Why are Newcastle not spending big?

When Newcastle United were bought by a consortium led by Saudi Arabia’s Public Investment Fund, the expectation was that they would splash out on players, due to the enormous wealth of the new owners, but that hasn’t really been the case. So why is the club not spending big?   The authoritative Swiss Ramble provides some answers.

Things have already changed at, as they have spent more under the new owners, but a combination of FFP restrictions and the desire to act in a sensible manner (until new revenue streams arrive) means that anyone expecting blockbuster signings is likely to be disappointed.

Manager Eddie Howe gave this answer: “Financial Fair Play impacts us and will continue to impact us for a number of years. We haven't got the free rein that maybe has been perceived within the media, that we can go and sign who we want and pay extortionate fees and wages.”

Spending ability is limited by the Premier League Profitability and Sustainability (P&S) 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.

They were actually well placed in terms of P&S, thanks to Mike Ashley’s parsimonious approach, as they posted a £2m profit in the 3 years up to 2020/21 (despite the adverse impact of COVID), which was the fourth best financial performance in the Premier League over this period.

P re-tax profit over the adjusted 3-year monitoring period up to 2020/21 (the last published accounts) was a very healthy £44m, which was £149m better than the P&S maximum allowable loss of £105m. In addition, They can make a £30m adjustment for “healthy” expenditure of £10m a year (depreciation, women’s football, youth development & community), giving a P&S profit of £74m. Adding this to the £105m allowable loss gives £179m possible spend.

The £44m pre-tax profit over the 3-year monitoring period was improved by £30m allowable deductions and £20m COVID impact to give £95m adjusted P&S profit. Added to £105m permitted loss, that meant the total spending potential after 2020/21 was an impressive £200m.

If they want to compete at the highest level, they will need to spend more on wages. Their £107m in 2020/21 was 17th highest in the Premier League (14th based on a 12-month accounting period). Either way, this is at least £200m below the top four clubs.  That is another challenge, as they will probably have to break their wage structure.

It’s also important to note that the club have spent money since the 2020/21 accounts. Their activity in 2021/22 led to an increase in annual costs of around £52m, including the highest transfer spend in Europe in January (Bruno Guimaraes, Chris Wood, Kieran Trippier and Dan Burn).   Adding the £58m transfer spend to date this summer on Sven Botman, Matt Targett and Nick Pope means a further £23m impact on the P&L (2022/23 accounts). Therefore, they  have already used up £74m of the theoretical £200m potential spend under P&S rules.

There’s relatively little left of the £200m potential spend, either because profitable years have dropped out of the P&S calculation or due to the expenditure since the 2020/21 accounts. This helps explain the tight budget, as well as the club wanting to keep its powder dry for future transfer windows. As Eddie Howe observed, “The more money you spend in one window, the more it impacts your ability to spend in windows beyond.”  In reality, it is more difficult for the club to copy Manchester City, who lost £562m in the 5 years after ADUG’s arrival. Howe again: “We can’t just go out and spend money on players like maybe teams could have done in the past, and totally change their squad within one transfer window.”

The need for revenue growth

In order to spend more on players they simply have to grow revenue. In 2020/21 their £140m was only 15th highest in the Premier League. Although the comparison is distorted by different amounts of revenue deferred from 2019/20, this was still less than a third of the top four.  The obvious area to exploit is commercial, which Ashley failed to grow at all in his 14 years, so they have fallen way behind their rivals. Their £21m in 2020/21 was less than a tenth of the Manchester clubs and Liverpool, but more meaningfully also below clubs like Brighton, Villa and Wolves.

Again they will look to Man City for their example, as their commercial revenue has surged from £21m in 2008 (before their wealthy owners bought the club) to £272m, the highest in England. It would be no surprise if Newcastle attracts some new sponsors from Saudi Arabia.  However, one challenge for will be to comply with new Premier League rules to ensure sponsorships are deemed to be fair value. This is difficult to assess, as we have seen with the extensive review of City’s Etihad deal (ultimately considered “not too excessive” by UEFA).

One strategy to ensure FFP compliance is player trading, as seen with Chelsea who have offset large operating losses with £344m profit from player sales in the last 4 years. There is plenty of room for improvement here, considering  the club’s  relatively small £56m profit in this period.

Newcastle will look to qualify for Europe, where the financial rewards would have a significant impact on finances. In 2020/21 England’s Champion league representatives earned between £70m and £105m, while the Europa League was worth £14m to £26m. Newcastle only earned €5m in the Ashley era.  If they do qualify for Europe, the UEFA FFP rules would be stricter than the Premier League with the allowable losses (“acceptable deviation”) over three years being only €30m (including €25m equity contribution), though this will increase to €90m from 2024.