Tottenham Hotspur plc Case

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Brigham Young University *

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Jan 9, 2024

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1 Advanced Financial Management Professor Chris Hair 13 December 2023 Tottenham Hotspur Case 1. Calculate the enterprise value and corresponding stock price of Tottenham using the method of multiples. Use an EV/Revenue multiple and at least one other multiple. Be creative. Using the method of multiples, we derived an Enterprise Value of £129.11 and a stock price of £12.16 . Although we have seven given teams to use as comparables, we selected Newcastle United, Everton, and Aston Villa considering their teams’ similarities in revenue and average points to Tottenham. Additionally, these three teams were a part of the bottom three teams, which were “relegated” or sent to a lower division, indicating far lower revenues than their competitors. Using the provided information, we calculated the respective EV/Rev and EV/Avg Points multiples for each comparable team because enterprise value tends to vary more with changes in revenue and average points. We then took the average of all the EV/Rev and EV/Avg Points multiples to find those multiples for Tottenham. EV/Rev was 1.9, and EV/Avg Points was 2.34. Using these multiples, we took the product of EV/Rev and Tottenham’s revenue to get an enterprise value of £138.4 (1.9*74.7), as well as the product of EV/Avg Points and Tottenham’s average points to get an enterprise value of £119.9 (2.34*50.9). We then average these two enterprise values to get a singular Enterprise Value of £129.11M. To calculate the stock price, we used the formula EV = Equity + Debt - Excess Cash and the values of 2007 debt (£43.1) and excess cash of £26.9 to back out equity. Equity = £112.93M (129.11-43.1+26.9). We divided the outstanding shares by 9.29 to arrive at a stock price of £12.16 . 2. Calculate the enterprise value and corresponding stock price of Tottenham using a DCF approach. Leveraging Table A's financial data, we computed Tottenham Hotspur plc's WACC. The Asset Beta (Ba) was determined as 1.072 using the equation Ba = Be*(E/V) + Bd(D/V) . Applying the cost of capital equation Ra = Rf + Ba(MRP ), we arrived at a WACC of 9.54% , where Ra is the required rate of return. For NOPAT, we utilized the equation EBIT * (1 - Tax Rate) . Starting at £2.2M in 2007, depreciation grew at 4% annually. Capital Expenditure (CAPEX) for 2007 stood at £3.3M, with an expected 4% growth rate. Predicting Net Working Capital (NWC) using the percentage of sales method, we found the initial NWC to be -£1.53M in year 0, factoring in a 9% revenue growth rate.

Investment in working capital ( △ NWC) was calculated through the formula NWC(year t-1) - NWC(year t) for 2007-2020. Free Cash Flows for 2007-2020 were computed as Net Profit + Depreciation – CAPEX – △ NWC . Terminal Value in 2020, with a 4% growth rate, was calculated using the equation [Cash Flows (year 2020) * (1 + Terminal Growth Rate)] / (WACC - Terminal Growth Rate) to obtain £204.94M. The Present Value (PV) of Free Cash Flows and Terminal Value was determined using the formula Cash Flows / (1 + WACC)^year , resulting in an Enterprise Value of £111.5M . Adjusting for Debt and Excess Cash, Equity Value was £95.3M. Dividing by the 9.29M outstanding shares, we obtained a stock price of £10.26 (£16.41). 3. Calculate the enterprise value and corresponding stock price of Tottenham with the new stadium. Should they build the new stadium? Assumptions: ▪ Attendance revenue experiences a 40% increase starting in year 3 ▪ Sponsorship increases by 20% starting year 3 ▪ Stadium operating expenses increases by 14% starting year 3 The CAPEX outlay for the new stadium totals £125M over the initial two years. We have retained the initial maintenance CAPEX from the original DCF in our financial considerations. Commencing in the third year, a £25M depreciation expense on the stadium contract is incurred, following a 10-year straight-line depreciation schedule. The Free Cash Flow (FCF) computation involves aggregating the original depreciation on maintenance CAPEX and the new depreciation related to the stadium. NWC

