Tottenham Hotspur - The Bottom Line

Being a Tottenham supporter must be a pretty good test of whether you are a glass half-full or glass half-empty type of person. On the one hand, the club is consistently at the higher end of the Premier League, memorably qualifying for the Champions League in 2010 and only missing out on a technicality two years later (due to Chelsea’s European victory); but on the other hand, it’s often a case of “close, but no cigar”.

This was once neatly summarised by Chairman Daniel Levy: “We have come far in the last decade – we have raised our expectations from a club  aiming to be in the top half of the table, to competing in Europe each season – to the point at which we find ourselves disappointed if we don't make Champions League.”

Tottenham’s search for success in recent times cannot have been helped by the constant management upheaval with the club parting company with Harry Redknapp, André Villas-Boas and “tactics” Tim Sherwood in the past three seasons, before settling on the current incumbent Mauricio Pochettino. It will not have escaped the supporters’ attention that all this tinkering at the top has only resulted in worsening league positions: 4th in 2012, 5th in 2013, 6th in 2014 and (currently) 7th in 2015.

Off the pitch, it’s a different story, as Tottenham reported record revenue of £181 million in the 2013/14 season plus an astonishing pre-tax profit of £80 million, which is not only the best ever for Spurs, but also the highest ever recorded in the Premier League (I believe). This was mainly thanks to unprecedented profits on player sales of £104 million, largely due to Gareth Bale’s bumper sale to Real Madrid.

In fact, the profit before tax surged £76 million from £4m in the previous season to that £80 million. After including a £15 million tax charge, the post-tax profit was down to £65 million, still a substantial increase on the £1.5 million profit recorded in 2012/13. Obviously the vast majority of the increase was due to the £78 million increase in player sales profits from £26 million to £104 million, but revenue also rose £33 million from £147.4 million to £180.5 million, almost entirely due to the new Premier League television deal.

Against that, operating expenses were £13 million higher, including a £4 million increase in the wage bill, which broke through the £100 million barrier for the first time. Player trading costs also rose £23 million (player amortisation £13 million, impairment of player values £10 million), while the club booked £5 million of exceptional items for redundancy costs (AVB and his coaching staff) and onerous employment contracts.

In addition, there were a few technical movements, as depreciation fell £8 million, largely as the previous year included a £5 million write-off for certain professional fees associated with the Northumberland Development Project (NDP), but also a £6 million profit from property sales (the northern end of the NDP site). Net interest payable was £4 million lower, as this year included higher notional interest on deferred receipts for player sales.

The higher TV money has significantly improved profitability in the Premier League in the 2013/14 season with 15 of the 20 clubs that have published their accounts to date reporting profits, but Tottenham sit on top of the pile with their £65 million post-tax profit, ahead of Southampton £33 million, Everton £28 million, Manchester United £24 million and Newcastle United £19 million.

Of course, making money is nothing new at Spurs with Levy commenting, “Tottenham Hotspur have always been run on a rational basis. It’s one of the few clubs that has been consistently profitable.” In fact, Tottenham have reported profits in eight of the 10 years since 2005, normally just above break-even, but sizeable returns of £28 million in 2007 and £33 million in 2009.

Clearly much of that solid financial performance is down to player sales with Tottenham making an incredible £267 million from that activity over the last nine years. That’s more than a quarter of a billion as Levy’s tough negotiation skills have certainly reaped large financial rewards, albeit at the cost of weakening the team.

Tottenham’s last significant profit of £33 million in 2009 was also largely due to profits on player sales of £56 million with Dimitar Berbatov moving to Manchester United and Robbie Keane to Liverpool.

The last two seasons have included a couple of mega money sales to Real Madrid (Bale £85 million and Luka Modric £30 million), but also highlight Tottenham’s ability to get good money for most sales, e.g. in 2013/14 Steven Caulker’s was bought by Cardiff City for £8 million, Tom Hudllestone went to Hull City for £5 million, while the moves of Clint Dempsey and Jermain Defoe to MLS generated around £12 million.

