In part one of this article I discussed the unique set of factors that have come together at Reading FC and have created a situation where Sir John Madejski has been able to defy conventional wisdom and make money out of owning a football club. These key factors are finding a football club that’s relatively run-down and without significant debts , which can bought relatively cheaply; the presence of a co-operative local council to enable land purchase and ease planning permission; a suitable location in an affluent area with good communication links; and taking a long term view and investing in infrastructure rather than gambling success on big money players.
In the second part I went through the actual numbers involved, and showed that the sum owed to Sir John on the club’s balance sheet in the form of Chairman’s Loan is now £25.8M – the terms of which are heavily weighted to the advantage of the football club. Now it’s time to tie those two strands together and to look at how Sir John can turn his investment into an actual profit. Because the obvious point, and his biggest problem right now, is that he makes no money or realises none of his profit whilst his investment is tied up in the club.
So how much is this all worth? The simple answer is, of course, it’s worth whatever someone is prepared to pay for it, but what that figure actually is likely to be is very much open to debate. Just before the start of Reading’s second Premier League season in July 2007 I sat down with a financial journalist and we tried to look at all the relevant factors and put a notional value onto the Football Club, including looking at the figures paid for other clubs at the time. This, of course, was not only for the football club itself but also the training ground in Finchampstead and the Stadium complex (including the expanded hotel, the conference centre and all the land on which they sit, so close to the M4 junction.)
Between us, we came up with a notional figure of £108M, which might seem a high figure but this was at the very top of the market. Reading had just finished 8th in their first ever season in the Premier League, the world market for football (and especially Premier League football was booming) and the club had announced plans for an ambitious expansion to the stadium to increase capacity by 50% to 38,000.
Since then, of course, things have changed a bit. Reading were relegated back to the Championship at the end of that season, and this, coupled with planning delays triggered by an objection by neighbouring Wokingham District Council as well as by an increase in global steel prices meant the expansion was put on hold. So today’s value will be considerably less than that – although since much of the value comes from land and infrastructure this is less affected by the team’s performances or league position. Having said that, Reading are currently in a play-off position and challenging for potential promotion, and this coupled with the spectre of unmanageable debt and potential financial regulation stalking many other football clubs, may mean Reading’s is about to rise again.
It’s widely speculated that the asking price for the full package today is something around £80M, so for the sake of arguments let’s use a slightly lower figure of £76M as a sale price. Selling at this price would realise a sum of £50.2M as well as the repayment of the £25.8M Chairman’s loan – so the whole purchase price goes directly to Sir John. That’s a nice little profit for investing wisely and having sums of money tied up in bricks and mortar – certainly, if Sir John had put £10M into a bank in 1990 at standard base rates it would now be worth approximately £33M, but of course the bulk of the investment came in 1998 and onwards, and the money invested before then, when interest rates were at their highest, were relatively small.
There is also the question of profile and publicity, which surely has a value. In 1990 hardly anyone outside the world of publishing had ever heard the name John Madejski, but now people across the whole globe know his name thanks to the stadium and Reading’s two-year Premier League adventure. I’m not trying to draw any comparison between the size and saleability of the two clubs, but Arsenal’s sale of naming rights of their new stadium to Emirates Airlines netted them £100M for a 15-year deal (or £6.7M a year), whilst in the USA market analysts put the average annual value of naming rights agreements to be between $2m and $4m. If we took a figure for Reading’s naming rights of just 5% of Arsenal’s value, that would equate to just over £333K per year, or a total of £4.33M over the 13 years of the MadStad. Add this to income from an eventual sale.
This isn’t to criticise Sir John Madejski in the slightest, though – full credit to him for seeing an opportunity and for going for it. Whilst he has clearly gained financially – or will do when he can realise his asset – the people of Reading and Reading FC supporters have also clearly gained as well, in that the football club they support now has facilities unrecognisable from Elm Park, and with a sustainable financial base. They’ve also had years of success that most had never dreamed of, including the spell in the Premier League. And they’re now an established Tier Two team with hopes of elevation and no significant debt. How much of this on-field success is directly down to John Madejski is open to debate, but what no-one can dispute is that he created the infrastructure and the environment in which this was able to happen.
So what of the future? It’s no secret that Sir John is happy to sell, and there have been various rumours of interested parties, but none have so far come to fruition. There’s on-going speculation on reasons for this, with the most popular being either that the asking price is too high or that a fixed condition of sale is that the name of the stadium cannot be changed for a set period – or possibly forever. I don’t know if there’s any truth in these assertions, but I do know that the sale of Reading FC will be quite different from the sale of many other football clubs.
Many other clubs are burdened by debt – frequently external debt – and so a buyer can often pay a relatively small sum and promise to take on that debt to gain control. The seller is usually happy to be rid of the club and to get some of their initial investment back – but sometimes they’re just happy to pass the hot potato of the debt and the running costs onto someone else so they can cut their losses and run. Incidentally, that’s one of the reasons why potential owners so frequently appear from nowhere promising the world to supporters but not actually having any real financial backing – making promises to pay someone’s debt is much easier than actually handing over cold, hard, cash.
And that’s what someone would have to do to purchase Reading – pay in full for not only the club itself but also pay off the internal debt – i.e. debt repayable to the Chairman. The whole sum would likely need to be paid off at the same time, and that’s a big sum of cash for any potential buyer to stump up in one transaction. This may be acting as a deterrent to potential purchasers, not many of whom may want to commit that sort of liquidity in one hit, especially when there are other cubs around that can be picked up relatively cheaply in comparison. Certainly, if someone is just interested in owning a football club for the kudos or for other (less salubrious) reasons, there are better bargains to be had – for instance Blackburn Rovers was purchased last December for just £23M, but again that club does have debts in excess of with £20M, which virtually doubles the purchase price.
But inevitably one day Sir John will sell Reading Football Club. And when he does he’ll make a very nice little profit and prove that it is possible to make a small fortune from owning a football club, in certain circumstances, if the conditions are right and if you’re patient enough. And when he does, the future may be very different, so in my next blog I’ll look at what Reading supporters are likely to want from a potential new owner, and the checks and due diligence we should be begging Sir John to do before handing over the title deeds.
PS As a side-note, in his excellent blog Football Management, John Beech, world-renowned expert on Football Finance has written a series of articles on “The Myth of the New Stadium” in which he argues that nearly all moves to new stadiums are expensive and unnecessary as well as potentially damaging the club’s financial prospects. Whilst I agree with much of what John says, I’d argue that the unique circumstances found at Reading overcome his arguments, and that John Madejski has used them to his advantage to not only make money for himself but to advance Reading FC to higher levels. The move to this new stadium was the catalyst for everything that followed on the field, as well as for vastly increased revenues. Other clubs may be trying to follow the “Reading model” by moving stadium, but unless they have exactly the set of circumstances I outlined in the first part of this article they are likely to fail, and fail expensively.