Tag Archives: ENIC

The balancing act: Can Spurs find a way to remain competitive through the stadium construction phase?

stadium_aerial_aug1216_730b

If it didn’t already feel real, the sight of the new stadium starting to rise up from the ground illustrates that a new era is finally dawning on Spurs. The next five years promise to be one of the most exciting, and most risky, periods in the club’s history.

Spurs are borrowing at least £350 million from banks, plus securitising future commercial and matchday revenues, in order to fund the stadium project and associated development.

The debt load will surpass what Arsenal took on to build the Emirates a decade ago, and will only be topped by Manchester United, who last year paid around £35 million in financing and £15 million in dividend payments for the privilege of being owned by the Glazer family.

Having spent a decade wading through the planning process and acquiring the land, now the club has the challenge of delivering a 61,000-seater stadium in a densely populated part of London on a tight timeframe, and to budget.

Things appear to be on track at this early stage, but an extraordinarily challenging few years await. The reward is clear though — New White Hart Lane promises to be a world-class stadium, and a true sporting cathedral that is everything the dreary Olympic Stadium will never be.

I have previously written about the stadium financing issue in great detail. In this post, I am going to take a look at the broader state of the club’s finances, and the challenges that lie ahead through the stadium construction phase.

Moving away from pragmatic player trading

A look through the recent financial history of Spurs reveals a number of distinct eras, layered on top of each other like sedimentary rock.

From 2001 to 2007, you have the “Early ENIC” years, in which Daniel Levy inherited the mess from Alan Sugar and piled on more mess as he tried to get to grips with the intricacies of Premier League chairmanship.

From around 2007, the “Wheeler Dealer” era truly began. This was a period of frenzied transfer activity that gradually pushed Spurs from mid-table to the fringes of Champions League contention, but without any sense of stability or sustainability beyond the confidence that more bargains would be found, and more mega fees extracted. This era came to a shuddering halt with the failure of the Bale money splurge, and the realisation that Spurs were never going to be able to compete with the moneybags elite when needing to sell as well as buy.

Since 2014, a new era has emerged, with a more prudent approach to player trading and a greater focus on cost controls. How much this is connected to the stadium funding, or the arrival of Mauricio Pochettino, is unclear. Certainly, you suspect Andre Villas-Boas was supposed to be ambitious young manager to lead Spurs through the tricky stadium construction phase, but there was a problem with a beanie hat and not everything works out.

Pochettino has made a virtue out of having a young, hungry and therefore relatively cheap squad, and the narrow band into which most of the player salaries reportedly fall is seen as a contributing factor to squad unity. Likewise, the club has had the incentive to ensure its accounts are glistening as it struck agreements on financing — a little money saved now could mean a lower rate of interest on the £350 million stadium loan.

Tottenham has been a consistently profitable club in the past decade, but has been reliant on player trading (profit on disposal of intangible assets, as it is known) to achieve this, as the following chart shows:

ProfitandTrading

In the past decade, the club is £152 million in profit. However, in that time, accounting profit on player trading is £295 million — without player trading, the club would have theoretically lost £143 million. Of course it’s not nearly that simple, but it illustrates the degree that Spurs have needed to sell in order to buy.

When Levy referred to “pragmatic player trading” in the club’s rather panicky statement to reassure disgruntled fans in September 2015, it didn’t sound right to me due to the suggestion of a continuation of the “buy low, sell high” era that had already started to pass. “Prudent player trading” would have been a better phrase — no need to sell players the manager wants to keep, but limits on what can be spent and a more cautious approach to acquisitions.

What the stadium financing phase needs is as great a degree of stability as is possible in the anarchic environment of Premier League football. Player trading is the biggest uncertainty of them all in football’s financial landscape. Now that Pochettino has cleared out the flotsam inherited from the Franco Baldini era, fans can expect the “churn” to reduce in transfer windows to come.

Cost controls in action

If you read any analysis of THFC finances from recent years, you’ll see some variant on the following phrase: “Daniel Levy runs a tight ship”.

There are many stories of these cost controls in action — my personal favourite was Mido being told to run across the tarmac to ensure he got a seat with extra legroom on a budget airline flight to London after being bought from Roma.

For a couple of months a year, this gets frustrating. The club’s approach to transfers is akin to dental surgery — deals are done painfully and slowly. Contract negotiations seem to drag on endlessly, key targets are missed, players leaving the club are left in limbo while the market is scoured for someone desperate enough to pay the premium.

Part of this, undoubtedly, is personality driven, and there appears a genuine relish in tough negotiations and brinkmanship. But part of this is necessity — with matchday revenues at their limit, and the club unable for various reasons to match the commercial growth of the richer clubs, it has become increasingly important to find value in the transfer market and control player costs with the stadium financing ahead.

I want to illustrate “where the money goes” at Spurs, and demonstrate what these cost controls actually look like.
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I’ve gathered data from the past 10 years for revenue and the two major outgoings, namely wages and transfer spend.

(For transfer spend I will use the figure for amortisation. Amortisation is an accounting method whereby the cost of buying players is spread over the lengths of their contracts. There’s an explanation at the bottom of this piece, but essentially amortisation is an annual figure that shows how much the club is actually spending on transfers. The advantage of this is that, while most transfer fees are undisclosed, the amortisation figure is listed in the accounts.)

Here is a chart:

RevWageandAmort

This gives you a picture of how revenue and wages are rising, but transfer spending has actually been quite flat.

However, if you combine wages and amortisation, something interesting happens:

RevWplusA

As you can see, wages plus amortisation tracks revenue remarkably closely from 2007-2014, to the point that it is almost a mirror. It is only in 2010 (financial year) when the gap becomes close. You can see the balance-sheet management in play to ensure spending remained at the desired level.

