How much can Newcastle spend?

Following Newcastle United’s takeover by a consortium led by Saudi Arabia's Public Investment Fund (80% stake), fans are eagerly anticipating a spending spree, due to the enormous wealth of the new owners, but how much can the club really spend, especially with FFP rules?   The authoritative Swiss Ramble provides some answers from his Zurich fastness.

The club’s spending ability will be limited by the Premier League Profitability and Sustainability rules. These allow a £5m loss a year, which can be boosted by £30m equity injection, giving allowable losses of £35m a year. This works out to £105m over the 3-year monitoring period.

The Magpies made £38m pre-tax profit over 3 years up to 2020 (latest published accounts), but they can make a £30m adjustment for “good” expenditure (depreciation, women’s football, youth development & community). Adding this £68m to £105m allowable loss gives £173m possible spend.

However, clubs can also adjust for COVID impact, which was £27m for Newcastle in 2019/20, so their total spending potential rises to £200m. Clearly, the 2020/21 accounts are likely to show a loss, due to playing almost all games without fans, but impact will again be offset.

To understand what that £200m spend actually means, we need to understand player trading accounting. Transfer fees are not fully expensed in the year a player is purchased, but instead written-off evenly over the length of the player’s contract via player amortisation. So if a player is purchased for £30m on a 5-year contract, the annual amortisation in the accounts would be £6m, i.e. £30m divided by 5 years. This is important, as it means the club could actually spend much more than £200m, as only the impact on profits is considered for FFP.

In theory, they could splash out around £600m on transfers (say, 4 top class players at £150m each), increasing player amortisation by £120m a year (assuming 5-year contract), while increasing the wage bill by £62m (with players paid £300k a week) and still be below £200m. 

However, that would use up their entire FFP limit in one year, which would cause a problem the following year – unless they grow revenue. So it might be more sensible to buy, say, 4 players for £50m each on £100k wages, which would give a £61m impact a year.

The fact that they can spend so much despite P&S regulations is thanks to Mike Ashley’s parsimonious approach to spending in the last few years. While this conservative strategy was not appreciated by supporters, it has ironically now left the club with plenty of wriggle room.

They have only lost money twice in the last 10 years, the largest being in the Championship in 2017. The £26m loss in 2020 would have actually been a £1m profit without COVID. In fact, Newcastle have the 4th highest profits in the Premier League over the last decade.

The club enjoyed the 5th highest wage bill in England before Ashley bought the club in 2007, but this slipped to 11th in 2020, as their growth was significantly outpaced by others. In fact, the £121m wages in 2020 were inflated by the accounting period being extended to 13 months.

Newcastle have also lagged behind in the transfer market, e.g. their £150m net spend in the l5 years up to 2020 is only 14th highest in the Premier League, behind the likes of Fulham, Aston Villa and Wolves. The ranking is higher for gross spend, but still only 11th.

The £108m debt is also on the low side, only the 11th highest in the top tier. The club has virtually no external debt, while Ashley’s £107m loan has presumably been repaid as part of the acquisition, which would then leave the club pretty much debt-free.  As Ashley’s loans were interest-free, the club only paid £160k interest in 2020, which was one of the lowest in the top flight, miles below the likes of Manchester United £20m (Glazers’ leveraged buy-out), Spurs £14m (new stadium) and Arsenal £11m (Emirates stadium).

Fans will appreciate some owner financing, as theirs is the only club in the Premier League to have had nothing since 2010 (owner loans plus capital). Other owners have been far more generous than Ashley.   One more indication of Ashley’s unwillingness to invest is capital expenditure, i.e. stadium and training ground, which was a feeble £7m at Newcastle in the last 10 years, the lowest in the top tier.

Although Ashley’s frugal approach helped the bottom line, he was not so good on revenue, so there are plenty of growth opportunities for the new owners, especially on the commercial side, though match day actually fell during his tenure from £34m in 2007 to £25m in 2019.   Ashley barely managed to grow commercial income at all in 13 years, so the club fell way behind rivals, e.g. the Big Six have grown by £100-200m in this period.

The current shirt sponsorship is £6.5m with Fun88, which pales into insignificance compared to others in the Premier League, e.g. the Big Six are all at least £35m. Newcastle will be looking at agreements for shirt, stadium naming rights, training kit/ground, etc.

[Press reports are suggesting that Premier League clubs have pledged not to sell any players to Newcastle in January, but they might get better value abroad or from the EFL.  In any case the sensible strategy might be to buy a couple of decent players and make some loan signings so as to avoid relegation and make the big signings in the summer when one can get better value anyway.  WG]