Finances - Scenarios - Case

EGARA FOOTBALL CLUB: Looking for a front player from a financial prism

Official Master’s Degree in Sport Management

Financial Management I

Official Master’s Degree in Sport Management Financial Management I

2

Egara Football Club: Looking for a front player from a financial prism1

JOSEP TORRES PRUNYONOSA

Egara Football Club has enjoyed successive promotions and will play next year at a

European competition for the first time. However, its most decisive player has been

injured. The coaching staff and the sports director have given approval for the

signing of four front players. Still, there are noticeable differences economically and

financially. Help Egara Football Club select one of these four players from a

financial prism.

THE COMPETITION SYSTEM IN SPAIN

The Honor Division –so-called First Division or First– consists of 20 professional teams.

All the teams play against each other in a league of 38 matches. At the end of it, the

team with the highest points is proclaimed champion and the three with the lowest

score category directly descendant to Second Division A. The three best teams play

the top competition without requiring any previous qualification, while the fourth must

pass a qualifying round before entering the raffle of 32 top clubs from around the

continent. The fifth and sixth-placed play lesser European competition and the

Champion’s Cup, in which teams from different divisions participate through a

qualifying round system of two games, and the raffle being conducted in the early

stages and totally clean in the last ones.

The Spanish Second Division, also known as Second Division A or Second A, consists

of 22 professional teams. All teams play against each other in a league of 42 matches.

The two teams with the highest points ascend directly to First Division. When the

championship ends, the teams which are in the third, fourth, fifth and sixth position

enter a system called “promotion”. This consists of a qualifying round system of two

games, the first being played between the third and the sixth and the other being

played between the fourth and the fifth. The winner of the “promotion” accompanies the

1 This case has been written with the sole objective to be discussed in class, not to be taken as a source of primary data. It is not intended as a model of optimal or efficient management. The situation presented and the names of individuals and institutions are fictitious. Any resemblance to reality is pure coincidence.

Official Master’s Degree in Sport Management Financial Management I

3

first and the second of the league in the ascent to First Division. On the other hand, the

four teams with the lowest points after the 42 matches descent to Second Division B.

It is common to find subsidiary of teams in Second A playing in First Division. In this

case, it should be noted that a subsidiary can never play in the same division as

their primary team. Therefore, if a subsidiary team of the First Division stands at

any of the six positions from second to first, it cedes the ascent rights to the next

and seventh in the league participating in the promotion. On the other hand, if a

team drops from second to first and has a subsidiary in that category, the latter

descends automatically to Second Division B. These principles are also applicable

to any other category where teams find its subsidiary.

Second Division B consists of 80 teams divided into 4 groups of 20 teams each2. This

division is based on geographical criteria, dividing the Spanish state into four zones to

avoid an increase in the costs of the transport equipment. The top four teams from

each group, that is, sixteen teams, fight each other for the four positions of promotion to

Second Division A. The last four teams from each group go directly down to Third

Division, while the five worst teams from each group fight against relegation, as two

teams accompany the sixteen teams with the worst scores to Third Division.

The Third Division consists of eighteen groups of twenty teams each, corresponding to

the different autonomous communities in Spain3. Therefore, to promote to Second

Division B, about 360 teams fight for only eighteen places of promotion. At this stage of

promotion, the top four qualifiers from each of the eighteen groups participate. The last

three or four classified in each category group descend to Regional Division.

2 During some seasons the number of teams can suffer some variation. 3 Except for some territories like Andalucía, which has two teams because it embraces the North-African autonomous communities of Ceuta and Melilla.

Official Master’s Degree in Sport Management Financial Management I

4

EGARA FOOTBALL CLUB

Egara Football Club was founded by Francesc Antoni Salvador in 1974. The club is

located in Terrassa, the fifth city with the largest population in Catalonia. It is

located north of Barcelona, just twenty kilometers away, and although it may seem

that it's just a dormitory town of Barcelona, that is not the case. The city itself has

an industrial structure, a very strong hallmark and deep-rooted customs4, in fact,

the club has the name of one of the Roman settlements that gave birth to the city

for more than two millennia.

