Wednesday, September 7, 2011

Manchester United - Introducing The Brand

Manchester United’s start to the season has been exemplary. Not only are they top of the league after winning their first three games, but they have also scored an impressive 13 goals in the process. They have already put North London to the sword, brushing aside Spurs 3-0 before spanking Arsenal 8-2 in one of the most extraordinary matches that the Premier League has ever seen.

If there was any hangover from their demoralising defeat to Barcelona in the Champions League final, when the Catalan side thoroughly outclassed United, it was difficult to discern. In fairness, 2010/11 was still a fantastic season for the Reds, as they won the league for the 19th time, a significant milestone that took them past the 18 titles gained by bitter rivals Liverpool, and reached the semi-finals of the FA Cup.

That wily old fox, Sir Alex Ferguson, then wasted no time in rebuilding and rejuvenating his aging squad, when he paid out more than £50 million to bring in the exciting Ashley Young from Aston Villa plus two U-21 internationals, Phil Jones from Blackburn Rovers and David de Gea from Atletico Madrid. Although the Spanish goalkeeper has had some flaky moments, these purchases look like really good business, especially as it was concluded early in the summer, thus avoiding the insanity of transfer deadline day.

It was also a great season off the pitch, as United announced a 16% rise in revenue to £331 million, the highest ever reported by an English football club, which helped boost operating profits to a record £111 million, up 10% from the previous year. This produced a fantastic turnaround in the bottom line, as last year’s pre-tax loss of £80 million became a £30 million profit this year, an incredible improvement of £110 million in just 12 months.

Great stuff, but not quite the miraculous achievement it might seem at first glance. In reality, there are three factors behind this recovery: (a) accounting adjustments; (b) exceptional items relating to last year’s bond issue; (c) and real growth.

The first two reasons are horribly technical, but seasoned followers of United’s financials are no strangers to fancy footwork in the accounts, and these need to be explained if we are to understand what is really happening to the business.

This year, the club has decided to switch from UK GAAP (Generally Accepted Accounting Principles) to IFRS (International Financial Reporting Standards) and so has restated the 2010 results on this basis to give a valid like-for-like comparison. This has reduced the prior year loss to £15 million, an improvement of £65 million, which largely comes from two sizeable adjustments.

"Young, gifted and back"

First, the goodwill amortisation of £35 million resulting from the acquisition of the club has been eliminated. When the Glazers’ purchased the club for £790 million, the “fair value” on the balance sheet was only £260 million with the difference of £530 million representing brand value and future earnings potential. This is known as goodwill in accounting terms and is amortised on a straight-line basis over its estimated economic life (15 years in this case), i.e. £35 million per annum.

Second, the once-off charge for the termination of interest rate swap agreements was reduced by £29 million from £41 million to £12 million. This swap was a derivative used to hedge against movements in interest rates, but the club did not anticipate that they would fall as far as they did in the recession. The loss was crystallised on the switch from bank loans to the bond, though the club claimed that this was still a price worth paying, as the bond would provide them with more financial stability.

There is nothing untoward about this change in accounting policy, even if the mechanics are fairly tedious, with the key point here being that there is no impact in the real world, as there are no cash movements.

"The Nani state"

Similarly, the movement between the exceptional items relating to last year’s bond issue has no effect on the club’s cash resources. There was a (revised) loss of £38 million for these items in 2010, but a £9 million profit in 2011, producing an improvement of £47 million.

Most of this relates to foreign exchange movements on the dollar denominated element of the bonds ($425 million). Last year, this was a £19 million loss as the dollar strengthened against sterling, but this was reversed in 2011 with a £16 million gain, as the dollar weakened relative to sterling. Such FX movements will only be realised in 2017 when the bond is due for repayment. In addition, 2010 included the once-off (revised) £12 million charge relating to the interest rate swap.

So, if we deduct the £65 million IFRS accounting adjustments and £47 million movement in exceptional items from the year-on-year improvement of £110 million, we are left with no real growth. In fact, there’s a small decline of £2 million compared to 2010. Although revenue grew by a striking £45 million, this has largely been eaten up by £35 million of cost growth and a £3 million increase in the interest paid. If the £9 million fall in profit on player sales is then taken into consideration, United’s pre-tax profits actually fell by £2 million in 2011.

Fair enough, most companies tend to accentuate the positives when they announce their financial results, though I do wish that United would drop their tiresome habit of referring to “operating profits” of £111 million in their press releases when they are really describing EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), thus excluding £51 million of costs.

This measure is only really relevant if you believe that buying footballers is not part of the normal business of a football club. As legendary investor Warren Buffett cautioned, “References to EBITDA make us shudder. It makes sense only if you think that capital expenditure is funded by the tooth fairy.”

It’s also unnecessary for the club to spin these results, as the operating profit before player sales is a more than respectable £60 million, an increase of £10 million (21%) on the prior year with the profit margin rising 0.7% to 18.1%. Of course, most of that is needed to pay £43 million of interest, though £4 million profit from player sales and £9 million of exceptional items (mainly the unrealised foreign exchange loss) produced the £30 million profit before tax.

That should not be sniffed at, as only four Premier League clubs were profitable in the previous season and three of those clubs only reported small profits (Wolverhampton Wanderers £9 million, WBA £0.5 million and Birmingham City £0.1 million). In fact, United’s 2010/11 profit before tax of £30 million was only surpassed last year by Arsenal’s £56 million, which was inflated by property development and hefty player sales.

United’s profit after tax comes down to £10 million after tax charges of £20 million, but this is not really an issue, as most of these are used to offset losses elsewhere in the group.

