Valencia is, by most measures, a failing club. One of Spain’s most historic football institutions is currently languishing in a relegation fight, with one win in 10 games. Their poor start to this campaign follows consecutive seasons of mid-table finishes; the club has become a shadow of the one that won La Liga twice in three years between 2002 and 2004.

Yet, despite this decline, it was announced last week that a group of investors had agreed to purchase a stake in the club at a valuation of over €1 billion. Pitchwise Holdings – a group which includes the founders of private equity firm KKR as well as the owners of the Denver Broncos – has reportedly agreed to purchase a 42% stake in the club at a valuation of €1.25 billion.

A valuation of €1.25 billion is striking when compared to other recent football transactions. Valencia’s last published accounts recorded revenues of €103m. On that basis, the transaction values the club at a 12x revenue multiple. For comparison, neither of the recent transactions for Chelsea or Liverpool exceeded a 7x revenue multiple.

How can Valencia – a club that is at genuine risk of relegation – be worth so much more on a revenue multiple basis than some of Europe’s biggest and most successful clubs?

One answer is that the €1.25 billion figure is slightly misleading. Valencia are reportedly carrying approximately €700m of debt, a large amount of which has been incurred in order to fund the construction of the Nou Mestalla.

The €1.25 billion figure is the enterprise value of the club – in other words the total value of the club including the debt which is on the club’s balance sheet. Subtracting the debt from this €1.25 billion figure will give you the equity value of the club – the amount which Valencia’s shares are collectively worth. An equity value of approximately €500m – approximately a 5x revenue multiple – is a more reasonable figure for one of Europe’s historic football clubs.

The other key consideration is the Nou Mestalla. The club’s long-awaited new stadium – construction of which began in 2007 but which will only open its doors next summer – is projected to increase a number of revenue streams. Club executives have claimed that matchday revenue will increase by almost €40m, largely due to the addition of 20,000 in capacity. They are also projecting that the new stadium will attract non-matchday events, such as concerts, conferences and business events, which will add a further €8 million in revenue.

If the Nou Mestalla can produce the revenues which the club is projecting, Valencia could conceivably reach revenues of nearly €200m – provided that it remains in La Liga. Given that the Nou Mestalla is now all but complete, it is likely that Pitchwise are valuing the club on the basis of the revenues which the club is projecting to generate following the opening of the new stadium. On that basis, an equity value of circa €500m represents a revenue multiple closer to 3x – a reasonable figure which would be in line with comparable transactions for similar European football clubs.

If the Nou Mestalla can deliver the revenue growth the club is promising, then the new investor group will likely feel justified in the entry valuation.

Much however rests on Valencia remaining a La Liga side next season and beyond. Demotion to the Segunda División would likely result in a net loss of up to €30m, given the lack of La Liga broadcasting revenues which the club would face. Sponsorship revenue would also decrease, and the projected value of the naming rights deal of the Nou Mestalla would likely fall.

Most pertinently, relegation would further anger a fanbase that is deeply disillusioned with the incumbent owner Peter Lim. Protests against Lim are a regular feature of matchday at the Mestalla, with fans critical of his seemingly distant management of the club since the 2014 takeover. The projected revenue growth of the Nou Mestalla is in part assuming that there is demand from fans to consistently fill the additional 20,000 of capacity. If the team is relegated, that assumption may well prove to be mistaken.

If the club’s new manager Javier Aguirre can guide the club to safety this season, and then reverse its decline in the coming years, the bet which Pitchwise have made on restoring the club to Europe’s elite will look well placed.

Fail to survive this season however, and serious questions will be asked about the entry valuation