Follow the money!

Just how much can Newcastle United afford to be spending this summer?

To understand the answer to this question we need to build a picture of the clubs existing financial footing and then understand the impact of the commercial deals, including the new television rights deal to show how the clubs finances should outturn this season.

Let’s start with Newcastle United’s current position. The club has been steadily increasing it’s ‘profit’ since 2011 meaning that it could pay off all it’s debts and move into the black other than the notorious £129m which sits on the companies accounts in terms of an interest free loan provided by Mike Ashley and his companies.

Much has been written about this ‘loan’ given Mike Ashley owns the club outright. But, as the Newcastle United Board insist, this money was pumped into the club by Mike Ashley when he first bought the club coupled with an admission that he did not carry out appropriate due diligence at the time of purchase. The bottom line is that Mr Ashley could insist this money was paid back to him at any time, with the club having to fund from either its cash reserves or from raising the money in the form of a loan. Most commentators however seem to agree that this loan will either be paid off over time in smaller payments or more likely continue to sit on the accounts perhaps serving as some sort of deterrent to potential suitors for the club. For the purposes of the rest of this article however let’s assume the £129m will sit unpaid for now.

What then is the cash position of the club now.

In April this year the club published its latest set of accounts. Whilst early reports had indicated the club had returned a pre-tax profit of around £18.9m the actual accounts show that during the period £38.6m had been generated into the clubs bank account which had previously been £4.5m overdrawn, leaving NUFC with a cash balance of £34m. The accounts cover the period to end June 2014.

So, we have established that Newcastle had £34m in the bank at the end of the last accounting period.

Not included in accounts is all the transfer activity from 1st July 2014. This means the incoming transfers of the likes of DeJong and Janmaat are not included to the tune of just shy of £40m. Offsetting this however is transfer money received from the sale of Debuchy, MYM and Santon expecting to recoup around £23m of this outlay. Even with at net spend of around £15m over the period to this summer’s transfer window the club continue to rake in record profits.

The key information in the accounts is the staggering increase in Newcastle’s turnover, driven primarily by increased TV revenues. To the year ending 30 June 2014 revenue increased from £96m to £130m. This increase of £34m accounts for how the club managed to move almost £39m into its bank account.

But this still only tells part of a story. The club has seen match day revenues hit too. During 2013/14 this was due to a lack of European football, but it is fair to say that this downward trend is likely to continue with ongoing protests against the clubs owner last season, including the ‘Boycott Spurs’ initiative and a general reduction in crowd sizes as performances on the field fell to depressingly terrible levels. Whist ticket sales are being hit this will also have had an effect on other revenue streams in the ground, whilst a trend away from official merchandise has also been there for all to witness with specific focus on shirts carrying the payday loan firm, Wonga, logo on it.

During the period of the last published accounts a fall in revenue from ticket sales of around £2m was realised. Many will expect a further fall of match day related revenue since these accounts, perhaps to the tune of another £2m, to be felt by the club.

On the flip side the club has been seriously trimming the number of staff it has on it’s wage bill, even if wages are going up overall. The thread bare nature of the squad was all too visible for those watching John Carver’s men crawl over the Premier League safety line last season. The sale of Davide Santon and Mapou Yanga-Mbiwa being two examples of what turned out to be a dangerous game of brinkmanship from the NUFC money men. And now with other senior squad players leaving the club including Jonas Gutierrez and Ryan Taylor the playing staff wage bill has taken quite a squeeze. This will mean there should be plenty of headroom for wages when it comes to new players, although the club will continue to keep a tight grip of salary costs.

And what of the Wonga deal. The four year deal has been under threat recently after the loan company posted a staggering loss of £37m last year. Whilst many would love to see the club’s controversial main sponsor replaced, Newcastle United currently ‘enjoy’ an income stream of around £7.5m a year under the deal. The deal currently has two years left to run. Whilst the clubs previous deal with Virgin Money was thought to be in the same ball park in terms of revenue both these deals were a significant improvement on the Northern Rock deal which was only worth around £2m a year.

What should worry the club’s Board is the continued erosion of the Newcastle United Football Club brand. The recent survey of the brand values of clubs across the globe puts NUFC at $155m and 22nd in the overall list. This is 11th in the Premier League with the club band now valued less than Aston Villa and Southampton whilst significantly behind the likes of West Ham and Everton as well all those clubs you would currently expect to see Newcastle behind in the branding stakes.

This does mean that, should Wonga need to cut it’s losses, it may well be very difficult to repeat the income stream generated from it’s current shirt sponsorship deal.

And as for the club’s global brand, surely the appointment of an Operations Director to the new Board structure (someone who could oversee branding, ‘sales’, customer relations and other commercial activity) should have been a priority for Mike Ashley as part of the recent restructure. Given Lee Charnley is now the only commercially minded individual on the board, and therefore has to take responsibility for all such activity as well as the Financial Director role, how is the club going to provide the leadership, innovation and drive to move Newcastle United forward as a business.

Mike Ashley, Lee Charnely and their Board of Directors seem to have turned a dangerously blind eye to all this for one reason. Media Revenue. No amount of shirt sales, hot dogs and hats at Christmas can complete with the revenues currently being thrown at Premier League clubs right now. And as long as this continues it would seem that this is all that matters for those in charge of NUFC.

So, accounting for an overall increase in salary costs (despite a headcount reduction), reduced match day revenue and other commercial revenue down turn it is the media deal which will dictate how much Newcastle United can afford to spend this summer.

In 13/14, the period detailed in the last published accounts, NUFC made £77.3m from broadcasting rights. Last season this rose slightly to £77.8m given the team appeared on live television 20 times as opposed to 14 the season before.

There is a good deal of smoke and mirrors going on with Newcastle United's finances. If the £34m sitting in the bank account has already taken into account the £15m loss on transfers in this most recent period then the club could easily be looking at this being upwards of £70m by this time next year if there is no transfer activity.

The absolute worst case is the club is now making a clear profit of around £38m (before tax). The ‘swing’ in transfers between 13/14 and 14/15 would equate to about £33m between the two seasons (£33m less in the latter period). This is due to making around £18m during the season Cabaye was sold (13/14) and a net spend of around £15m in 14/15. If these transfers are still to be accounted for all the evidence would suggest that Newcastle could easily afford to invest £40m this season and still not be in the red rather than the £70m mentioned earlier.

In addition, the new Sky/BTSport starts in the 2016/17 season and runs for 3 years. When this deal kicks in it should see revenues for Newcastle United raise from £77.8m they received in 2014/15 (and likely to receive in 15/16) to between £120m-£130m a year. Meaning an increase to the bottom line of well over £40m, and meaning NUFC could well be easily clearing £70m a year (not taking into account the likely pressure on wages to increase from the players union). Whist speculating against possible future revenue streams is not advisable it does show just how important it will be for Mike Ashley and his Board to remain in the Premier League this season. And all this before you even start to factor in any increase in oversees broadcasting rights revenues.

This should, if for no other reason than Mike Ashley can see the huge pot of gold at the end of the rainbow, give all Newcastle fans hope that the club will invest in the first team this summer, and probably in a pretty big way!

Now, Lee, go and find that horse!!