Unsurprisingly Tottenham’s £104 million profit on player sales was the highest in the Premier League in 2013/14 with only a couple of other clubs (so far) reporting more than £10 million profit from this activity: Chelsea £65 million and Everton £28 million. When Southampton publish their detailed accounts, they will also probably include high player trading profits, but nothing like Tottenham’s level.

The other side of the player trading coin is player amortisation, namely the annual cost of expensing the transfer fee of purchased players, which is written-off evenly over the length of the player’s contract. As an example, Roberto Soldado was bought from Valencia for £26 million on a four-year contract, so the annual amortisation is £6.5 million.

This increased from around £25 million in each of the previous two seasons to £40 million in 2013/14 “due to the continued investment in the playing squad”. The total cost was actually £50 million, as there was also £10 million for impairment with the value of certain players in the club’s books being reduced. Although there are clear accounting criteria for impairment, it is a little bit of a grey area, so it makes sense for Tottenham to book such charges in a year of such high profits.

Even though player trading (and particularly profits from player sales) have such an important impact on Tottenham’s bottom line, they are still profitable from their core business. This can be seen by looking at the club’s EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which can be considered a proxy for the club’s profits excluding player trading, as this is solidly positive year after year. After two years of decline, it rose from £19 million to £39 million in 2013/14.

That is not bad at all, but still a fair way behind the top five clubs: Manchester United £130 million, Manchester City £75 million, Arsenal £62 million, Liverpool £53 million and Chelsea £51 million. This is despite the far higher wage bills at those clubs, so goes a long way to explain Tottenham’s greater reliance on a player sales business model.

Nevertheless, revenue rose £33.1 million (22%) from £147.4 million to £180.5 million in 2013/14, almost entirely due to the additional money from the Premier League TV deal, which helped increase broadcasting revenue by £32.5 million (52%) from £62.3 million to £94.8 million. Match day revenue also rose £3.7 million (9%) from £40.2 million to £43.9 million, but commercial income fell £3.1 million (7%) from £44.9 million to £41.8 million.

Note that I am using the Deloitte Money League revenue split here, which is different from the categorisation in the club accounts, in order to ensure comparability with other clubs’ figures. The main difference is corporate hospitality, which is included in commercial income in the club accounts, but match day in Deloitte’s numbers.

The importance of TV money to Tottenham’s revenue growth is clear: 83% (£55 million) of the £66 million increase since 2008 from £115 million to £181 million has come from broadcasting. In the same period, commercial income rose only £8 million from £34 million to £42 million, while match day income grew by just £4 million from £40 million to £44 million.

The major increases occurred in 2011 and 2014 in line with the new three-year cycles of the Premier League TV deals. The rise to £164 million in 2011 was also boosted by £37 million from the Champions League (prize money and gate receipts).

One problem with this is that all Premier League clubs are increasing their revenue off the back of the central TV deal, while the leading clubs are also reporting high growth in their commercial operations. In this way Tottenham’s 2013/14 revenue growth of £33 million has been eclipsed by the top five clubs: Manchester City £76 million, Manchester United £70 million, Chelsea £60 million, Arsenal £55 million and Liverpool £50 million. Mind the gap, indeed.

So Tottenham’s revenue of £181 million is the 6th highest in England, but is a long way behind the other leading clubs: Manchester United £433 million, Manchester City £347 million, Chelsea £320 million, Arsenal £299 million and Liverpool £256 million. After Tottenham’s recent loss to Aston Villa, Mauricio Pochettino commented, “It is difficult to fight for the top four. We need to be realistic.” This was probably in reference to their current league position, but could just as easily apply to the huge financial disparity.

That said, Tottenham are in turn a fair way above the next clubs (Newcastle United £130 million and Everton £121 million), so they could be considered to some extent to be “The Inbetweeners” of the Premier League, struggling to reach the highest echelon, but comfortably beyond the chasing pack.

