Monday, July 9, 2012

Manchester United - Tuning In To Capital Radio

Last week Manchester United fans once again saw their team’s name plastered over the business pages, as the club announced plans to float on the New York Stock Exchange (NYSE) via an initial public offering (IPO) that would raise at least $100 million of capital. This is the latest piece of financial engineering from the Glazer family, who have tried the patience of the club’s support ever since they acquired United in 2005 in a highly leveraged takeover that placed over half a billion pounds of debt on the club’s balance sheet.

At least the supporters could gain some understanding of the proposed transaction from the comprehensive Form F-1 filed with the United States Securities and Exchange Commission, a document that weighed in at nearly 300 pages. For those that do not have the inclination or energy to plough through this mighty tome, this article will look at what the IPO means in practice and whether it is likely to succeed. This will entail a review of United’s prospects, the threats that they face and the impact of the Glazers’ ownership.

"Wayne's World"

Why have the IPO in New York?

Last year United had planned to float in Singapore, but that was abandoned due to a combination of poor market conditions and difficulties in attracting demand. At the time the club had emphasised the importance of Asia to the club’s growth strategy as one of the reasons for launching an IPO in Singapore, but that no longer seems so important.

However, there are good reasons from the Glazers’ perspective for listing in the United States. They are well known on that side of the pond as owners of the NFL team the Tampa Bay Buccaneers, as well as First Allied Corp, which owns and leases shopping centres. American investors are also more comfortable with the dual-class share structure that the Glazers want to use, as opposed to the UK, which might seem like the more natural home for an English football club.

Furthermore, the American business magazine Forbes has ranked Manchester United as the most valuable football club in the world eight years in a row, most recently at $2.24 billion. Indeed, the US gives the Glazers the best chance of attaining a good valuation by positioning the club there as a global media business rather than a sports franchise.

"The Glazers - dressed to kill"

How much money will be raised?

There have been reports of $100 million (£64 million), but the reality is that this is only a placeholder for the filing. No details have been provided for the number of shares, or the price of the shares, so we cannot calculate the amount of money to be raised yet.

Given that the stated objective is to reduce the club’s debt (currently £423 million), it is likely to be much more than the nominal $100 million, as there would be little point in making all this effort to reduce debt by just 15%. There has been speculation that the amount raised will be $500 million and might even be as high as $1 billion, depending on investors’ appetite for the offering.

The offer price (and implied valuation of the club) will be critically important to the success or otherwise of the float. If the targeted valuation is too high, then the offer will fail to get off the ground. Whispers around the possible Singapore IPO suggested that the board was seeking to raise £600 million for a 30% stake, which would have valued the club at £2 billion.

At the time Stephen Schechter of the eponymous investment bank argued, “They are betting they will get a higher valuation in Asia based on smoke and mirrors rather than facts. I think it’s worth probably half of what they’re looking for.” His view was supported by the Red Knights, a group of wealthy fans interested in buying the club, who suggested that the club was not worth more than £1 billion.

Indeed, there have been press reports that Morgan Stanley left the syndicate of banks preparing the offer, as they felt that the valuation the Glazers placed on the club was too rich. The lead book-runner now is a far smaller bank, Jeffries, who are likely to have pushed a higher valuation in order to secure the business (in much the same way as some estate agents do when selling a house).

What will the money be used for?

There had been concerns that the money from an IPO would be simply passed to the Glazers, potentially to pay off any other loans that they might have, but the prospectus clearly states, “We intend to use all of our net proceeds from this offering to reduce our indebtedness.” In other words, they will replace debt with equity.

Although the club has been making bond buybacks over the last two years to reduce the debt from the £541 million peak, it still stands at a thumping great £423 million, so it makes sense to accelerate the process. The money owed has gone through a number of iterations, the last being a £500 million bond issue in 2010 that replaced the previous bank loans, but the harsh fact remains that this is unproductive acquisition debt. While clubs like Chelsea and Manchester City have used their debt to fund the purchase of better players and Arsenal used theirs to build a new stadium, United’s debt was only used to enable the Glazers to buy the company.

No dividends will be paid?

The SEC filing states, “We do not currently intend to pay cash dividends on our Class A ordinary shares for the foreseeable future”, which, on the face of it, looks like good news, as the club would not benefit if interest payments on the debt (£43 million in 2011) were simply replaced by dividend payments.

However, the wording is not exactly unequivocal (“currently intend”), leaving the Glazers plenty of room to manoeuvre. Indeed, “foreseeable future” could be as little as 12 months – or after the debt is repaid. On the other hand, the lack of dividends makes the shares a less attractive proposition to investors, so it could be argued that this is just cautious wording.

What is interesting is that holders of the new Class A shares would receive the same amount of dividends as holders of the Class B shares (i.e. the Glazer family). Moreover, no dividend would be declared in the Class A shares without declaring a dividend on the Class B shares, which potentially benefits the Glazers. Incidentally, the filing notes that a £10 million dividend was distributed to “our principal shareholder”, i.e. the Glazers, on 25 April 2012, the same date that they repaid a company loan to the family.

"David Gill - owing pains"

So is this good news for the football club?

Given the pledge to use the IPO proceeds to reduce debt, this is undoubtedly positive for the club, as it will free up funds to boost the manager’s firepower, both on transfers and wages. Instead of spare cash being wasted on interest payments (at a steep 8.5%) and bond buybacks, which in total cost £71 million in the nine months up to 31 March 2012, instead it could be used to compete with the likes of Manchester City and Chelsea.

This is an issue on which all sides of United’s support are in agreement. United’s chief executive David Gill described the share issue as “beneficial”, while Duncan Drasdo, chief executive of the Manchester United Supporters’ Trust, responded, “If it turns out that the vast majority of the proceeds are used to pay off the debt, that is certainly something MUST would welcome.”

Is this a good time for a flotation?