Why am I so confidently proclaiming a new financial era? Look at 2014. For the first time, revenue starts to diverge, and there is every indication that the divergence will grow starker over the next two financial years.

In the next accounts, the following senior players will come off the books, or be added:

OUT: Paulinho, Holtby, Capoue, Kaboul, Stambouli, Chirches, Soldado, Lennon, Adebayor.

IN: Wimmer, Trippier, N’Jie, Alderweireld, Son,

While there have also been a number of new contracts, and there are hints some of Adebayor’s contract pay-off may have been factored into the 2015 accounts, in all likelihood the wage bill is going to be level or even lower in the 2016 accounts. Meanwhile, the strong league performance means TV money will increase. In the 2017 accounts, we’ll have both the new Premier League TV deal kicking in, and Champions League revenue, to counterbalance a series of new contracts and the signings made in the past window.

My prediction is that revenue and first-team spending will continue to diverge in the next two years. This puts Spurs in opposition to most other Premier League clubs, which are frantically offloading the new TV money on transfer fees and wages as fast as it is pouring in.

As it stands, here are the combined wages and amortisation for the four clubs arguably “closest” to Spurs financially (United are on a different planet, and Chelsea and City are billionaire playthings, so a comparison isn’t worthwhile):

Arsenal — £244.1m
Liverpool — £227m
Tottenham — £139.4m
Everton — £97m
West Ham — £94.3m

In previous years, Spurs have been all alone in “sixth” place in spending on wages (among several other indicators of club “size”) — we will start to see other clubs narrowing the gap. Some may interpret this as a lack of ambition, but ultimately Spurs have a £750 million stadium scheme to fund, which seems pretty ambitious to me.

The growing gap between revenue and first-team spending means more funds that can be rolled into the stadium project. Spurs appear to be positioning themselves to absorb the spike in financing costs that is to come.

In short, since 2014 Spurs have been shifting to a more sustainable model that relies less on big transfer fees to balance the books. The emergence of home-grown stars like Harry Kane, smart acquisitions like Dele Alli and Eric Dier, and the strong management of Mauricio Pochettino have turbocharged this shift. Sometimes you need a bit of luck.

Learning from Arsenal

Over the next five years, the period of peak financing, Spurs need to strike a balance between funding stadium construction, and remaining competitive on the pitch.

Over the next two seasons in particular, the financial benefits Spurs can accrue from being competitive (Champions League money, greater share of British TV money, improved receipts from Wembley), relative to the amount of money that can be saved, justify continued investment in the playing squad. A competitive and appealing Spurs team will greatly help the club sell the increased number of tickets and long-term hospitality packages that is the rationale underpinning the whole project.

Levy has repeatedly stated that there is no need to sell players to fund the stadium, including at the last board-to-board meeting with the Tottenham Hotspur Supporters’ Trust. This isn’t just a statement of confidence in the funding package for the stadium, but also recognition of the need to ensure Spurs field a strong team on opening day of the 2018/19 season.

However, there is a difference between not needing to sell players, and having limits on what can be spent to secure new ones. The extent to which Spurs can compete for new players over the next five years will depend on how much Spurs will have to spend to finance construction. Spurs will be taking on huge debt — at least £350 million — but the key will be controlling the amount that is spent each year on interest payments and repayment of principal.

(Why do I keep saying five years? As previously reported, the £350 million loan will be a five-year loan, which will then be refinanced — per the Viability Report for the project submitted during the planning process. Until I hear otherwise, I will assume the basic funding plan is the same.)

As the only other club to have built and financed a comparable project, the best example for what lies ahead is Arsenal. I don’t want to go into too much detail as the comparison isn’t perfect, but there are a few points worth making.

Arsenal, notoriously, felt the squeeze during construction, creating a need for parsimony that some fans argue Arsene Wenger has never really shaken off. Spurs have the great advantage of learning from Arsenal’s experience. From my understanding of what I have read, Arsenal ploughed ahead without all the required funding in place, which made it more expensive and at one stage forced construction to stop. Spurs can’t afford such a delay given the tight time schedule imposed by the need to play away from White Hart Lane.

I’ve attempted to gather data for the finance costs paid out by Arsenal, to demonstrate, not so much the amounts, as the “profile” — how finance costs will peak and then reduce and flatten to a tidy annual sum. This is extremely hard — Arsenal have refinanced their debt load on several occasions, making it hard to track. The chart below gives the club’s stated figures for interest charges in the period, and debt payments due in the coming year (repayment of principal).

Arsenal raised debt for both the Ashburton Grove stadium project, and the redevelopment of Highbury — likewise, Spurs will be funding property development (on the “southern development land” on the stadium site and at 500 White Hart Lane) as well as stadium construction. I can’t be sure all the debt payments relate to stadium/property development, so take the figures with a pinch of salt. But, it is a consistent measure.

Arsenal Emirates Financing

The 2007 figure isn’t right, as I can’t find the “repayment of principal” number due to refinancing, frustratingly. But for the first four years, you can see how total financing costs were between £35m and £45m — quite a burden. From 2008, things levelled out, and Arsenal continues to spend around £19m a year on its Emirates “mortgage”.

Spurs can expect a similar profile to this. For five years, repayments and interest will be high, but then the bank loan will be refinanced into a long-term debt package at a lower rate of interest. Arsenal’s debt is split about 80-20 between fixed-rate and floating-rate bonds, at 5.8 percent and 6.6 percent interest respectively. More than any aspect of this whole project, I expect Daniel Levy to get the best possible terms on this sort of financial jiggery-pokery — he has years of experience.

