Friday, 26 February 2010

Out of control

So today Portsmouth became the first Premier League club to go into administration.  Of course more than 50 professional clubs have gone down this route over the years, some more than once.  The infamous “football creditor” rule kicks in and the taxpayer and local supplier gets screwed at the expense of other clubs and (in Portsmouth’s case at least) multi-millionaire players.

This may all seem a long way from United as we prepare for another trip to the Wembley, but the same madness that drives clubs to the wall impacts the biggest clubs too.  One of the most pressing issues, and a central feature of UEFA’s report on club finances this week, is the endemic inflation in costs.

The Glazers have always described themselves as being experts in managing sports clubs (although I imagine a few Tampa Bay Buccaneers fans would beg to differ).  Unfortunately, the reality is that they too have fundamentally underestimated the cost pressures running through football.

The bond prospectus is not the only financing document Red Football Ltd has published since the takeover.  In July 2006, the Glazers published an “Investment Memorandum” when they were raising the bank debt for their first refinancing (you can download it here).  The section entitled “Key wins under the Glazer reign” makes particularly galling reading for supporters (and not just because of the title).  Their three “key wins” are a) building the quadrants (where their only role was to say “carry on lads” to the builders), b) winning the AIG sponsorship (that “brand association” worked out well) and c) putting up ticket prices (no comment required).

Because it was sent to banks interested in lending to Red Football, the document differs from the bond prospectus in the level of detail it provides and crucially, includes forecasts for the club from 2006-2011.  It is here that we can see how naïve they are about costs.  The following table shows what they expected operating costs to be and what they actually have been in the subsequent years:

Actual 2005
Glazer plan 2006
Actual costs

Cost overrun

% of plan


As you can see, by the end of last season, costs were almost a third above budget.  Rather than growing by 6.2% pa from 2005 to 2009, costs have actually risen by a staggering 13.8% pa, almost twice as fast.  Some of the big leap in costs in 2008 relates to winning the Champions League, but sadly in 2009 we got taught a lesson by Barcelona and no such bonuses were paid.  The wage bill went up 31.2% in 2008 and rose again in 2009, even though we lost the Champions League final.

In the bond prospectus, the club identifies the problem (my emphasis):

“This increase [in 2008] was largely due to significant increases in players’ compensation resulting from performance bonuses as a result of winning the Premier League and Champions League and a very competitive open market for players as a result of the announced increase in the contract value for Premier League media rights.”

So as the new TV contract kicked in, United were forced to follow the market and pay ever higher salaries.  Of course in 2008 and 2009 we did exceptionally well on the pitch, which pushed up TV revenues; in any sport such success can’t be guaranteed (just look at 2006).

So what is more worrying here, the fact that the Glazers totally underestimated the cost pressures in football to the tune of £113m since 2006, or the fact that extra media money is making the problem worse not better?  For United fans, the fact our owners appear to understand nothing about our “industry” should be of enormous concern given the debts they have burdened the club with.  For football as a whole, the worm has turned as the TV “bonanza” is beginning to work against clubs not for them.  Quite soon Richard “£866k a year” Scudamore will be triumphantly announcing his “success” in selling the Premier League’s overseas TV rights for over £1bn, but injecting yet more money into the system he may just be accelerating the arrival of the next Portsmouth.



United Rant said...

Superb post once again. It's a dark day for football today. Not only is Portsmouth in administration with no real prospects for repaying creditors but Chester City was today kicked out of the Conference.

I hope I never see the day United requires similar drastic financial measures.

Anonymous said...

The word "chancers" suddenly springs to mind, playing Russian Roulette with esentially a football club NOT a business.
I'm wondering whether the noises from UEFA regarding will force their hand to sell or will they find a way of moving the debt around even more subsiduaries (at a huge cost to the club, of course)

Steve S

andersred said...

United Rant, the situation at Chester (where my dad comes from) is a case study on everything wrong with the way football is run. Sad day.

Anonymous, let's hope UEFA are serious in their declared intentions to clean out the stables. Word's are easy and actions are hard but I rather liked this (no. 1 of their "11 values"):

"Football First

In everything that we do, football must always be the first and most important element that we take into consideration. Football is a game before being a product, a sport before being a market, a show before being a business."


Diem said...

From this article, you're either suggesting that David Gill played no part in the formation of the forecasts, or in the event that he put forward a more 'realistic' view, that he was ignored: neither of these scenarios I find likely.

So whilst "The Glazers" woefully underestimated football cost inflation (and 2009 may in fact be depressed by lower VAT costs?), it must be true that United's CEO, and formerly CFO, was also extremely wide fo the mark.

Additionally, without inforamtion on other comparable clubs, it's hard to tell whether this was an industry-wide forecast bias or a peculiarity to United.

andersred said...

I was trying to lay off David Gill for a change (Scudamore gets no such luck) but it is a fair point.

Clearly over this period the costs have far exceeded plans but thanks to SAF and the players, so has the team's performance and hence TV and ticket revenue. Can that carry on forever?

I am certain (except for the CL win bonus in 2008) that this inflation is endemic in football.

If you need figures, try this:

Arsenal total staff costs year ending May 2005: £63.4m

Arsenal total staff costs year ending May 2009: £104.0m

I've only looked at staff costs because of the "Emirates impact", staff costs are 75% of United's operating costs incidentally.

The Arsenal figures show a 64% increase or 13.2% pa. Arsenal had one more player (a total of 62) in 2009 compared to 2005.

United's staff cost only numbers are a 60% increase or 12.4% pa. Weirdly the number of players is identical, 62 in 2009 and 61 in 2005.

Hope that gives you some comfort.


Diem said...

Thanks anders, interesting comparison - especially given Wenger's apparent reluctance to 'spend big', by bringing in high-profile or established names.

I agree with your underlying point though, that costs seem to have got out of control, and it's a worry and unsustainable

andersred said...


I forgot to put down the United staff cost numbers.

2005: £77m
2009: £123m

That's only 18% more than Arsenal last year and we won the league, CC and got to Rome.

Arsenal published 6mth numbers today and frankly it is a well run club. The risk of developing Highbury and building the Emirates has paid off despite the property crash. The debt (all related to improving the club) is falling rapidly. It's what United used to look like.

Thankfully they remain classless on the pitch and in the stands and can't defend against pace.....!


Anonymous said...

Rumours flying around about a BIG press release due this afternoon by MUST.
Not sure if it's a wind up.

Steve S

Anonymous said...

Hi Andersred

Excellent blog, keep it up!
Peter from Hungary

Anonymous said...

Hi Andersred,

First of all "great blog" :)
In Germany people discussed about a Delloite study regarding the changes in the UK Tax system.
Do you have any idea how this will impact the staff cost at United ?