Adverse economic conditions mean that this is a very poor market for a flotation. Several high-profile listings such as Graff Diamonds and Formula 1 have been pulled, while the Facebook debacle has raised probing questions about valuations. In fact, launching an IPO in these terrible conditions could be construed as a slightly desperate move, though it might also be indicative of the owners’ belief that the shares will be over-valued (Fergie factor, football on the ascendant).

At the very least, this marks a profound change in strategy from the Glazers, as it is less than two years since they opted for a bond issue instead of raising capital. That financing was intended to last for seven years, but they have decided to go through the whole painful, expensive process once again – for whatever reason. Furthermore, the prospectus notes that a premium (averaging 8.5%) will have to be paid to redeem the bonds.

"Valencia - with a shout"

How would the IPO impact the Glazers?

The dual share structure will allow the Glazers to retain control, as they will hold B shares, which will have 10 times the voting power of the A shares that will be offered to the New York market. This is a classic case of having your cake and eating it, as the Glazers will (again) use other people’s money to pay off some (or all) of the debt, while remaining firmly in control.

This is highlighted on the third page of the prospectus, which states that the voting power of the B shares will amount to 67%, i.e. enough to win any special resolutions that require a two-thirds majority. In other words, new investors will not be able to block any decision made by the Glazers.

Although United’s corporate structure will increase in complexity, the bottom line is that the Glazers are still in charge, as noted in the filing, “Upon completion of this offering, Red Football LLC will remain our principal shareholder and will continue to be owned and controlled by the six lineal descendants (five sons and one daughter) of Mr. Malcolm Glazer.”

Moreover, they have even managed to reduce the amount of information disclosed to investors for five years by classifying the new company, Manchester United Limited, as an “emerging growth company”.

Incidentally, although this company will be incorporated in the tax haven of the Cayman Islands, it will still be subject to US federal income tax, which has a higher statutory rate (35%) than the UK (currently 26%, falling to 23% in next two years). While it is true that the effective tax rate may be lower, that is still a high price to pay for moving jurisdiction.

Finally, there is a possibility that the Glazers will be able to cash in on some of their shares to cover over-allotments. This is perfectly normal in an IPO, where if demand for the offering is higher than expected, then the owners will often make additional shares available for sale.

"Tom Cleverley - brand values"

Are the shares attractive to investors?

The attraction to potential investors must be diminished by the inferior voting rights arising from the dual share structure, though it is true that other companies have implemented similar arrangements, especially those in a comparable situation to the Glazers, namely family owned companies looking to raise money but retain control, such as the Murdochs’ News Corporation and the Rothermeres’ Daily Mail & General Trust. More recently, it has been employed by tech companies riding a wave of popularity, e.g. Google and Facebook.

In addition, the lack of dividends could be a barrier to some investors, but, again, other companies have done quite well without paying dividends, most notably Apple, who have only just resumed paying dividends after a 17-year hiatus.

On the surface, this offer does have a few drawbacks, but similar doubts were expressed before the 2010 bond issue and that ended up being twice over-subscribed, so it could yet surprise on the upside.

"Mr. Jones"

Why would investors buy the shares?

In the absence of dividends, most investors buy a company’s shares for capital growth. That means that for this offering to fly, investors need to believe that Manchester United have excellent growth prospects, which we shall explore in the next section.

United are not exactly backwards in coming forwards about their status in the prospectus, bragging, “We are one of the most popular and successful sports teams in the world, playing one of the most popular spectator sports on Earth.” That may be fair comment for a club that has won the Champions League on three occasions and the Premier League a record-breaking 19 times, but it is followed up with the more cringeworthy belief that they are “one of the world’s leading brands with a global community of 659 million followers.”

That statistic is a reference to the ludicrous research that the club published before the Euros to almost universal scorn, where the definition of “follower” was stretched to the extreme. They are certainly not fans, nor are they customers (in marketing terms) that are likely to spend money on the clubs’ numerous products.

In truth, there is no need for United to rely on such spurious claims, as their financial record is very good, especially for a football club, with impressive revenue growth meaning that they are highly profitable (at an operating level) and generate a lot of cash. Not only that, but there are exciting (but realistic) prospects of more growth to come in the future from commercial activity and media rights.

In 2010/11 (the last season when clubs reported annual financial results), United made profits before tax of £30 million, second only to Newcastle United in the Premier League, though the Geordies’ figures were boosted by £37 million profit on player sales, thanks to Andy Carroll’s transfer to Liverpool.

That’s pretty good, but pales into insignificance when looking at United’s operating cash profits, known as EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), which were a remarkable £111 million. That’s more than twice as much as the nearest contender Arsenal (£48 million). In fact, United’s EBITDA is more than the next five clubs combined. There’s little sign of the cash machine breaking down, as EBITDA for the first nine months of 2011/12 was £85 million, up from £82 million the year before.

The only thing that prevents their bottom line profits being substantially higher than their rivals is the net interest payment of £43 million, which is considerably higher than the other leading English clubs. The only other one in double figures is Arsenal, whose £14 million net interest is only a third of United’s bill.

United’s prowess stems from their imposing revenue of £331 million, which is by far the largest of any English club, being more than £100 million higher than the next highest Arsenal and Chelsea. Moreover, this is the third best revenue in the world, only surpassed by Real Madrid (£433 million) and Barcelona (£407 million).

Deloitte’s annual report noted, “Manchester United's consistent on-pitch success has helped establish it as a continued fixture in the top three of the Money League, yet in recent years a gap has grown between themselves and the Spanish giants Real Madrid and Barcelona.” However, the impact of exchange rate movements should not be ignored, as the weakening of the Euro in recent months (from 1.11 to 1.25) would have almost halved the difference between Madrid and United from £102 million to £53 million.