We won’t know how much Spurs are spending on financing costs (I could ask, but I will get a polite note stating the commercial sensitivity of the topic, I guarantee) until the accounts covering the financing period are published — we’ll have to wait for the 2016 accounts, published in April/May of 2017. Any attempt to put a figure on it on my part would be conjecture. But it will be substantial.

One final point of comparison with Arsenal is the shift in the broader financial environment of a Premier League football club in the past decade. Here are the comparative revenues of Arsenal at the peak of Emirates financing, and Spurs last year:

ArsSpurRev

As you can see, Tottenham’s revenue is nearly £60 million higher, due to more commercial income and TV money (and that number will spike in future accounts with the new TV deal).

On the one hand, Spurs are taking on a bigger finance package — £350m versus £260m. On the other hand, Spurs are doing it from a stronger financial position — £196m revenue versus £137m.

The ability of Spurs to control financing costs and maximise revenues during the construction phase will ultimately determine the amount that is ringfenced to be spent on transfers and wages.

Capital expenditure

What shouldn’t be forgotten amid the talk of the massive new financial burden is that, for years now, Spurs have been investing heavily in both the stadium project and the training centre.

In the meeting with the THST in May this year, Daniel Levy stated that £150 million had been invested in the stadium project to date. Per the last accounts, the “cumulative” spend on the stadium (professional fees and “enabling works”) was stated to be £59 million, up from £40.9 million in the previous year. On top of that £59 million are property acquisitions, professional fees/other costs for the previous design that will have been written off, and construction costs in the six-week period between when Spurs gained the final green light and the board-to-board meeting.

As for the training centre, upon opening, it was capitalised at £27.5 million — in line with the £30 million price tag that is generally put about for the wonderful facility.

This £177.5 million capital expenditure has taken place over the past nine financial years (prior to 07/08 there was none). The average spend is about £20m per year, although of course it is far from a straight line. This investment has been funded by a combination of equity contributions, bank loans and club profits.

As an aside, I was curious to see how much money has been put in by ENIC to fund this sort of expenditure in the past decade, and how much has come from loans/profits.

This stuff gets hard to track as the club accounts are pretty complex. But from what I can make of it, in 2014 there was a £40m injection, while in 2010 there was a £15m injection plus a further £18.4m “investment in group companies”. This refers to the many subsidiaries that are mostly focused on property, so it would be reasonable to suggest this was for property purchases.

From my chats with people who know about this stuff (OK, that’ll be @ztranche), this equity contribution has been in the form of loans converted into preference shares.

The combined equity contribution is £73.4m, meaning the rest — £104 million or so — has been funded by loans and from profits. This is equity contribution is fairly modest, given the size of Joe Lewis’s Tavistock Group portfolio and the way the value of the club is going to soar once the stadium is complete. I’d compare this level of investment to adding a conservatory to your house to increase the value, rather than being a sugar daddy and sticking a helipad on the roof. But the money was found, and the investment now will help the club in years to come (and help “Uncle Joe” cash in, if and when he sells).

Overall, while not on the level of the stadium financing costs once the £350m loan kicks in, this £177.5m is not an inconsiderable amount of capital investment in the period. It will have given Spurs experience in managing its balance sheet to ensure not all the TV money is pissed away on agents and transfer fees. There is an adjustment coming, but won’t be like Spurs are accelerating from 0 to 60mph — we’ve already been cruising along at 30mph for a while now.

Final thought

The next five years is about finding the right balance between funding the stadium and funding a competitive team. It’ll be hugely challenging, and even if Spurs get it “right”, events out of the club’s control — luck, relative performance of others, macroeconomy, you name it — may mean it looks like the club got it “wrong”.

Underinvestment in the playing squad could have a negative impact on the viability of the stadium project, just as overinvestment could. It is safe to assume Spurs will be on the cautious side of this spectrum — the unofficial target of a 45 percent wages-turnover ratio hints as much.

But, building a new stadium doesn’t mean the club must put away the chequebook for a few years — in fact, the club must not. A drift back towards mid-table would be counterproductive in terms of both lost revenues, and the potential loss of Champions League calibre players that would harm the effort to sell tickets and hospitality packages in the new stadium when it opens.

I don’t want to see the club hide behind the stadium project as an excuse for not sufficiently strengthening the playing squad. The fact that Spurs were prepared to overpay on deadline day to secure a player like Moussa Sissoko shows the money is there, and the club is prepared to spend it. Likewise, continued investment in Hotspur Way through the construction of player accommodation shows the bigger picture isn’t being ignored, and the club is not being stretched beyond its limits by the stadium scheme.

The data I have gathered shows, in my opinion, that Spurs are well positioned for the huge leap that is now being taken. Years of pragmatism in the transfer market, and stringent cost controls, mean Spurs are as well prepared as they could be for the jump in stadium-related spending that is coming.

The spike in Premier League money, improvements in performance under Mauricio Pochettino and emergence of a clutch of homegrown talents are perfectly timed and give Spurs a little more leeway, arguably, than Arsenal had when building the Emirates. Of course, the Premier League TV deal has an inflationary impact on transfers and wages, which makes finding value harder.

Investing big bucks during boom years on capital projects such as training centres and stadium upgrades is exactly what a football club should be doing from a business perspective. Personally, I am very happy with what is being attempted and fully supportive. Some readers will disagree — that is your right.

For Daniel Levy, the new stadium is his vision and the defining project of his chairmanship. He has skin in the game — as the owner of a significant portion of the club, his net worth will soar if the stadium project is completed successfully.