Tottenham actually rose one place in the Deloitte Money League to 13th, ahead of Schalke 04, Atletico Madrid, Napoli and Inter, but their problem is that there are five English clubs ahead of them. In many ways, it would be better to have less income, but be higher placed in the domestic league, as the competition in England is much tougher from a financial perspective. From this season 14 of the Premier League clubs are in the top 30 worldwide by revenue, while all 20 clubs are in the top 40.

Broadcasting now contributes more than half of Tottenham’s total revenue, rising from 43% to 53% in 2013/14. Match day income is down to 24%, while commercial income falls to 23%.

Despite finishing a place lower in 6th, Tottenham’s share of the Premier League TV money increased by £34 million from £56 million to £90 million in 2013/14 as a result of the new three-year deal. In fact, they received more than 5th place Everton, as they were shown live more often, which resulted in higher facility fees (25% of the domestic deal).

The only other variable element in the Premier League distribution is the merit payment (also 25% of the domestic deal), which depends on where you finish in the league. All other elements are equally distributed among the 20 Premier League clubs: the remaining 50% of the domestic deal, 100% of the overseas deals and central commercial revenue.

Of course, this is just the first year of the current Premier League TV deal and there will be even more money available when the next three-year cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimates are that a club finishing 6th will receive around £138 million a season, which would represent an additional £48 million for Spurs.

Given the equitable nature of the Premier League TV deal, the real differentiator for the leading English clubs is in fact the Champions League. In 2013/14 Tottenham were more or less the same as the top five domestically, but their total broadcasting income of £95 million was easily surpassed by Chelsea £140 million, Manchester United £136 million, Manchester City £133 million and Arsenal £123 million, thanks to their Champions League receipts.

Although Tottenham earned €5.9 million prize money (£9.2 million including gate receipts) for reaching the last 16 of the Europa League, this was much lower than the Champions League, where the four English clubs earned an average of €38 million, ranging from Manchester United’s €45 million to Arsenal’s €27 million.

In 2010/11 Tottenham’s run to the Champions League quarter-finals before being eliminated by Real Madrid generated €31 million of prize money (£37.1 million including gate receipts). It must have therefore been really galling when they finished fourth in the Premier League in 2012, which would normally have guaranteed a place in the Champions League qualifying round, only to be deprived following Chelsea’s unlikely victory against Bayern Munich.

The importance of qualifying for the Champions League has been further emphasised with the new deal from the 2015/16 season that will increase the prize money by around 50% with further significant growth in the TV (market) pool. Europe League payments will also rise, but it will still be very much the poor relation.

Tottenham’s match day revenue rose £3.7 million (9%) from £40.2 million to £43.9 million, but they were still overtaken by Manchester City £47 million. This is not going to change any time soon, following the decision to freeze ticket prices for 2014/15 season. Importantly, Tottenham generate less than half of the revenue of their rivals Manchester United and Arsenal, who both earn more than £100 million a season in their far larger stadiums.

In fact, Tottenham have only the 11th highest attendance in the Premier League with around 36,000, behind Sunderland, Everton and Aston Villa, but this is effectively full capacity with the club selling out all Premier League home games. This underlines the need for a new, larger stadium, which would satisfy a waiting list that has risen to over 45,000.

Levy is fully aware of this issue: “We cannot stress strongly enough how critical the new stadium is over the long term. We have the smallest capacity stadium of any club in the top 20 clubs in Europe, let alone the current top-four Premier League clubs, and given we now operate within UEFA Financial Fair Play rules, an increased capacity stadium and associated revenues is fundamental to supporting the future ambitions and consistent achievement at the top of the game.”

