With Setanta now collapsing, this close season is getting more and more difficult for Premier League clubs. Some of these problems, however, have been due to own ill-thought out decisions, meaning that the cost of relegation has become almost unbearable. Rob Freeman has been looking at Newcastle United’s relegation from the top flight and concludes that the sums just don’t add up.

It’s been a week since it was revealed that prospective buyers for Newcastle United had to provide proof that they had the finances to meet owner and chairman Mike Ashley’s asking price of £100m. Those that did meet the Tuesday evening deadline have been given access to an online “data room” containing the club’s books. Considering the mistakes that Mike Ashley has admitted to so far, it’s almost a surprise that the contents haven’t been all over the internet, which suggests that any offers received have been genuine, and the password isn’t either “newcastle” or “shearer9”.

The concerns so far are the rumoured bidders. Former owner Freddie Shepherd is believed to be interested in taking advantage of regaining ownership of the club he sold for considerably more than the current asking price. While Shepherd was far from being the most popular owner in football, his tenure is now seen as halcyon days compared to the shambolic mess that Mike Ashley has presided over. However, Shepherd sold 28% of a Premier League club for £37.6m, and the difference in turnover in the Championship, plus all the additional outgoings that Newcastle will have to spend to reduce the wage bill, maybe Shepherd will only be interested if the asking price lowers. After all, while people consider that Ashley is making a huge loss on the club, he only paid £131m for the club in 2007. The £100m that Ashley loaned the club to clear the debts he inherited is in the form of an interest-free loan which only becomes payable once Ashley sells the club. Whether that is the £100m that Ashley is selling the club for is unclear. That will be the real test of just how desperate Ashley is to sell the club. And the more desperate Ashley is to sell, the more wary buyers will be.

The biggest reason Ashley is desperate to sell is that the cost of relegation from the Premiership at the moment is the most financially expensive it has ever been. Newcastle received £37.2m from the Premier League last season – £2.3m in prize money, £22.9m from televised games and £12m in overseas licensing. Next season, they will receive just the £12m parachute payment that all clubs relegated within the last two seasons will receive. This is the very large tip of the iceberg where the drop in income is concerned. Season ticket prices have been reduced by an average of 9%, even with the longer Championship season. This means that the club will make less per game, as expenditure will be the same for most games, and it will have to be spent an extra four matches. In terms of attendance, the only teams over the last six seasons who have not seen a reduction in their home attendances of between 8% (Wolves in 2003-04) and 31% (Sunderland in 2002-2003) have been those who have been promoted back as champions. Last season, Derby’s attendances dropped 9%, Reading’s 16%, and Birmingham’s dropped 27% despite finishing second.

The number of away fans per game will also reduce as, unlike a lot of Premiership clubs, most Championship teams don’t sell their allocations. Crystal Palace only took 534 fans to the relatively short trip to Ipswich last season and they’re unlikely to sell out their allocation at St. James’ Park, especially as the price for tickets will be around £30, although the club is believed to be moving away fans away from the Leazes Corner.

In many respects that’s the good news because in football there are a lot of hidden outgoings – ones that any prospective buyer will need to find out, either during the due diligence that Ashley famously failed to undertake, or through other research. Hidden outgoings that will increase the amount of money any prospective buyer will need to take into account, because a lot of these will come into play over the next season, as Newcastle look to reduce their wage bill, and this is almost certainly where Ashley’s desperation to sell will come into play.

Newcastle’s wage bill is rumoured to be in the region of £1.2m per week. And that is just for the players, before employer’s tax and national insurance is taken into account. This will be reduced at the end of June, as the contracts for five players expire (Caçapa, David Edgar, Peter Løvenkrands, Michael Owen and Mark Viduka). On the plus side, that is approximately £305k a week less that Newcastle will already need to pay next season. The bad news is that those players will have been paid over £1.5m for the six weeks between relegation at the end of the contract, and then comes a sting in the tail. Or at least the first sting in the tail, as players have loyalty bonuses written into their contracts – often referred to as signing on fees. These are (usually) a year’s salary spread across the length of the contract, paid at the end of each season and these have to be paid to a player in full before they leave, unless they submit a written transfer request. For the five players out of contract, these are likely to be in the region of £3.2m. In other words, when relegation was confirmed, Newcastle realised they would have to pay those five players around £4.8m in the full knowledge that they would never play for the club again because they could not afford to renew their contracts.

The contracts can’t afford to be renewed because even with those five players leaving the club, the wage bill is only reduced to £860k per week (£44.7m per year). Newcastle were already paying out 75% of their turnover at wages (£74.6m) according to their last annual accounts. The recommended wages to turnover ratio is in the region of 60-66%, and the wages being paid at the moment are well beyond the reach of a Championship club. On the last day of last season, “Match of the Day” claimed that fifteen Newcastle players were on more than £50k per week in the Premier League, and that is a figure that would dwarf the wage bill of certain Championship club’s playing staff as a whole. Certainly without a sugar daddy, a club in the second tier cannot really afford to pay more than a handful of players more than £10k per week, even with a parachute payment. Newcastle have 19 players alleged to be on at least £20k per week, even after the expiry of the contracts of Owen et al. Newcastle also famously did not include relegation clauses in the contracts during the Shepherd era. It has, however, been claimed that Jonás Gutiérrez has a relegation release clause, so this may be true for other players signed under Ashley’s watch. That said, releasing players comes at a cost – this is the second sting in the tail.

