Friday, 25 February 2011

United’s Q2 2011 results: running on one engine

Red Football Limited reported figures for the three months to 31st December this morning. The media will probably focus on the following statement:

“The Board notes recent press speculation regarding a possible bid for Manchester United. The Owners remain fully committed to their long-term ownership of the club. No discussions have taken place, Manchester United is not for sale and the Owners will not entertain any offers.”

So “United, United, not for sale” remains the mantra. I’ll let readers make up their own minds about that....

Results overview
These were solid figures, United’s money machine is actually quite a predictable beast (as long as we qualify for the Champions League each year).

Revenues rose 7.1% in Q2 vs. last year, all driven by the Commercial side of the business. Matchday income was down 1% despite the club playing exactly the same number of home games as last season (10). This was driven by a tiny dip in average attendances from 72,862 to 71,851 (the Wolves Carling Cup game was not a big draw).

Media income rose 0.5% in the quarter. United (like all PL clubs) benefit from the new international rights deal this season, but received less CL income as a consequence of finishing 2nd in the league last year vs. 1st the year before. The eventual outturn for the year will depend obviously on how far we progress in Europe and whether we win the league...

The “star” was again the commercial operation. Revenue was up by a third vs. last year at £25.5m for the quarter. The rise of £6.3m on 2009/10 splits roughly; £1.5m extra from Aon compared to AIG, £0.7m extra from Nike and £4.1m from the plethora of “partners” signed up in recent years (DHL and Epson being recent examples). The big question of course is how much further the club can push these “partnerships” in the future. Can £15-20m continue to be added each year or will the growth flatten out?

Endemic cost inflation remains the bane of football. The cost growth in Q2 was actually lower (7%) than in Q1 (15%), which may be due to the timing of bonuses. Over the first six months of the financial year, United’s wage bill rose 10%.

Other operating expenses rose 22%, which the club blamed on (non-staff) expenditure “largely associated with the Company’s commercial and media business”. A £3m rise in these items year on year is pretty large, and may reflect commissions paid to acquire commercial partners. In aggregate, costs are growing slightly faster than income.

Profits, transfers and investment
EBITDA (“earnings before interest tax and amortisation”) growth remains subdued and does not (as I wrote in the Guardian this morning) justify a very high valuation. EBITDA in Q2 rose 2.8% and over the first six months of the year 3.2%. It is striking that very fast revenue growth from the commercial arm is unable to drive any real profit growth.

The club spent £1.3m in Q2 on capital expenditure at Old Trafford (further development of the executive boxes in the North and East stands).

Net (cash) transfer spending was £3.5m for the quarter (which obviously falls outside a transfer window). This included stage payments for Smalling (well worth it) and Bebe (hmmm).

Cash and debt
The second quarter of the year is very working capital negative as prepayments unwind. There was a seasonal working capital cash outflow of £31.8m, to leave operating cash flow for the quarter at £12.7m. Bond interest is paid in February and August so there was no payment in this quarter’s numbers. Deducting the investment described above, the club saw a cash inflow of £7m.

During Q2 Red Football bought in (but did not cancel) £24m of the sterling bonds. With cash sitting in the bank earning c. 1%, and bonds costing 8.5%+, this is obviously a sensible bit of housekeeping. The buyback and a small fall in the pound vs. the dollar left the company with £489.4m of gross debt. On the asset side, the club has £134.5m of cash in the bank. Regular readers will know that this is effectively the money received from selling Ronaldo in 2009 (£80m) and the pre-payment of the Aon sponsorship in 2009 (£35.9m) and the cash in the bank at the end of 2007/08 prior to these events. These windfalls remain unspent.

On the conference call with bond investors, Ed Woodward (“Chief of Staff” and architect of United’s financial plan) explained that having such an unusually large amount of money in the bank was to ensure “flexibility”. People like me think that the money is earmarked to be paid out of the club in dividends at some future point (there seems no financial logic for sitting on it). Woodward reiterated however that there are “no plans” to pay dividends.

There was (unsurprisingly) no comment on the PIK repayment in November or the move of the holding company to Delaware. These are matters outside the scope of these results. No explanation of where the Glazers suddenly found £249.1m to repay the PIKs has been forthcoming of course.

