Monday, 19 April 2010

Should we worry if the Red Knights took over and kept the bonds in place?

In the last week, the press has been full of speculation about the timing and structure of any offer from the “Red Knights”.  One often repeated idea is that the RKs might keep the recently issued bonds in place, at least for the time being.  Reading various United forums, it seems this possibility is worrying a lot of supporters.  Obviously the ideal thing for United would be to turn the financial clock back to May 2005, when we had no debt at all. But if the only way to get the Glazers out involves keeping the bonds for a few years at least, then I still believe this would produce a transformation of the club’s financial position.

The first key thing to bear in mind, is that if the Glazers sell United, they will repay the PIKs from the proceeds, removing this terrifying millstone from around our necks.  The PIKs are central to everything, because the Glazer family do not have the money to repay them and are therefore using the clubs money.  So any successful takeover would immediately reduce the debt that our football club is supporting from over £750m to the £534m of bonds.

In the event of the Glazer family selling United, the bondholders can demand that they are repaid at 101% of the bond’s face value.  The cost of this would be around £540m.  This would be money that any buyer would have to find on top of the amount they had to pay the Glazers and would therefore hugely increase the amount of equity (cash) that had to be found.  Theoretically, a buyer could raise new debt to repay the bonds, but this is a complex, difficult process in what remain tough credit markets.  The third option would therefore be to make an offer to the Glazers that was conditional on the bondholders waiving their right to be repaid.  Why would bondholders accept this?  There are two main reasons, firstly the price of the bonds has risen very sharply since speculation about a takeover began in March.  Prior to the RK announcement on 2nd March, they traded at £92.5.  Today they trade at around £97. If the bondholders did not waive their rights, there would be no bid and the price would almost certainly fall back towards its February levels.  Secondly, new owners who (unlike the Glazers) were not seeking to take significant dividends out of the club would be far more attractive for bondholders.  The more of the club’s profits that are retained inside United, the safer bondholders are.

But wouldn’t keeping the bonds just leave the club in the same position as we are now?

The answer to this is a definite no.

In these successful times (which may not last, just ask a scouser about dominating the league), United is making cash profits (EBITDA) of around £90-100m a year.  From this has to be paid the cost of the bonds, around £45m pa, and then a whole host of payments to which the Glazers are entitled.  These include £6m a year in “management fees”, £3m a year in “parent company corporate expenses” and around £20-25m of permitted dividends.  That’s £30-35m of extra profit that can be saved by removing the Glazers, over £200m during the remaining life of the bonds. 

So an ownership structure that removed all the Glazers’s non-interest costs would be a huge improvement on the current situation.  Under the Glazers, in a season when United make around £95m of EBITDA, only around £26m is left after interest, fees and dividends are paid (and this actually overstates the cash flow).  Under the sort of structure the press say the Red Knights are looking at, this would rise to £60m a year. This extra money could go towards investing in the playing squad, reducing ticket prices and, over time, starting to pay down the bonds.

If the bonds were retained post any takeover, the rules relating to repaying them would still apply.  The bonds cannot start to be repaid until 2013 and early repayment in that year costs an additional 8.75%, falling to 4.375% in 2014, 2.1888% in 2015 and zero in 2016.   So any new owners would have around five years before it became economical to repay the bonds.  In addition to the cash that the club should have generated over this period, it is very likely that by this time lending markets will also be more benign than they are now.  If banks are more willing to lend, the club could repay a large chunk of the bonds and refinance the rest of the debt at far less punitive rates than it is currently paying.  Just to give an illustration, the bank debt the Glazers put in place in 2006 cost 3.5% above LIBOR (roughly similar to base rates), so around 4.5% at today’s LIBOR.  This compares to the 8.5%+ being paid on the bonds.  Similar terms to the 2006 deal would not be achievable today in the post credit crunch world, but in the next few years I would expect credit conditions to improve, allowing a refinancing of the bonds and significantly lower interest costs.

In an ideal world, a new owner would take over our club and sweep away all of the debt so pointlessly loaded onto it by the Glazers.  In the real world, the most we can hope for from a financial point of view is to staunch the flow of cash into the Glazers’ pockets and then gradually rebuild the club’s balance sheet.  It is natural for supporters, all too used to years of financially motivated owners, to be sceptical about the motivation of the Red Knights and people should of course wait and see what they propose. But if supporters can gain a substantial stake in Manchester United in a  structure that provides an extra £200m between now and 2017 to pay down debt, cut ticket prices for kids or to buy world class replacements for Giggs, Scholes and Neville then it sounds pretty good to me.



Gary said...