Interestingly, player sales have not had a major impact on United’s figures with the exception of 2009 when the mega transfer of Cristiano Ronaldo to Real Madrid produced profit on player sales of £81 million. Since then, the club has only booked profits from this activity of £13 million in 2010 and £4 million in 2011.

The fans clearly did not welcome Ronaldo’s sale, but it did at least lead to a profitable year for the club, which was very much the exception to the rule, as United have reported large losses every other year since the Glazers’ arrival.

However, if we strip out the accounting “funnies”, namely the goodwill amortisation and exceptional items, then a different picture emerges with the club showing large profits for the last five years (2007 - £11 million, 2008 - £14 million, 2009 - £84 million, 2010 - £23 million and 2011 - £21 million) – even after considering the significant interest paid to service the club’s substantial loans.

Of course, the amount of interest paid is still highly damaging, which has been the case ever since the Glazer family bought the club in 2005 in a leveraged buy-out that loaded debt onto the club. They only paid £250m themselves, borrowing the remaining £540m from banks and hedge funds, which significantly increased United’s interest burden. Essentially, the club’s highly impressive operating profits are greatly reduced by the massive interest payments.

In fact, net interest payable actually increased in 2011 by £3.5 million to £43.5 million, as the interest rate on the bonds is higher than the bank loans they replaced.

"What a difference a David makes"

United’s chief executive, David Gill, has argued that this is not a problem, “We have a long-term financing structure in place, excellent revenues that are growing, we are controlling our costs and we can afford the interest on our long-term finance.” As we have seen, this is undoubtedly true, but, when giving evidence to the House of Commons select committee inquiry into the governance of football, even he admitted that “it would be better” if the club did not have to pay such high interest.

Of course, all of the above figures have come from the Red Football Limited accounts, so exclude the crippling interest on the PIK loans, which were booked in the club’s holding company, Red Football Joint Venture Limited. In 2010 this brought the total interest up to a staggering £73 million and the pre-tax loss to £109 million. The club has always insisted that these loans are the responsibility of the owners and nothing to do with the club, even though the PIKs were secured on the club’s assets. In any case, this may be a moot point now, as this debt was cleared last November.

Incidentally, United will have no problem coping with UEFA’s Financial Fair Play regulations, which aim to force clubs to live within their means. The break-even calculation takes the £30 million pre-tax profit as a starting point, then excludes depreciation £7 million, net profit from exceptional items £4 million and expenses for youth and community development (assume £12 million), giving a comfortable break-even result of £45 million.

This is largely driven by United’s vast revenue, which has reached £331 million following the £45 million growth in 2011. In fact, United’s revenue growth of £165 million in the Glazer era has been mighty impressive, doubling the club’s turnover.

Although you could argue that much of this is down to centrally negotiated television deals and the Old Trafford expansion that was approved by the former board, it would be churlish not to give the Glazers some credit for the rise in revenue, not least the impressive progress made in the commercial arena. Their revenue growth has certainly been better than Chelsea and Liverpool, while only Arsenal (of the Big Four) have kept pace, largely due to the move to a new stadium.

Even so, last year United’s revenue of £286 million was a long way ahead of Arsenal’s £224 million, while other clubs are even further behind: Chelsea £206 million, Liverpool £185 million and Manchester City £125 million.

This placed United third in the most recent Deloitte Money League (based on 2010 results), only behind the Spanish giants, Real Madrid £359 million and Barcelona £326 million. They will almost certainly remain in that position when the next Money League is published, though the gap to Real Madrid (up to £425 million in 2011) and Barcelona (£381 million) is actually widening, though that partially depends on the vagaries of the exchange rate.

United’s revenue has gone from strength to strength over the past few years, leading to an almost perfectly balanced revenue mix with no single stream dominating. The revenue split is now a very healthy 36% media (£119 million), 33% match day (£109 million) and 31% commercial (£103 million). This is in marked contrast to the majority of clubs in the Premier League who have a dangerous reliance on television revenue.

That said, TV has still grown the most since 2005 by £71 million (or 147%), though the other categories have been no slouches either: commercial £55 million (112%) and match day £39 million (57%). In fact, in more recent times, defined as the last two seasons, nearly two-thirds of United’s revenue growth has been due to the commercial arm of the business.

The dazzling progress made in leveraging the global appeal of United’s brand is perhaps the most striking aspect about the club’s financials, which was demonstrated by the £22 million (27%) growth in 2011. Even MUST (the Manchester United Supporters’ Trust) conceded, “The commercial team at United are clearly smart operators.”

As commercial director Richard Arnold explained, “The world’s number one game is football. Manchester United is the number one club and we are offering the number one marketing platform to fantastic partners.”

There’s a lot to this argument: the Premier League is televised in 212 countries, while research undertaken by the club estimated that United has more than 330 million followers worldwide. It is difficult to know whether these figures are accurate, but conclusive evidence of United’s popularity is provided by the sales figures from Nike and Adidas, which point to United (along with Real Madrid) selling more shirts globally than any other club. Furthermore, Wayne Rooney tops the Premier League sales of replica shirts, according to the PL Season Review.

United’s largest sponsorship contract is with long-term kit supplier Nike, which runs until 2015 and increased from £23.3 million to £25.4 million in 2011 in line with a contractual step-up. Nike also manage the club’s merchandising, licensing and retail operations, sharing the net profits equally with United. This kit deal remains the highest in England, slightly ahead of Liverpool’s new Warrior deal £25 million and Chelsea’s improved Adidas contract £20 million, though is a little lower than the deals at Real Madrid and Barcelona.