The incentives for him to get things right are clear. But finding the right balance will be hugely challenging, and involve much guesswork. It’s going to get interesting, folks.

Thanks for reading, please follow me on Twitter for more chat. I welcome comments and criticism (preferably constructive) — I’m not an accountant or economist, so there are bound to be areas where my analysis falls short.

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Fun with numbers: How the new stadium will enable Spurs to join the Premier League’s £1 billion club

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I was chatting football finances on Twitter the other day, and the conversation turned to the value of Spurs — specifically, what impact the new stadium is going to make.

Stories have surfaced now and again in recent years about possible interest in the club, and a valuation of £1 billion has been bandied around. This has generally been dismissed as excessive, and a figure aimed at deterring potential investors. Nonetheless it is widely accepted that the value of Spurs will soar once the new stadium is built.

The question my co-conspirator (who may or may not have been @ztranche) and I were wanting to answer was: what sort of increase in value are we talking about?

Clubs are valued in many ways, most famously by Forbes, but also by standard measures in the investment world such as through cash flow or revenue multiples.

These valuations often serve as poor guides for what a club may fetch when sold, but nonetheless movements up and down the Forbes rankings serve as fodder for the “my club is bigger than yours” pissing contest that football fandom so often comes down to.

In 2013, an academic and soccer nerd, Dr Thomas Markham, proposed a more sophisticated valuation system, the Markham Multivariate Model, which correlates far more closely with the actual price of clubs when sold.

The key is in the word “multivariate” — and yes, in case you are wondering, we are deep into the off-season.

The model uses several variables — revenues, assets, profit, wage ratio and stadium utilization percentage — that better represent the business of football and the differences among clubs.

The formula is as follows:

MMM variate

Dr Markham’s last published rankings in August 2015 valued Spurs at £710 million — comfortably above Liverpool (£537 million), but well behind Arsenal (£1.18 billion).

That figure was based on the 2013/14 accounts, so first I wanted to get an updated value using numbers from the recently published 2014/15 accounts. I don’t have the exact stadium utilization percentage, but it is fair to assume it is somewhere around 99 percent, which most sold-out Premier League stadiums are.

The “current” value of Spurs: £717 million.

The small increase in value reflects moderately increased revenues and a decrease in wage ratio. It seems “about right”, as really the value of Spurs won’t have changed all that much given how static things are while we are stuck at White Hart Lane, and with the TV deal flat in the period.

But what happens once the new stadium is built?

I have done some quick and dirty calculations. There are too many variables to sensibly project what the revenue will be in 2018/19 given soaring TV deals and critical commercial deals to be negotiated. But, with Arsenal having built a similarly sized stadium in a nearby part of North London, there is a very useful proxy for projecting what sort of uplift a new stadium may have for Spurs, were it to open tomorrow.

Arsenal’s revenue increased from £137.2 million to £200.8 million after its move to the Emirates, according to its accounts for the 2006/07 financial year. This is an increase of 46.4 percent.

Revenue mix varies from club to club: Arsenal recorded sizeable income from property development but only increased commercial revenue by £7 million, far below the target of £30 million Spurs have set for commercial revenues associated with the new stadium. But nonetheless this feels a decent starting point, as much of that increase was from rising matchday revenue due to the larger capacity and better corporate facilities.

Applying the same 46.4 percent increase, Spurs revenue would jump from £196.4 million to £287.5 million.

Net assets are interesting. The key is “net” — while Arsenal’s fixed assets soared when the club moved to the Emirates, so did what it owed to creditors. In the two years that covered the final year at Highbury, and the first year at the Emirates, net assets increased by only 8.7 percent. This slightly broader view seems a better gauge as it cuts out year-to-year churn, and I will apply the same increase to Spurs. This would take net assets from £183.0 million to £199.0 million

Arsenal’s profits dipped slightly in the first year at the Emirates (but the club remained profitable). I don’t want to get too involved in guessing what direction Spurs profits will move as it is actually quite a small variable in the calculation, so I’ll keep them the same. Likewise, stadium utilization will remain at 99 percent, if the season ticket waiting list turns out to be an accurate measure of interest, and not some Potemkin justification for the whole project.

I’ll calculate a range for wage ratio: from the current 51.35 percent, to the desired 45 percent (Arsenal got wage ratio down to 46 percent at the lowest point).

So, plugging these variables into the MMM formula, what is the value of Spurs once our shiny new stadium is opened?

My calculation: £968.5 million to £1.105 billion.

As stated, the revenue is hard to project given the changes in the TV deal, meaning that by the time 2018/19 rolls around, this is likely a very conservative estimate. But it shows that the new stadium, right now, would add £250 million to £386 million to the value of the club.

It also shows that the £1 billion figure that is batted around isn’t actually all that optimistic. This simple MMM projection shows it is a good ballpark figure for what ENIC may seek should they chose to cash out once the stadium is built, or as a guide if they seek new investment to help bridge any funding gaps in the project.

A valuation of £968.5 million to £1.105 billion would put Spurs third in the current MMM rankings, and hot on the heels of Arsenal. They still have advantages in commercial revenue, and Spurs have not shown any indication of being able to land the big sponsorship deals to narrow this gap. But it would put Spurs ahead of the two oligarch playthings, Chelsea and Manchester City.

Tottenham Hotspur has been one heck of an investment for Joe Lewis and Daniel Levy, and no doubt quite the ride.

In 2000, when ENIC first bought into Spurs, the deal valued the club at around £60 million. In 2007, when ENIC bought out Alan Sugar’s remaining stake, the deal valued the club at £209.5 million. The club is now valued, by my calculation, at around £717 million, and once the new stadium is complete this should pass the £1 billion mark.

