Estimating the Options, Part Two

Note: Since the publication of Part One of this article we have seen various comments about it on Twitter and elsewhere. To explain, we are merely trying to weigh up the potential costs of developing a new or extended stadium for Chelsea FC because nothing else like this exists right now. We want to help move the whole debate forward and, if nothing else, we hope that our figures can be a starting point for further discussion. Let us know your thoughts via cfctruth@gmail.com.

In the previous article, we introduced you to our attempt to estimate the associated costs of each of Chelsea FC’s stadium options and we drew some fairly broad conclusions about the overall costs of each scheme. In Part Two we hope that we can go a little further in analysing the financial viability of each option via the estimated figures. Of course, these calculations continue to depend on an assumption that the figures we came up with in Part One are reasonably accurate (or at least are vaguely in the right ball park). So let us assume this for now. Indulge us.

When a developer considers whether to go ahead with a large-scale development, or indeed, when a choice has to be made between different large-scale development project options, the decision process involved is known as Capital Budgeting.

A number of tools have been developed to assess the viability of potential investments during a capital budgeting process. Two widely used tools used to decide on whether a particular investment is worth pursuing are the Internal Rate of Return (IRR) and the Net Present Value (NPV) of an investment. The Payback Period can also be used to compare investments but this does apparently have some serious limitations. So for the stadium question, we will look at each of the options using the IRR and NPV tools.

To simplify the exercise we have decided to compare the median values of the net total expenditure rather than either the best or worst case scenarios (though you can see the full set of calculations here – to the right of each cost breakdown). Here is a comparison of the Internal Rates of Return (IRRs) of the median values of each of the various options:

Option	Median IRR
Stamford Bridge 55K Extension	3.15%
Stamford Bridge 60K New Build	4.44%
Battersea 60K New Build	7.38%
Earls Court 60K New Build	7.65%

So what does this mean? It seems that the key question is whether an investment yields a greater return than the cost of capital (which is usually assumed to be 10%). If the return is above 10% the investment may be worth pursuing but if it is less then it almost certainly isn’t. In the table above none of the median options manage this level of return although either Earls Court or Battersea would seem to be better investments than the Stamford Bridge options (which look to be potentially terrible investment decisions).

The other tool regularly used to evaluate potential investments is the Net Present Value (NPV) which should confirm whether a particular investment option is worth going ahead with it at all. To explain, if the NPV of an investment option is a negative figure the answer should always be No. If, however, it’s a positive figure then the answer should normally be Yes (unless a better option is available). Finally, if the NPV is about zero then the decision should take other factors into account. Here are the Net Present Values of the median values of the various stadium options:

Option	Median NPV
Stamford Bridge 55K Extension	-£151m
Stamford Bridge 60K New Build	-£329.2m
Battersea 60K New Build	-£106.4m
Earls Court 60K New Build	-£92.8m

So, strictly according to an assessment of the median NPVs of the various stadium scenarios again none of the options look financially viable. More than that, none even look close to being financially viable.

However, there is another way to look at this. As noted in Part One of this article, there are immense differences in the spread of costs between the best and worst cases in each scenario (virtually £1bn difference in the estimates for Earls Court and Battersea for example). So we have also calculated how much money could be spent on each of the projects before its respective NPV dipped into negative territory – that is, the maximum net investment that would appear to make financial sense for the club (the net investment is the Total Cost spent minus the Total Revenue gained - primarily from the sale of SB - in each scenario). The result is as follows:

Option	Best Case Net Investment	Worst Case Net Investment	Recommended  Max Net   Investment
Stamford Bridge 55K Extension	£275m*	£275m*	£109m
Stamford Bridge 60K New Build	£561m	£877m	£356m
Battersea 60K New Build	£1m	£947m	£356m
Earls Court 60K New Build	£20m profit	£938m	£356m

*Club estimate.

So what can be concluded from these estimates? Firstly, the figures seem to suggest that neither an extension nor a new stadium on the Stamford Bridge site will ever make sense financially - even in the best possible circumstances. The maximum amounts that the club should consider spending on either a Stamford Bridge extension (£109m) or a rebuild (£356m) are way below what it would cost to do the work even if we assume costs could be kept to a minimum. So, on balance, staying at a 42,000 capacity Bridge makes more sense than even attempting to extend the capacity.

What of the other stadium options? The figure for the maximum net investment for a new stadium at Earls Court or Battersea happens to be the same as that for a new build at Stamford Bridge (£356m). This is because the recommended maximum spend is based on the predicted additional income from a 60,000 stadium and this doesn’t change between the different scenarios. So, according to these figures, building a new stadium in Battersea or Earls Court could make financial sense but only if the club make enough money from Stamford Bridge and don’t overpay for the new site and associated building costs. However, the figures suggest the costs of either project could quite easily rise above the £356m figure and so make either option slip into unviability once again

Overall, then, at least based on these estimates, it appears that the economic case for either expanding or moving our stadium is far from clear. The insecurity and fluidity of the large scale London property portfolio doesn't help in making estimates of property values or outcomes but building costs at the moment are favourable for large scale developments and, equally, some property developers are having financial difficulties. So it remains a fact that Chelsea's inability to confidently throw their hat into the EC ring and prise CapCo away from LBHF has been something of a disaster really. That EGM decision is haunting this whole process now.

In a way, the club’s Future of Stamford Bridge report has now set a baseline for the expected viability of a potential project – the club have shared information which now allows all Chelsea fans to question whether a particular stadium option really does makes sense in terms of building a stable and prosperous future for the club. How ironic, then, if the information instead appears to make the case that maximising revenue from our current 42,000 Stamford Bridge capacity might be the best option for the club. "Great!" we hear you say. Well, not really because there is only one way for the club to do that and it will be eye-watering increases in ticket prices. And the level of increases necessary to bring our match day revenues up to the level required are not sustainable so, therefore, nor is staying in a 42,000 seat Stamford Bridge. And so the cycle continues.

What is obvious and laced with further irony is that if these figures are even remotely accurate, the club will be, whatever move/expansion option they go for, taking a big hit on the development in order to make the club itself a more efficient business model going forwards. And of course, the hit will probably be taken by Abramovich. The club have said that certain options produce unacceptably long periods for return but it is unreasonable for us to expect them to disregard that entirely.  What is abundantly clear, however, is that the profit motive that Roman is being bashed with moves further and further into fantasy whenever one looks at the issue in any detail.

Chelsea fans really have to face up to the realities of the situation at some point soon. In the meantime, CFCtruth will continue to encourage the club to take the steps required in order to further clarify these issues and to fully convince fans who continue to harbour doubts about their motives and honesty that they have the best interests of Chelsea FC at heart. But it seems that, as things stand, all the club's available options are fraught with danger and uncertainty - not least in relation to LBHF's role in all this. The path to the future remains unclear but we suspect the club has to make the next move...

Note: If you disagree with these conclusions then please tell us how and why you disagree via cfctruth@gmail.com. If we have missed or misunderstood some crucial aspect of this evaluation then we are very keen to correct the error(s) as we believe that Chelsea fans deserve to be able to read an realistic financial assessment of the situation in order to allow us all to take an informed position on these issues.