Fool's Eye View

[ April 11, 2000 ]

Leeds Leading to Football Value

By Maynard Paton (TMFMayn)

Carburton Street, London -- Anybody remotely having an interest in football or investment must have read the recent headlines screaming the fact that Manchester United (LSE: MNU) had become the world's most valuable sporting team, the club breaching the £1b level last month.

Of course, comparisons are always made to the other runners in the Premier League. Take this year's two FA Cup finalists. Chelsea Village (LSE: CAV) is worth £105m, while Aston Villa (LSE: ASV) has a value of just under £60m. Those two just pale into insignificance compared to the might of Man Utd in terms of stock market value, even though they lie fifth and sixth respectively in the top flight. Those two teams just don't have the worldwide brand and the global following of the Red Devils. In terms of the "name", and its potential exploitation in the new media age, Man Utd are in a league of their own.

Alongside Chelsea and Villa, another contender to take Man Utd's Premier League crown is Leeds United, owned by Leeds Sporting (LSE: LES). Leeds unveiled its interim results for the six months ended last December today, and again, with a market capitalisation of £78m, is another financial also-ran in the world of English soccer.

With a good run in the league, Leeds currently lying third, and a very impressive campaign in the UEFA Cup competition, the club has scored quite well with the accountants.

Gate receipts rose a stunning 49%, to reach £6.1m, the rise fuelled by two additional cup games and a 17% increase in average match attendances. Television income rose 48% to £7m, driven by the success in Europe. With the help of two new away kits, merchandising revenues rose 42% to £2.7m. Indeed, with new shirt sponsorship and manufacturing deals imminent, Leeds are confident that the fans will fork out for yet more replica shirts after the summer's new kit launch. Such activities as corporate entertaining, publishing and even a lottery game generated £8.8m of revenues in the interim period, a 25% jump over last year.

Combine all that income with a £4.6m payment by British Sky Broadcasting (LSE: BSY), Leeds selling some of their media and commercial rights to the broadcaster, and total revenues amounted to £29.2m in the first half.

Compare the underlying Leeds interim revenues with Man Utd's latest first-half performance.

Source             Leeds Sporting  Man Utd
                         (£m)        (£m)

Gate receipts            6.1         21.4
Television               7.0         15.6
Merchandising            2.7         14.3
Sponsorship/Commercial   8.8         12.5
Total                   24.6         63.8

Can Leeds ever catch up in size? Probably not. The merchandise figures are most telling, probably correlating closely to the fan base sizes of Manchester United and Leeds. Although television income is relatively evenly distributed from the Premier League, and Leeds are looking to get a slice of the lucrative Champions' League next year, Man Utd will always be on top of the broadcasters' lists because of the larger fan club. And in terms of gate receipts, Old Trafford will soon be able to hold twice the number of fans that Elland Road currently averages.

Although Leeds have done well on the pitch, producing the benefits in the accounts, all the success comes at a cost -- the players' wages. Although Leeds declare that payroll costs have dropped 3% to 41% of turnover, it still equates to a player wage hyper-inflation rate of 65%.

Those that play for Leeds took home an aggregate £16m in the first half, including £4m of amortised contracts. Compare that figure to Man Utd's estimated interim £27m wage bill for Giggs and company. The Red Devils can leverage 2.4 times the players' wage bill in revenues, while Leeds can manage revenues just 1.5 the value of their interim wage costs.

Although Leeds will probably be unable to match Man Utd's relative size, there is a good chance they could match their profitability. There is scope for Leeds to witness revenue increases from television, especially from the increasingly rewarding European competitions. Very significantly, the club has drawn a line under the players' wages. Nine members of the first team have been secured on four or five year contracts, leading to only "a modest element of salary inflation" in the years to come. These hefty contracts drove the dizzy increase in player costs in this interim period.

Stripping out the one-off BSkyB payment, but including the club's regular profits from player disposals, interim earnings per share are roughly calculated at 0.5p. Annualise that, and with Leeds Sporting's current share price, the shares stand at a price to earnings ratio of 23. Looking ahead, the scope for television revenue increases coupled with the slowdown of player costs could lead to significant profit enhancements in the near future. Although they'll never be in the same overall class as Man Utd, Leeds currently look far better value for those hunting around the football sector.

Related Links
• Television -- gateways and content
• Glory, Glory Man Utd
• Half-time at Old Trafford
• Football Clubs discussion board