FM 421 – Applied Corporate Finance Coursework Lent 2011
Tottenham Hotspur Plc
Group Alex Fischer Christian N Kartik Subramanian
Company Overview Tottenham Hotspur is engaged in the operation of a football club in London, England together with related commercial activities. The Company has two segments: football and property. Its main component – Tottenham Hotspur Football Club, commonly referred to as Spurs are an English Premier League association football club based in Tottenham, North London. The club's home stadium is White Hart Lane having a capacity of 36,500. The club has a rich history illustrated by its trophy laden cabinet include three major honours in European competition and several domestic trophies. They are the only club to have won a trophy in each of the last six decades – an achievement matched only by Manchester United. The club became the first publicly owned football club in England when it listed on the London Stock Exchange in October 1983. Since 2001, the key shareholder has been ENIC International Ltd, an investment company established by the British billionaire, Joe Lewis. Daniel Levy, Lewis's partner at ENIC, is currently the Executive Chairman of the club. The Annual Report for the year ending 30 June 2010 indicates that ENIC continues to directly hold 76% of all Ordinary Shares and also 97% of all convertible redeemable preference shares giving it a combined overall 85% (2009: 85%) beneficial interest in Tottenham Hotspur plc. No other shareholder owns at least 3% of shares. The football club has a passionate fan base numbering an estimated 20 million people worldwide, including 2.1 million in the UK. The significant proportion of the fan base outside the home nation (UK) illustrates the international appeal of the club which is a result of on pitch success and sound commercial management of the brand off the pitch.
Strategy As a forward looking club, the company’s strategy for growth was three-pronged: •
To continue to strive for success in domestic and European football.
•
Development of the Company's Principal Fixed Assets, being the Academy and the Stadium.
•
Continue to build the Tottenham Hotspur brand both domestically and internationally.
To meet these objectives, Daniel Levy, the company’s chairman, focused on three pillars that he felt could establish a consistent, long term success. The development of a new stadium.
The building of a new practice facility. The continual improvement of the main squad through prudent player acquisitions during transfer windows.
The football club generated revenues from four major sources: gate attendance, sponsorship rights, merchandise sales and broadcast rights. Its main costs consisted of player salaries and cost of operating stadium. White Hart Lane had been updated, expanded and refurbished several times over the last 100 years, but the chairman felt that the only way to truly elevate the club into the upper echelons of English and European football and truly modernize the club’s match day facilities was to build a new stadium. Only a new stadium could facilitate the potential growth in revenues from attendances as the current stadium was sold-out for every game, and there was a waiting list for season tickets of over 20,000 people. The club were hoping to accommodate 60,000 at the new stadium. A new stadium – the first pillar of their strategy was majorly linked to the third pillar, the continual improvement of the main squad through player acquisitions. The potential added revenues from the new stadium would help the club compete more aggressively in the transfer market for international superstar players. The club already had a provisional agreement in place to build the new training ground just outside of London. Having a world class training ground is a major selling point and attraction for players; both young players whom they hoped to develop, as well as attracting top players from around the world whom they hoped to acquire. Hence, the club viewed the training ground – the second pillar of their strategy as also crucial to the third pillar, which was to constantly improve the quality of the squad. Thus this was a focal point in their endeavour to become a dominant player in English football. Player acquisition, the third pillar of the clubs strategy, was probably the most influential factor for on field performance. Levy realized that in order to significantly improve the quality of the team, he would have to consider signing another striker at the least. This became more evident due to the sale of Dimitar Berbatov and Robbie Keane, their two leading goal scorers. To offset these personnel losses, the club signed Roman Pavlyuchenko, a promising young Russian striker. After all, analysis had shown that a fit, top quality striker would be expected to increase the goal difference (net goals) by 12 which in turn increases average points tally by 8, a very significant impact. However, this would come at a non-trivial cost. It was forecasted that the club would have to pay a transfer fee of £20 million, in addition to the average player wage of £50,000 a week for a period of 10 years.
