “buys” much of the new equity, essentially pumping money into the club, with a view that the value is going to soar, is far from outlandish.
I’d note, Spurs will be keen to avoid another lesson from Arsenal — warring factions of investors that create an atmosphere of stasis, or arguably worse, instability. So ENIC strengthening its control of Spurs isn’t a bad thing, per se.
Judging by the amounts Spurs already have committed, the potential for naming rights and the profitability of the club, the amount of finance needing to be raised by ENIC may be fairly modest — by my fag-packet maths, it would more likely be in the tens of millions than the hundreds of millions. This is a relatively small amount in the grand scheme of things. Provided it has the funds, there seems little incentive for ENIC to dilute its shareholding of the club, and even reduce its control by, say, surrendering seats on the board.
To sum up, ENIC appear to have made major strides in ensuring sufficient money is in place to fund the Spurs stadium project. And it will be fascinating to watch their strategy in securing what else needs to be found.
Thanks for reading, please follow me on Twitter for more Spurs chat, my handle is @spurs_report. I’d welcome any feedback on this article.