After numerous delays and rejected options, including a possible move to the Olympic Stadium in Stratford, now that the courts have rejected the legal challenge from Archway Sheet Metal Works, the club can finally press ahead with its plans for a new 56,000 capacity stadium next to White Hart Lane. This will be a massive project, costing hundreds of millions (estimates range from £250 to £400 million) that requires Tottenham to ground share in the 2017/18 season (Wembley and Stadium MK being the most likely candidates), with the objective of moving in August 2018.

The cumulative spend on the Northumberland Development Project is up to £41 million in the 2014 accounts. If the project were not to go ahead for any reason, then many of these professional fees would have to be written-off. Assuming that the stadium is completed, then Tottenham’s depreciation will increase, as the asset will be capitalised once it results in a probable economic benefit.

Tottenham will hope to emulate Arsenal’s model when constructing the Emirates Stadium in two ways: (a) fund some of the cost by selling naming rights – there has been talk of a £150 million 10-year deal, but these are notoriously difficult to secure; (b) profit from residential development because of property the club has purchased in the area.

The other area that Tottenham need to do something about is commercial income, which fell £3.1 million (7%) from £44.9 million to £41.8 million, despite merchandising sales rising 13% to £11 million. This is one of the lowest in the Deloitte Money League, just below Inter and Galatasaray. Obviously Paris-Saint Germain’s £274 million is artificially boosted by their €200 million deal with the Qatar Tourist Authority, but Bayern Munich (£244 million) and Real Madrid (£244 million) demonstrate the size of the problem.

The club might argue with some justification that this is an unfair comparison, given those clubs’ pre-eminence in their countries, but it is worth also considering the growth from this revenue segment of the top six English clubs. Since 2009 Tottenham have the lowest growth, both in absolute and percentage terms, with an increase of only £19 million to £42 million. As a painful comparative, in the same period Arsenal have grown by £29 million to £77 million (excluding the new Puma deal which started in July 2014) – and that’s nothing compared to Manchester City £148 million, Manchester United £119 million, Chelsea £56 million and Liverpool £44 million.

The 2013/14 season is the last of Tottenham’s innovative dual shirt sponsorship arrangement with Hewlett-Packard on the shirt front for Premier League matches and AIA for cup matches (both domestic and European), which they had first pioneered with Autonomy (subsequently acquired by HP) and Investec. From 2014/15 AIA, an insurance services provider, will be the sole sponsor in a five-year deal worth around £16 million a season. That’s not bad at all, but still much lower than Manchester United’s £47 million Chevrolet deal or (for that matter) Arsenal’s £30 million Emirates deal, while Chelsea have recently signed a £38-40 million agreement with Yokohama Rubber.

It’s a similar story with Tottenham’s kit supplier, Under Armour, who have a five-year deal worth a reported £10 million a year, running until the end of the 2016/17 season. Again, that’s pretty good, but it pales into significance next to match Manchester United’s “largest kit manufacture sponsorship deal in sport” with Adidas, which is worth an average of £75 million a year from the 2015/16 season or even Arsenal’s Puma deal worth £30 million a year.

Tottenham’s wage bill rose £4.3 million (4%) from £96.1 million to £100.4 million, reducing the wages to turnover ratio from 65% to 56%. The wages have only risen by a cumulative £9.3 million in the last four years, though there was a substantial increase from £67 million to £91 million in 2011. This was partly due to the club “augmenting its squad of players to be able to compete both at home and in Europe”, but also an attempt to retain core players on long-term deals with higher, competitive salaries.

Despite the growth, which took Tottenham’s wage bill above £100 million for the first time, this is still much lower than the top five clubs: Manchester United £215 million, Manchester City £205 million, Chelsea £193 million, Arsenal £166 million and Liverpool £144 million. Since 2005 the gap to Arsenal has literally doubled from £33 million to £66 million.

It’s worth noting the 46% increase in directors’ remuneration from £2.5 million to £3.6 million with Daniel Levy receiving £2.2 million (up from £1.7 million), around the same as Arsenal’s chief executive Ivan Gazidis.