Some may be curious about what this means for Daniel Levy himself? Remember, he owns* 29.41 percent of ENIC, which itself owns 85.55 percent of the shares in the club.

(*The exact wording is, “Daniel Levy and certain members of his family are potential beneficiaries of discretionary trusts which ultimately own 29.41 percent of ENIC’s share capital”)

Actually, I’ll let you do the maths as it feels a bit gauche to be spelling it out. But, put it this way, the new stadium could see the value of his stake increase by something approaching £100 million, which is very nice and is one heck of an incentive to make sure this thing gets built on time and on budget.

I have no idea if ENIC really want to sell — this has always been an investment with an emotional component. But if they do, ENIC will be quids-in once the stadium is built. The value of Spurs is about to soar — and for the first time in a while, this may actually be mirrored by success on the pitch.

Thanks for reading. Please follow me on Twitter for more Spurs chat. Thanks to Sam Z for pointing me to Dr Markham’s research.

Spurs take a gamble on the NFL — New Stadium Deep Dive (Part 2)

[Part one of this series can be found here]

The most curious, and talked about, aspect of the new Spurs stadium scheme is the NFL connection. Why are Spurs, a prudently run Premier League club, going to what appears a considerable amount of trouble to incorporate facilities for American Football?

In part one of this series, I looked at the Viability Report for the scheme, and examined the huge financial challenge facing Spurs. The report also contains a couple of interesting references to the NFL provisions: I plan to explore these in detail.

While my last piece built upon what was stated in the Viability Report, this piece is inherently more hypothetical nature. Without wishing to come over all Donald Rumsfeld, there are a few “known unknowns” in play here

To repeat, the Viability Report is a document produced by KPMG for Haringey Council and the Greater London Authority. It does exactly what it says on the tin — assesses the feasibility of what Spurs are setting out to do with its stadium scheme. Its primary source is information provided by the club.

From the outset, it is important to make one thing clear: Spurs did not need to include NFL facilities in the new stadium. The club had planning permission for a 56,000 seater stadium in place, and was building a new stadium regardless.

Initial planning permission was granted back in September 2010, but as the project stalled amid the legal battle with Archway Sheet Metal Works, new plans were hatched. The first hints that something more substantial was being planned came in October 2013, when it was reported that Spurs had switched architects from KSS, which designed the training facility at Hotspur Way, to Populous, a major US architect which designed Wembley, The Emirates and 13 current NFL venues.

Spurs may well have wanted to increase the capacity from the original 56,000 before the NFL became involved. There’s the “willy waving” desire for a bigger arena than Arsenal, for one thing, but also the fundamental principle of maximising potential — if the site could, at a push, hold something bigger than 56,000, then it should be considered.

But going back for planning permission on a new stadium, and squeezing in even more into what remains a small site in a poorly connected, residential area of the capital, carried risks, in particular due to the need to demolish listed buildings.

The expanded scheme may never have been in serious danger of being rejected by the local authority. But, due to the heritage concerns and the technical challenge of incorporating a first-of-its-kind retractable pitch, there may be a risk of further delays. In 2014, Arsenal brought in £100.2 million in match-day revenue, while Spurs managed £43.9 million. Every home match, we fall further behind. Delays are seriously expensive.

In this article, I am going to examine the cost and potential benefit of Spurs having an NFL-equipped stadium, the rationale that led the club to take this gamble, and what the potential long-term implications could be.

A retractable revenue stream

siding_pitch_1.0

From stadium plans, via Google Images

Even if Spurs were always eyeing a more substantial stadium, the scheme has become significantly more expensive with NFL provisions such as the retractable pitch.

How much more? It is very hard to say — I have not seen a breakdown of stadium expenditure that spells out exactly how much each part costs, and would welcome any input.

Retractable things are expensive though. The last time Populous attempted something of this nature in the UK, adding a roof on top of Wimbledon’s Centre Court, it ended up costing between £80 million and £100 million, way more than originally planned. A similar cost is expected when a roof is added at Arthur Ashe stadium in New York.

These are very different projects (and sports) of course — adding structures to venerable existing facilities — and Wimbledon’s spend included new corporate facilities and more seats. But it hints at the cost of such engineering.

Spurs aren’t sliding out a pitch into open space like has been done at the Populous-designed University of Phoenix stadium in Arizona. Spurs are sliding the pitch under the stadium and other parts of the development, where there is little or no access. Issues such as drainage and environment (ensuring the grass is not harmed while the stadium is in NFL mode) will be to the fore. Also, it fundamentally has to be a high-spec piece of retractable kit — or to put it another way, I can’t imagine it is going to be a case of sending someone under there with a wrench if it isn’t working properly.

In the deal struck between Spurs and the NFL, Spurs get to host a minimum of 20 NFL games at the stadium over the next 10 years. From the reports I’ve read, Wembley’s profit from the NFL games there is between £500,000 and £1 million per game. Let’s assume Spurs are able to strike a very good deal that enables the club to match what Wembley brings in, despite fewer tickets being sold. That would be £10 million to £20 million over 10 years. Is that enough to cover the cost of adding a retractable pitch? I strongly doubt it.

Even if the club has reasonable assurances that the 10-year deal would be extended, it feels like we’re talking about marginal amounts in a £675 million to £750 million project. Added to this is the risk, as stated earlier, that comes from installing a first-of-its-kind piece of technology, both in terms of cost but also from the potential for delays (should the technology not work as envisaged, say).

The Viability Report considers the NFL provisions, as they stand, a negative.