Since 2005 United have virtually doubled their revenue from £166 million to £331 million. Other top English clubs may have beaten them in terms of percentage growth, but United’s absolute revenue growth of £165 million is still the largest. Thus, Manchester City have increased revenue by 152% compared to United’s 99% in that period, but the gap between United and their city rivals has actually widened from £105 million to £178 million.

That’s impressive enough, but the balance of United’s revenue is equally striking. In 2010/11 each major revenue stream contributed around a third of the club’s turnover: media £119 million (36%), match day £109 million (33%) and commercial £103 million (31%). This is in marked contrast to the majority of football clubs who have a dangerous reliance on television revenue.

The prospectus builds on this approach and notes five key elements to their growth strategy: (a) expand our portfolio of global and regional sponsors; (b) further develop our retail, merchandising, apparel and product licensing business; (c) exploit new media and mobile opportunities; (d) enhance the reach and distribution of our broadcasting rights; (e) diversify revenue and improve margins.

United have been second to none when it comes to successfully monitising their brand – or milking their fans like a cash cow, if you’re feeling uncharitable. That is highlighted by the great strides made in the commercial area with revenue rising by nearly 50% in the last two years from £70 million to £103 million.

Their two largest sponsorship deals are with long-term kit supplier Nike and shirt sponsor Aon. In 2011 Nike paid a guaranteed minimum of £25.6 million plus £5.7 million for United’s 50% share of profits from the club’s merchandising, licensing and retail operations. At current exchange rates, this kit deal is probably the highest in the world, slightly ahead of Liverpool’s new Warrior deal £25 million. United receive £20 million a year until 2014 from Aon for shirt sponsorship, only matched by Standard Chartered at Liverpool, though the shirt sponsorship element of Manchester City’s Etihad deal has also been estimated at the same amount.

In addition, United have many secondary sponsors, the prospectus listing DHL, Chevrolet, Singha, Concha y Toro, Thomas Cook, Hublot, Turkish Airlines and Epson as global sponsors with Honda and Smirnoff as examples of regional sponsors. This is an example of the enduring power of the United brand globally and the club’s ability to attract new partners, despite the negative headlines arising from the Glazers’ ownership. This is highlighted by the explosive growth in new media and mobile revenue, which has shot up from £5 million in 2009 to £17 million in 2011.

Indeed, commercial income has grown a further 17% in the first nine months of 2011/12 from £77 million to £90 million, including the amazing DHL deal that sponsors training kit for £10 million a season, a sum that exceeds the value of all but five of the main shirt sponsorship deals in the Premier League.

There is still scope for future growth, as can be seen by the tremendous commercial revenue earned by Barcelona (£141 million), Real Madrid (£156 million) and especially Bayern Munich (£161 million). Consequently, in addition to offices in London and Manchester, United have opened a new office in Asia and are in the process of doing the same in North America.

They will be looking to secure even higher sums when the shirt sponsorship and kit deals are up for renewal in 2-3 years time. The bar has been raised by some of the deals signed elsewhere, particularly City’s innovative Etihad partnership and the French national team’s deal with Nike, which is worth €320 million over 7½ years, working out to about £38 million a year for just a handful of matches. Accordingly, United are in discussions to extend their deal with Nike, looking for an increase of at least £10 million a season.

Match day revenue remains a core part of United’s strategy, though it is probably reaching saturation point, depending on the number of home games played. That said, £109 million in 2010/11 was by some distance the highest in England and only beaten by Real Madrid in Europe. Only Arsenal (£93 million) come anywhere close, while United generate 60% more than Chelsea (£68 million) and two and a half times as much as Tottenham (£43 million) and Liverpool (£40 million).

The prospectus points out that Premier League games have been sold out at Old Trafford since the 1997/98 season. In 2010/11 home games were attended by over 2 million fans with each match generating £3.7 million. One of the main drivers for revenue growth has been deeply unpopular, namely ticket prices, which have risen by at least 40% under the Glazers’ ownership. That said, United’s cheapest season tickets actually cost less than those at Arsenal, Chelsea, Liverpool and Spurs and prices have been frozen for next season.

"Evans - (Jonny) New Light"

United are in a very good position with Old Trafford’s 76,000 capacity being 16,000 more than the next largest English ground, the Emirates. Their average attendance of 75,400 is the third highest in Europe, only behind Borussia Dortmund and Barcelona. Many other leading clubs have stadium issues, either looking to move to a new ground or expensively refurbish their existing arena.

However, television remains the largest revenue category for United at £119 million, mainly comprising £60 million from the Premier League, £47 million from the Champions League plus £9 million from MUTV. According to the prospectus, United’s games generated a cumulative audience reach of over 4 billion viewers across 211 countries. Not only that, but industry surveys suggest that United have the biggest share of the Premier League TV audience, as confirmed by Kevin Alavy of Future Sports + Entertainment, “United are the number one club by viewing by a very clear margin.”

Nevertheless, United’s TV revenue will fall for the next two seasons for a couple of reasons: (a) the earlier exit from the Champions League at the group stage will cost them around £14 million in 2011/12; (b) finishing second in the Premier League will reduce the market pool distribution for the 2012/13 Champions League by an estimated £5 million.

That said, the future is bright in terms of TV revenue with the signing of the £3 billion Premier League deal for domestic rights for the 2014-16 three-year cycle, representing an increase of 64%. If we assume (conservatively) that overseas rights rise by 40%, that would drive United’s share up to £94 million, an increase of £34 million a year (using the same distribution methodology). Of course, other English clubs’ revenue would also rise, though not by so much in absolute terms, but this would certainly help United’s ability to compete with overseas clubs, especially Madrid and Barcelona, who benefit from massive individual deals.

Although United warn in the filing, “There is a risk that application of the financial fair play initiative could have a material adverse effect on the performance of our first team and our business”, they later state, “We already operate within the financial fair play regulations, and as a result we believe we are in a position to benefit from our strong revenue and cost control relative to other European clubs and continue to attract some of the best players in the coming years.”