Revenue from shirt sponsorship also increased by £6 million in 2011 as the club replaced AIG with another insurance company Aon, who will pay £20 million a year until 2014. Only Liverpool’s £20 million deal with Standard Chartered can match this, though the shirt sponsorship element of Manchester City’s Etihad deal has also been estimated at the same amount. Other English clubs’ deals are far behind (Chelsea – Samsung £14 million, Spurs – Autonomy £10 million and Arsenal – Emirates £5.5 million), though better deals have been secured on the continent: Barcelona – Qatar Foundation £26 million, Bayern Munich – Deutsche Telekom £24 million.

In addition, United have many secondary sponsors, including the likes of Betfair, Thomas Cook, Turkish Airlines, Airtel, Epson, Audi and Singha Beer. Most of these bring in around £1.5 million per annum. 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.

"Vidic leading by example"

The good news does not stop there, as more partners are being added to the roster all the time. Most spectacularly, the 2011 figures do not include the amazing DHL deal to sponsor training kit for £10 million a season, which David Gill said, “breaks new ground in the English game.” Incredibly, the contract only covers domestic use, so excludes the Champions League where broadcasters get more access to training. It actually exceeds the value of all but four of the main shirt sponsorship deals in the Premier League.

DHL may have been convinced of the upside of being associated with United by their sponsorship of this summer’s US pre-season tour, which attracted a notable total of 290,000 spectators. As a further example of United’s global appeal, two more deals have recently been signed in Asia, with the leading Vietnamese mobile phone company, Beeline, and a Malaysian snack food manufacturer, Mister Potato.

Under chief of staff Edward Woodward, United’s commercial team has no intention of resting on its laurels and expects to secure much 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. Consequently, United are in discussions to extend their deal with Nike for a record £450 million, which would be worth £35 million a year, i.e. a £10 million increase.

They might also consider naming rights, though not for their stadium, but their training ground at Carrington. Sir Bobby Charlton, now a director at the club, asserted, “It’s not our policy to change the name at Old Trafford. It’s too important.” However, fans would be less resistant to giving a corporate name to Carrington, especially if it funded the arrival of a quality new player.

There’s certainly some room for growth, as United were still a fair way behind the commercial income generated by some leading continental clubs, at least last season, when their £81 million compared to Bayern Munich’s extraordinary £142 million, Real Madrid’s £124 million and Barcelona’s £100 million. Obviously, the 2011 figure of £103 million has overtaken Barcelona, but that is before the new Qatar shirt sponsorship is included. In fairness, United’s merchandising operation is outsourced to Nike, so commercial revenue (and operating expenses) would be higher, if it were brought back in-house.

Notwithstanding the commercial boom, television remains the largest revenue category at £119 million, up £14 million (or 14%) from the previous year, which mainly comprises £60 million from the Premier League and £47 million from the Champions League, plus around £10 million from MUTV and MU Interactive.

The Premier League distribution increased £7 million, almost entirely due to the substantial increase in overseas rights for the new three-year deal that commenced in 2010/11. Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£17.9 million). However, facility fees (25% of domestic rights) depend on how many times each club is broadcast live, which benefits United, as they were shown the maximum 26 times, more than any other club, which was worth £13.5 million. Finally, merit payments (25% of domestic rights) are worth £757,000 per place in the table, with that amount going to the bottom club and £15.1 million to the top club, which was obviously United.

Champions League revenue was £6 million higher, mainly because United reached the final compared to the quarter-finals the year before. The distribution from UEFA of €53 million (£47 million) comprised €7.2 million participation fees (same for each team), €20.1 million prize money and €25.9 million from the market (TV) pool.

Interestingly, United actually received more money than the winners Barcelona, as their TV money is higher, due to England’s TV market being bigger. However, they received less TV money than the previous year, as this allocation is split 50% between progress in the Champions League and 50% based on the club’s finish in the previous season’s Premier League. Therefore, finishing second to Chelsea in the 2009/10 Premier League reduced United’s share of the Champions League TV pool in 2010/11.

Of course, United’s media revenue is still far below the Spanish giants, Real Madrid and Barcelona, as they are allowed to negotiate individual television deals. Whether this arrangement endures is another question, given the pressure from other clubs in Spain to move to a collective agreement (as they have done in Italy this season).

Match day revenue remains a core part of United’s strategy, though it is probably reaching saturation point. Although it rose £8 million this year to £109 million, this was only back up to the same level as 2009. Essentially, it now depends on the number of home games played, which increased from 28 to 29, though the club also received a share of gate receipts from the Champions League final and FA Cup semi-final.

This is the highest match day revenue in England with only Arsenal (£94 million) coming anywhere close. United generate 60% more than Chelsea (£67 million) and two and a half times as much as Liverpool (£43 million). Each home match earns £3.7 million, so two matches bring in more than an entire season’s gate receipts at Blackburn Rovers, Bolton Wanderers and Wigan Athletic. In fact, it’s probably the highest of any European club, as only Real Madrid were in the same ballpark last season at £106 million.

Even though there has been some weakening in season ticket demand, United have still achieved 99% capacity utilisation and their average attendance of 75,000 is the third highest in Europe, only behind Barcelona and Borussia Dortmund. Old Trafford’s capacity of 76,000 has 16,000 more seats than the next largest English ground, The Emirates. There has been some talk of an even bigger “Theatre of Dreams” by expanding the South Stand, but the logistics would be quite tricky.

The other driver for the growth in match day revenue has been deeply unpopular, namely ticket prices, which MUST claim have risen by 55% under the Glazers’ ownership. Of course, other clubs have also raised their prices, most notably Arsenal with a 6.5% increase this season, and the fact is that United’s cheapest season tickets actually cost less than those at Arsenal, Chelsea, Liverpool and Spurs.

