Wednesday, 2 June 2010

Aon's down payment - an enduring mystery

The razzamatazz surrounding the start of Aon's sponsorship of United was somewhat overshadowed by the spectacle of David Gill somewhat grumpily rowing back on his rather aggressive anti-green and gold comments in the Independent. Perhaps the Aon guys had been explaining risk to him?

For most supporters, changes in sponsor are events of total disinterest. Personally I'm glad to lose the name of one of history's greatest corporate disasters from our shirts, despite the karma of the linking of the world's worse experiment in financial engineering with the Glazers. Aon (a company I had dealings with in a previous job) is a far more normal service business and actually has a decent sized office in Manchester.

The c. £80m four year deal is a good one for United, although not quite as good as that achieved by Bayern Munich (€25m pa from Deutsche Telekom) and is apparently in line with Standard Chartered's deal with Liverpool (the existence of which surely goes to show that the largely Asia based but UK listed Standard Chartered must employ expats in its marketing department who haven't been back to the UK since the 1980s).

The enduring mystery of the Aon deal is the early payment of £35.9m by Aon to United between the deal being signed on 24th May 2009 and Red Football's year end on 30th June that year. Why ask for such a huge prepayment a year before the deal started? It is worth remembering that the prepayment will have the impact of creating a four year negative working capital swing of £8.6m pa starting next season (in layman's terms, United will report £20m of income each year but only get £11.4m in cash - less than the annual AIG payments).

It does seem unlikely that United maximised value by asking for 45% of the four year deal to be paid upfront in this way. No explanation has been given by the club or by Aon as to the rationale behind this strange arrangement.

Rather bizarrely, Aon have chosen to add me to their corporate mailing list ahead of today's launch "in case you and your blog followers are interested in learning more about our firm and why we are so excited about this opportunity", perhaps misunderstanding my motivation in such matters. Anyway, I emailed back in reply to ask the helpful David P. Prosperi (Vice President, Global Public Relations for Aon in Chicago) what the down payment was all about. Here's the email exchange:

Me: "I had one query you may be able to help me on. Why was your sponsorship deal with United structured to include such a large (c. 45%) up front payment more than a year before the sponsorship actually began? I can only imagine the club could have gained more in total by not asking for such a huge prepayment. This is a very non-standard structure and I and many other supporters are somewhat baffled by it!"

David: "Thanks for the feedback. Unfortunately, the finances of the sponsorship are one of the subjects we or Man Utd are not commenting. Let's just say that Aon had a strong balance sheet that allowed us to make the offer that we did."

Me: "Thanks David. Funnily enough it isn't Aon's balance sheet that worries me."

David: "What does worry you about Aon? Or is it something related to the club?"

At that point I decided David probably had more important things to consider than whether United were desperately trying to scrape together enough cash at the last year end to avoid breaching a PIK net debt covenant, so I didn't follow up.

Until my unreliable source delivers on his promise of a PIK document (yes that's you mate) and we can see such covenants, Aon's down payment will sadly remain an enduring mystery.



simpson said...

thanks for another great post Andy.

United Rant said...

So did United accept a lower total in return for the up-front payment? After all this is normal practice in football transfers and indeed something United did with the Beckham deal. Real had staggered the fee, United then asked for the rest up front in return for a discount.

Anonymous said...

Informative as per usual Andy, quite ironic that they added you to the mailing list !!

Me thinks there are more squeaky bums in the corporate world than would care to raise their hands.

I wouldn't be surprised if David Gill is on your mailing list or has an RSS feed.

Keep ruffling those feathers !


Jörgen said...

Come on!!! Although you will have a discrepancy between revenue and cash flow for each accounting year, this cannot be described as negative working capital. For woring capital to of any use as a KPI it has to be looked upon as something other than a post in the annual report.

You know as well as I do that this is good cash management and that is something all businesses strive for.

On top of this the Glazers are immediately suspected of foul play or doing something funny.

The only speculation that can be made is the one from United Rant, when he/she asks if United accepted a lower total in return for early payment. This is very likely, in my opinion.

To decide if this was good or bad is not possible with the information we have.

And now, I will be looked upon as pro-Glazer because you've alluded to that there is something going on, when this is something any comapnay would try.

Or am I missing something?


andersred said...

Hi Jörgen,

Lighten up a bit please!

Look, in calendar H1 2009, United dragged forward three major cash sources for no apparent reason.

1. The £36m from Aon.
2. The £80m from Real Madrid, paid (unusually) in one lump sum pre-the 30th June year end.
3. The club offered execs a discount for early (Jan-Mar) renewals, which is Woodward's explanation of why the movement in working capital in financial Q3 2009 was +£24m vs. -£19m this year.

That's a hell of a lot of money to cram into the bank account in a six month period.

Why can't I speculate on why they did it?

Speculate being the word of course.


Jörgen said...

Well, I'm going for a run later so hopefully I'll be lighter after that...

Sorry about the outburst. I'll try to be jollier in the future.

Of course you can speculate about anything, but then, please, let it be clear that it is speculation.

I agree that's a whole bunch of cash and that it might be because of covenants the cash was accumulated.

But bear in mind two things:

2009 was the worst year in modern history in terms of credit. This means that cash was hard to come by. A lot of the businesses that went bankrupt (and still do) did so because of a shortage of cash. Suppliers tried everything they could (and still do, as well) to get customers to pay as fast as possible. Is there any reason for United to act any differently than any other business in this respect? And trust me, sponsorships were not a priority during last year, so the discount might have a plausible explanation there (speculation on my part of course).