Under the FFP rules, clubs have to break-even from their football operations, which strengthens the position of clubs with the most revenue, such as United. If this IPO does indeed pay off the club’s debt and remove interest payments, then United will be in a very powerful position – so long as UEFA do enforce the regulations. The status quo will be entrenched, while it will be extremely difficult for new clubs to break through the glass ceiling.

"His name is Rio"

On the other hand, the prospectus does include no fewer than 21 pages of risk factors, though fans should not be overly alarmed, as this is standard practice under stock exchange regulations, whereby companies have to inform potential investors of all factors that they should take into consideration before purchasing shares. This is really a worst case scenario, as can be seen by the risk of business interruptions due to “natural disasters and other events beyond our control, such as earthquakes, fires, power failures, telecommunication losses, terrorist attacks and acts of war.”

Even so, some of these risks are more meaningful than others with particular attention being paid to the club’s admission that “our indebtedness could adversely affect our financial health and competitive position.” That’s hardly surprising, especially as the very fact that the club is launching an IPO to raise money to pay off indebtedness points to the debt being an issue, but it is in stark contrast to previous denials from the club’s hierarchy.

In particular, a year ago David Gill told a Commons committee on football governance that “debt doesn't impact what we do.” He added, “There has been no impact in terms of our transfers”, while the prospectus includes a specific risk that debt “could affect our ability to compete for players.”

Gill has always insisted that funds can be spent on improving the squad, “The Glazers have retained that money in the bank and it’s there for Sir Alex if he needs it for players”, but the reality is that since 2005/06 United’s net spend of £68 million (per the Transfer League website) is only higher than the notoriously frugal Arsenal among top clubs. In the same period, Manchester City’s net spend is over £400 million, while Chelsea’s is nearly £300 million. Clearly, United’s net spend is reduced by the Ronaldo proceeds, but even so that’s a galling comparison, considering United’s revenue potency.

The threat of City and Chelsea is noted in the filing, “In the Premier League, recent investment from wealthy team owners has led to teams with deep financial backing that are able to acquire top players and coaching staff, which could result in improved performance from those teams in domestic and European competitions.” Indeed, United have loosened the purse strings in the last two seasons, splashing out around £50 million last summer to acquire David De Gea, Phil Jones and Ashley Young, while this summer they have already bought the exciting Shinji Kagawa from Borussia Dortmund for a reported £17 million.

Nevertheless, a club with United’s financial capacity should be competing for the very best players, especially as they need to respond to the competitive threat from teams not afraid to spend. Although last season was pretty good by most standards, a bit more investment in the squad might have avoided losing the Premier League to City on goal difference and crashing out of the Champions League at the group stage.

Although United would probably still have not matched City’s outlay with Sir Alex Ferguson admitting, “We are not like other clubs who can spend fortunes”, they should still be spending a lot more than the likes of Aston Villa, Stoke and Fulham, which has not been the case over the last few years.

Similarly, United are under pressure to increase their wage bill of £153 million, as they have now slipped to third in the English wages league behind Manchester City (£174 million) and Chelsea (£168 million). In 2008, United’s wage bill was £67 million higher than City’s, but it is now £21 million lower, a turnaround of £88 million in just three years.

As noted in the prospectus, “Our success depends on our ability to attract and retain the highest quality players and coaching staff. As a result, we are obliged to pay salaries generally comparable to our main competitors in England and Europe.” By this token, United are a fair way behind Barcelona and Real Madrid, which helps explain the 10% rise in the wage bill for the first nine months of 2011/12.

If all the debt is paid off after the IPO, the £45 million saving could theoretically be added to the wage bill, which would close that gap and allow United to challenge for the top talents in the game.

In fairness, United have not done too badly under the Glazers, winning the Premier League four times and the Champions League once, though much of that is down to the brilliance of Ferguson. It is doubtful whether any other manager in the modern era could have papered over the cracks and achieved so much with such a limited budget. The question is whether this success can be maintained once the great Scot finally leaves. As the prospectus drily puts it, “Any successor to our current manager may not be as successful as our current manager.”

This is another reason why the IPO is important, as it is doubtful whether a manager of the calibre of, say, Jose Mourinho would be tempted if he had to operate with one hand tied behind his back (from a financial perspective), when there are plenty of other clubs that are willing to give elite managers carte blanche.

To give some idea of the constraints faced by Ferguson, we only need to look at the club’s cash flow statement. Since 2009 United have generated a very healthy £353 million operating cash flow, but have spent the vast majority on interest payments and paying off loans and bonds. In that period they have used 77% of their expenditure on these financial costs with only 12% (£45 million) on player purchases.

As an aside, cash flow for the nine months up to 31 March 2012 is a large negative £125 million, partly recognising higher expenditure on transfers, but mainly due to working capital movements of minus £71 million, which are described as being down to timing, e.g. receipts from sponsors, season tickets and hospitality). This may well be the case: for the same period the previous year, working capital movements were also negative (minus £41 million), but ended up as positive £14 million for the full year. However, it does go to show that United’s cash flow is under pressure in the current business model if they pay interest AND buy players.

The money wasted in the Glazers’ reign is now estimated at £553 million, comprising £295 million interest payments, £128 million debt repayments, £101 million for various bits of financial reengineering (fees for takeover, refinancing, interest swap termination, bond issue and IPO) and £29 million payments to the Glazer family via consultancy fees and dividends.

In the last nine months alone, they have thrown away £79 million: interest £43 million, bond buybacks £28 million, IPO professional fees £5 million and £3 million consultancy fees, not to mention £10 million dividends to the Glazer family to repay loans taken out previously.