There has been a fairly dramatic turnaround in Tottenham’s transfer activity in the last four seasons with net sales of £39 million, compared to net spend of £131 million in the previous eight seasons. In fairness, there has been over £200 million of gross spend in this period, but on the whole Spurs have been a selling club in recent times, only splashing the cash after a player has been sold. As Levy explained, “Tottenham is not a club that can consistently pay £50 million for a player. We have to make our players.”

In fact, every other club in the Premier League has spent more than Tottenham in the last four seasons. It is particularly telling how much more Spurs’ rivals for a Champions League place have spent in this period: Manchester United £260 million, Manchester City £212 million, Chelsea £196 million, Liverpool £135 million and even the traditionally frugal Arsenal £88 million.

It’s difficult for Tottenham to keep up with that sort of financial firepower and the concern must be that there will be even less cash available to spend in the transfer market while the new stadium is being built. Although Levy has promised to ring-fence a percentage of cash for buying new players, Tottenham fans need only look at their North London neighbours to see the impact while a new stadium is being financed.

The club has moved from net debt of £54.8 million the previous year to net funds of £3.2 million, as gross debt was reduced from £58.0 to £35.4 million, while cash increased from £3.2 million to £38.5 million. The debt comprises a £14 million Investec bank facility repayable over five years tracking LIBOR, a £1.2 million bank loan tracking the Bank of England base rate and £20.2 million of 7.29% secured loan notes repayable in equal instalments over 16 years from September 2007.

The accounts also reveal how much of the transfer fees are paid in stages with Tottenham still owing other clubs £51 million, while being owed £73 million – though Spurs have received £33 million of the Bale fee from Real Madrid since the balance sheet date. Similarly, Tottenham have contingent liabilities of £15 million, which are potentially payable based on the success of the team and individual players, but also a contingent asset of £18 million.

Tottenham have generated a lot of cash in recent years, though this would have been even higher if clubs had paid for transfers upfront, as we can see from the cash flow difference in player purchases compared to the actual fees. A lot of the surplus cash is being invested in fixed assets, essentially the plans for the new stadium and the new training centre in Enfield.

As the club put it, “this huge investment has been funded through equity contributions and long-term debt financing”, including a £40 million interest-free, unsecured loan from ENIC that was converted into non-voting, preference share capital in 2013/14. However, it should be noted that around £50 million of borrowings have been repaid in the last two seasons, including £22.6 million on the Bank of Scotland loan facility in 2014.

There have been some rumours of an approach from US private investment company Cain Hoy to buy the club on behalf of a group of American businessmen, but this seems to have fizzled out. There might be more interest in the future, as overseas investors will be attracted by the booming TV rights, but they might be scared off by the price asked by owner Joe Lewis and the investment required to finance the new stadium.

"Christian Eriksen - Danish dynamite"

With apologies to Spurs’ supporters, the current situation still brings to mind the quote from the wonderful film “In Bruges”, where the character played by Colin Farrell muses, “Purgatory's kind of like the in-betweeny one. You weren't really shit, but you weren't all that great either. Like Tottenham.”

Given the club's position it is perhaps understandable that Daniel Levy operates in such a prudent manner and his understated reaction to the latest results was typical: “It has been rewarding to see the progress and growth now being made on and off the pitch and we look ahead with realistic optimism.”

In the long-term Tottenham’s financial future will be dictated to a very large extent by what happens with the stadium development, though they would obviously be greatly helped if they could again qualify for the Champions League. The new stadium is indeed an exciting opportunity, but as the old English proverb says, “there’s many a slip ‘twixt the cup and the lip.”

It might seem strange to sound a note of caution after such superb financial results, but the challenge for Levy is how to drive the club forward to the next level without continually selling the club’s talent and fans will already be concerned that the irrepressible Harry Kane might be the next star to exit stage left in order to boost the bottom line.