Wednesday, January 24, 2007

Transfer Pricing

The January transfer window has been pretty uninteresting so far, but I found it astonishing to learn that Martin O'Neill has bid nearly £10m for Watford's Ashley Young. This seems an inordinate amount of money even in this age of excess, and it got me thinking how does one actually value a footballer? Cue an opportunity for me to spout some near-indecipherable b*llocks.

Some Addicks fans learning of the bid for Young immediately concluded that Darren Bent must be worth at least £15-20m should we contemplate selling him this January. Based upon Villa's bid they are correct of course, but only if the bid for Young has any relevance for Bent's general valuation.

In light of the Djimi Traore saga, transfer valuations are a particularly topical and painful subject for Charlton fans, and I'm cynical about the techniques used by clubs to value players because they appear to confuse absolute and relative value. On what basis for example did they conclude that Traore and Amdy Faye were worth £2m, but that Andy Reid was worth £3m? Experience so far has suggested that the 50% premium paid for Reid was well-merited, but why weren't the respective fees £1m and £1.5m, or £4m and £6m?

The fee-setting process therefore (not unique to Charlton obviously) appears to be arbitrary rather than precise, and thus more prone to Traore-esque mistakes. I'm also troubled by the prevalence of round numbers in transfer fees; is it really just a pure coincidence that Traore and Faye were valued equally? Or are these amounts just plucked from the air? Or even more worryingly, are they anchored to the initial asking price of the selling club, with the buying club lacking a suitable absolute value estimate to compare to? However just because certain factors are difficult to calculate or unknowable, does not mean that some kind of framework for estimating them can't be constructed.

In simple terms, a buying club should in my view bid no more than the following (all amounts calculated in present terms):

Maximum Transfer Value = (Playing Value to Buying Club less Wages/Bonuses) + Resale Value

The difficulty lies in the fact that only the wages/bonuses in the above equation are relatively knowable at the time of the transaction. The 'playing value' depends upon the player's form and his estimated impact upon gate receipts, merchandising, prize money etc.. The 'resale value' depends upon his age, form, contractual situation, etc. and is thus also highly subjective.

The above equation also implies that if a player's estimated 'resale value' was equal to the current transfer fee (perhaps not unreasonable in the case of journeymen players in the middle of their careers), then the 'playing value' must equal the 'wages/bonuses.' In the case of Marcus Bent for example, it's not clear to me whether the mistake lay in believing he could be realistically re-sold for £2.3million, or that someone thought his no doubt enormous wages are somehow 'worth it'. Perhaps it lay in both.

From the selling club's standpoint, a transfer should be considered acceptable if the transfer fee offered is at least equal to the following (also expressed in present value terms):

Minimum Transfer Value = (Playing Value to Selling Club less Wages/Bonuses) + Replacement Cost

Assuming a player's agreement (not given in Young's case when he spoke with West Ham), then a transfer should occur so long as the amount bid by the buying club is greater than the transfer value assessed by the selling club. Moreover it suggests a player's transfer value (in a completed transaction, as opposed to tabloid rumour columns) largely depends upon which club is doing the bidding and their own expectations (for the player and the club in general), rather than being a fixed amount set by the selling club.

In light of the above, suggesting that Darren Bent is now worth £15-20m because Villa bid £9.65m for Ashley Young, is nonsense unless it's also Villa that are interested in Darren Bent! All that Villa's (and West Ham's) new owners have done is to send a signal to the entire footballing world that their expectations for the football club are so high, that the 'value to buying club' of any player they are bidding for is enhanced commensurately.

Hence if we are relegated, it would be irrational for Charlton's board to declare for example, "Bent is for sale, but for no less than £12 million", because only a handful of clubs could justify the outlay (this is not the same as afford it). For example, Fulham could probably just about afford him, but they couldn't justify it, because his impact on an otherwise average team would never be enough to pay for the outlay (particularly given the aforementioned uncertainty over his future resale value). This is a lesson that Leeds learned. But what if the clubs that might be able to justify it are simply not interested in Bent? Where would that potentially leave Charlton?

