Wage pressures are depressing the value of football stocks, according to David Poole, director at S...
Wage pressures are depressing the value of football stocks, according to David Poole, director at Singer & Friedlander.
Over the 12 months to the end of April 2001, Manchester United stocks are down 51.60% while Newcastle stocks have fallen 31.83%.
Over the same time period, the FTSE All Share has fallen by 4.43% while the FTSE Leisure, Entertainment and Hotels index, of which Manchester United makes up more than 1.5%, returned -11.74%.
Poole says the pressure to pay players higher wages is taking its toll on many clubs. Chelsea, Leeds, Blackburn and Wimbledon all have high wage to player ratios. Wimbledon, for example, has a player to wage turnover of 110%. The exceptions to these high ratios are Manchester United and Celtic, with United's ratio at 33%.
Brian Gallagher, senior investment manager at Gartmore, says Manchester United has an innovative scheme for dealing with salaries by setting the cost income ratio at a maximum of 40% of total revenues. This is achieved by capping the players wages and making any additional payments performance related.
Poole says the millions clubs have received in TV rights has covered up a lot of the issues, and the financial inefficiencies of many clubs will soon come back to haunt them. Gallagher says that TV money makes up about 50% of a club's earnings, around 30% comes through gate receipts and the rest comes from merchandising and other spin-offs.
Poole says that too many clubs run their finances on sentimentality and emotion, rather than a sound business approach. Sunderland, Ipswich and Manchester United are the exceptions, says Poole. These clubs are run more like a commercial business and should get stronger in the years to come.
Gallagher says: "Sunderland has built up a strong franchise, has a new stadium, earnings are strong, and if they get into a European competition next season, revenue streams will be high."
Poole says football stocks are volatile, although they do not fluctuate as much as some people expect, but cup performance can be a factor on share prices. Poole says when Manchester United went out of the Champions League, share prices fell by about 5%.
Success in European cup competition is good at boosting the liquidity of the clubs involved. When Chelsea reached the quarter final of the Champions League last season they made around £20m, in gross terms, through prize money, gate receipts, merchandise and other spin-offs. By contrast, by failing to get into any of the major cups, Tottenham Hotspur's profitability halved.
With the gap between the football's top division and first division widening, the costs of relegation can inflict the most damage on a club's earnings. The minimum TV money any team in the top division can expect is £12m to £13m, in the first division it is £1m to £2m,
Relegated clubs would not only lose TV money, says Gallagher. "If Coventry, for example, is relegated, gate numbers would fall, season ticket numbers would fall and so would the number of away fans going to other grounds. All in, the cost of being relegated is around £20m."
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