Newcastle v Rangers or is there a third way?
Newcastle v Rangers
Ever since Mike Ashley took a stake in Rangers during 2012, there has been speculation as to what are his intentions? Could he be looking to finally leave Newcastle United? We take a look at the options.
As was reported earlier in the week, things could be coming to a head with a hearing scheduled for 27th January before the Scottish Football Association. The SFA have been trying to establish Ashley’s intentions, with more intent since October.
Ashley had stood back from an open offer for Rangers shares in September. However, a month later, he had blocked further share issues and provided short term funding to meet Rangers’ cash flow problems. This allowed him to insert some of his own people, notably former NUFC henchman, Derek Llambias, whilst removing other directors.
Ashley had of course bought into Newcastle United in the summer of 2007. Much was made of the extra funding needed to finance loans, notably the one to cover the expansion of St James’ Park. A popular perception is that the extra cash requirement was a surprise. This is hard to believe with the quality of the legal team, led by former interim Chairman Chris Mort who would have easily picked up on Note 14 to the financial accounts which were in the public domain.
It has been a rollercoaster at Newcastle. Managers came and went, his 2nd season saw United’s first relegation from the Premier League. The drop in revenue was funded in no small part by the sales of leading talent. This was also an opportunity to reduce one of the highest wage bills in the English game. The first immediate return to the top flight in NUFC history followed, led by Chris Hughton who was unceremoniously dumped.
Different stories persist. Hughton became highly respected by the St James’ Park crowd. The official line is that he was to be replaced by a manager who would take Newcastle to the next level. Speculation inevitably drifted to suggestions that the outgoing manager had stood up for loyalty to his players, against the desire to cash in on stars of rising value.
The pattern that was to become established emerged. The home grown striker Andy Carroll, who was not going to be sold, not at any price, at least not in that January transfer window, was shown the door – to Ashley’s helicopter en route to Liverpool. Wage costs were further slashed during the summer as the trend came to buy cheaper players, increasingly from overseas, France in particular.
The cost cutting, combined with TV revenue increases, brought the club slowly to generate operating profit, the difference between gate, commercial and TV revenues and costs. Transfer profits piled much much more into the kitty.
What we have seen so far at Rangers is a start to the cost cutting. Yes, there have been pay offs to outgoing directors but the Christmas party has been cancelled. Llambias has moved from a consultancy role to take up a director position. The early phase blueprint seems to have been established.
It was discussed earlier in the week (here) whether SFA rules allow Ashley to maintain influence over both clubs. If that is the case, how and which would he choose? It will be remembered that back in September, a statement was made on his behalf that he would not be selling Newcastle United, at least until the end of next season.
That timing might be relevant from 2 angles. The first is obvious, that this is the first time that it is realistically possible for both Rangers and NUFC to both qualify for UEFA competition. The next reason is perhaps less obvious.
Premier League revenues have leapt forward over the last few years. Last season, NUFC took in around £80m from TV alone, around double that of Ashley’s first season. At the same time, gate receipts and commercial income have remained relatively stable. More TV deals are to come, recent speculation suggests broadcast fees to a projected £10m per match.
As Ashley has demonstrated through his dealings in his flagship business, the best time to sell is when a business is at the peak of its value, the best time to buy when at its lowest. The end of next season will be a chance to take stock of whether such high revenues can be maintained. Given current levels of expenses, financial experts from Deloittes place a value of 14-20 times profit levels on Premier League clubs. On those levels, Newcastle United could be argued soon to be worth over £1bn.
So what of Rangers? Certainly, they are currently a loss making club. Celtic’s accounts are a possible guide to what can be expected there. Their revenues in a normal season have come in around the £50m mark. Champions League runs have increased that by up to £25m more. Significantly, wage costs are around £40m, 10% lower than Wigan and Reading when they were relegated, 35% below NUFC. Gate and commercial operations generate surprisingly similar levels on revenue.
So NUFC v Rangers? Newcastle are clearly more profitable but full value, based on those profits, would give Ashley a huge windfall. Rangers can be acquired for a much lower investment, but being one of two clubs who can reasonably expect to qualify for the Champions League add an edge to profitability and, arguably more important for Ashley, European exposure to his main brand.
There is however a 3rd way to choosing between them. Giampaolo Pozzo owns 3 football clubs, Udinese, Granada and Watford. Udinese is that Italian flagship, similar to Newcastle united, buying in talent that is then sold on at a higher price. Granada have been promoted 2 leagues since being bought by Pozzo in 2009, a large part of the success in being loaned players from Udinese. Watford are on the fringe of the Premier League, aided by players on loan from or acquired from Udinese.
Rangers, in a financially poorer league, can provide a similar stepping stone. Newcastle have the record of making money by selling players on, as repeatedly identified by Pardew, to bigger clubs, Carroll and Enrique to Liverpool, Ba to Chelsea, Cabaye to PSG, Debuchy to Arsenal, Routledge to Swansea, Best to Blackburn and Perch to Wigan, even Loic Remy used us as a loan stepping stone. Profit can be enhanced by attracting young players with potential career progression.
In many ways, Pozzo’s model could provide Ashley with the best of both worlds. Unambitious for cups and UEFA competition, seemingly keen to protect Premier League income at Newcastle, Rangers could be a feeder club to a feeder club, with the added bonus of minimal investment to gain Champions League coverage for his brands.
Under such a structure, it might be assumed that Newcastle United might loan out younger players to Rangers. There is a teasing alternative. Since it seems easier for Rangers to qualify for the Champions League, would it actually make sense to loan out some of the best players, either to ensure qualification in the latter part of the season, or to assist Rangers, once qualified, in progressing as far as possible?
It may not appeal to Newcastle supporters but financially, the 3rd way could make sense for Ashley.
Rex also runs his own website (toontoon.co.uk) which you can visit HERE
If you would like to feature on The Mag, submit your article to [email protected]