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 largescale development, or indeed, when a choice has to be
made between different largescale 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
eyewatering 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.
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