Newcastle's new Wonga
In my view the game of football is long dead. It’s fair to say that in some parts of the world it’s been replaced in name by “soccer” but more critically our game of football has now become the business that is professional football. That’s right, I said professional, and it’s a hard fact to accept that we’re supporting a company rather than a club. Football’s long had business overtones but with the new levels of commercialisation, in the post-Sky sugar daddy era, nothing seems sacred. Nothing.
The commercial drive for success has always been a counteracting balance to the on-the-field actions. The concept that you “need” a successful team on the pitch to put “bums on seats” is a model that is now outdated in principal as well as practice. This idea that investing in a playing staff that wins you trophies, and that will pay the club back in shirt sales and increased sponsorship revenue, is long gone. The old example of commercial drive pushing an on the field expansion really can be defined by the total bubble bursting experience from another United, not Newcastle but Leeds. Borrowing from the future to pay for the now clearly didn’t work. So what is the strategy for success?
When Mike Ashley took over Newcastle United the club was running the classical “Leeds” model. It was in a bubble of expanding debt balanced against future earnings potential. Thankfully for fans our bubble hadn’t yet popped. Many thought that it was only a matter of time before Newcastle slid into administration. Then along came Mike Ashley, the billionaire, to save the day. I think he understood what he was getting himself in for, right? It’s been five years since he purchased the club for £134m. That is a significant investment, even for a guy with a “playboy” persona happy gambling with millions on a single spin. It is hard to believe that his business acumen, which made him a very rich man, fell short of conducting a thorough due diligence of the debt and creditor positions. Surely a successful business man like Mike Ashley failed to consider external debt owed to a bank before acquiring Newcastle United?
Smart things done in the business world may not seem very smart to the average football fan. You only have to look at another controversial take over, that of Manchester United. The Glazer family personally borrowed the monies needed to purchase the club. Just hours after completing the deal they refinanced the debt to the company they bought, paying off the personal debt and removing their own liability from the transaction. This effectively reduced the risk of the purchase to zero by replacing the costs of the refinance against future earnings of the club. I’m not sure what you think but I see this as buying Manchester United “for nothing”.
Like the Glazer’s, I believe Mike Ashley draws upon many financial mechanisms more commonly conceived in the business arena. The club owed significant (£73m) external debts that were settled by Mike giving the club an interest free loan now valued in the accounts as £114m. In my eyes, this conversion was needed to spare the significant interest payments due on the debt that was incurred. In reality this “debt-to-equity transfer” move actually makes great sense; it saves the yearly cost of the loan estimated to be tens of millions of pounds per annum in interest to the company. The action created positive feelings amongst fans that Mike had saved the club from slipping into an unrecoverable debt position similar to Portsmouth or Rangers. But my perception of the action is that he was really then paying the true cost of the club. It must be restated that buying a company also means you buy the debt so effectively Mike’s “mistake” in not examining the debt means he was effectively purchasing an overvalued asset owing money to an external company. The debt migration has been turned into a positive whereby a future sale would require a capital investment of £248m. Given than Ashley was actively trying to sell the club, at the time, I fear that these decisions were far more short term reaction than long term action.
Once Mike realised there was not a quick buyer available for the club he and the board settled on a long-term strategy. Having a cash loan within NUFC provides increased opportunity for accounting and tax benefits as well as potential “good will”. Like any business, you can make money by increasing your top line, or reducing the bottom line, or better still doing both. Mike and Derek Llambias set about working on making Newcastle “work”. Retail sale is Mike’s core but I believe this commercial potential has surprised even him. The club shop has started to expand its branded products to include some weird and wacky ideas, many of which make me cringe, but ultimately aim to make the business money. Shirt prices inside its flagship store at the ground are significantly more expensive than Mike’s own Sports Direct retail outlets. If you want the “tourist” experience of buying your shirt at the ground you’ll pay a premium. Many of the external club shops have been shut down because they failed to make financial sense to a clothes retail magnet. At the end of the day, Newcastle fans buy Newcastle shirts in the hundreds of thousands. I think the cash generation potential here, with three replica shirts a year, sponsor changes and even the new limited edition members’ only shirts, could even be considered as a licence to print money.
Newcastle United earned £54.2 million from Premier League TV and prize money in 2012. This is based on a split of league money, a bonus for placement and additional monies depending on TV appearances. Each place earns around £800k in prize money but the cost to get into the upper layer is monumentally different. Manchester City’s league win finished 37 points ahead of Liverpool but only earned them £6m from the Premier League. Consider the top half of the table, strangely enough the prize money broken down on a “per point” basis means that higher up the league you go the lower the value a point earned becomes. This means that a club is obviously “worse off” in mid-table than winning the league but as a company you may be better off mid-table than winning the league. Business success would be based on the maximum return for the minimum outlay. What incentive is there to a business to move from an area of good profitability to an area of similar income but with higher expense? I understand that finishing in the Champions League Qualifying spots brings a different level of revenue but a serious amount of squad investment for 80% of the teams is needed to even attempt that assault. Newcastle’s hard work finishing 5th brings additional games with European excitement for the fans and a wider brand exposure. It’s sad to note that the total prize money for lifting the Europa League trophy is less than winning a single Champions League group game.
