Financial Fair Play - Manchester United.
FFP Manchester United
Forbes has rated Manchester United as the richest football club in the world for the past eight years, but following the recent IPO, it would appear that their valuation of $2.24 billion was somewhat wide of the mark. The Glazers wanted to float at $20 a share and In the end a figure of $14 a share was agreed upon and it has since settled at around $13 a share, effectively making United less than ¾ as valuable as the Glazers led us to believe it was. Ah, the Glazer family, a name to raise the hackles on many a united fan after immediately burdening the club with $700 million of debt, Their detractors claim this enormous drain on finances has affected the clubs ability to compete at the high end of the transfer market, a point disputed by manager Alex Ferguson; however more than $75 million has been spent on finance costs this year alone.
Football clubs are notoriously difficult to profit from and show a poor return on turnover because the nature of the beast requires that as much money as possible be spent on players. If you are successful players want bigger bonuses or wages; if you lose, fans want you to spend on players it's a downward spiral and why United were only able to generate $20.5 million in profit from a $522.9 million turnover last year. The bad news is that revenue is expected to decline 3% to 5% this year as United didn't reach knockout stages of the Champions League last season, furthermore an operating profit forecast of between 62% and 77% has been compromised by the 20 million pound plus signing of Robin Van Persie, who is reputed to be on a salary in excess of £200,000 a week.
Think back to Wayne Rooney’s outburst (Keep your hair on Wayne ho ho) that the club weren’t buying enough top drawer players and his resultant mega pay rise and an influx of new players and you can see why sports clubs in general struggle to generate large profits. Expect the wage bill figures to show a sharp rise in the next few sets of accounts.
In the lead up to the IPO the club claimed they are”One of the world’s leading brands, with a global community of 659 million followers”, a claim that was widely derided as the use of the term follower was stretched to the extreme. It was no doubt worded to sweeten the IPO, but was unnecessary as their record is impressive, despite the poor turnover/ profit return that is standard for a football club. The revenue growth has been impressive in recent years and given the innovative range of deals done in the past year, DHL sponsoring the training kit for example, the club are highly profitable; the last published figures in 2010 showed a highly commendable £103 million recorded by commercial activities.
Whatever the merits, or otherwise of the Glazer family and the ongoing arguments over the massive debt repayments, the fact is that under their stewardship the club continue to prosper. Since 2005 United have virtually doubled their revenue from £166 million to £331 million. A plethora of secondary sponsors, including DHL, Chevrolet, Thomas Cook, Turkish Airlines and Epsom among others, combined with regional sponsors Honda and Smirnoff have been brought on board and the latest figures will no doubt dwarf the 2010 figures. The lucrative deals illustrate the enduring power of the United brand globally and the club’s ability to attract new partners, consequently, commercial income has increased in the first nine months of 2011/12 from £77 million to £90 million, including the DHL deal, which includes sponsoring the training kit for £10 million a season, a sum that exceeds all but a handful of primary shirt deals in the Premier league. An even more impressive statistic is the balance of United’s revenue, as 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; marketing teams at Arsenal and Chelsea please take note.
The 2010 figures, show a turnover of 331 million, by far the largest of any English club and just over £100 million higher than Arsenal and Chelsea in 2nd and 3rd place. Moreover, this is the third best revenue in the world and only surpassed by Real Madrid (£433 million) and Barcelona (£407 million) In recent years a gap has grown between United and the Spanish giants, due mainly to the strength of the Euro against Sterling (from 1.11 to 1.25) which would have almost halved the difference between Madrid and United from £102 million to £53 million.
A salary bill of £221 million is acceptable, but on the rise (46% wages to turnover) and before tax the bottom line was a £30 million profit, which is excellent. However that is dwarfed by United’s operating cash profits, known as EBITDA (Earnings before Interest, Taxation, Depreciation and Amortisation), which were a most impressive £111 million, more than twice as much as the nearest contender (Arsenal with £48 million). To show just how impressive that figure is United’s EBITDA is bigger than the next five clubs combined. EBITDA for the first nine months of 2011/12 was down however to £85 million.
The spectre of debt always looms large however and the 2010 figures show a gross debt of £459 million and the net interest payment of £43 million dwarfs the other leading English clubs. The only other one in double figures is Arsenal at £14 million net interest.
The Glazers aren’t on top of everyone’s Christmas card list and the IPO was a further example of the shameless way they exploit the club to lessen their own burden.
The main purpose of the exercise exercise was to help the Glazer family with their cash flow problems; why else would you issue an IPO at such an inopportune time, following the disastrous Facebook IPO. As the Andersred site points out the club will receive net proceeds (after underwriters' discounts and commissions) of around £70.7m. The club will use this entire windfall to repay £63.6m of the 2017 US$ notes at a price of 108.375% of nominal value. The prospectus states that the club, and not the family, will bear the expenses of the IPO and with so little debt repaid and united bearing the £7.9m of expenses, it will take until the end of 2014 for the club to even break-even from the IPO, let alone benefit financially. To rub salt into the wounds of United fans the Glazer family receive their $110m straight away.
It will come as no surprise to find that under the criteria set out under FFP regulations United would have shown a £34 million profit during the 2010 season. Even given the high level of signings over the last three windows and the Robin Van Persie signing in particular, the amortisation figure will rise significantly and the wages figure is on the up. However, United fans can sleep easily, the club will have no worries at all satisfying the UEFA accountants when the day of reckoning arrives, despite the huge burden of debt. The good news for United is that UEFA aren’t worried about debt, as long as it is manageable and the bills are being paid to the taxman and other clubs.
One interesting aside from the IPO, is that United are now registered as an "emerging growth company" as defined by the JOBS Act in America, which means that they can take full advantage of the "Reduced reporting burdens" in the future. This means that it will be far more difficult to scrutinise the figures in the future and adds further fuel to the fire of the Glazers detractors.
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