changes specific to the new stadium have been factored in, utilizing a methodology aligned with the original DCF but adjusted to accommodate the anticipated revenue surge. The Terminal Value, estimated at £686.6M, using the above formula mentioned in Question 2. The present value of the Terminal Value was determined using the same methodology applied to other cash flows. The Enterprise value stands at £150.85M , translating to a revised equity value of £134.66M and, consequently, a recalibrated stock price of £14.50 . This marks a substantial increase of £4.24, attributed to the enhanced seating capacity of the new stadium leading to augmented attendance and sponsorship revenues. Constructing the new stadium emerges as a strategic move to optimize shareholder profit, and we strongly recommend Daniel Levy to approve this project. 4. Calculate the enterprise value and corresponding stock price of Tottenham if they sign the new player. Should Tottenham sign the new player? Assumptions: ▪ Revenue growth attributable to a new player of 5.59% until the player contract ended in 2018 ▪ A player transfer fee of £20M ▪ Player salary was 2.6M in 2008 and grew by 10% until 2018 ▪ Used the same method to adjust NWC as described in question 2, but used new forecasted revenue values To derive a revenue growth projection contingent on Tottenham's acquisition of a new player, we conducted a regression analysis correlating average net goals with average net points. Emphasizing prudence, we utilized the more conservative 95th percentile values, yielding the equation y = 0.63x + 50.54. This choice was motivated by a comprehensive evaluation of Tottenham's recent performance relative to competitors. Moreover, a cautious approach was taken due to a perceived optimism bias in

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projecting a yearly net goal increase of 12, considering the potential adjustment period for new players integrating into the team, where performance may deviate from initial expectations. Although a healthy player would contribute a net goal increase of 12, we factored in an 80% probability of sustained health, resulting in an adjusted net goal growth of 9.6 per season. Applying the regression equation, we anticipated 56.6 average points in 2008, reflecting an 11% point increase. Consequently, revenue would surge by twice the points percentage (1% points increase equating to a 2% revenue increase). However, due to the restricted stadium capacity, Tottenham would only capture 50% of the revenue benefits from the new player, resulting in a modest 5.59% revenue growth. With an Enterprise Value of £ 109.5M , this translates to a recalibrated equity value of £ 93.3M and a revised stock price of £10.05 . Our counsel to Tottenham is to refrain from signing a new player without the completion of the stadium, as this would not fully unlock the revenue potential associated with the acquisition. Additionally, the stock price experienced a dip from £10.26 to £10.05, failing to generate shareholder value. 5. Calculate the enterprise value and corresponding stock price of Tottenham if they build the stadium and sign the new player. Should they build the stadium and sign the player? Assumptions: ▪ Incorporated the depreciation of both the stadium and the original CAPX depreciation. ▪ Applied the identical assumptions as in question 3 for the growth in attendance revenue, sponsorship revenue, and stadium operating expenses. ▪ Maintained the same assumptions for player transfer fees and salaries as in question 4. ▪ Total Revenue growth of 5.59% for the years 2008 and 2009 (pre-stadium ▪ Total Revenue growth of 22.35% from 2010 to 2017, attributed to the new stadium enabling Tottenham to harness additional revenue. ▪ A correlation was established between a 1% increase in points and a 2% increase in revenue. Anticipating a 22.35% growth, revenue doubled the 11% increase in points explained in question 4.

Our valuation yielded a terminal value of £686.6M, with a present value of £210M. Employing the same discounting methodology as in prior inquiries, we derived an Enterprise Value of £225.31M , leading to a recalibrated equity value of £209.13M and a revised stock price of £22.51 . Our recommendation for Tottenham is to proceed with acquiring the new player and constructing the enhanced stadium. The augmented stadium capacity positions Tottenham to fully capitalize on the revenue advantages of signing a new player, concurrently elevating stock value and creating significant shareholder value.