Today Liverpool FC went through a complicated court procedure to resolve their ownership. Their biggest rivals, Manchester United, have not had the problems that have engulfed the beleaguered Anfield club but nevertheless have issues with their ownership. The Glazer takeover of Manchester United has created friction between the club’s support who deride the Glazers and want them out (Love United, Hate Glazer) and the owners themselves.
Liverpool’s current (for now) owners were desperate to sell the club on their terms, for their own financial benefit and not the benefit of Liverpool Football Club. In Manchester and Florida the Glazers will be looking on in interest at how their national compatriots have floundered in the business of football ownership. Let me be clear, the Glazers like Hicks and Gilette have entered football for one purpose, profit. How they will achieve that profit though is important, having already turned down a 1.5 billion pound offer from a Middle East Consortium, just how will the Glazers leave United?
NB: A lot of the financial numbers etc contained below are garnered from the always excellent Swiss Ramble and his article on Manchester United’s recent results.
First and foremost we must understand how the Glazers got involved in Manchester United and what they hope to achieve through football ownership. Prior to the Glazer Ownership Manchester United was a publicly limited company trading on the LSE. Over the course of several years the Glazers bought Manchester United shares with the intention of one day buying the lot. They achieved this particular aim in June 2005, however to buy a company the size of Manchester United this particular transaction required a lot of money. More than the Glazers had, they put up 250m of their own money and 540m of loans, in what is technically described as a Leveraged Buy-Out (an LBO). The purpose of an LBO is to take a company you think is not being run well or has more value in it than is represented in the share price so that you can run it, trim it and then resell it later at a vast profit as you have made the company more valuable through actions which, if unpopular, could’ve been prevented by the shareholders.
True to LBO form this is precisely what the Glazers started to do. With the grim spectre of debt hanging over their ownership they set about trimming where necessary and increasing revenues where possible. It has not gone unnoticed that United’s ticket prices have sky rocketed since the takeover. In having a captive audience the Glazer’s realised they could increase match day revenues in the most base of ways. It is no surprise that having the biggest stadium would lead to Manchester United having the largest matchday turnover in the Premier League, it is surprising to see that they outstrip (considerably) the revenues of Barcelona and Inter Milan.
Though it is not only at the turnstile that the Glazer’s have turned the screws, a look at their profit trend on SwissRamble shows an increase in other areas that include Commercial Income and Media Income. Though the Premier League have helped with their increasingly profitable TV deals, United have struck out on their own with MUTV and according to SwissRamble:
“increased their stake in MUTV Limited to 66.7% “in order to have greater influence over the future strategy of the channel.” The ability to use technology to distribute live matches is definitely one of the attractions for overseas investors.”
The Glazers have helped United become a “veritable cash machine” but the problem with an LBO is what you are waiting for me to get to, the debt.
The debt loaded onto Manchester United dwarfs that which is crippling Liverpool and forcing the court case we see today, however United have continued to function properly and have not (yet) exhibited the decline which fell on Liverpool as the credit crunch hit. The story of their recent results though are the massive loss attributed to United’s ongoing debt concerns. Whilst the Club still retains large cash in it’s bank account (£164 Mil) the analysis at SwissRamble seems to indicate that when you include Red Football Joint Ventures PIK debt payments, which is secured against the clubs assets, the loss before tax was closer to £108m for Manchester United. For an excellent breakdown of United’s debt situation see SwissRambles article don’t be put off by the length or technical language it is as accessible as any blog post.
So to the question, how will the Glazers leave United? The strong revenues created are desirable but any purchase of United will have to clear up to £1.1 Billion of debt which seemingly the Middle East bid would have done but only would leave the Glazers personally receiving 400 million which whilst a profit would not make up for their default on their Malls or their ridiculously under budget Buccaneers. No, the Glazers would want more bang for their buck when leaving United and as far as I can tell there are only three ways to do so. They could sell to a mega-rich western consortium, who will probably be loaded with debt to be able to afford the club, they sell to a mega-rich eastern consortium who won’t need the debt but whose or they return the club to the market. Of these I think this is the best for Manchester United.
