Tuesday, August 15, 2006

AIM and Fire

On Monday the club announced its intention to delist from the Alternative Investment Market (AIM). A short drive away via the M1 and M6, American billionaire Randy Lerner had his £62.6m bid accepted for Aston Villa. Although these two announcements were unrelated, in my view they have much in common if you put them in context.

Ordinary shares in Charlton Athletic Plc floated on AIM in March 1997 at a price of 80p per share. Since then, despite two promotions, six consecutive seasons in the Premiership and a sustained increase in stadium capacity and attendances, the shares trade at just 37p. I was one of the 'investors' who took up the original offer and some time ago wrote off their value in my head, if not on my tax return.

It was certainly fashionable to float football clubs in the late-1990s. Indeed boutique investment bank Singer & Friedlander launched a 'Football Fund' in 1997 with Alan Hansen as 'football consultant'. Not surprisingly, it no longer exists and Hansen has returned to consult solely on the offside trap.

It is sensible for the club to delist. Companies usually list to enable the founders to partially monetise their investment (not the case here), and to open up the prospect of frequent, cheap and transparent equity financings in the future. Given that investors long ago gave up upon the football industry ever being a source of returns, and given that the majority of club's shares remain tightly held by the directors and their families, the regulatory burden of remaining listed must surely outweigh any benefits.

The obvious disadvantage for the estimated 4,000 individual shareholders will be the disappearance of the instant valuation of their holding. In truth, the shares are so thinly-traded that even this valuation is only relevant for the smallest lots.

Some fans have speculated that a new investor may be sniffing around the club, hence the delisting. Whilst this is not presposterous per se, I don't see any obvious link between this possibility and today's announcement. If an investor approached the Board with appropriate motives and suitable funding, the club is effectively 'for sale' whether it's listed or not. Hence it begs the question "What might Charlton Athletic be worth?" To use an unfortunate American term, if arguably the 7th largest 'franchise' in English football is only worth £62.6m, Charlton is clearly worth considerably less.

Most valuations of companies use either asset-based metrics or those based upon profits and cashflow, or a combination thereof. A reasonable starting point then might be to assess the club's book value - in short, how much would be raised if the club sold all its players' contracts, the Valley and its other assets, and then paid off all of its debts? The balance sheet at 31 Dec 2005 offers a clue (net assets: £32.2m) but only those players for whom we have paid a fee are included (and then amortised over time); Kevin Lisbie for example is valued at zero (this was agreed with the auditors - Ed.).

The problem with any valuations based upon profits and cashflow is that well, in short, we don't have any. During the six months ended 31 Dec 2005, the club had a loss on ordinary activities of £5.1m and negative cashflow of £4.8m. Despite ever increasing TV revenues from Sky, the football industry has been completely unable to prevent any resultant surpluses from ending up in the pockets of players and their agents. The gap has to be met either by net transfer receipts, equity financings (almost certainly from the directors, hence the delisting) or more debt.

In short, it is not unreasonable in my view to place a zero value on Charlton's future earnings power from operating as a football club. Even if the club successfully expands the Valley and increases its support base, those extra revenues will flow to the playing squad (ironically at the behest of fans, many of whom will also be shareholders!). If you agree with my analysis, this is surely an indictment upon the state of football today given that Charlton remains one of the best run clubs.

The problem is of course that an entity that continually runs at a loss and burns through its cash begins to eat away at that very 'book value' upon which one can build an estimated valuation. It may sound obscene, but the club would probably be worth more if it ceased being a football club and turned the Valley into a housing estate, preferably as soon as possible. It would have worked for Leeds United. If any of those 4,000 shareholding fans are upset about the delisting, perhaps the club ought to put that proposal to a vote.

Returning to Randy Lerner, the purchase of most English football clubs for a premium can surely only make sense if they are to be a plaything, not a genuine investment. Only the likes of Manchester United have genuine brand value that can be leveraged for profits. Unfortunately this very 'plaything' trend is driving up footballers' wages across the board, putting at risk any club that both tries to compete and lacks a sugar daddy. This phenomenon however seems lost upon the typical caller to Radio Five's 6-0-6 who constantly bemoan their club's lack of funds.

We should be eternally grateful therefore for the generosity of Richard Murray and his fellow directors who plug the inevitable gap yet whose wealth is completely overshadowed by the likes of Lerner, Abramovich et al. Moreover, should Charlton be in the firing line of a bored billionaire somewhere, we may have little choice but to accept their offer, thank the Board and hope for the best.


At 4:24 PM, Blogger Wyn Grant said...

I think there is considerable unrealised value in Villa. It is the only really major club in the Midlands and one to which the cliché 'sleeping giant' truly applies. Better on pitch performances could greatly boost income. There is also a lot of land that the club owns and is undeveloped or under developed. Lerner may have got a good deal, certainly it is worth more than one-tenth of Manure's value (or rather Manure was over valued).

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