In a section analysing the “internal rate of return” (a measure of potential return for investors in development projects such as this), the IRR for the amended scheme is lower than for the original, smaller stadium. The NFL facilities are pinpointed alongside the larger stadium size and the high-specification corporate facilities as dragging down the expected return.

“This principally arise because capital costs have increased significantly between the two applications, partly because of the construction of NFL facilities, whereas income streams are not forecast to increase in the same ratio”, the KPMG report notes.

Per KPMG, it would appear that the additional cost of incorporating NFL facilities may not be worthwhile.

In reaching that conclusion, one imagines KPMG will have considered both the income from the deal between Spurs and the NFL, and the other revenue that may be derived due to the installation of a retractable pitch.

The Spurs stadium project has always been more than just a football stadium — it has long been sold as a multi-purpose venue that will bring visitors to Haringey year-round.* A retractable pitch may make the new stadium more attractive for hosting other events, such as boxing or concerts, or enable Spurs to host more events than could be hosted at Wembley, the Emirates and the Olympic stadium where there is concern over damaging the playing surface.  A sell-out title fight, or a sell-out Coldplay gig, could be just as lucrative an earner for the host stadium as an NFL game.

But this must be very difficult to accurately project, not least due to the incredible competition that Spurs face in luring stadium-filling acts. London is the stadium capital of the world: Wembley and Twickenham host over 80,000 people, the Spurs stadium and Emirates will both hold 60,000, the Olympic stadium 54,000. Other venues over 20,000 capacity include Stamford Bridge (which is about to get a lot bigger and no doubt plusher), Lords, The Valley, Selhurst Park, Craven Cottage, the new stadium in Brentford, and the Oval, not to mention the O2 arena. No other city in the world comes close.

A retractable pitch offers Spurs a competitive advantage in terms of the frequency it can host events — and a good thing too, as judging by that list Spurs will need an edge. Wembley has its own competitive advantage in terms of capacity, and the Olympic Stadium has an edge in terms of transport links and size of its in-stadium area (this is useful for things like Race of Champions, but is going to suck for football as West Ham may discover…)

There is one other revenue source that should be considered: additional marketing income. In my previous piece, I discussed naming rights, and several people pointed out that a deal with the NFL and exposure to the US market at least twice a year will enable Spurs to potentially command more. How much? Again, it is a “how long is a piece of string” assessment — the examples of previous NFL stadium rights deals I cited in my last piece may offer guidance, or they may not. Certainly, it is safe to say that once naming rights negotiations begin, the subject of the NFL deal will come up.

It was also suggested in feedback from my last piece that there may be additional marketing upside in terms of the exposure that an NFL stadium deal will give to Spurs itself. I’m sure there are very smart marketing people who can put a value on this, although personally I’m pretty cynical — this stuff gets tangential and fast. A more specific relationship between Spurs and an NFL franchise may have greater benefits, but we’re into fuzzy territory here.

In sum, Spurs appear to be making a considered gamble that the addition of NFL facilities will eventually bring in sufficient revenue, through hosting events and through a better naming rights deal, that it justifies the additional cost of installing them, and the risk from delays. The 20-game NFL agreement is a nice little hedge in case it doesn’t work out, and may be seen as a precursor to a larger hosting agreement if the number of NFL games taking place in London increases.

It is quite visionary, in its own way, and appears a reasonable roll of the dice.

So why then does a staid Viability Report produced by the accountants of KPMG hint that a bigger gamble is being made?

The London Spurs

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When assessing how the rate of return for potential investors in the stadium development could increase, the KPMG report outlines five scenarios:

1 Reduced construction cost

2 Better than estimated on-field performance (all calculations, sensibly, are based on Spurs not participating in the Champions League)

3 The club spends less than the forecast 45 percent of revenues on player costs

4 The club secures an NFL franchise

5 Greater than forecast revenues from commercial development

Number 4 jumps out a bit, doesn’t it?

Yes, it is hypothetical, but the fact that it is was even stated as a potential scenario, and so specifically (the wording is not, say, “The stadium hosts an NFL franchise”) in this document suggests it has been discussed as a possibility between KPMG and Spurs. Remember, the primary source of this Viability Report is information from the club.

(More cynically, I’d also add this may prove a rather useful line in the smoke-and-mirrors world of naming rights negotiations, but for now let’s not disappear down that particular rabbit hole.)

Is THIS the play? It’s not that ENIC is gambling on Spurs hosting more NFL games, or even hosting an NFL franchise, but is instead gambling on actually owning an NFL franchise?

It is an interesting possibility to explore.

Generally, the assumption is that, if and when the NFL finally pushes the button on having a team in London, an existing NFL franchise will move. The most likely contender is the Jacksonville Jaguars — it is owned by Shahid Khan (think Fulham and moustaches), has agreed to play one game a year in London until 2020, and is a small-market team with a (by NFL standards) relatively old stadium.

But there is another possibility to be considered: the league expands, something it has continued to do through its history.

The last NFL expansion was in 2002 when the Houston Texans were added, making the league 32 teams. If the league does expand, London will be high on the list of potential cities. A crucial factor in deciding which city gets a team is stadia. Spurs will own an NFL-ready stadium, in a market the NFL has invested heavily in. This is quite an advantage.

NFL franchises, potentially, make a lot of money. In 2014, each franchise earned $226.4 million in “revenue sharing” — this primarily means income from the league’s TV rights sales. There is “local income”, or merchandising and ticket sales, on top.

For what it’s worth $226.4 million is around £154 million at current rates — under the next Premier League TV deal, the team that finishes first would receive £146 million.

