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Newcastle: The “not so” smooth transition from football club to business

The fact that football clubs across the UK are now being ran more and more as businesses is not entirely popular with football fans. There is often a gulf between what the football club can afford to do and what the loyal fan would like them to do and over the next couple of years that gulf is likely to grow.

My team is Newcastle United, and has been since I attended Kevin Keegan’s first debut as as a player when I was 10 years old. It is an “interesting” time for Newcastle, when isn’t it to be fair? I am not a fan of Mike Ashley, the Newcastle owner, I think he lacks the style and decorum that a man of his standing should have but he is a successful business man and he is blatantly trying to run Newcastle United as a business and he has proven in the past that he knows how to run a business.

The discussion of whether anyone would like Newcastle United ran like a Sports Direct outlet, with its stack em high and flog em fast approach is irrelevant. The discussion on whether he should have bought the club in the first place is irrelevant, as is the discussion on why such a successful business man could even consider buying a club without carrying out full due diligence is also now irrelevant. He is the current club owner and he has bought the right to do what he wants with the club. Over the past few years he has put money from his own pocket, a significant amount, into the club to cover instalments on transfer fees for players who were signed prior to him taking over the club and to cover a massive wage bill which he inherited. It is expected of him, as a business owner to cover any losses that the business he owns may make, yet when he then tries to introduce measures to prevent the club making a loss he takes stick!

The burning question is around the £35million received for Andy Carroll.

The fans want to know where it has gone? Assurances have been made on many occasions that the whole amount would be re-invested into the business/ club but there is a massive debate and a huge amount of scepticism whether it has been or ever will be. I am not a finance expert but I have had a close look at the information that is available and with some “educated” guesses I have tried to work out where it has or will be going. I am also going to try and keep this very simple and I am also well aware of the stick I will receive!

Mike Ashley’s right hand man, Derek Llambias has made it clear that the football club would be allocated a budget for playing staff each year and that the club were working to a five year plan. This is supported by Alan Pardew being brought in on a  five year deal, and the new players signed being given five year deals in the main. The practise of giving a division of a business (the team) a budget is completely normal practise and in the non-football business world it is an absolute necessity.

I have no idea what this budget is, but if I was to use the last available figures published the expected revenues into the club will be around £80million based on comparisons with other clubs in the Premier League. The aim of any club to stabilise has to be to keep the spend on the team, including wages and transfer fees below 60% of the turnover of the club on an annual basis. That would give Pardew an annual budget of £50mill to spend on wages and transfers and at the end of December 2010 the wages alone at Newcastle were £47million, which would have left him only £3 million to spend the following year.

This is where I need to try and keep it simple. When the £35 million came in to the club for Carroll, the management team will have had some decisions to make. It could be argued that there was already £3 million available, add the £35 million from the fee and then factor in the savings on not having to pay Carrolls wages (apparently £1.5 mill a year) it would have given Pardew £39.5 million to play with. If was to go out and sign 2 x £10 million pound players who would demand wages of £65,000 a week plus a £5 million player on £35,000 that would in effect have cost £34 million including wages just that season and would have blew the whole budget for the following few seasons without any further additions.

Since the club sold Andy Carroll, there have been various comings and goings and new contracts issued to key and promising players to secure their futures. My estimate shows that the wage bill will have gone from the £47mill to £51mill a year. Tiote, Ben Arfa, Williamson and Ferguson have all signed new deals and Cabaye, Ba and Marveaux have come in all of which will add to the wage bill. I appreciate that Carroll, Campbell, Nolan and others are now off the wage bill but a conservative estimate still shows an increase up to £51mill after all the recent activity.

If the annual team budget is around the £50 million mark and the wage bill is now running to £51 then it is entirely understandable why Pardew would be looking to use some of the £35mill to increase his annual budget over the remainder of the five years. I would hope and expect that when players like Alan Smith and Xisco are off the pay-roll that will release move room to move but until they are moved who knows? It is estimated that they are both on about £3.5 mill a year, so if they were moved on it would have a significant impact on the resources available to the club. There is also a huge debate why Newcastle haven’t tried to buy Charles N’Zogbia from Wigan, with a transfer fee of £9mill and a first year wage cost of £3.25 mill + agents fees to be paid it just isn’t good business for the club with the players already at the club such as Jonas, Ben Arfa, Ferguson and Marveaux who can all play his position!

I can see where the £35mill has is being “visibly” spent, I can also see why Newcastle fans won’t like the way its being spent, and why Newcastle fans won’t trust the men making the decisions, but personally I believe they are doing what is right for the club as a business and the rest of the clubs without mega rich owners will have to do the same at some stage.

None of this answers the question of why won’t Ashley spend any of his own money on the club? It definite questions the ambition that he has for the club but is there anyone out there that thinks that if Pardew had spent £35mill on transfers this summer then Newcastle would have been in the Champions League next year? If not, why risk the future of the club for a short term failure? Isn’t that what Freddie Shepherd tried and failed with?

Now living in Scotland Craig was born and bred in the North-East, living half way between Newcastle and Sunderland, with a black & white father and red & white mother. Although if asked to choose he would come down on the side of the Toon Army, he is a keen observer of all that happens at the Stadium Of Light. Craig will be our North East writer for the 2011/2012 season.
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