United as a business is in good shape. The club will (barring a calamity on the pitch) makes £105m+ of EBITDA in the current year. That places it in a league of one in European football. Pre-transfer cash flow will be less strong as interest, swap loss payments and working capital outflows impact, but the club will be cash positive.

From a growth point of view however United is like a plane running on only one functioning engine; commercial partnerships. Between 2006 and 2010, largely through ticket price increases, matchday revenue rose 9.4% per annum, it is now not growing at all. Over the same period, media income rose a staggering 23% per annum, it is now growing 1-2%. Everything rests on commercial partnerships. None of this is particularly gloomy as the club already makes so much money, but what it does show is that future growth is going to be very hard to find.

Meanwhile the great “cash mystery” remains. Why issue expensive bonds at 8.5% interest whilst keeping so much money in the bank? Why has there been so little transfer spending by the serial smasher of British transfer records? Where did the PIK repayment money come from? Woodward claims the money in the bank is there to provide “flexibility”, but the club was happy to run with an average cash balance of £45m between 2005 and 2008. Now £135m is seen as prudent, far in excess of what any football club anywhere has needed before. Why the sudden change?

As ever with the Glazers, more questions than answers.



ja said...

The Glazers seem intent on diluting the brand to homeopathic levels with these commercial partner deals. What kind of a fit is epson or DHL, turkish airlines to name but 3 recent additions? I can see the point of the Chilean wines for the executive boxes with wining and dining facilities, but what exec suddenly needs to print something during a match, or courier something, or fly to Turkey unless United get drawn against Fenebarce or Galatasary etc?

Oyvind said...

Some fans wont be happy before they own the club themselves.

I think the Glazers are doing just fine, no need to change owners and risk getting owners like Abrahomovitsch/Sheik who are interfaring way too much..

As long as we are successful, I see no need to change.

My only issue is that we havent spent enough lately, but I think that is poor decisions from Fergie (Bebe, Obertan, Diouf, Tosic, (M. Owen, Hargo, Ando)) and belief in youth, rather than no money in the bank.

Anonymous said...

Was transfer cash flow ringfenced under the covenants of the old bank debt? If so, then that would offer an explanation for the 'big cash mystery', in so much as they had to clear the old bank debt without touching the Ronaldo cash.

Nigel said...

With ticket prices more or less frozen, the only way for matchday income to increase would be a better performance in the Champions League compared to last year's exit at the quarter finals. Some growth could be expected with us progressing to the QF of the FA Cup and having a home draw, but the Champions' League remains the biggest piece of the cake. I would be interested to see Liverpool's results this year without CL football.

Anonymous said...

Hi Anders
Fine work.
The Glazers didn't 'retire' the 24m in bonds purchased from the market. From a BS perspective, does this mean we now have 24m in investments under assets?
Are we set up to receive our own coupons- ie, we pay out 45m put receive 2-3m back. If the bonds aren't retired, does this mean that any covenants attaching to the bond are unchanged- the annual dividend capacity remains the same. It will not have a major bearing really but wouldn't a retirement further secure a dividend outflow to pay back, say, a debt in Delaware.

pharrap said...

When I look at financial results like these half of me is happy because United are in good shape.

And half of me is sad because the Glazers are going to get away with it.

Anonymous said...

Hello Anders,

You say that United are in a "league of one" in Europe when it comes to EBITDA, what is the EBITDA levels of the likes of Real, Barca and Arsenal?

Thanks for your time.

Geoff Ho said...

@Anonymous: re the bonds, it certainly looks like it. I've seen other deals where by private equity owners by back the bonds or pik debt and keep the coupon for themselves. I can't tell if the Glazers are doing this but it wouldn't surprise me.

@Oyvind: while you're entitled to your opinion, I think you're missing the point. The Glazers are not doing fine - they have taken the best run club (and formerly richest) in world football and saddled it with debt. Fergie CANNOT spend given the financial constraints we operate under.
You're right, fans like me won't be happy until the club is owned by the supporters. That is because it is our club and we're sick of being exploited, whether its by the Edwards family, the old PLC or the Glazers. We're especially against people like the Glazers endangering the club with their debt.

andersred said...

Thanks for the comments.

Like ja I'm sceptical how far the "partners" thing can be pushed. How much "value" do DHL or Epson get from a vague association with United? Time will tell.

