Tottenham Hotspur plc. Harvard Case Solution & Analysis

Financial Analysis:

The major portion of the club is generated from broadcast which reports 38.7% of the total revenue. The second and third largest revenue is generated from attendance and sponsorship, which represents 23.5% and 21.2% respectively of the total revenue. Further, the club expects to report an increase in revenue by 9% over the next 13 years, this is because the club is considering to invest in new stadium and new striker, which will increase the fan base of the club and will lead them to report an increase in revenue. Although, the club will be required an outflow of £250 million, if it decides to invest in new stadium and an outflow of £20 million, if it decides to invest in new striker but the potential strategies are expected to report more benefits than the cost required to acquire such strategies.

tottenham hotspur case solution

tottenham hotspur case solution

Further, current EBITDA and net profit margin of the club is 6.75% and 0.47% respectively and is expected to report an average increase in EBITDA margin by 8.77% and average net profit margin by 2.3% over the last 13 years, this may be because the operating cost of the club is not expected to be increased by an increase in revenue. The club is expected to increase its revenue by 9% over the next 13 years but the operating cost is expected to be increased by an average of 8.38% over the next 13 years, which will lead the club to report sufficient profits.

The current interest cover of the club is 1.24 times but the potential investment in new stadium and new striker will require an out flow of £250 million and £20 million respectively. Further, the club has only £26 million cash in house and the excess cash required for the potential investment will be financed through debt facility; which will increase the average interest cover by 2.16 times over the next 13 years.

In a capital market imperfection, the lender does not have idea whether the lender will pay the borrowed amount and the lenders will have to trust the borrowers for the amount borrowed to the borrowers. In order to obtain the new striker, the club will be required to pay transfer fees of £20 million and negotiating a 10 year contract with the club will require the player to pay £50,000 per week for 2008 season with a 10% increase thereafter. Further, there is a risk that at any given point in the season an average of 20% of all premiership players are sidelined by one injury or another, so there is a risk that the club ay fail to earn sufficient points which will result in a loss of substantial sponsorship revenue, hence, treating the repayment of debt.

Discounted Cash Flow (DCF)

a)      Discounted Cash Flow (DCF) analysis using current player strategy

The results of our analysis in Appendices 2 show that the club has an enterprise value of £36.7 million and if the net debts of £16.79 million are deducted from it then it will give an equity value of £19.91 million. Following assumptions have been considered for calculating the DCF valuation of the club.

  • Tax rate has been assumed constant at 35% over the next 13 years
  • Capital expenditures are expected to increase by 4% over the next 13 years
  • Working capital is expected to be changed as there is a change in revenue
  • In calculating WACC, market risk premium (MRP) is assumed as 6.51%
  • The perpetuity growth rate is assumed to be 2.5%

The results of the analysis show that the club has a share price of £2.14, which is substantially low than the current share price of £13.8 that indicates that the stock of the club has been overvalued. Further, DCF analysis uses number of assumptions in calculating the figure, so the reasonableness of the assumptions are very important because unrealistic assumptions can significantly threaten the value of the enterprise. Moreover, the club can also use different valuation techniques in order to value the club because every valuation techniques has its own drawbacks and an average of all the valuation techniques will enable the enterprise to report an accurate valuation..................................

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