Although the exact figure is open to debate, there is no doubt that United have wasted around half a billion pounds that could have been spent on the football club, purely for the dubious pleasure of having the Glazers as owners. Those funds could have been used much more progressively, with the following examples given by MUST: “Cheaper tickets for loyal fans, investing massively in the squad and stadium, developing and retaining the best youth players, competing on an equal basis with the very best teams in Europe.” Perhaps the worst thing is that even after all that money has disappeared into the financial ether, United have made little impression on the club’s debt mountain, which still stands at £423 million.

Obviously, if the club had remained a PLC, then it would have had to pay out dividends and the current structure also produces tax savings, as interest expenses are tax deductible, but the net impact of the Glazers’ ownership is surely still hugely negative. The respected financial analyst, Andy Green, an acknowledged expert on United’s finances, has estimated the tax savings at around £110 million and the dividends not paid as £70 million. Deducting that £180 million from the costs of £553 million would give net costs of £373 million.

"Kagawa - hold on, I'm coming"

Furthermore, the comparison is not just with the PLC, as it is not beyond the realms of possibility that United could have been bought by a benefactor like Sheikh Mansour or Roman Abramovich, who have pumped money into their clubs via capital injections or interest-free loans.

There is no doubt that United’s commercial business has thrived under the Glazers’ guidance, but, again, other owners with the slightest business acumen would surely have done much the same with a brand as wonderful as that described in the IPO prospectus.

Some have suggested that this IPO is the first step in the Glazers’ exit from the club, but it has been reported that the owners have already rebuffed several expression  of interest with the board stating, “The owners remain fully committed to their long-term ownership of the club. Manchester United is not for sale and the owners will not entertain any offers.”

Even so, Manchester United non-executive director Michael Edelson said, “It is inevitable that at some time they will sell”, though he added, “That will be a long way down the line.” Clearly, everything has its price and investors that employ the LBO model usually sell when they feel that they have maximized value, so that could be any time.

"Here comes the knight"

Therein lies one of the dangers of this IPO, as the share price might fall after the float, which would wipe millions of pounds off the implied value of the club, further delaying the day when the Glazers exit stage left.

At least the owners have now accepted what almost everybody else has been saying for ages, namely that the debt is holding back United and needs to be cleared as soon as possible, though it’s a shame for United fans that it cost the club so much before the Glazers woke up to this fact.

Supporters of other clubs will be more conflicted: while abhorring the impact of the likes of the Glazers on the game in general, they will be quietly relieved that the money paid to financial institutions did not go towards improving Ferguson’s team, as United have not done too badly without it. It is by no means guaranteed that the change in financing strategy will lead to more money being spent on strengthening the squad, but United fans will be excited at the prospect, imagining what they might achieve with all that extra cash.


  1. Terrific piece, Swiss.

    The year end financials are going to be very interesting to see how much revenue came into the club to pump back up the Cash which dipped very low at the time of the 3rd Qtr filing. One suspects they want several good items between now and the shares going on the market to keep the share value up:

    * Cash reserves back up
    * International TV Rights announced
    * Shirt Sponsor Contract

    The first is unlikely to get back to where it was at the end of FY 2011, but at least up from where it was in March.

    The second one they are likely hoping will match the growth of the Domestic Rights. If they do, the selling point to investors (a/k/a marks) is the the prior massive revenue growth will be sustained in part by the massive growth in TV in the coming years. Pretty good selling point at a time of economic doom & gloom: the EPL, and United by extension, have locked in growth rather than speculative growth.

    On the third, my recollection is that the length of the current deal with AON sets up nicely to have the next deal announced in the next six or so months. That would be before the shares hit the market.

  2. Enlightening as always. One question, with the club now "based" in the Caymans, what (if any) tax will be paid in the UK? And given the current wave of ill feeling towards brands like Vodafone who dodge their tax bill do you feel this could negatively affect the share price?

    1. Investors want to make money, not participate in morality plays. Investors like lower tax payments. This frees up income for shareholder dividends.
      Unfortunately, the share structure proposed does not offer much or any dividend income, nor voting rights.
      Therefore, if you assume that capital gains died with Lehman and Madoff in 2008 the shares on offer are useless until the liquidation dividend.

  3. A really great, comprehensive piece of work. I was wondering about the tax point too. Presumably it is only the top level company that is going to be domiciled in the Caymans and paying US tax, so (in answer to feetballs too) so the football club will presumably be still paying the same tax as it always did (which is not much given the interest-induced losses it incurs at the bottom line).

    I will bow to someone else's knowledge of Cayman Islands thin capitalisation legislation, but in the absence of dividends it is hard to see the top company earning much income or paying much tax. Who knows, it may even generate tax losses there that he can offset against some of his other investments

  4. Am I the only one who finds the stuff in this blog repetitive?

    I think Swiss can reduce the length of each blog by cutting out the repeated stuff.

    1. In that case, you will be delighted to know that I am now going to take a break from writing, so you will not have to read any repetitive, or indeed any, stuff in this blog for a while.

    2. Hey Mr Swiss, never mind that troll. Your blog is fantatstic, and this article is as interesting as I have come to expect.

      If you are taking a break then enjoy it. But please come back soon. God knows there's plenty of interesting economic situations for football clubs on the horizon.

    3. Argh! :( :( :( :(


      Please don't let the troll bother you. These are always great pieces, and this site is always the first place that I and others look to for great financial on football. The length is fantastic because you give all the depth and detail one needs to understand the finances of these clubs. An example would be Barca and RM where most of the mainstream media gets caught up on one item (various debt numbers). Your detailed walk through the books enlightens us that there's more to these clubs finances than what the media is hung up on.

      We all hope you enjoy your break, but please return. I think you see from the comments through the years how appreciated your work is. I also think you see from some of those who ask questions how much we appreciate your willingness to respond. This is the best football site on the net, and it would be horrid if trolls drove you away. :(

    4. We depend on your excellent analysis, so please dont take too much time off. You are the best!!!!!!!!!!!!!!

    5. Thanks so much for the article,

      The sad man at the top clearly doesn't realize how much effort it takes to prepare these contents. Mr. Swiss is graciously writing & sharing these at no charge.