1. DCF Analysis & Stock Valuation We will analyse the components of Tottenham Pro Forma Income Statement (given in Exhibit 5) and state the assumptions made in order to arrive at the appropriate forecasts and valuations. Revenues The revenue drivers for the club arise from four main sources: gate attendance, sponsorship rights, merchandise sales and broadcast rights. The ‘other’ component captures all the other miscellaneous revenues. We assume that all components of revenues grow by 9% per year for the first 12 years (until 2019) and then perpetually at 4% per year. This is consistent with revenue growth figures across teams in the Premiership over several years. Operating Costs The two main components of operating costs for the firm arose from player salaries (payrolls) and stadium operating expenses. The ‘other’ component captures all the other miscellaneous costs. We assume that ‘payrolls’ grow by 10%, ‘stadium operating expenses’ by 4% per year for the first 12 years (until 2019) and then perpetually at 4% per year. This again is consistent with revenue growth figures across teams in the Premiership over several years. EBITDA We get earnings before interest, tax, depreciation and amortization (EBITDA) simply by subtracting the total of operating costs from total revenues for each year. Depreciation Depreciation related to capital expenditure charges was £2.2 million in 2007, and was expected to grow at 4% per year. EBIT EBIT = EBITDA – Depreciation Interest The interest to be paid on debt is assumed to grow at 9% per year.
Tax The tax amount is calculated on the figure arrived after subtracting interest payment from EBIT. The corporate tax rate is assumed to be 35%. Net Working Capital In order to forecast future NWC, we will assume that the relationship between NWC & Revenues (NWC/Revenues) that exists in 2007 carries on at the same rate in the future. This then facilitates us to calculate changes in net working capital. Capital Expenditure (Capex) Irrespective of what stadium it had, Tottenham Hotspur could anticipate a maintenance capital expenditure what was currently £3.3 million and was expected top grow at 4% per year. Calculation of Free Cash Flow FCF = [(1-t) x EBITDA] + (t x depreciation) – ΔNWC – Capex expenses. Calculation of Weighted Average Cost of Capital (WACC) WACC is the rate at which we will discount all future cash flows in order to attain the current fair value of the company. In other words, it is the discounting factor.
Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V=E+D E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate
In this calculation, we will assume a 20 year risk free rate to be equal to 4.57%. Also the company equity beta and debt beta is given as 1.29 and 0 respectively. We will ascertain the cost of equity (Re) using the CAPM asset pricing model. Re = rf + [βe x (Rm - Rf)] Re = 4.57 + (1.29 x 5) = 11.02% Cost of Debt is the ratio of Interest paid to Gross debt. i.e. Cost of debt = Interest paid / Gross Debt = 5.25% After careful consideration of Balance Sheet figures, we ascertained the D/V and E/V to be .1036 and 0.8964. Therefore, WACC = (0.8964 * 11.02) + (0.1036 * 5.25 * 0.65) = 10.23% Present Value (PV) of FCF We will now discount all future forecasted FCF at the WACC – the discounting factor. The sum of all the PV of FCF from 2008 to 2020 helps us to determine the time 0 (2007) PV of FCF. Enterprise Value (EV) Adding the PV of FCF and the PV of Terminal Value will give us the Enterprise Value of the company. This Enterprise Value comprises of the equity and debt values of the company. The amounting of net debt levels of the company to 16.16 leaves the company with a equity value of 118.16. Price per share Given the prior estimation of equity value of 11.16 and 9.29 million shares outstanding, Price per share = Equity Value / No. of outstanding shares = £12.72.
Conclusion Compared to the intrinsic value of £12.72, we observe that the company is trading at £13.8. This clearly suggests that the company is over-valued. Over a long investment horizon, an investor can expect to
generate positive alpha by holding a long position in Tottenham Hotspur as the market traded price is greater than the true or intrinsic value of the share by almost 8.5%. Hence, we can confidently propose that Tottenham Hotspur is not fairly valued and is over valued.