Like any business, the key is to make money, and this is the crux of the problem in the eyes of many a football fan. The future value of this business requires the club to be operating at a lower cost while maximising its opportunity for cash generation. Locating players that hold a significant upsell value has been another aspect that NUFC has significantly improved upon. Newcastle’s transfer policy of committing only to a deal when it is clear it makes significant financial sense to do so has been a football equivalent to Texas Hold’em. There’s little value to a company in expending significant cash on a player to strengthen the squad based on improving results in 2 or 3 fixtures. As a fan it’s easy to criticise but as a business man it makes complete sense. Newcastle United has been doing all it can to save money. The grounds energy bill has been reduced by £100,000 a year by shutting off systems and installing motion detector light switches. There has been a well drilled at the clubs training ground that removes expensive water bills saving another £50,000 a year. One recently introduced initiative at NUFC is the addition of a £1 per ticket administration fee. This may seem like nothing but adding this fee to away tickets has covered the estimated operating costs of the box office.
No regime is perfect. I have been critical of Newcastle United before and I am sure I will be again. Some things just catch the throat as you try to swallow and digest them. Some things are too big to swallow while others get cut up and force fed to you over time. I hated the idea of renaming St James’ Park. I still do, it stinks to high heaven. I think the whole experience has proven that commercial decisions on Stadia names should be restricted to newly built arenas. The actions can have as negative an impact to a business’ reputation as it can produce good from the advertising exposure. People say there’s no such thing as bad publicity but I do not agree. Sports Direct clearly received national and international exposure from the actions on the day the renaming occurred their website crashed due to excessive traffic, this, in spite of the total unanimous outcry amongst the average fan. At the end of the day, the actions that have occurred may have done more damage than good. During recent Europa League games Sports Direct advertised both Greek and French language retail sites live on air. No one can deny this wasn’t ideal for Sports Direct, but a free piggy back from Newcastle United sticks in the throat.
I believe the fans would have had significantly more acceptance of Sport Directs’ total rebrand if it was clear what the proposed value of this had been to the “club” and it had been openly acknowledged. With the proposed renaming being talked up, to be worth £10m a year, only a fool would reject the chance of a potential improvement in income. In reality, no clear line was drawn between Sports Direct and Mike Ashley, no £10m shuffling of monies towards NUFC occurred. The proposed “showcasing potential” basically appeared to be back-door mechanism for free advertising. The only thing the renaming did was take the sting out of any future sponsors’ move to do similar.
Wonga’s sponsorship offer left corporate Newcastle with an easy business decision to make. Wonga offered £1m a year more than the previous shirt sponsors. Clearly Wonga’s offer for the proposed stadium renaming fell short of the prior expectations of around £10m a year. Given the length of time taken to secure an acceptable offer, Wonga’s additional million seems a small price to pay for the Wonga Arena. The decision to “return a tradition to Newcastle United” makes Wonga sound like they’d saved us from footballing Satan but the decision to call St James’ Park by its rightful name has clearly alleviated some of the criticism that could have been targeted at a pay-day-loans company. This choice to revert is a sensible business decision, it explains Newcastle’s choice to take a lower than expected offer while leaving the option open if a suitable sponsor comes forward in the future. Renaming an existing stadium seems like one of the hardest commercial sales for sponsorship- just considered Chelsea, who even after winning the European Champions League failed to attract any cash to secure naming rights to Stamford Bridge. Maybe no company other than Sports Direct would be happy taking the bad publicity that such a sponsorship attracts.
Being successful in the Premier League now is measured on the global scale. Clubs across Europe are clamouring for a piece of the money pie. Billionaire backers and mega investment from industrial giants has seemingly gone from strength to strength. It’s no surprise then that controls over the amount of spending and operation expense would be considered. The introduction of Financial Fair Play (FFP) gives hope for a controlled reduction in clubs’ spending while providing a level playing field for competition. Clubs have adopted different approaches to the current and forthcoming restrictions. In reality Europe’s elite have continued to spend billions drawn from the treasure chests of rich backers. Chelsea stand as champions of Europe having spent £90m in 2012 on team strengthening. It’s hard to conceive how any club can compete with a Man City or a PSG given the seemingly endless backing of oil. Newcastle certainly cannot.
So what makes business sense? Only two Premier League teams currently comply with FFP, one of them is Newcastle United. Surely then the company would consider a corporate strategy of “play in mid-table” to be a successful one. Targeting the Champions League and failing leaves you in a dead zone where costs outweigh rewards. Newcastle has recently signed up the entire off-the-field-staff on 8 year contracts. This move shocked many but highlights the stability and acceptability that such a “play in mid-table” strategy requires. With the Chairman and his staff clearly going nowhere, the “franchise” focus has moved to the playing staff and the acquisition of individuals that provide a shot for success. Strangely enough this attitude is much like the sporting franchises in the NHL. There are many differences, but I see one significant parallel. NFL teams often choose a future point at which they feel will be their best window for success. This may even include a period of deferral of recruitment at a senior level to invest in youth. Then if this youth develops it becomes either a backbone to base a team or ammunition to recruit the stars needed to compete. Coupled with the right investment this targeted planning has proven very successful. Don’t burn all the money and energy with next year in mind but with 5 years in mind. Choose the right time to play your hand.
I still get shocked when considering the magnitude of profit generated from Andy Carroll’s St James’ departure. Is it any wonder then that the company has done everything in its power to try and secure Category One status for the academy? This allows expanded recruitment from outside the region and an increased level of cherry picking talent. I would love to see Newcastle win a trophy within my lifetime. If I have to wait five years for the time to be right for the best window of opportunity to open up so be it. I only hope that the action of the business now reaps footballing rewards rather than just financial ones. It would be amazing to see a team fighting for the shirt, holding their own in the premier league maybe even competing for a cup now and again. If this strategy provides a genuine alternative to recruiting millionaires, who fail to understand what is required of them, it could prove to be invaluable both on and off the field. Thankfully in the meantime I can once again watch the current crop of players do all they can to be “professional” at St James’ Park.