On the costs side, there is no sign of growth slowing down, as the wage bill rose £21 million (16%) to £153 million, the increase being split almost evenly between salaries and success-related bonus payments. Last year United’s wage bill of £132 million was the third highest in the league, but this year it is likely that Manchester City will also significantly grow their £133 million, while Chelsea may come down from their £173 million following a few major departures, so there may well be three clubs all around the £150 million level. Wages were even higher on the continent in 2010: Barcelona £233 million, Inter £207 million, Real Madrid £166 million and Milan £152 million.

The wages to turnover ratio remained unchanged at 46%, which is the lowest in the Premier League. To place that into context, over half of the Premier League clubs are struggling with ratios above UEFA’s recommended upper limit of 70% with Manchester City “leading the way” with 107%. United’s huge turnover has helped them maintain this ratio in a very healthy range of 44-47% for the last five years.

How long United can compete without spending more on salaries is open to debate. In the bond prospectus, the club warned, “it may be difficult to maintain this ratio at historic levels without negatively impacting our ability to acquire and retain the best players.” This issue was highlighted this summer with the fruitless pursuit of Wesley Sneijder.

Two conflicting factors will affect next year’s wage bill. On the one hand, it will increase following numerous contract extensions, including Nani, Nemanja Vidić, Antonio Valencia, Park Ji-Sung and infamously Wayne Rooney’s bumper new deal, which will cost an additional £4-5 million on its own. On the other hand, several high earners have been offloaded, including Edwin Van der Sar, Gary Neville, Paul Scholes, Wes Brown, John O’Shea and Owen Hargreaves, which should save at least £20 million, though this will be offset by the arrival of younger replacements.

Other operating expenses have risen at an even faster rate than the wage bill with a 26% (£14 million) increase to £68 million. This is due to costs associated with the growth of the commercial business, the US tour, the Champions League final and the sale of MUTV international rights.

"Me and Mr. Jones"

In addition, there were £5 million of exceptional costs, namely a £2.7 million provision for professional advisor fees and a £2 million impairment charge in respect of investment property.

Player amortisation, which is the cost of writing down new players, has actually fallen 2% to £39 million. This concept is not always clear to football fans, but the example of this summer’s purchases should help explain the mechanics. Both Phil Jones and Ashley Young were signed for £17 million on five-year contracts, but those transfers are only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, i.e. £3.4 million a year for each player (17 million divided by five years).

In 2011, any acquisitions during the year were offset by the impact of the many contract extensions, where any remaining amortisation is written off over the revised contract, thus reducing the annual expense. United’s amortisation is much lower than those sides that have spent big in the transfer market, such as Manchester City £71 million, Barcelona £63 million and Real Madrid £57 million.

This is a reflection of United’s restrained spending on new players in the past few years. In the era of foreign ownership, since Roman Abramovich’s arrival purchase of Chelsea in 2003, United’s net spend is less than £100 million (according to the Transfer League website), which is much less than their peers with the obvious exception of Arsenal. In the same period, both Chelsea and Manchester City’s net spend is over £400 million. Clearly, United’s net spend is reduced by the Ronaldo proceeds, but even so, that’s a telling comparison.

That said, United‘s 2011 net spend of £43 million is not far behind City £57 million and Chelsea £48 million and is actually higher than Liverpool £36 million, so maybe the purse strings are being loosened just a shade. Nevertheless, Ferguson’s claim that the reason that he has not made any marquee signings is that he cannot find any value in the transfer market really does stretch fans’ credulity to breaking point when the likes of Mesut Ozil move to Real Madrid for £13 million and Rafael van der Vaart to Spurs for £8 million. Indeed, when Rooney agitated for a transfer, he openly questioned the club’s ambition and ability to compete for world-class players.

The suspicion is that the debt mountain has influenced the club’s transfer policy, so it is a promising sign that the net debt has been cut from £377 million to £308 million (£459 million gross debt less £151 million cash), as the club has bought back £64 million of its bonds. This is down from a peak of £474 million in 2008.

Last year the club raised around £500 million of funds via a bond issue, so that they could repay the previous bank loans, in order to fix the club’s annual interest payments for a longer period (up to 2017), thus ensuring more financial stability. However, there was a price to be paid, which can be seen with a comparison to Arsenal’s bonds, as the debt has to be repaid quicker (7 years vs. 21 years) and the interest rate is higher (8.5% vs. 5.75%).

The really annoying thing for United fans is that this is still unproductive 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.

"Ryan Giggs - still life in the old dog"

At least the Glazers managed to find £249 million last November to pay off the prohibitively expensive PIKS, though it is unclear how they funded this repayment. Many observers believed that the club’s cash would be used, especially after the bond prospectus explicitly allowed the payment of a £95 million dividend for “general corporate purposes, including repaying existing indebtedness” and future dividends of up to 50% of net cash profits (as long as the club’s interest is covered twice by EBITDA).

However, the board confirmed that no club cash had been used, though it remains unclear whether this was always the plan or whether this was in response to supporter protests. The chances are that the PIK debt has simply been replaced by another loan, which would mean that the threat of using club cash for repayment remains, but at the very least any new loan would surely be at a lower rate of interest than the 16.25% PIKs, thus advantageous to the club.

Included within the net debt are astounding cash balances of £151 million, though this has been boosted by cashing the £80 million Ronaldo cheque and the £36 million upfront payment from the shirt sponsor. The seasonality of the cash flow also needs to be understood, as most of the season ticket money is received before the end of June and used to pay operational expenses over the next few months.

"Hard Times for Rio"

The board has argued that it likes to retain so much cash to provide “flexibility”, but this seems a strange decision when they have to pay 8.5% interest on the bonds, while cash balances are unlikely to attract more than 2% interest.