Egara Football Club has been wandering away until five years from Second Division to

the Third Division. This was due to two main factors. On the one hand, one of the best

clubs in the world, which has been developing an exquisite game over many years, is

located just ten minutes by car. This way, many people in Terrassa did not support the

club although they were members and subscribers. They were members of a bigger

club in the city. On the other hand, Terrassa has a very important hockey tradition. In

fact, the competition in the Olympic Games of Barcelona '92 took place entirely in this

city. The city has also three very powerful hockey clubs, and one of them has won

several European titles. This meant that few fans attended the stadium, which was

renovated before the Olympics took place.

THE KEY FIGURE OF THE LAST SHINING LUSTRUM: FRANCISCO JAVIER FERNÁN

Everything changed five years ago when Francisco Javier Fernán returned to his home

club. After having won numerous national, European and intercontinental titles in the

main football club from the city of Barcelona, one of the best offensive midfielders

returned to play his final years at Football Club Terrassa. When he arrived at the club,

he was in Second Division B and thanks to its incorporation, as well as the attracting

4 They are famous for the “colles de castellers” (human towers), and they can build human castles up to 10floors high.

Official Master’s Degree in Sport Management Financial Management I

5

talent that its signing led to, the club won two consecutive promotions to reach the First

Division. In the third and final year as a player, the category consolidated as the team

reached the 10th position.

In the past two years, Fernán has become Sports Director, and thanks to his contacts

and his enormous charisma and personality, he has been able to convince dedicated

players, but in the middle of this sport decline due to his age, so that they serve

Terrassa’s club. We must bear in mind his first signing, Thesis Leandro, a centre

forward considered for more than a decade as the best player of all time, and being

more than thirty-five years old, he decided to end his career alongside his former

teammate and friend Fernán. All this talent recruitment meant reaching the

classification of the team to the 7th position in the league in their second year of

participation in the Honor Division. In the following year, in the season which just

concluded, for the first time in history, they classified to play in a European competition.

However, Tesis had a serious left knee injury in the last league match, which meant a

goodbye in the pitch.

THE CANDIDATES TO BE THE NEW FORWARD: BASIC SCENARIO

Egara Football Club needs to sign a new forward player; a player who can face the

new challenges of the coming season. It may be possible to perform well at the

European competition and again have a good role at the regular competition to get

a place to compete in Europe for the second consecutive year.

In order to do this, Fernán and the technical club staff have validated the potential

signing of four players for the forward position. Discussions have been initiated, not

only with the players but also wit the clubs of origin, and the situation is as follows:

• Cristino Rimado is a Brazilian international who has played in Calcium for

three years. He is a natural goal scorer, although a little selfish on the field

and even more egocentric outside the field. It can be considered a great

international star and signing him would be a big media hype. In fact, studies

show that his signing would raise the number of shirts sold at 300,000 in the

Official Master’s Degree in Sport Management Financial Management I

6

first year, 120,000 in the second and 100,000 in the following three. His

signing would cost the club 10 million to pay cash. A five-year contract has

been put forward, with a salary pay of 2 million per year for the Brazilian

player. Furthermore, it is considered that his signing would increase stadium

attendance in five thousand spectators for the entire first season, four

thousand in the second and three thousand in the next three.

• Xavier Marchans is a young Catalan player but really experienced. In the

future he may be considered as a second class star. Hard-working,

generous with the team and with a strong personality inside and outside the

pitch, he has earned the affection of the English club fans. His signing would

represent a significantly smaller outlay than Rimado’s, since his signing is

valued at €2,750,000. Signing him would mean an increase of fans’

attendance at the stadium to two thousand spectators during the next five

seasons. It is expected to sell 70,000 shirts with his name the first year,

65,000 in the second and 60,000 in each of the following three. The club is

also considering a contract of five years where he would receive one million

euros per year.

• Dudu Regba is 34 years old, from Senegal, but he has played all his

professional career in the Premier League. He is an old glory with a

tremendous eye for goals, well placed in the field, opportunistic and disciplined

when defending. After a short stay in Japan, he wants to play in Europe and

sign his last big contract. He asks for a three-year contract in perceiving

625,000 euro per year. His purchase is considered to increase stadium

attendance, only during the first year, to 2,000 spectators. The sale of T-shirts

with his name is expected to reach 42,000, 35,000 and 28,000 in the first,

second and third year respectively. His purchase price is €1,600,000.