Before a player leaves a club, the club must ensure two payments have been paid in full – the player’s signing on fees/loyalty bonuses and any outstanding transfer fees. This is what appears to have caught Ashley out when he bought the club. A player’s signing on fee is guaranteed. So, even if a player leaves a club at the end of the first year of a five year contract, he receives all of the payments due to him, unless he asks for a transfer in writing, and with agents working behind the scenes, how many players do that these days? So, for example, if Fabricio Coloccini (signed in 2008) leaves this summer, he would receive the entire signing on fee for his five year contract, which would be about £3.1m. Alan Smith (signed in 2007 on a five year deal) would receive four of his five payments were he to leave this summer, a mere £2.5m. To get rid of all 19 players that are reputed to earn (well, get paid) more than £20k per week could cost as much as £31.3m in owed signing on fees.

And then come the transfer fees. Transfer fees are rarely paid in full up front. For a player transferring from outside an English league, a transfer fee has to be paid in up to four instalments over three years (at least 25% up front, then another quarter each year). Between English clubs, that can be spread across the length of the initial contract (so a player bought on a five year contract is paid in up to six instalments). Ashley has stated that the players signed in January (Kevin Nolan and Ryan Taylor) were paid for up front. This still leaves ten players with an approximately outstanding bill of £29.2m waiting to be paid out, which is likely to be a lot less than the club will receive from transfer fees. Every club in the country (and most of the main players across Europe) will be aware of the club’s financial position, which will reduce the values of these players. The fact that Newcastle have to pay out as players leave will mean that they will have to negotiate to receive the transfer fee up front – which will reduce the value of players even further, and this impacts on the income for future seasons if they don’t get promoted straight away. And that’s if they can find buyers for players prepared to meet the high wages Newcastle had been paying – Newcastle had the fifth highest wage bill in the country in 2007-2008, £20m (36%) more than the Premiership’s sixth highest payers Portsmouth, with a smaller squad. Failing that, Newcastle could loan out some of their players, but even if clubs were prepared to meet the wages, Newcastle would still have to pay the loyalty bonus and transfer fee for next season.

One other type of payment needs to be taken into account as well. Image rights – essentially merchandise sold by the club with the player’s face included. Players can either be paid their image rights based on exactly what is sold, or they can receive a lump sum – usually 10% of their yearly wage. There is one exception to this at St. James’ Park – Joey Barton reputedly has the largest image rights at the club, 20%, instead of 10%. There are few worse ways of spending £675k per year than paying for Joey Barton’s image rights. Overall, the image rights come to £122k per week (£6.2m per year) for the whole playing staff.

All of this means that any new owner has a choice. Do they risk keeping the players and pay out £74.9m next season in wages (£44.7m), transfer instalments (£15.4m), image rights (£6.2m) and next season’s loyalty payments (£8.6m)? Or the £60.5m in outstanding loyalty bonuses and transfer fees to get rid of the players? Not to mention any associated tax that needs paying out at the same time. And as a side note, this summer Football League chairmen have voted to introduce a transfer embargo if a club falls behind on its payments to the Inland Revenue (which if nothing else, will give fans an earlier warning that there are financial problems at their club, regardless of the club involved).

This may explain why so few people have been linked publicly with buying the club.

Of those that have been linked, one appears to be an outright hoax. A Rick Parkinson was linked with a £150m buyout, but appears to be a creation of some Sunderland fans who wanted to take advantage of the club being for sale via email. Apparently the name Parkinson was chosen, because someone with the name R. Park or R. Parker (as in Roker) may have been identified as a hoax too easily. The other named consortium is the Singapore-based Profitable Group. The Guardian recently claimed that the Profitable Group are being behind the purchase of a protected plot of land in Colchester with the view to selling it on at a large profit, with the suggestion that the land can be developed. Whether they would try a similar deal with Newcastle United remains to be seen.

Part of the reason for that is that Newcastle United own very little land. The ground is owned by the club, but the land upon which the ground is built is owned by the council. The club part-owns the car park at the back of the Gallowgate end (with the council and Nexus – the owners of the city’s Metro system), which was proposed as one of the sites for the City’s casino, but later rejected. Freddy Shepherd proposed a redevelopment weeks before the club was sold, but an planning application was not submitted, and Ashley shelved the plans upon buying the club. The only other land the club owns is the training ground at Darsley Park, and the youth academy at Little Benton.

Right now, those are the only assets the club have, and £100m is a lot to pay for a small amount of land and a lot of potential. At least in that respect, they should be safe from predators and asset strippers, as the assets are worth a lot less than Ashley’s asking price. Newcastle are looking to avoid following in the footsteps of other clubs who overspent in the Premiership: Leeds, Nottingham Forest, Sheffield Wednesday, Ipswich, Leicester, Derby, Southampton, Bradford, Charlton and Norwich. All found themselves broke and unable to compete with clubs at the top of the Championship. For Newcastle to avoid joining that list of clubs, their best hope is for a benefactor or a businessman looking for a plaything, but with the economy as is, Newcastle could find themselves going the same way as their sponsors – only without the chance of the government bailing them out.

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