David Gill has always insisted that the money 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”, adding that “there is no pressure at all to sell any star player.” In fairness, over £50 million of this was used this summer to bring in new players.

However, this has not really been the case in the last three years, when the large operational cash flows of around £100 million have been primarily used to service the club’s debt, as opposed to buying players, e.g. in 2010 the club spent £120 million on paying interest (£52 million) and repaying loans (£68 million), which was ten times as much as player registrations (£11 million).

In fact, since the Glazers’ arrival, the club has paid out around half a billion pounds for the privilege of having them as owners, either in interest, professional fees or repaying debts. Obviously, if the club had remained a PLC, then it would have had to pay out dividends, but it is unlikely that they would have risen to this level. The current structure also produces tax savings compared to the PLC, but the net impact of the Glazers’ ownership is surely negative. Equally plausibly, United could instead have been bought by a benefactor like Roman Abramovich, who has provided Chelsea with massive interest-free loans.

Even though Ferguson has been supportive of the owners, “They don’t have any criticism from me or anyone in the club”, it is easy to see why many fans have protested. All of the money paid to the Glazers could have been made available to strengthen the squad or keep ticket prices down, but has instead disappeared into the financial ether.

The latest financial engineering from the Glazers is the decision to float a minority stake of the club via an IPO (Initial Public Offering) on the Singapore Stock Exchange. It is understandable why Asia was selected, as this is an obvious region for future growth, but it is less clear why they went for Singapore instead of Hong Kong, though some believe that this is due to the less onerous regulatory requirements.

"The Glazers laughing all the way to the bank"

Whispers suggest that the board is seeking to raise £600 million for a 30% stake, which would value the club at £2 billion. That seems a very “rich” valuation, especially if they opt for a two-tier share structure with one non-voting share for every voting share. This may have the advantage to the Glazers of protecting their control of the club, but it is less attractive to investors.

Stephen Schechter of the eponymous investment bank suggested, “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.” Indeed, the Red Knights, a group of wealthy fans interested in buying the club, suggested that the club was not worth more than £1 billion.

The risk is that if the targeted valuation is too high, then the offer will fail to get off the ground. In fact, you have to wonder why the Glazers are pushing the IPO at a time when the equity markets are lower than they have been for some time, which begs the question of what they will do with the proceeds.

"Little Black Eyed Pea"

There are effectively three possibilities: (a) repay some of the club’s debt; (b) use the cash elsewhere in the business, e.g. a transfer/wages fund; (c) pass it to the Glazers, potentially to pay off any family loans they may still have, e.g. from repaying the PIKs. Or a mixture of all three.

If they repaid some of the club’s debt, as the club has apparently briefed journalists, then United would benefit from lower interest payments, though this would not be much use if they were then replaced by dividends to the new shareholders. We shall see.

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 rejected several offers above £1 billion, including one of £1.5 billion from Qatar. If that were not clear enough, the board stated, “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.”

"Cheer up, Alex, you're top of the league"

Even so, Manchester United 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.

At the right price, United are an exceedingly attractive investment proposition, as they are a veritable cash machine. Even though the profits are currently largely siphoned off by the enormous interest payments, the financials look great at an operating level.

However, perhaps the club’s biggest asset during the Glazers’ reign has been Sir Alex Ferguson. It is doubtful whether any other manager could have operated so successfully under the constraints imposed by these owners. Indeed, one of the greatest challenges facing Manchester United is how effectively he is replaced when he eventually retires. Whoever it is will have a tough act to follow.


  1. I want to cry. 46% of wages to turnover and 30mln profit keeping the high end of the spectrum of european football clubs. the day i see something like this for FC Inter I can die without i sigh. :/

  2. Manchester United is a football club based in the North West of England - under the Glazers it has been turned into a global franchise - owned by a secretive company in Delaware, floated in Singapore and with sponsors from around the world - Its soul is sick and slowly dying. LUHG

  3. Mezut Ozil & van de vart world class?? Do me a favour love!

  4. Possibly worth saying that agent fees for contract renewals are amortised over the length of the contract too. I make this point because they can be significant when looking at Nani, Vidić, Valencia, Park Ji-Sung and Rooney’s renewals. Obviously there's no transfer fee, but as well as wages the agent fees are an amortised expense (straight line).

  5. Another great article from Swiss Ramble.

    Still waiting about Juventus finance after they have own new stadium and money from EXOR.

    I hope you can write about Juventus soon.

    Thank you.

  6. Obviously A Suede Maniac. Good Job!

  7. Great stuff!

    I am betting on a quick cash grab - investors should not hold their breath on any dividends any time soon. Instead, any funds will re-pay the off-the-books personal loans the Glazers may have outstanding.

  8. "Anonymous said...
    Mezut Ozil & van de vart world class?? Do me a favour love!"

    Anon, VDV is probably not world class, but at 8M he was a tremendous value for a Spurs team fighting above their weight and reaching a 1/4-final in the CL.

    Ozil is a whole different matter and unquestionably world class, and a huge bargain at 13M. If you don't think so, then you probably haven't watched a minute of Real's games last season, so your opinion on the matter is largely irrelevant.

    Back on topic, I do think United made inquiries for Ozil at the time, but Madrid proved to be an offer too good to refuse for him.

    Ivo S

  9. Wow this is amazing... but am a science lad so am a bit confused abt some of the business terms and calculations here... but man utd is simply oustanding when it comes to money issues

  10. Swiss Rambler:

    Utd's gross debt has reduced from £541m to £459m in the last year - a total of £82m. Yet the figures suggest they've only bought back £64m of bonds. How has the other £18m been paid back?

