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Gareth Bale: Tottenham to Madrid and a lesson in prudent accounting

The hotly anticipated return of Gareth Bale provides an unexpected lesson in accounting
Gareth Bale: Tottenham to Madrid and a lesson in prudent accounting

Word on the lane (White Hart Lane) is that Gareth Bale is coming home. Seven years after Tottenham Hotspur sold their star player to Real Madrid for a then-record £85m, Spurs are bringing him back.

Depending on the final re-purchase price, the North London club have done rather well from Bale (whether his absence cost the club riches of another kind is a matter to be debated elsewhere – Bale has won four Champions League titles at Real Madrid, Spurs remain trophy-less). And while Bale was off winning trophies, Spurs have created something with far greater long-term value: a stadium which – coronavirus aside – has capacity for 62,000 fans.

When Spurs vacated the Lane in 2017, scurried off to Wembley and took out a £500m loan to finance the new Tottenham Hotspur Stadium, fans balked. But the stadium has added huge opportunity to the club’s revenue-generating capacity – match day and commercial revenue contribute about half of most football clubs’ total sales.

Besides, Wembley didn’t do the club’s performance much harm: Spurs have enjoyed three top four finished, three seasons of Champions League football and a Champions League final from their time in West London. And this success has translated to other financial gain. Revenues rose from £210m to £461m in the last three years – no other English club has reported anywhere near such strong revenue growth in the same period.

But revenues only tell a fraction of the story. Football clubs live and die by the amount they spend on players, their capacity to do so and their ability to manage transfer windows sensibly. Tottenham’s Bale re-purchase is case in point and a lesson in prudent accounting.

 

Lesson one: How much do players really cost?

In 2016, Bale renewed his contract with Real Madrid for $33m. He’s had a difficult few seasons since then and is now on the wrong side of 30, so let’s say Tottenham secure a new contract worth £20m and let’s say that contract covers four years and an annual salary of £4m (the average for a Tottenham player, according to Statista).

Tottenham will book two key costs on this contract: the salary and the amortisation of the ‘asset’ (Bale). Players are assets (much like a software company has patent assets, or retailer has physical stores) and the asset value of a football player (like a patent or a clothes shop) isn’t accounted for when the football club (or software company or retailer) initially pays for that asset.

So, when Spurs spends £20m on Gareth Bale, they don’t book all that expense as a cash cost immediately. Instead, the value of the contract is divided by the number of years it exists for (in Bale’s theoretical case, that’s four) and written down as amortisation in every one of the years the contract exists for.

 

Bale Transfer Fee

£20m

 

 

 

Year of Contract

1

2

3

4

Annual Amortisation (£20m/4 years)

£5m

£5m

£5m

£5m

Cumulative Amortisation

£5m

£10m

£15m

£20m

Value (of Bale) in accounts

£15m

£10m

£5m

£0m

 

It’s worth noting here that Spurs' low player purchasing over the last three years means the amortisation it has paid on its players is very low compared to other large football clubs.

 

£m

Arsenal

Chelsea

Liverpool

Man City

Man United

Tottenham

Player Amortisation

(253)

(380)

(247)

(383)

(387)

(148)

Player Impairment

(7)

0

(1)

0

5

(22)

Depreciation

(46)

(29)

(25)

(40)

(34)

(68)

Goodwill Amortisation

(1)

(5)

(4)

0

(5)

0

Non Cash Flow Expenses

(307)

(414)

(277)

(422)

(421)

(238)

 

Lesson two: How do player costs impact profit and loss?

Both wages and player expenses are considered club operating costs, so Bale’s annual costs of £9m (wages plus amortisation) will impact Tottenham’s operating profits. Indeed, player wages and expenses are far and away the biggest football club costs.

Tottenham’s prudent player expenditure in the last few years means it has generated more operating profit than any other large English football club.

 

£m

Arsenal

Chelsea

Liverpool

Man City

Man United

Tottenham

Revenue

1206

1251

1353

1509

1798

1151

Operating Costs (wages and other)

(906)

(1068)

(1061)

(1170)

(1236)

(701)

EBITDA

300

183

292

348

562

450

Exceptional Items

(21)

(33)

0

0

(22)

(7)

Non Cash Flow Expenses

(307)

(414)

(277)

(422)

(421)

(238)

Operating Profit (Loss)

(28)

(263)

15

(74)

120

205

 

There is one other consideration. Clubs can sell their ‘assets’, but as these aren’t considered operational metrics, their impact comes further down the profit and loss statement.

 

£m

Arsenal

Chelsea

Liverpool

Man City

Man United

Tottenham

Operating Profit (Loss)

(28)

(263)

15

(74)

120

205

Profit on player sales

139

243

207

112

55

124

Share of JV

2

0

0

0

0

0

Property

5

0

0

0

0

14

Profit (Loss) before Interest & Tax

118

(20)

222

38

175

343

Interest and Tax

54

0

43

16

154

125

Profit (Loss) after Tax

65

(19)

178

22

20

218

 

 

Lesson three: How does player spending impact cash flow?

But the profit and loss account is not the end of the story. An arguably more important document for assessing a club (or company’s) financial health is the cash flow statement.

For football clubs this is especially significant because player amortisation is a non-cash cost and therefore doesn’t impact the amount of cash that a club generates. Therefore, when assessing operating cash flow, amortisation and depreciation have to be added back in.

 

£m

Arsenal

Chelsea

Liverpool

Man City

Man United

Tottenham

Operating Profit (Loss)

(28)

(263)

15

(74)

120

205

Non Cash Flow Expenses

307

414

277

422

421

238

Working Capital Movements

(16)

(75)

16

122

94

197

Operating Cash Flow

262

76

307

470

635

640

 

This means Manchester United’s heavy player expenditure in the past few years hasn’t impacted its operating cash flow.

For Tottenham, evidence for the steadier player spending comes lower down the cash flow statement. Capital expenditure hit £1.1bn in the last three years as the company splashed out on its shiny new stadium – that’s more than ten times any of its big rivals. Free cash outflows in the same period were £559m, only Chelsea (at £248m) comes anywhere near that.

But perhaps Spurs has benefited from its hefty stadium spending. It’s left the club with a super revenue generating asset and enough spare capacity to buy a big player. The hotly anticipated return of Bale can surely only be a good thing?