Ive certainly become very sceptical about the motivation of the Knights.

I think hearing the opinion from someone who actually knows what they are talking about has a calming affect!

Gary said...

Ive certainly become very sceptical about the motivation of the Knights.

I think hearing the opinion from someone who actually knows what they are talking about has a calming affect!

Rob said...

This is a very well structured and measured post and certainly lays out in understandable terms the benefits of a RKs (supported by the fan base) purchase of the club. I agree that this sort of info needs to become more broadly available to quell some of the information/mis-information that is being perpetuated.
An excellent blog, thank you

Rob Cameron
robjcameron on Twitter

Ed - United Rant said...

I'd like to know more about what return the RKs want on their investment. This isn't a purely philanthropic exercise - the RKs will want dividends and be able to sell on their shares. What guarantees will there be about how much the RKs will be allowed to take in dividends and who and when they're allowed to sell shares on the open market.

Steven said...

I also need to know what dividends are going to be paid and if they will be capped. What is confusing me the most, though, are media reports that the bid may involve further borrowings or a share issue to fans. I understand the bond needs to stay in place but borrowing more money isn't feasible, surely. Also raising, as speculated, £200m from fans is going to be extremely difficult if that's required in a short space of time. Maybe its possible over a few years.

Patrick said...

Good blog Andy. I agree with your analysis.

I'm also keen to see the investment returns for any RKs, the type of constitution proposed with respect to re-sale of shares and timescales as well as fan representation on any board structure. I'm sure this info will be made available soon enough.

The issue of raising ~£250mil from fans may also be difficult. I'd put in up to 5k, but would enough people as it is a huge amount?. There is also the problems with timing, it would take a lot to generate such an amount from fans. Maybe there might be a need for further borrowing to act as a holding stake (to top up to 250mil) that fans can buy over time. I'm just speculating here.

Regarding the main question of "will we be any better off under the Red Knights?", we should also try to anticipate the future under the Glazers if they remain. Everything they have done so far indicates to me that they will try to run United on the cheap so they can take out as much money as possible while keeping the stadium full, and United on TV. And there is no reason to think they will get bored of doing this - surely they would ideally like to be able to take £50mil+ of United's profits for decades to come?

Rob C. said...

As others have said the RK's will want some return on their investment, that's to be expected as any bid surely won't be a purely philanthropic exercise.

However I think Patrick's last paragraph sums it all up really: does any right thinking Red want the glazers leeching huge amounts of cash out the business for ever and a day while leaving the debt untouched?

As has already been mooted, the RK's bid if and when it materialises must be accompanied by a co-ordinated threat or action from current season ticket holders not to renew. This must also be backed by a firm committment from the RK's to return said ST's to those who make the sacrifice. If this promise is made explicit then I think there would be huge support for a boycott.

The bid can't come soon enough for me!

Keep up the good work Andy.

roninja said...

Some good posts here following another very intelligent blog from Andy. I would also endorse the view that the Red Knights offer a superior alternative to the Glazers yet the debt will not mysteriously dissapear overnight. So how much of a premium will the Glazers' want. They invested circa £275m in the club - supposedly their own cash. Would twice that amount suffice? Lets say the RK's need to stump up £550m how does this compare with the perceived £1.25bn market value being banded around in the media.

roninja said...

Season Ticket holders that boycott are highly regarded in my view.

I would also encourage discounted season tickets to those that become shareholders in the organisation perhaps with a graded structure, say those investing
£1k-£2k get 10% off for 5 years
£2k-£5k 20% for 10 years
£10k-100k get 25% off season tickets for 10yrs
£100k+ get 33% off for life,

*based on published annual ST price. Would also Freeze ST's for 2 years and then peg them to inflation.

I would also like the overall players salaries capped and agents banned!

Or something of that nature....perhaps this could be added to a manifesto or something of that ilk.

steven said...

I think the current situation at Liverpool is interesting. United could be, maybe one or two years, away from this scenario whereby the Glazers are forced to sell the club. Do they want to take that risk?
I'm really hopeful (despite the media cyniscism) that a reasonable offer will be accepted by the Glazers. If they don't then only a boycott will do to attune their minds.

Anonymous said...

In a way it's a little disappointing that the bond debt will remain in place, but so long as there's a plan to deal with it in the coming years through further share issues, further investors, refinacing at preferential rates, or whatever, then I'll be happy with that.

Short of a sugar-daddy coming in to buy us as a plaything (and I definately wouldn't want that anyway) it was always likely that we'd be paying for what the Glazers have done for some time. So let's cut this cancer out of the club and start the rebuilding. Now.

Anonymous said...