  11. The best run club in top football. such a pity it has fallen into the hands of the glazers

  12. Great work again man! I would love if you can write a piece explaining the latest financial results of FC Barcelona. Thanks.

  13. My hopes of UTD going under have just been dashed

    Dam the dark side

  14. @Anonymous (8:15),

    The difference is largely the FX movement on the US dollar denominated bonds, i.e the £16 million gain that you see in the profit & loss account, after the dollar weakened against sterling.

  15. Personally I have no problems against the concept of LBO because you will find in the business world they do work, you do need savvy owners (which Gillett and Hicks were not) and the Glazers have been able to maintain strong growth and have given Sir Alex and David Gill an alleged free reign regarding footballing matters.

    That said, it is unfortunate that a football club (any football club) in Europe is allowed to be turned into a pawn in the hands of greedy businessmen or royalty trying to make a quick buck and/or boost their egos.

    Also, any more word on the IPO?

  16. mighty stuff.

    I am amused however about the mention of little fat rafa vdv as being value. I'm not sure that man utd had any real use for a player who plays in the wayne rooney position, who is either holding his hamstrings after 60 minutes, or puffing and panting like eric cartman in the special olympics episode of south park. Also I doubt they would have sold him for £8 million to a realistic CL rival, given what happened with robben and sneijder.

    Mesut Ozil was looking for €100,000 a week net, which are kolo toure wages. So while his fee was affordable, his wages simply weren't, which is a shame, because he's a brilliant player and utterly wasted at madrid.

    just one thing, there's a liverpool blogger called jaimie kanawar who has done a comparison between the wage bills at liverpool and man utd over the last decade, and he says that he is using the accounts as the basis, and he has a considerably lower figure for man utd's wages in 2009-10, which he takes from the accounts.

    What is the difference between the figure you use, and the figures he uses. Here is an example.

  17. @Anonymous (12:38),

    The Man Utd wage bill used by the other blogger is from the company Manchester United Football Club Limited, which is owned by Manchester United Limited, which is in turn owned by Red Football Limited.

    I took my wage figures from Red Football Limited to capture the total wages at United. I'm not saying that the other guy's figures are wrong, as it depends on the analysis he is preparing, but he will definitely not have the total wages at United.

  18. cheers for that. I knew that it would be something like that. could you tell me what makes up the 21 million difference between the two figures?

  19. Anonymous (1:43)

    From a google search to find what I presume is said blog, he excludes social security and pension costs. I'd also make the assumption he might well have excluded bonuses, as United would undoubtably have paid out higher amounts due to higher level of success.

    Per the bond prospectus: (as it outlined bonuses for the years other than 2009)

    Wages and Salaries 94,502
    Bonuses 13,369
    Social Security Costs 12,116
    Other pension costs 1,093

    Wages and Salaries 73,641
    Bonuses 8,633
    Social Security Costs 9,101
    Other pension costs 935

    comparing to the other article, 2008 he has £90.7m compared to £94.5m above, and 2007 £68m compared to £73.6m above. Smaller discrepancy that can probably be explained as above, by more staff within the whole group.

  20. Regards Nike negotiations c.£450m:

    Would United not be looking to exceed the figure paid to the French national team? Mark Ogden (Telegraph) "Manchester United supporters hope for 'beginning of the end' as Glazers prepare to relinquish sole ownership
    " 16th August 2011, states the Glazers are confident of securing a deal in the region of £600m. If that's achieveable, then c.£20m increase p/a working on a 13 year deal again.

    Additionally I think one of the primary drivers will be if the mobile telecommunications deals have an uptake sufficient to be viable and renewed. Might be difficulty in some regions where the mobile provider is state-owned, but United currently have 11 such partners covering 31 states (Bahrain, Benin, Botswana, Burkino Faso, Cambodia, Chad, Democratic Republic of the Congo, Congo Brazzaville, Gabon, Ghana, India, Indonesia, Kenya, Laos, Madagascar, Malawi, Malaysia, Niger, Nigeria, Rwanda, Saudi Arabia, Seychelles, Sierra Leone, South Africa, Sri Lanka, Swaziland, Tanzania, Uganda, Vietnam, Zambia, Hong Kong.)

    The continuation of agreements being made (Beeline and Viva Kuwait this summer) are encouraging, in that implication would be that it has been a successful venture so far. Also given some of those partners are market leaders or well placed in other regions not currently included - if realising gains on the sponsorship investment - one would hope of an extension towards those regions. eg. MTN who cover the agreement for South Africa and Uganda among others, are market leaders for Cameroon & Ivory Coast. To prognosticate, as those countries become more developed and wealthy, penetration rate is likely to increase, and so the £1m-3m p/a deals currently could be c.£5-6m by time of renewal. Additionally, if proves to be successful with this first batch, possibility might attract some of the larger companies. Airtel (who agreement is placed for 14 territories) are partly owned (32%) by Singapore Telecommunications. Singapore with the IPO would be an obvious target, but they also own (wholly or partly) the market leader in Thailand and 2nd market leaders in Australia and Phillipines. SK Telecom would be attractive as market leaders in South Korea. KDDI or Softbank in Japan. América Móvil or Telefónica to attempt to penetrate into Mexico & Ecuador, in hope of tapping into interest in Hernandez, & Valencia. Possibly Brazil even with Anderson, Rafael, Fabio, though would guess less interest in regions with strong domestic leagues/support like Brazil/Argentina or the European nations.

  21. @Paul,

    Yes, I saw that article, but the value of the new shirt sponsorship is a moving target. For example, in December last year the same journalist projected a figure of £450m:

    I've seen quite a few figures bandied about, so I opted for the more conservative estimate, though it wouldn't surprise me at all if the new deal came in at a higher level.