There is a catch though: a wannabe owner can’t just stick its name in a hat, and hope it gets lucky. A franchise owner must pay a fee, and a potentially astronomical one at that.

When the league expanded in 2002, the owner of the Houston Texans, Bob McNair, paid a cool $700 million for his franchise fee — adjusted for inflation, that is $923 million in today’s money. Back in 2002, under the TV deal in place then, annual revenue sharing was $2.6 billion. The figure is now $7.3 billion. The Rams franchise owned by Arsenal’s Stan Kroenke is paying a $550 million fee to relocate from St Louis to Los Angeles. That is the relocation of an existing franchise: one can only wonder how much a new franchise would cost, but certainly the figure would be huge.

As mentioned in my previous post, ENIC (via Joe Lewis) surely has sufficient funds that it can fill any gaps in financing the stadium through equity investment. But securing an NFL franchise is a whole different ball game. ENIC, in the grand scheme of things, is small fry.

As for Lewis, Forbes list his net worth at $5.3 billion, and ranks him comfortably ahead of, say, the Texans owner McNair. But has there ever, in Lewis’ ownership of Spurs, been any suggestion that his net worth is there for the spending? Let alone to the degree required for an NFL franchise? Is his ambition, really, to become an NFL owner too?

I just can’t get there: Harry Kane probably knows more about the NFL than anyone does in the Spurs boardroom.

In fact, the more I think about it, the less likely it seems. But the idea that ENIC don’t really know all that much about the NFL leads onto another scenario, which is much less edifying for all concerned: Spurs are being played.

The fool’s errand

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Stan Kroenke (Rams and Arsenal owner) with NFL Commissioner Roger Goodell, via Google Images

As I have stated, the NFL gambit has always struck me as an odd one for ENIC to take.

Daniel Levy, having been in charge of Spurs for 15 years, knows a tremendous amount about running a football club and the business of football (yes, there are plenty of jokes that could be inserted here, particularly during a transfer window). But it isn’t clear from what is known about his CV that he has any knowledge at all about the US sports business.

ENIC is in new territory here, and as smart a businessman as Levy thinks he is, it is at risk of being taken advantage of by a league, and a group of immensely wealthy owners, that hold all the aces in terms of awarding of franchises and making decisions on where games are played.

The NFL has made no secret of its desire to expand the league outside of North America, starting in London. Its International Series at Wembley has been a huge success: the games, now up to three per season, are generally sell-outs and earn an estimated £3 million a time. The league already sells season tickets for dedicated fans wanting to attend all games. Slowly but steadily, the league is building up its fan-base in London in preparation for adding a team in the city permanently.

It was reported that the NFL, in 2012, bid to become the anchor tenant for the Olympic Stadium, but were rebuffed. If true, this interest showed the NFL was aware that Wembley was not a viable long-term option.

With the Spurs project stalled due to the Archway dispute, but the club desperate to push ahead as soon as possible with a new stadium, could this be the opportunity the American league was looking for in terms of having an NFL-equipped stadium in London?

There is some debate over whether an NFL franchise will ever be located in London due to logistical issues such as travel and time difference. But personally, I think the NFL is sincere in wanting to expand to London and take the sport beyond North America — they’ve put a huge amount of effort into this project.

The NFL has tried to internationalize before, albeit unsuccessfully, with NFL Europe — in fact the now-defunct London Monarchs even played at White Hart Lane for a while. In a more globalised world, a sport like the NFL risks becoming parochial if it doesn’t reach beyond North America. The league must look on at the global TV rights secured by the Premier League with envy.

Arguably, the hardest step for the NFL in London was finding a stadium — it now has accomplished this through its deal with Spurs. As discussed above, the 20-game agreement is quite modest compensation in terms of the outlay Spurs are likely making. Did the NFL try to encourage Spurs into taking the risk by dangling the carrot of NFL ownership? It is hardly beyond the realms of possibility.

Nor is the idea that they appealed to the reptilian side of Daniel Levy’s brain — the part that thought spending £26 million on 28-year-old Roberto Soldado or appointing Juande Ramos, say, were good ideas — through some convincing talk of future marketing or revenue-generating possibilities.

Perhaps a gambler was encouraged to up his stake, and the NFL, London base achieved with minimal cost and effort, is rubbing its hands with glee?

Those who take a more negative view on Levy’s chairmanship may be inclined to agree.

But there is a counterpoint to this theory, which is only fair to suggest. Sure, Levy may have been naive, but he may also have been very smart indeed.

Levy the Investor vs Levy the Fan

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Joe Lewis and Daniel Levy, via Google Images

In researching this article, I came across the Guardian’s original report on ENIC’s securing of a majority stake in Spurs back in 2000. ENIC paid £22 million for then plain old Alan Sugar’s 27 percent stake, taking its total shareholding to 29.9 percent. The deal valued the club at around £60 million.

“Levy hates publicity and has no desire to take on the chairmanship, preferring instead to find a figurehead and pull the strings in the background,” the report stated, before adding, optimistically, that Levy’s first priority would be “to put together the plan to bring the glory days back to White Hart Lane.”

Interestingly, the article also identified a dichotomy that has never really gone away throughout ENIC’s tenure. Describing Levy as a season-ticket holder, the Guardian noted he was “certain to invest in the club but will not let his passion for the team overrule his business sense.”

“Levy the Investor” versus “Levy the Fan”. We’ve seen the fruits of this conflict throughout the last 15 years. The long-term vision of, say, investing in a world-class training facility, versus the knee-jerk impulse to sack managers after a poor run and the manic switching between continental and English footballing philosophies.