      If Mr. Swiss decides to take a break, I hope he enjoys every bit of it as he deserves it!

    6. Bit of a misunderstanding here, as the break I referred to was just a holiday, not anything longer. In any case, that holiday has now been postponed, due to bad weather, so I will be publishing again before my re-scheduled break. But thanks for the support :-)

  5. Hi
    Good blog!
    I have always felt that any analysis of the club's financial engineering should reflect the Red football structure as a whole; that is, decisions about refinancing reflect total indebtedness as was the case when the bond was issued to help with the pik loan. The Glazers didn't go the carveout route; and I suspect that the means by which the pik was removed is the driving factor behind the IPO.
    Had the Glazers repaid the pik loan from their own resources, I doubt there would have been any imperative to IPO now.
    My question is: is there anything in the prelim. prospectus that precludes debtholders in Red football LLC from exercising a convertible interest in the new Cayman company?

    Reducing debt interest, a benign dividend policy, and use of prior losses to reduce the CT bill, means the IPO will be very cash flow positive from the club's perspective but to what end? You seem to be suggesting that the club might relax its wage/ turnover ratio of 50% and be more competitive but a debt interest to wage conversion is not likely to make the club any more profitable. Investment in players is not as revenue generative as, say, expanding the commercial operation.

    One other thing: have you any idea why the club intends to redeem the bonds at principal plus 1-yr-interest, the redemption price as from Feb 1 2013 when there is a provision enabling the club to redeem 35% of the bonds at par with the proceeds of an equity offering prior to Feb 2013?

    Many thanks


    1. The Red Shareholder goup has never issued convertible bomds (or does not have any outstanding convertible debt) so it would be impossible for a lender to the Delaware company to exercise a convertible option that does not exist. Any debt in RF LLC is a debt of the Glazers and not a debt of the new Cayman company. The Glazers could simply sell some of their own shares post lock up to clear any debt that might reside in Delaware. No new shares would be issued by the Cayman company.

  6. Much appreciated The Swiss Ramble, for once I was able to get my head around the facts & figures, very enlightening & somewhat reassuring, enjoy your break.

  7. Does this mean thaat they'll soon be able to afford to replace Rooney with a forward who can consistently control a football?

  8. Here's my biggest worry: they float way too many shares and at way too high a price. Then, the "too cheap" shares go below the $20 threshold for institutional investors, and all of a sudden the stock becomes more of a liability than asset. Then, they feel pressure to either a) buyback stock or b) start paying dividends within a year.

  9. Great stuff as always Kieran but I think you've missed something important re the timing of this. July 3rd was the last day they could file this with the SEC to avoid disclosing the full accounts for 2012. Even then they had to get special clearance from SEC to do this with audited accounts older than 12 months.

    The one significant factor that will impact Q4 is the loss of revenue from the failure to qualify for the CL knock-out stage. You say £14m media income alone, andersred has it at £20m iirc but the totla "lost" revenue could actually be a lot higher than this as they missed out on matchday revenue for the semi final and final compared to Q4 2011. As their cash reserves were abnormally low in March 2012, they would have been relying on the CL prize money to bump it up, alongside the PL prize money.

    From a market point of view, so close to the Facebook IPO, the timing seems appalling yet they have chosen to do it knowing they won't have to declare full year results for 2012. So the conclusion must be that there is something they don't want potential investors to see in those figures. There will be hell to pay if investors put money into this and then they report relatively poor results for the full year. But will the Glazers care if they pay off the bonds?

    1. Not entirely sure about this. Under the bond issuance wouldn't they still need to report their year end? That will come out in early September.

      This also isn't a final prospectus. Wouldn't they need to release their most recent financials as part of the final prospectus where they fix the amount of the offering? The clock for the final prospectus is 90 days, which will be after the annual financials are out.

      Also, the year ends aren't going to be that horrible. They were £14M ahead of revenue through the end of March when they already had taken CL hits. My recollection of andersred's piece was that he expected revenue in the 4th Qtr to be at such a level to push cash up from £25M to £75M. There also were a few other sponsorship deals popping up in the second half of this FY which could have dumped some cash into the coffers.

      Does anyone really think United is going to be under the £331M in revenue that they made in FY2011?

  10. As always, I am totally enamored with your work. PLEASE keep writing, you bring clarity to the most nebulous component of the world's sport.

    Maybe throw a fundraiser to keep things going? I'll chip in.

  11. Incredibly thorough! Thanks for blogging Mr Swiss!

  12. Once again terrific work. I suspected as much concerning the dear owners, but seeing it laid out in such clear detail is a completely different thing.

    Thanks alot, the input into such an article must be high indeed. Without you many would be lost in all that smoke and mirros which is football finance.

  13. congrats man, incredible work!

    but hey, you could write a piece on brazilian teams. Corinthians and São Paulo are now on 25 and 32 position on the delloite money league, and the league is getting some attention with the arrival of the likes of Forlan and Seedorf



  15. Thanks as always for your wisdom. One question: why does MU have to pay 8.5% interest? Debt isn't exactly expensive these days, even for junk - HY is 590, and even CCC paper yields around 11% (and that stuff has ebitda yields a lot lower than MU's, and worse collateral too).

    1. The yield is probably a factor of two things. One, the issue is unrated. Obviously MUFC has a good enough EBITDA to get a reasonable rating if it chose to, but for whatever reason a rating wasn’t sought. Regardless of what your EBITDA is, no ratings mean fewer institutional investors are allowed to look at it, which means a smaller book, and higher pricing. Plus, the bonds themselves have a whole host of provisions (poison put @ 101%, Make Whole option at +50bps, several call options etc) all of which can put off certain investors.