    I agree with you that there is a lot more growth to come in United's commercial revenue. I think that in time they will at least reach Bayern Munich's current level and probably even higher.

  22. Thanks for the reply.

    Regards the IPO, looking on your twitter timeline, you suggest the prospectus would have detail but wouldn't likely outline the use of proceeds. I would've thought they'd need to give some intention to attempt to increase attractiveness or do you think it'll be lots of scenarios that they may or may not exercise? e.g. the £95m carveout outlined in the bond prospectus appeared to be to facilitate paying down the PIKs but equally could've been purely placed as a security. Better to leave yourselves as mainly options as possible. I see the prospectus also outlined that an IPO before 2013 can allow redemption of 35% of the bonds at par without redemption penalty or premium.

    But surely no investor will wish to invest if likelihood is Glazers are looking to purely pocket the cash. Equally surely their capability to do so, depends on type of issue, whether new shares or existing. New shares (which I'd presume most likely) would result in the proceeds going into the club, and thus the Glazers would be limited by the bond prospectus as to what they could extract, namely the £95m carveout and the dividend entitlement proscribed - though that provision would be obsolete if cleared the bonds.

    But either ways, I would've thought investors would be looking for either the Glazers to either reduce the debt (reduce the EV/EBITDA multiple they'd have paid plus reduce liabilities so easier to pay dividends), or use the proceeds to further grow the brand, eg. expand South Stand, development of the surrounding area, commercial offices in Asia etc.

  23. @Paul,

    I agree that a prospectus will normally provide a broad range of options without necessarily saying exactly what will happen with the proceeds. That doesn't always scare off investors. For example, the bond offer was twice over-subscribed, even though the prospectus seemed to indicate that the club's cash would be used to pay down the PIKs.

    My own guess is that if the Glazers get anywhere near the rumoured £600m, they will pay down some of the club's debt, provide Sir Alex with some transfer money and use some for their own means.

  24. Thanks for the great article, i was wondering if you knew what UEFA stance regarding FFP is on the matter of changing from UK GAAP to IFRS.

  25. @Anonymous (10:14),

    Thanks. Not a problem for UEFA. The main recurring difference, i.e. the goodwill amortisation, would have been excluded for the purposes of the FFP break-even calculation in any case.

  26. Brilliant work once again mate. Love all your articles, but this one is special as its about my club.

    Its interesting to note the change in the atmosphere around the club and its fans in the span of the last 24 months. We went from complete doom and gloom to some optimism about the future of the club.

    Strange this. Just 2 years ago we lost Ronaldo and Tevez, while our debt kept growing. There were fears of United actually going under. And I have to give credit to the gimps, they have crafted a way to get us out of the mess they put us into. They are certainly very crafty businessmen. Though I do wish they had stayed the f**k out of our club. But that's not happening so we have to deal with what we have.

  27. .cont The way they shifted the debt is very good I have to admit. However we still do not know what happened to the PIKs. So our net debt could still be well over 500 million. I am guessing the IPO will go towards reducing some of that debt. With the new money they can pay back whoever gave them the cash for paying off the PIK loans. I am thinking that was the plan and promise all along. A short term loan to reduce debt, and take it off the books. This increased the United's value as far as the flotation was concerned. The gimps will quietly pay it off and be done with it with the money they get from the IPO. The rest, around 200-300 million depending on how well the flotation goes will go to buy back some of the bonds, and keep money for dividends. The more bonds they buy back the easier it will be to pay them off in the end or refinance them. They do not have to pay themselves the interest on the bonds they bought back, though its quite likely that they will.

  28. .cont United's business side still has room for growth. As you said, the matchday revenue has reached its peak and any sharp raises will be met with lower attendance, so I do not think they will be coming. The increases will pretty much be in line with inflation. United's media arm does have a bit room for growth. The Gimps just have to figure out what to do with MUTV. It they can provide the content over the internet they might see good growth. Right now MUTV online is rubbish and useless unless one is desperate to see the summer tour. But more and more countries are providing tour coverage so there is no need for it. But if MUTV online resembled MUTV that costumers in the UK see then it might grow. And with a potential market of millions there is true room for growth. That or the expansion of MUTV to the rest of the world with cable and satellite deals as a paid channel. I would definitely pay up to $12US if I could get pre and post match shows and reserve and youth games on top of the regular programs and replays of first team matches. Plus the tv deals, as high as they are, still can grow a bit with more markets opening up and paying more money for the rights worldwide. especially in the Americas, Africa and Asia.

  29. .cont But the biggest positive is the commercial growth. Finally we are reaching the levels where we should be at. United have the potential to surpass even Bayern and Barca and Real. Surely another 100% of growth is not out of the question over the next 5 years. The new deals with Nike and a new shirt deal will provide a large part of it, but United is not done with secondary sponsors. If all this happens then United can reduce their debt to a manageable 200 million level (gross). With interest and dividends not costing the club more than 30 million per annum. And all this would be necessary in the post SAF era when success wont be guaranteed and stability wont be taken for granted.

  30. .cont The only person who held this club together over the last 5 years is Sir Alex. But even he will go within the next 3-5 years. Then we will need the financial freedom to get through the transitional period before we again find the right person to lead the club into the future (hopefully). Under SAF we have grown accustomed to success on the pitch and financially. But once he is gone there will be no guarantees. Player and manager turnover could become very high and very costly. That is on top of the very possible lack of on the pitch success. And if we are still close to a half a billion in debt we could be back in trouble very quickly. And then the gimps would take offers of even under a billion quid because the fear of the club going under could become real again. I think they realize that and are doing everything to prevent it. At least I hope they do. Because a post Busby United was in real turmoil. A Post Ferguson United could actually go under if things don't go right for us.