Real Madrid borrowed around 200m last summer, so I'm sure we weren't the only ones asking for money up front in transfer dealings with them.

Despite all that you might speculate about why the cash was accumulated, it is still good business to do such a thing, especially during last year.

So a good question to you would be:

Wouldn't you (if you were the dealmaker) try to go for these prepayments, regardless of the debt situation at United. Why/Why not?

And what's the motivation behind the working capital comment?

Jörgen said...

To clarify:

In general, sponsorships were not a priority to buy for other companies last year. United were probably more than happy to sell them. :)

Ole1999 said...

I'm pretty sure if you did an NPV analysis then it makes sense to get cash upfront in Year 0.

The fact that the Glazers knew a bond issue was to come, makes it an added bonus for them - i.e. they could show the bond market a large bank balance making United more credit worthy.

andersred said...

I doubt the NPV would be greater than zero.

If it was me in charge, I'd go for the highest NPV deal. In most walks of life you get a discount for early payment and (as United Rant points out re Beckham) this applies in football transfers too.

When I said "negative working capital", I meant cash will underperform EBITDA by £8.6m pa for four years (as Woodward said again on the analysts' call). It is actually quite material vs. c. £50m operating earnings after interest.


Ole1999 said...

@ Anders
It is a zero cost deal so of course the NPV will be greater than 0.

I was talking about comparing two deals: (i) Cash received of approx £34m at Year 0 plus £46m over 4 years, versus (ii) say £85m (if you subscribe to the discount theory) spread over 4 years.

Jörgen said...

In most deals there are real options involved that are hard to estimate or discount properly. Especially in times like these. I'd say that NPV-analysis is a good example to use in school, but not a good instrument to solely base your decisions on in real life. My opinion, though.

On a lighter note:

Cash will not underperform EBITDA if you include the rolled up interest on the PIK's. :)

Well, it's not working capital by its most commonly used definition, then.

Jörgen said...

You guys are keeping me from my run...this is too much fun!

Jack said...

seems like that would suggest they have some cash on hand but why the need for the 75m facility if thats the case

andersred said...


Yes, that's what I mean too (more money spread over time vs. an upfront payment and smaller annual payments).

We all seem to agree we'll never know, but interesting none the less.


Jörgen said...

I suppose it would make sense to include in the NPV-calculation what you do with the money in each situation also.

If you have an opportunity to lower your outbound cash flow by getting an early down payment (by reapying a loan, thus lowering your annual interest payments) this might swing the NPV in favour of getting lower annual payments.

All theoretical, of course, as it doesn't seem like this was the case.

Anders, what are the odds of United making one (sort of) marquee signing of around 20-25m and using the rest of the cash to pay off some of the PIK's, then start using the revolving credit until we get some cash flow come next season?

The weakness here is the signing bit. I suppose it's sort of wishful thinking on my part.

Anyway, it seems like a lot of the cash is still there. From my pov that's not very productive. I don't think they could foresee the protests surrounding the news of the bond, already last summer, so why do you think they have saved the money until now? Is it because they couldn't transfer it to the PIK's before the bond and realised that it was bad timing until this report?

United Rant said...

Anders - so you did a ton on analysis on the Glazers property biz earlier this year. David Bond seems to suggest their property debts are in the 1bn range... any further insight?

Diem said...

Jörgen, you're not the only "Pro-Glazer" (tongue in cheek) person around here ;-)

I do think your scenario of having the cash on hand for signings is a plausible one, not that Sir Alex seems keen on buying at the moment due to "value" concerns. Maybe that's because he's Scottish and tight!

With regards the other two advance cash calls:
Ronaldo money: makes sense to me - given the amount of bad blood over the previous two seasons, I wonder if it entertained United to extract the full amount up front just to be difficult?
Execs discount: can only speculate that this might have been to prevent a 'run' - demonstrate strong renewal base to other corporates / the media. Alternatively, maintaining the relationship with companies who could have been wavering due to their own financial situations (cost of client acquisition being greater than cost of servicing an existing one)

Jörgen said...

oops- To clarify my earlier comment, cash will underperform EBITDA of course, but may be offset by including the rolled up interest on the EBT-level.

In any case, there may be perfectly rational explanations to the accumulation of cash, it may even be labelled good business, but we will see, I suppose.

Anonymous said...

Great work Anders. Hope it's not in vain!

I imagine that the deal struck was NPV equivalent from the sponsor's point of view-- meaning that nominally the club receives less in cash overall by going with the heavy cash upfront option. However, unless the sponsors DR is higher than the pik rate(unlikely), this represents good value for the Glazers(assuming that pik targeting is in play).
Guys, What do you mean by 'cash underperforming EBITDA'? Is this accounting jargon? I assume that the EBITDA is unaffected by the deal(level income) and that cash is higher then lower than revenue suggests (requiring adjustments) but the negative working capital angle confuses me. Can you elaborate?
Anders, are accounts obliged to account for the deal as a series of level contributions or is it a choice to do so? I guess I am trying to reckon how it benefits the glazers wrt meeting an EBITDA target of twice interest.
The credit facility of 75m is intersting. It seems to indicate that a drawdowm of 95m is likely and that max dividends will be taken going forward. Are they anticipating cash problems as a result of marquee signing(s) or is there something else on the horizon?

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