The True Price of Buying Newcastle United

A week has passed since the deadline for prospective buyers of Newcastle United to prove they possessed the £100m Mike Ashley is demanding. Those who satisfied the chairman’s demand have been granted access to a digital “data room” containing the club’s accounts, a level of due diligence Ashley famously neglected when he bought the club in 2007. The contents have not, so far, leaked online, suggesting that the password is not, as one might have feared, “shearer9”.

This discretion also suggests the bidders are serious. Among them, reportedly, is former owner Freddie Shepherd, whose tenure now looks like a golden age compared to the shambles that followed. Shepherd sold his 28% stake in a Premier League club for £37.6m; whether he would pay a premium for a Championship version, even at a knockdown price, is another matter. Ashley himself paid £131m for the club, and the £100m he loaned it to clear inherited debts is interest-free, repayable only upon sale. Is the £100m asking price simply a way of recouping this loan? The answer will reveal just how desperate he is to get out.

The Relegation Deficit

Ashley’s desperation is understandable. The financial penalty for relegation has never been greater, a problem compounded for all clubs by the collapse of Setanta. Last season, Newcastle received £37.2m from the Premier League in broadcast and prize money. Next season, that income will be replaced by a single parachute payment of £12m.

This is just the start of the revenue collapse. The club has cut season ticket prices by an average of 9%, but must now stage four extra home league games in the Championship, increasing matchday costs while earning less per fixture. Attendance will almost certainly fall. In the last six seasons, every relegated club has seen attendances drop, with the exception of those who returned as champions. Last season, Derby County’s crowds fell by 9%, Reading’s by 16% and even second-placed Birmingham City’s by 27%. Visiting support will also shrink, as few Championship clubs will sell out their allocation at St. James’ Park, even if ticket prices are around £30. Crystal Palace, for instance, took only 534 fans to Ipswich last season.

The Wage Bill Iceberg

The real damage, however, lies in the outgoings. Newcastle’s player wage bill is understood to be around £1.2m per week. The expiry of contracts for Michael Owen, Mark Viduka, Peter Løvenkrands, Caçapa, and David Edgar at the end of this month will provide some relief, cutting roughly £305,000 from the weekly total. But before they depart, the club owes them a final sting. Between relegation and their contracts ending, these five players will have been paid over £1.5m. On top of this comes their final loyalty bonus payments, which are effectively a year’s salary spread over the life of a contract. For these five players alone, that final payout is estimated at £3.2m.

This is the hidden cost any new owner must confront. Even without those five players, the weekly wage bill will be £860,000, or £44.7m a year. The last accounts showed Newcastle’s wages-to-turnover ratio was already a dangerous 75%. In the Championship, that figure will be unsustainable. Match of the Day recently claimed fifteen Newcastle players were earning over £50,000 per week, a figure that would dwarf the entire playing budget of many second-tier clubs. With no relegation clauses in most of the Shepherd-era contracts, shedding these players is both essential and expensive.

Getting players off the books triggers two huge, immediate costs: the remainder of their loyalty bonuses and any outstanding transfer fee instalments. A player’s signing-on fee is guaranteed for the full term of their contract unless they hand in a written transfer request, a rarity in the age of the agent. If Fabricio Coloccini, signed on a five-year deal in 2008, leaves this summer, the club would owe him his entire signing-on fee, around £3.1m. To offload all nineteen players reportedly earning more than £20,000 per week could cost an astonishing £31.3m in loyalty payments alone. Added to this are transfer fee instalments, with an estimated £29.2m still outstanding on ten players. Every club in Europe knows Newcastle is a forced seller, which will drive down transfer fees and pressure them to accept payment upfront, further reducing the price.

No Assets to Strip

So what is a buyer actually getting for their £100m? The club owns the stadium, but not the land it sits on, which belongs to the council. It part-owns a car park and owns the training ground and academy. There are few assets to strip, which should at least protect it from the most predatory buyers. It does not protect it from financial reality.

The list of clubs who overspent in the Premier League only to find themselves broke in the Championship is long: Leeds, Nottingham Forest, Sheffield Wednesday, Southampton. A new owner faces a stark choice: keep the squad and face costs of nearly £75m next season, or sell the players and pay out over £60m in fees and bonuses just to get them out the door.

This might explain the lack of credible public interest, beyond a hoax apparently perpetrated by Sunderland fans and a Singapore-based consortium with a questionable land-dealing history in Colchester.

Newcastle United needs a benefactor, but in this economic climate, few are available. The club could easily follow its sponsor, Northern Rock, into oblivion, but without the prospect of a government bailout.