  31. oh wow, was finally able to post my comment after trying since the morning. Good thing I had it saved. Sorry for the length, the 4 above this one are all mine. I tend to ramble a bit. Also could not post with my wordpress account. Weird.
    Anyway, cheers again for the great post.
    And will we be seeing another United post once the IPO happens? Would be interesting to hear your views. Cheers.

  32. Also, a question about the bonds. Are there any limits/penalties that would prevent the Gimps from buying back all the bonds if they suddenly came into money? Doubt this will be an issue, but was just curious.

  33. Fantastic piece of analysis, as usual.

    And they say LBOs are dead! A £270m equity investment for an asset worth potentially £2bn+ while the world went through a major recession? Would love to find such deals for my pension fund... Ok one should include the PIK loans for a proper ROI estimate but still.

    Quick question on Arsenal's commercial situation: I understand the Emirates deal (front payments for the stadium etc) but why is Arsenal not signing second-tier type of deals like ManU? Could it be a winner-takes-all market or just a crap commercial team?

  34. @GreekGunner,

    The answer to your question is that Arsenal, nor any other English club for that matter are anywhere near as attractive as Manchester United for sponsorship by secondary sponsorship deals.

    It is difficult to stress just how far Arsenal are behind Manchester United in this sense, despite the fact that they are (were until this year?) one of England's biggest clubs

  35. Bond retirement seems to be limited to 35% of each issue before 2013. That said, United could use some of the funds to purchase bonds in the market, as they have done this year (those bonds are not retired).

  36. I'm amazed by your sudden recognition that United have been profitable for the last five years. While it's not a surprise to anyone who actually troubled to do the analysis, I can't help feeling that a little more intellectual honesty and a little less determination to bash the Glazers at all costs might have led you to recognise the obvious earlier. And that in turn might have helped to assuage some of the anguish caused to United supporters by the constant predictions of doom by (supposedly competent) analysts.

  37. @Anonymous (6:16),

    Your amazement appears to be blinding you to the fact that these points were made in my last piece on United, when I specifically mentioned the impact of items such as goodwill amortisation and exceptional items on the club's profits. However, I am happy that the addition of a pretty graph has made that completely obvious to you.

  38. Thanks for the graph, although I had actually taken the trouble to dig out the truth already. And I'm proud of you for at least mentioning the impact of goodwill, etc. The pity is that you didn't carry it over into your conclusions.

    ".... the fact is that Manchester United only make profits until they make interest payments, as their enormous debts to the banks and hedge funds soak up all the profits from the playing side.

    This should be nothing new to Manchester United fans, as the club has reported large losses in four out of the last five years. The only exception was last year’s profit before tax of £48 million, but this would also have been a loss without the extraordinary £81 million profit on player sales, due to Ronaldo’s transfer."

    “The loss shows that the business model doesn’t work unless there are player sales. It’s an absolute mess.”

    The huge loss was no surprise for Duncan Drasdo, chief executive of the Manchester United Supporters Trust (MUST), who lamented, “Every time these results come out, we see how much money is being wasted.”

    Given that you obviously new the reality of the situation, this continued focus on spurious ("accounting") losses is questionable.

  39. Edits for the last sentence: "knew" and "was questionable" as you came clean this time round.

  40. @Anonymous (10:34),

    Nice bit of selective quoting there.

    I particularly like the way that you ignore all the points that I made in the previous piece about the strong cash flow and the impact of goodwill amortisation and exceptional items.

    Perhaps best of all though is the way that you exclude the fact that one of the more emotive statements you cite is actually a quote from a partner at the accountants PKF.

    It's almost as if you are deliberately trying to mislead. I would suggest that that is a little "questionable".

  41. I seem to recall congratulating you for mentioning the impact of goodwill, etc. Perhaps I should have been more expansive. And you're right about the strong cash flow - but again you didn't carry this through to your conclusions - which were that the club was making losses.

    You're also right about the source of the "emotive" statement - trouble is, you're the one who chose it to support your thesis, so it's a little late to disown it now.

  42. Brings a tear to my eye

  43. from what you have written is it right that losses resulting from intrest dont count under fair play given that whilst the fiar play rules are aimed at cutting spending of clubs that carnt affor it surly indebted clubs carnt afford it in many ways more so than clubs that have money but low revenue and large losses like city and chelsea is this the case and would you agree with me that so long as owners dont leave this is unfair epsecialy given the fact that the clubs that have gone under all had debt issues not large benficators wanting to leave

  44. Being an American who has only been to Manchester once (and briefly for a City/Spurs match), I am struck by something you said when analyzing City and their situation vs. FFP. You mentioned the potential to develop the complex around Eastlands with youth training fields and (likely) a bunch of other revenue generating opportunities that would be calculated as "related income" for the purposes of FFP. Do United have similar options in the areas around Old Trafford? If so, do you have any insight into whether they have designs on doing anything against those options?

    Cheers - Neal

  45. are you a city fan and how long for im a city fan and not from manchester my understanding is that united could raise there capacity and could build a hotel or something but the etihad campus is 210 acres and covers a large part of east manchester which is a lot less built up and has more brown field sits and old factories the etihad campus may end up being quite spead out and not all of the projects will be city or sports related some of it will be more housing type stuff not done by city or for city but will benfit from what is doe especialy as some sports facilties will be cheap or free and open to the community a lot of new housing but i dont realy think anyone one knows what it is yet

  46. Just a quick point- I know the media have reported the DHL deal as 10 million a year. I realise that the word of an anonymous person over the internet doesn't count for much but I've been told on good information that this is a massive overestimate and the deal is less than 1 million a year (still impressive for a training kit).


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