      Secondly, the bond was issued in 2010, when spreads were generally wider. For what it’s worth, Bloomberg has the current Z+ trading down at 392 (from Z+685 at launch), which gives an idea of where an equivalent issuance from MUFC in current (improved) market conditions would price (Roughly 5.125%). Although that spread has obviously seen a dramatic dip recently due to the potential redemption from the IPO. A more reasonable assumption of pricing might be around Z+550, which would price a new issue at around 6.703%

      Basically, it’s a highly structured, unrated issuance which hit the market at a fairly bad time. As Swiss says in the article, the Glazers don’t have a great record when it comes to timing!

  16. Great article Swiss as always .. Utd loss the leage on goal difference even with with these interest payments.

    If the Glaziers pay off their debt and Ferguson has more of a war chest in recent years the god help us.

    As an Arsenal fan it pains me to say it but their a worl;d class money making machine. Their ability to maximise commerical revenue is clearly the way it should be done. Apart from the last few seasons they hand back the manager, continually invested in the player staff and made the most of all their success.

    Its very annoying that Arsenal were the invincibles at one stage and never seem to build on that success,we are light years beyond them on commerical side and this in turn has reduced the funds available for the squad.

    One last point is the shocking of wages Arsenal are spending despite at actually paying any Big Money although Wenger has made some amazing deals in the tranfer market the likes of Squallaci etc shows he has made some very bad mistakes in his time.

  17. Anyone know where I can buy a share?

    1. I can't tell if you're being sarcastic. If you're not, I'd recommend you wait until the deal prices and then pick it up in open trading (Fidelity, eTrade, whatever).

      But I highly doubt they can get this deal done. If they couldn't float it in the UK or Singapore, there's no way it will work in the ADHD, show-me-the-money USA.

  18. Excellent article as always. A bit negative at the end maybe. A debt free United with the increases in PL & Nike contributions coming in the next three years will be a formidable cash generating machine. If United list and the shares go up, then the Glazers win with an increased valuation. If the shares go down, then with a debt free profits running at £60/70 million they can buy back shares on a rolling basis and maintain listing for valuation purposes or maybe arrange secondary listings in UK/Asia, making it easier for fans to participate.

  19. "Although the exact figure is open to debate, there is no doubt that United have wasted around half a billion pounds that could have been spent on the football club"

    This is rubbish. The Glazers have been costly but the amount "that could have been spent on the football club" is nothing like half a billion pounds. For starters, without the buyout, if the plc had been able to generate the same revenues that we have seen under the current regime, United would have had to "throw away" approximately £225 million in dividends and taxes. (To get there, redo the accounts eliminating Goodwill and Interest, apply the statutory tax rate and take 35% of profit after tax as dividends - that was the plc dividend payout ratio.)

    Moving on to the "Glazer Costs" chart, let's look at some of the individual line items. The "Bank Loan" line picks out the repayment of drawdowns from the revolving credit facility - the seasonality of United's cashflows means that there will often be a cash shortfall around the end of Q3 and the beginning of Q4. The loan "repayments" should be netted against the drawdowns - there was no net outflow.

    "Takeover", "Refinancing" and "Bond Issue" are all costs that were paid by means of an issue discount - there was no outflow of funds from the club. Instead, the total borrowings were grossed up to include the amounts that were paid. From United's perspective, the only immediate impact was the interest paid on the excess borrowing. (This was offset by the ability to amortise the issue discounts and hence reduce tax liability.) In the long run, if the borrowings were repaid using internally generated cash, the club would have paid those discounts. In the event of an IPO, however, the burden passes to the Glazers. By having to sell sufficient equity to pay the issue discounts, the Glazers' holdings will be diluted to a greater degree than would otherwise have been necessary. Thus the discounts will be paid for through a reduction in their ownership percentage.

    "Management and Consultancy fees" are questionable. We have no way of knowing to what extent equivalent consulting would have been needed to drive the expansion of Commercial revenues - given that United obviously didn't have the capabilities in-house. (Commercial revenues had had zero growth for the 5/6 years before the takeover.) The bond prospectus detailed what the management fees could cover - if we assume that the bond trustees were doing their job, there's a limit to how much of this could just have been a straight transfer.

    I left the "Bond buybacks" to last because they represent an issue of timing rather than substance. As it stands the repurchased bonds have not been retired, they are available for resale. It's arguable (and is United's stated position) that the repurchases are Treasury transactions representing the highest return available on a short term investment. As such, the bonds are the functional equivalent of money in the bank and their purchase should not be considered to be a net outflow. Of course, if they are retired at the time of the IPO without their loss being balanced by an increase in United's cash holdings, then internally generated cash will have been used to retire them, amd the costs can be considered valid "Glazer costs". But not yet.

    So I guess that leaves us with "Interest", "Swap termination charges", and "Dividend" as unambiguous Glazer costs, and those must be balanced against the tax and dividends from the alternative scenario in figuring out what the Glazers have really cost United. My estimate of the upper bound is around £120 million - potentially plus the cost of the bond buybacks. (If the alternative management hadn't achieved such high revenue growth, then the "Glazer cost" would have been less.) It's a lot of money but it's nowhere near half a billion pounds.

    Enjoy your sabbatical.

    1. Well, it's clearly not "rubbish", though it is "open to debate" (as I wrote) or "questionable" (as you wrote).

      Welcome back. It's good to see that you have not lost your love of selectively quoting sections of an article.

      For example, I note that you did not mention the fact that I referred to potential dividends and taxes paid under a PLC regime in the article. Nor did you refer to the possibilities raised that any United comparison should not surely be restricted to a Glazer interest-burdened model against the former PLC dividend model - there are others out there.

      Your delusional attempts to restrict this debate are shown beautifully in your point on management and consultancy fees: "we have no way of knowing to what extent equivalent consulting would have been needed to drive the expansion of commercial revenues." Just hilarious.

