The real cost of Relegation
In the aftermath of Newcastle United’s relegation to the Championship we look at the real cost to the club and what it will mean in the coming seasons.
Staggering: Relegation from the Premier League will cost Newcastle United £85m next season.
It is well publicised that the new deal for Broadcasting Rights in 2016/17 is substantially more than in previous seasons, to the tune of a 65% increase in this seasons figures. So how does that translate into actual money given the various other income streams the club has and what is our overall cash position.
Parachute payments explained:
Newcastle United will only receive a proportion of the five element that make up the Premier Leagues payments structure. These being the ‘equal share’ and ‘oversees tv’ elements (see below).
This immediately reduces the revenue that Newcastle can expect next year to a proportion of £49m rather than the full £78m we received in 2014/15 and £76m we can expect in 2015/16 (reduced from £78m due to fewer TV appearances in 15/16).
You then need to factor in the new increase in broadcasting revenues that the Premier League will receive from next year. Whilst we understand that the oversees deal is yet to be changed this will mean an increase of around 65% in the ‘Equal Share’ payment, taking this future payment from around £22m to £36m. Now factoring in the oversees share this will mean a gross parachute payment of around £64m.
HOWEVER, the Premier League rules are clear that clubs now receive only a proportion of this gross payment over THREE YEARS. The split is as follows:
2016/17: 55% of gross amount = £35m
2017/18: 45% of gross amount = £29m
2018/19: 20% of gross amount = £13m
So what does that mean overall:
Newcastle’s TV revenue for last season will has already decreased slightly having been on Live on one platform or another just 16 times compared to 20 in 2014/15.
One small piece of good news is that Sports Direct have confirmed they will be providing a new income stream following many years of free advertising and at SJP. The holding company owning Sports Direct, in turn owned by Mike Ashley, confirmed it would start paying an ‘arms length’ sum for this advertising. Whilst the full value of this exposure could be sold for in excess of £10m a year we expect the actual sum to be a fraction of that. We have assumed that this payment will start next season making up for some of the shortfall in other Commercial revenue meaning this revenue in this stream may stay largely unchanged.
The other thing we need to factor in is expenditure on players and the change in manager. The profit declared in the 2015 accounts at £32.4m represented an increase from 2014 of £18.7m however included both net sales and a vastly reduced wage bill that has since been increased with the purchase of senior internationals like Wijnaldum, Townsend and Shelvey. We therefore expect that Newcastle have not just eaten into any potential profit made in 2016 but have also consumed their entire cash reserve position this season.
Assuming no player sales and a constant wage bill next season we anticipate that Newcastle United would make an operating loss of £25m next season. And whilst we also fully anticipate that there will be some player sales this does outline the magnitude of the financial peril the club now finds itself in.
In contrast Newcastle would have likely made circa £60m profit before player sales / purchases had we remained in the Premier League this season. The gap between the ‘have’ and ‘have nots’ is getting bigger all the time and this really does slam home the real impact of the catalogue of poor decisions over recent season.
The net effect of relegation is that swing from what would have been a £60m profit to a likely loss of £25m next season (before player sales). This amounts to a staggering £85m hit to the club.
With news of a lack of relegation wage reduction clauses in high earner contracts and with the pivotal challenge of retaining Rafa and providing him with the assurances on transfer funds aside from his own wage and bonus expectations it is no wonder that thrashing out the finer details of the financial constraints he will have to work under are taking some time.
Even with some player sales Newcastle will have to invest in some new players to strengthen the depth of the squad just to cope with the increase in games next season. The depth of the squad will be just as important as retaining some quality no doubt for our Spaniard.
To finance all of this Newcastle United will undoubtedly need to borrow some funds, and with Ashley still owed £129m in the form of an interest free overdraft and with him having his own financial challenges away from the club it is more likely that Newcastle will turn to the bank to raise additional funds in the form of an overdraft or loan.
This is not a place that Mike Ashley wanted to take the club and would constitute both a major deviation from the clubs financial policy and a major risk to the long term future of the club. Financing the club this way is ultimately a huge gamble and will make an immediate return to the Premier League a necessity. If we don’t get straight back up the outlook for Newcastle United is very bleak indeed.