For Levy the Investor, Spurs has been an incredible success. In 2007, ENIC brought out Sugar’s remaining stake for a further £25 million. This time, the deal valued the club at £209.5 million. Nothing that has happened recently suggests the investment hasn’t performed extremely well since. The £1 billion valuation put about by the club amid the Cain Hoy interest appeared purposefully high, but the idea that the club has at least doubled again in value since 2007 is hardly unlikely.

The biggest constraint on Spurs’ value has been the small stadium capacity that limits its ability to compete with rivals such as Arsenal. Right now, the club is making a huge, and risky, investment to change this. While debt will increase tremendously, revenues will increase once the stadium is built, and so will its value.

For Levy the Investor, it may be a tempting time to cash out. And in the NFL, he may have been handed the tools to cash out in a truly spectacular fashion.

Think of the pitch: with Spurs, you’re not just getting an established Premier League club (TV money ranging from £99 million to £150 million per season, at least the same again in match-day and commercial revenue). With an NFL-equipped stadium in a desirous market, you’re also getting the potential keys to an NFL franchise (revenue sharing £154 million, plus local revenue on top).

Your pockets are going to have to be deep, to cover both buying out ENIC and a potential franchise fee. But if it is within your range, and you are serious about investing in sports ownership, it’s not a bad play. My thoughts instantly go to someone like Guggenheim Partners, not just due to the Cain Hoy connections. Guggenheim Partners has $250 billion of assets under management, and in 2012 it was part of a consortium with Magic Johnson that bought the LA Dodgers baseball franchise for $2.15 billion. I’m not saying “it will be them”, but rather giving an example of the type of party that may be interested.

The NFL additions would make Spurs more appealing to US investors specifically — even more appealing than they already are as a highly profitable club in the Premier League. ENIC may not be able to realise the club’s maximum value as it lacks sufficient resources to secure an NFL franchise itself, but this is the sort of upside that may appeal to a group with deeper pockets and the right knowledge and connections.

The risk of installing a sliding pitch appears a very reasonable gamble from the view of significantly increasing the value of an asset before a sale, with a deliberate market in mind.

I don’t doubt that if ENIC wants to cash out after the stadium is built, it could. The question is whether Joe Lewis and Levy want to? With Premier League TV cash pouring in from all corners of the globe, it may be a tempting to sit back and count the money as it rolls in.

On a human level, Lewis is now 78. We really know very little about him, although this piece by David Hytner from the giddy summer of 2013 was an interesting glimpse. Is Spurs just a part of the Tavistock group, to be bought low and sold high, or is it more to him and his family than that? It is impossible to say.

And what of Levy? If Levy the Investor may be tempted to cash out, could he sell the idea to Levy the Fan?

Levy is 53, and has been running the club for 15 years, a good part of his professional life. Surely, you would think, there comes a point when he decides that he has had enough of negotiating with agents, firing managers and dealing with snotty fans. He has already made a fortune from his time with Spurs — both in salary and the fact that he and his family are “potential beneficiaries of a discretionary trust that ultimates owns 29.41 percent” of ENIC. Selling his stake would take him to the next level of wealth, and may significantly reduces his stress.

But does this quite match up with reality?

Love him or loathe him, Levy is at the Spurs games, home and away, week-in and week-out. Fifteen years on, he still appears to engage in transfer negotiations with relish, in particularly driving fellow executives such as Messrs Aulas and Peace to distraction. He is deeply involved in the stadium project — at the final planning meeting in December, which stretched late into the night, he was sat in the front row even though it was another Spurs executive, Donna-Marie Cullen, who was representing the club.

His son, Josh, who works as an investment banker, increasingly accompanies him at matches. Is Spurs going to go the route of many a sports team, and become a hereditary asset that is more than a mere investment? Levy is a Spurs fan, is getting to run Spurs, and is getting rich doing so — why walk away from that? Or to put it another way, what on earth would Levy do with himself if he wasn’t running Spurs?

Once the stadium is completed in 2018, by which time the NFL’s future in London may be more clear, the logical play from an investment standpoint may be to sell.

But this is football, where logic is generally checked at the door.

Conclusion

As stated, much of what I have discussed here is hypothetical. As the KPMG report itself notes, Spurs are investing up to £750 million in a new stadium development, but the “ever-changing nature of the industry in which it operates” poses inherent risks. Much of what is to come is unknown — including by those making the decisions.

By installing NFL facilities, Spurs are taking several risks. There is the increased cost of installing them, the potential for delays either in planning or construction, and the gamble that, once installed, the club can derive the anticipated benefits.

The 20-game NFL deal offsets some of the cost, and the planning permission has now been secured. The key now will be project management to ensure the stadium is built on time, on budget, and to specification.

Whether the ultimate goal is merely enhanced hosting and marketing revenue, as Occam’s Razor would suggest, or something altogether grander, will become clear in time. But to me, it appears Spurs are taking a calculated and reasonable gamble. It is certainly imaginative.

Whatever happens, Spurs are set for a fascinating period, both on and off the field. I’ll be watching both aspects, closely.

 

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.

Part One of this deep dive can be found here.

* Update via HotspurSam, who has added some very insightful comments this series: “It is worth noting that in the old consented scheme there was only provision for to 4 additional events per annum. In this scheme it is for up 10 non-THFC sporting events and 6 non sporting events (concerts)”

** I’ve also changed the headline from “anatomy of a gamble” — it’s my blog, I can do these things

The £300 million funding question and the dangers of “doing an Arsenal” — New Spurs Stadium Deep Dive (Part 1)

[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

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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

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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

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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.

NEXT: In part two, I’m going to look in detail at the most curious single aspect of the whole stadium scheme — the NFL connection.