For the first time in I don't know how many years, the Glazer's have admitted that the Tampa Bay Buccaneer football games in the US face a TV blackout due to NFL rules of a stadium having to be sold out.

Glazers pumped and then dumped investment in Tampa seems like this may be a feasible scenario unfolding over in the UK.

I hate the Glazers

Altfish said...

My chief worry is that if the Glazers start talking to the RKs; then some Russian ar Arab billionaire will offer more money and the Glazers being the Glazers accept the higher offer.

Anonymous said...

Check out 'points of interest' in the corporation wiki. My rear that Glazer doesn't have the money to pay the PIKs. Someone needs to investigate them - between the authorities in the US and UK.

andersred said...

Thanks for all your comments everyone. Sorry for not replying sooner.

Ed: I do believe this is a philanthropic exercise although I understand people's scepticism and I may be proved wrong!
Any decent dividend on £750m takes a huge amount out of the club (£20m+) and defeats the object.
We are happy to accept that a Lerner, Mansour or Abramovich sinks millions into football clubs for nothing more than glory. It was actually true of almost all the owners of football clubs before the 1990s and is still true of most. Look at this as the assembling of a group of "mini-Abramovichs".

On the "share issue", I think the press are getting it wrong. An "offer" to the Glazers reliant on a global offer of shares isn't an offer at all and the RKs/Nomura would never think it was a realistic way to buy to the club. Any offer to fans would have to be "stage 2".

Roninja: Using the £1.2bn bandied around, the Glazers would get c.£700m from which they repay the PIKs, leaving c.£500m for them. It's a bit more complex than that because of the £98m cash on the balance sheet which may or may not have gone to pay PIKs already.....

I understand where you're coming from on the ST discounts but it can't be right for richer fans to pay less for season tickets than poorer fans. Wealthier supporters may well be asked to stump up more, but if this is our one moment to get the supporters a big stake in our club, it had to be at a level that is affordable for our core support.

Steven: you're quite right, the only saving grace of having financial owners like ours or the scousers' is that when it looks like they'll make more from selling than holding on they sell...

The Glazers will hopefully get a decent offer and have to weigh that up against:
SAF retiring sometime soon.
An ageing squad needing investment.
No excess demand for tickets.
The OFCOM Sky ruling.
Political risk.
UEFA regulation.
City pushing up the transfer market
etc, etc....

Altfish: A takeover that involved fans is clearly the best scenario but I'd take a sugar daddy over the Glazers. So if this brings one along it'll be an improvement.

Anonymous: lots of people are looking a First Allied. Watch this space. Thanks for the link.

Cheers everyone,


Joshua said...

I think what we're forgetting to ask about RK is what the management structure will be.
Can you imagine 30 fans running the club? If they were only interested in return and left the club to itself I'd be fine with it.
But if they buy the club because they care - Im not sure having fans at the top is best. Fans tend to argue, think they know more than they do and over-react to bad results. Both Abramovic and Mansour made got involved too much and made bad moves, remember that.

Anonymous said...

Joshua, the idea of all the RKs wanting to run the club on a daily basis is ludicrous, it's a fantasy doomsday scenario dreamed up by the likes of Gill as a way of fooling the gullible, as a way of discrediting a 'consortium' type takeover. Don't be Gillible, it's like gullible but only worse :) Of course the RKs wont be involved in the daily running of the club. Like all businesses that have a multitude of shareholders a board will be appointed and left to get on with the running of the club. The best way for the RKs to eventually get a return on their investments is to appoint the best people possible to run the club.

Joshua said...

Try and read carefully, Anonymous.
I said RKs will want one of the two - a cash return or a say in club's activities, if not both.
If anyone thinks they will be happy to own the club with nothing in return he/she is mad.
If they want cash, then thats not very different from Glazers. Money would be sucked out of the team - in interest or dividends - doesn't matter.
Abramovic and Mansour didn't buy the club for cash and offer another alternative. They bought it to achieve some sort of personal glory ,got involved with transfers and panic-sacked managers.
Pay the owners or put it with them running the club - thats the only way possible. And neither scenario is perfect

Anonymous said...

Joshua are you advocating the status quo (not the band although they must have some RK links!)

Oli W said...

In regards to comments that another bidder could trump the RKs, that can be tempered by the reality now that no investor would be likely to want to take the club over without supporters onside. The Glazers may make a profit but they also did not envisage the amount of hassle that has come their way, and whether it be protests or green and gold, no one is ever likely to mess with us again so obviously care free about us. And THAT is one thing we have achieved- had we been silent and never made a fuss oveer 5 years, then the club would go from owner to owner all as bad as each other.