      Similarly, the machinations around "timing" and "substance" are pretty desperate. Ultimately, despite all of this wheeling and dealing, even you conclude that the Glazers have cost United around £120 million - and as you say, that's a lot of money.

    2. A few points:

      1) The club has consulted widely with leading marketing firms to arrive at its commercial strategy; those costs have been carried by the club via an increase in operating costs and not through management fees.
      2) The top 4 clubs (in terms of commercial performance and excluding united) in Deloitte's FML have increased commercial revenue by approx. 50m pa since 2005. Adding that to the PLC's 2005 commercial revenue is a good independent guide as to where the plc would be in 2011. Of course, those of a certain persuasion like to assume that the plc's commercial department would forever remain a 2-man-and-his-dog operation as it fits with a deliberate bias to reverse engineer a reduction in overall glazer costs. A pretty obvious strategy really and one devoid of context and reason. Seemingly the PLC had it continued would have ignored wage pressure (both absolute size and escalation rate) and accepted reducing profitability because shareholders (for some novel reason) were no longer interested in adding value.
      3) I am sure that your calc of dividends includes all of the Ronaldo money. How would that be implemented? By increasing either the base or special premium to an unsustainable rate leading to unrealistic market expectations? Rubbish. The PLC had faced stern criticism in the aftermath of Beckham's sale and retracted its position regarding player sales and dividends.
      In any event, Andersred doesn’t agree with your estimate of dividends; he merely posted a worst case scenario which you now choose to misrepresent.
      4) What return would plc shareholders have earned from investing the extra cash costs of the LBO structure. It’s striking that no assessment is made of the opportunity cost of having to dole out so much hard cash on non-growth debt. The equivalent of the Aon prepayment and the Ronaldo money is used to repurchase bonds when it could have been used to expand the South Stand generating more revenue, or, as seed capital for an even more rapid expansion of the club’s commercial department. Characterising the repurchased bonds as an exercise in sound treasury management rather than a cost completely misses the point: That cash would be available to the plc for reinvestment.
      In any case, the amended F-1 statement with the SEC states that the club will retire the repurchased bond following the offering. You will have to find a different approach to big –up the Glazers LBO model.


    3. Great article and good bit of banter/analysis. Perhaps we could do a post 2014 analysis with TV deal and new GM deal $600 over 7 years. Does this together with rise in £ against € eliminate T/O difference with RM & Barca?

  20. "Therein lies one of the dangers of this IPO, as the share price might fall after the float, which would wipe millions of pounds off the implied value of the club, further delaying the day when the Glazers exit stage left."

    Why on earth do you expect them to leave? United are going to be an enormous cash generator going forward - why would the Glazers do all the hard work then walk away? Makes no sense. It also conflicts with what we know of their past behaviour - if they were primarily motivated by turning a profit, they would have sold the Bucs long ago. The fact is, they seem to enjoy running sports teams and from that perspective, United is as good as it gets.

    1. United are already an enormous cash generator - before they have to pay out chunks of that on interest and debt repayments.

      Assuming that this IPO flies, then the club should have even more free cash flow, though that does rather suggest that a PLC model (that you have been slating for all these years) is not so bad after all.

  21. Should have mentioned that my dividend and tax figures are consistent with Andy Green's. If you check the comments on the andersred blog, you'll find that he finally admitted (towards the end of last year) that the dividends paid by the plc would have totaled around £95 million - which, by now, would be close to £100 million. The updated tax would have been around £125 million.

  22. "There is no doubt that United’s commercial business has thrived under the Glazers’ guidance, but, again, other owners with the slightest business acumen would surely have done much the same with a brand as wonderful as that described in the IPO prospectus."

    If this is the case, what does it say about the plc, who totally failed to grow Commercial revenues for the 5/6 years before the takeover.

  23. Great overview of the IPO. If Man U was to get a $2 Billion valuation, that suggests they are trading at 18X EBITDA based on numbers in this article. That's the kind of multiple tech companies trade at. Sorry I just don't see where this level of earnings growth comes from. Domestic ticket sales are tapped out (they are already selling out out every game) beyond price hikes which can only go so far before fans rebel. Yeah there's more money in Media/Sponsorship but this will be offset with increased wage spend if Man U hopes to stay competitive. To grow Commercial Revenue and acquire new fans they need to continually bring in the biggest stars which means higher transfer fees/wages. The $50M in annual Champion's League revenue is far from guaranteed as we saw this season. I think it adds up to a very bad investment

  24. Hi Swiss
    Fantastic piece as usual. Hats off to you.

    I’m interested in yours and others opinion on this. Do you think the timing of this IPO despite unfavourable environment has a lot to do with the potential retirement of Sir Alex Ferguson?

    The man will be 71 this year, if in the next 18 months he announces his retirement (unlikely) or has any health scare, surely that would have a massive impact on the valuation as it would create a lot of uncertainties in investor’s mind.

  25. I'll never understand how Man U could get into so much debt and have absolutely nothing to show for it. At least when Arsenal got into debt it was to build a new stadium.

  26. great read as always mr swiss.
    would love to see your take on the rangers situation if possible

  27. What a brilliant article Swiss! Enjoyed reading the stats to the hilt!!

  28. First of all - Nice Blog!
    Manchester United is a craze i guess! In Asia, middle east and europe as well. Lets see what they do in upcoming Premier league 2012-13 season. I see Rooney's club effective in this season as well.

  29. Don't get me started on Man United. Think back pre Glaziers, everything was fine. We were competing (and signing) top talent in Europe and these players all wanted to come to United. United don't need a sugar daddy because they all ready have one, the fans! United would be such a better position without their American owners in office. Some might argue that they have tied up big sponsorship deals, but who is to say that without them United wouldn't have managed to get these lucrative deals signed?

  30. This is a fantastic blog. Keep up the good work.


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