• Albert Rovirosa is eighteen years old and he is a rising star. He has made an

excellent last season, being the fifteenth top scorer in the league with eleven

goals. However, his team has descended category, and therefore he has been

offered to Egara Football Club at a reasonable price of €500,000. His impact

Official Master’s Degree in Sport Management Financial Management I

7

both on shirt sales and at the increasing influx to the stadium is considered to

be modest at first, but growing as he develops as a player. Thus, the sale of

shirts is expected to be 5000 for the first year, 10,000 in the second, 15,000 in

the third and 20,000 in the fourth 40,000 in the last. About the increase of

spectators in the stadium, it will not be until the third year that the attendance

will increase to 500, 1,000 and 3,000 in the fourth in the fifth. His salary is being

negotiated – either €100,000 the first year, €200,000 the second and €300,000

from the third through to the fifth.

To make the investment project evaluation, the following hypotheses are considered:

• The price of the shirt for the first year will be of 60€, 61€ in the second year,

62€ in the third, 63€ the fourth and 64€ the fifth.

• For the club, the margin of shirts is 60 percent.

• The average entrance ticket is 50€. A price increase in the tickets is not

expected.

• The signings are associated to a 15% additional cost on the purchase price of

the player, in respect to the fees of the player's agent. Notwithstanding any form

of payment that is agreed with the home club, the representative is required to

pay the fees in cash, i.e., at the time of signing. Hence, a 15% should be

considered as a “Representative Fees” related to the price of purchase, not the

salary.

• The minimum return required by Egara Football Club to investment projects is

of 30%.

In order to make a decision regarding the signing of one of the four players, you are

asked to calculate the expected cash flows5 and the NPV, IRR and payback6. Each

5 In order to calculate the cash flows, you can use the template provided in Annex I. 6 To display the results you can use the template provided in Annex II.

Official Master’s Degree in Sport Management Financial Management I

8

of the four investment projects must be evaluated, that is, the four draft signings. In

light of the results, answer the following questions:

1. What are viable signings in economic terms?

2. What is the signing that creates more value?

3. Suppose we consider solely the risk factor, that is, Egara Football Club

descending to Second Division. Based on this single criterion, which player

do you think should be signed?

4. Make your recommendation on which player should be contracted, bearing

in mind all the given information.

Scenario 1: Cristino Rimado is sad

After two weeks of negotiations, with the goal of forcing the signing and lowering the

price, Cristino Rimado has reported after a session of training with the national team

that he is sad in his club. After this, we will have a meeting with the club where Rimado

plays now and we want to know the following information:

5. To what amount should the price of his signing be lowered for it to be

viable?

6. To what amount should the price of his signing be lowered for it to be more

equal to the signing with the highest NPV?

7. To what amount should the price of his signing be lowered for it to be

equaled to the signing with the highest IRR?

Scenario 2: Xavier Marchans and his salary7

Xavier Marchans knows it is not the signing that provides greater IRR to Egara Football

Club, but he is really interested in anchoring in the ranks of our team. So he is ready to

reduce his wages.

8. To what amount should the salary be lowered in order to be the signing with

the highest IRR?

7 For this scenario’s analysis you must take the basic scenario and do not consider the first scenario.

Official Master’s Degree in Sport Management Financial Management I

9

Scenario 3: More negotiations for Cristino Rimado

After the negotiations, the club where Cristino Rimado is playing has assured us that

he does not want to give up any penny of the transfer price. However, he is willing to

charge up half of it within three years.

9. To what amount should be paid within three years before the signing was

feasible?

10. Make a recommendation again about what signing must be done bearing in

mind the information explained in the whole case

Official Master’s Degree in Sport Management Financial Management I

10

Annex I: Template for cash flows calculation

Player: Cristino Rimado Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Signing Representative Fees Collection of Shirts Collection of Stadium Wages Cash flows

Player: Xavier Marchans Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Signing Representative Fees Collection of Shirts Collection of Stadium Wages Cash flows

Player: Dudu Regba Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Signing Representative Fees Collection of Shirts Collection of Stadium Wages Cash flows

Player: Albert Rovirosa Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Signing Representative Fees Collection of Shirts Collection of Stadium Wages Cash flows

Source: own elaboration

Official Master’s Degree in Sport Management Financial Management I

11

Annex II: Template for comparative results

Cristino Rimado

Xavier Marchans

Dudu Rebga

Albert Rovirosa

NPV IRR

Payback Source: own elaboration