Our Corporate Finance Partner, Steve Plaskitt, shares his thoughts on what business owners can learn following the news that the Newcastle United takeover has fallen through…
Mike Ashley put Newcastle United up for sale in October 2017. After months of negotiations, press reports this week announced that he has declared the proposed deal is off and that both sides are no longer talking.
I must state that I have no knowledge of the reality of the deal itself. From the view of an experienced deal adviser, there are a few lessons that business owners can learn to help them negotiate their sale.
Reportedly, Mike Ashley has a price in mind (£350m) and Amanda Staveley and PCP Capital Partners have bid £250m, rising to £300m under certain conditions.
Unlike typical deals where confidentiality is maintained throughout, the press reports may simply be part of negotiation tactics or they may be the truth. We don’t know, but we can see five possible learning points…
Lesson 1: Test the opening bid
Firstly, Mike Ashley is doing the right thing by appearing deliberately uncooperative and firm – depending perhaps whether you are a Toon fan! He is more likely to get what he wants (i.e. the sale at the highest price) and he wants PCP to increase their opening bid and move close to him. After all, how else do you find out if the buyers opening bid is their highest?
Lesson 2: Keep an eye on performance during the sale process
Would it be possible to persuade the buyer that their valuation assumptions are wrong and undervaluing current performance?
This would be hard for Mike Ashley to demonstrate – as performance in the period since the sale was announced in October has slipped dramatically. In that week, Newcastle United rose to sixth place from the top of the Premiership table after they beat Crystal Palace. Garth Crooks, Match of the Day pundit, even stated that Rafa Benitez was capable of winning the Premier League title.
Now they lie sixth from the bottom of the league table. Poor performance has weakened both the valuation and Mike Ashley’s negotiating hand.
Lesson 3: Understand the valuation gap
Mike Ashley apparently wants certainty and Amanda Stavely will see lots of risks – this creates the typical valuation gap.
In this instance, the valuation gap of £50m to £100m is huge and it can be put into perspective in a number of ways:
- Newcastle United’s market value based on players alone is estimated at £130m, which is the fifth lowest in the Premiership.
- In Premiership football terms, £50m is the price of one or two star players (including transfer price, fees and wages over the term of a contract). However, those star players do not alone guarantee Premiership survival.
- If Mike Ashley decided to spend £50m in the January transfer window and his manager, Rafa Benitez, spent it wisely on players, then the value of an extra years stay in the Premiership is reportedly worth an estimated £100m from broadcast revenues alone.
So, the valuation gap of £50m to £100m is apparently either half of the value of one year’s premiership survival or the full value.
Lesson 4: Seek to bridge the valuation gap
Advisers would typically aim to bridge the gap in valuation and introduce new facts, or persuade either side to reassess their views of uncertainties.
The largest uncertainty is whether Newcastle stay in the Premiership this year. By investing in players now, Mike Ashley arguably reduces the chances of relegation. The outcome will be known in May 2018. Would Amanda Stavely underwrite some of this investment?
Another uncertainty is the valuation of future income. For example, the broadcast rights for the Premiership are due to be negotiated and could have a massive positive valuation impact. This will be known in February 2018.
With the Premiership transfer window ending on 31 January 2018, one party has to take risks in order for a deal to be done and time is running out. In other deals, sometimes the simple passage of time allows one or both parties to change their position and allows a deal to be done.
Lesson 5: Assess your risks
So how do you assess the risk of whether whether Newcastle stay in the Premiership this season?
- If they do, then one year’s stay is worth £100m
- If they don’t, then they could lose an estimated £150m to £200m
So at the extremes of the reported valuation gap…
- Should Mike Ashley hold out for an extra £50m or risk the loss of £200m if Newcastle are relegated?
- Should Amanda Staveley pay out an extra £100m to secure an extra £100m if Newcastle stay up?
Looking at the current betting odds, Newcastle are 11/4 against being relegated and are at odds of 2/7 to stay up. What would you do?
These are the calculations that both sides will be evaluating – assuming that they both still want to do a deal and are still talking to each other.
In the end, the only way to be sure of doing a deal is to continue to talk!