Manchester United are a cash cow, they sit on vast revenues and cash. It seems that under the Glazer regime they have optimized their revenue streams and are now stuck clearing debt. An IPO of Manchester United would return ownership to the public and the sheer value of the business and hostility to private owners would worry potential investors. The club would be free of debt and with such a large cash position they could offer investable dividends. Whilst this is all dependent on future success the likelihood of United dropping out of the top 4 is so remote as to be negligible, especially given UEFA’s fair business guidelines. Something Manchester United would comfortably fall under. LBO’s often result in a return to market of the trimmed down spruced up company. The financial results prior to United’s takeover indicate that turnover was £169m (which is £192m adjusted for inflation) boosted by the sale of David Beckham, the most recent results indicate £286m boosted by the sale of Ben Foster. This is an increase of 49% in 5 years. 49%. Even if we roughly apply this to price the Glazer’s paid (adjusted for inflation) this would be £1.3Bn of course this doesn’t take into account the improved revenue streams, the increased length of commercial contracts, the youth available through the Glazers transfer policy and the continued expansion of the Global brand. The market will always value future money streams as well as those available now so I don’t think that this is a reflection on what United would get if floated on the market.
There are already several clubs which are publicly listed and with anyprospective market action it is appropriate to take account of your competitors already listed, so in that regard we would look at Arsenal Holdings. Arsenal are currently the poster child of good football financial management, they have debt but it’s interest does not cripple the balance sheet and most recently they announced profits before tax of £45m. If we take into account Arsenal’s current ‘value’ and apply the difference in the EBITDA between the two companies Manchester United are currently 40% ahead of their London rivals. If the Glazers were to IPO Manchester United, it would create a large influx of money as the shares are sold, this money would be put to use to clear the ridiculously high interest PIK debt thus scrubbing a significant amount of Interest payments off the books. They could also relieve some of the other debt to leave United with a manageable amount which would be Arsenal-esque . The Glazer’s would not have to give up 100% of the company to make this happen they could do a partial IPO where only 49.9% of the equity is available to the market allowing Red Football to maintain control of the company and reap the rewards of the dividends and cash value of their stake. The problem with this is that with only 49% trading the stock would not trade frequently which leaves the price vulnerable to large increases or decreases caused by trades when they do happen. Whilst an IPO would be best for Manchester United it doesn’t seem the best for the Glazers at this time.
Unfortunately given prevailing market conditions and the sheer size of Manchester United the Glazers cannot cash out now without either transferring the company to another debt loaded consortium or not getting the profits they crave for in a return to market. As long as Manchester United stay in the Glazer’s hands fans will continue to see large losses on the balance sheets and interesting coincidences in transfer policy to quote, once more, SwissRamble:
“It will not have escaped those observers who are good with figures that the annual interest payment of £42 million plus the once-off £41 million paid for the bond issue add up to a sum that is horribly similar to the £81 million received last year when Cristiano Ronaldo was sold to Real Madrid. Fancy footwork on the wing replaced by fancy footwork on the balance sheet – how do you like them apples?”
They may not be in court but the Glazers are playing a dangerous game in how long they are holding on to Manchester United – their goal get’s increasingly further away the longer they allow debts to increase whilst the match day revenues (the largest revenues on the books) peak. With another protest lined up for the Tottenham game on the 30th of October the pressure will continue on the owners to leave.
With the choice between another debt heavy private sale or a beneficial but not very profitable IPO, How will the Glazer’s leave United? Not well.
Finally on a personal note, if you enjoy my writing which has included the articles hotlinked to these words and you have the disposable time then could you vote for me on part 5 at the Not 100% Football Blogger Awards. You can also follow me @kipp9 on twitter.