This January only West Ham and Aston Vila have splashed the cash thanks to their new owners. However this is not in my view because their new club is a plaything, but because they can currently justify the outlay based upon their ambitious plans for the club (and the player's role impact on that), or in West Ham's case, based upon pure desperation. It's interesting also that Chelsea's spending has stopped despite the fact that Abramovich can clearly afford it (once an astute businessman, always an astute businessman).

I found it interesting however that the players they have been able to attract are decidedly uninspiring (Neill, Davenport, BoaMorte) or simply unproven (Young). And in the case particularly of Davenport, if a buying club that can justify the outlay, matches the very loftiest valuation of the player (Spurs are not forced sellers) then he should be sold, period. But would Charlton do the same if say Manchester United bid £15m on Jan 31?

The popular answer amongst Charlton fans would I think be "no, our fate would be sealed". But if we all remove our rose-tinted spectacles and accept that our relegation probability is accurately reflected in the current odds (23%), then Bent's 'playing value' to Charlton (including the potential for TV riches next season) needs to be discounted accordingly, because those odds already assume he will play every game for us once fit.

Without Bent I would estimate our survival odds would be approximately 10%, so as much as we rate our best player, his financial impact (ie. playing value) is not as high as we might care to think (for 2007/8 at least, a reasonably proxy would thus be 13% [23% - 10%] multiplied by the difference between our income in the Premiership and our income in the Championship). Looked at another way, if we are relegated, his 'playing value' to us falls even further because he's worth a lot less to us in the Championship (and that's without mentioning the non-zero risk that his 'playing value' to us becomes negative because we have to sell him to avoid financial meltdown). Once again, touting values like '£15m' out of thin air are daft because the true valuation is a moving target.

Perhaps those that are staunchly against selling Bent would point to the 'replacement cost' aspect of the second equation. Whilst for example the 'replacement cost' of Djimi Traore was seemingly £500,000 (ie. Thatcher), Bent is less easily recreated. However I might argue that firstly, Bent only cost us £2.5m (implying another similarly-priced gem might be uncovered), or second, that maybe we should only seek to replace him to the extent that it returns us to the same point we were at the day we bought him (ie. before we really knew if he was Premiership quality). Although I'm not a lawyer, I believe this type of concept is used in tort.

I'll gladly admit that much of the above is intended to stir debate rather than be some kind of blueprint for transfer valuations. I've also been struggling for inspriration this week, thanks in no small part to our disappointing lack of transfer market activity (buying, not selling!). However, I do believe that the club's 'not for sale' stand on Darren Bent is by implication a bet that the handful of clubs that could justify paying top dollar for him, will also be interested in him in the summer. And with the 'big four' almost solely looking abroad, with West Ham at threat of relegation, let's just hope Villa don't prefer Defoe.


At 8:29 AM, Anonymous Trigger said...

So what are you saying !?!?

At 12:20 PM, Anonymous newyorkaddick said...

Just trying to put some objectivity into the issue of what a footballer is worth, and to suggest that we should be careful not to extrapolate from Ashley Young's transfer that Bent is now worth £15m.

At 3:37 PM, Anonymous trigger said...

Thanks Dave

Road sweeping duties were put on hold while I went for a lie down !.

At 6:36 PM, Anonymous Anonymous said...

Surely it's all about resale and who that resale might be to? MON may well be gambling that Ashley Young will prove himself to be the kind of player Man U will come in for in about 3 years time with a big bucks amount.

But in truth MON doesn't have to worry about getting value for money because his job is simply to do good things for Villa, and that Randy bloke doesn't know his arse from his elbow yet with regards to valuation. Likely outcomes of this? (1) Villa struggle, MON sacked, money written off
(2) Villa do well, make big profit when Man U come in for £30m.
(3) Villa do ok but no bigger club wants Young cos he turns out to not be that good.

On the Darren Bent issue, he doesn't strike me as good enough for the big four which means the only people who might want him are Spurs / Everton / Bolton / Boro and they aren't going to stump up £15m. You might get £10m though.

Love from your old mate, Andy


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