To Oyvind, the tragedy for me is that we could have been just as successful without screwing the fans. £340m of extra interest costs, fees etc could have kept prices down, built south stand up etc, etc. It's a huge waste just to have the Glazers as our owners...

Anonymous @ 15.28
There was no transfer restriction in the old bank covenants, just dividend restrictions. I have a copy if you'd like to see them!

You're absolutely right. The problem the Glazers have is that they have squeezed matchgoing fans as much as they can. What's their next trick?

Anonymous @ 16.09
Those bonds aren't classed as an asset, if you look at the balance sheet the liabilities has come down (as has the cash of course). It won't change any of the bond covenants.




andersred said...

Anonymous @ 17.31

Maybe "league of two" would be better!

EBITDA 2009/10
United £100m
Real Madrid £95m
Arsenal £72m
Barcelona £8m


Anonymous said...

I would like a copy of the old bank debt covenants if that's possible. Can you upload them onto the resources section of your blog? Thanks.

andersred said...

Anonymous @ 18.06
Drop me an email and I'll send them. Am a bit pressed for time!


Stojan Yugoslavia said...

At the end of last year, we were around 80m in minus, is that right? How much we will be in minus this year, what you think, when you take in account the results od first two Qs of 2011?

Also, are the wages going to rise on a slower rate till the end of the year, now when Neville is retired, and VDS, Hargreaves, probably Owen and maybe even Brown leaving in the summer?

Thnx, and appologize for my poor English, best wishes from Montenegro.

Anonymous said...

Is there an audio recording of the conference call available?

Oyvind said...

Geoff Ho:
At the moment the Glazers are doing fine.
It is hard to remain debt-free these days for any club and business anyways. But we have been very successful the last 5 years, so at least they couldnt have hindered us that much.
We will see over the next 1-2 years if Fergie has money to spend or not, when he really have to replace some players.

As for ticket prices: I doubt any new owner would really lower them that much. Especially if you compare the prices with other BPL clubs.
I agree, it is a shame that some people got forced out of OT, but as long as we have 76000 people every week, who are prepared to pay what it takes, I cant see any new owner doing anything about it.

As for expanding the stadium: I think the Glazers are/were prepared to do that, but as we all know there are a number of complications.

David said...

Hi Anders

As always terrific to read your comments, forgive this possibly stupid question. The glazers have circa £489million debt, we have a bond issue of £500million and the piks of circa £220million which I think we all believe have got to be repaid from somewhere. Added up this comes to around £1.2 billion. How realistic is this or am I MILES wide of the mark !

Anonymous said...

Great blog. I will be adding your blog to my favorites. I read some of the old articles and I am really concerned in regards the PIK-s or rather how did they paid them. I also believe that if it was other money they would have reported it, so I believe it was borrowed. .

Anonymous said...


We have £489m in debt, no more no less.
Bonds = debt
We do not have £500m in debt and £500m in bonds.
Also the PIK debt is gone.

Oli said...

You miss one very simple point. More money is leaving the club than coming in, so it is not sustainable as things stand. Two years ago the 35m profit was only because Ronaldo was sold for 80m, last year without a major player sale the club made a huge loss. The ONLY reason for this loss (despite hugely impressive revenues) is the debt, which was to no one's benefit but the Glazer family themselves. They took it out, we pay it off. If you cannot make a profit (post debt payment) after 3 consecutive titles, 2 consecutive CL finals, highest ever ticket pricing, commercial and TV revenue, then what chance do you ever have of balancing the books?
You talk about the £150m in the bank, but how else will the difference between the club's profit and the debt payments be met each year assuming we do not suddenly start making £40m extra every year to cover the costs?
I agree with you that other potential problems would come with new owners and that it is not a case of getting rid of the Glazers and thinking anything else is better, but that does not mean the Glazers are doing just fine, when they are leaving the manager to work with less and less and charging us more each year to pay their debts.
As for your comments that you blame Fergie for bad signings, we have ALWAYS taken risks on players some of which did not come off. The difference we also signed top class players as well, to have a good balance. Now it is all cut price bargains and nothing else. Over 5 years the club has had its highest ever revenues yet has made a PROFIT in the transfer market, spending only a fraction of the Ronaldo money etc on cheap replacements.
Get a grip,

Anonymous said...

@Anders. You mention a new figure of 340m in interest/fees resulting from the glazers.
I thought the figure was 437m.
What has changed?

Anonymous said...

Why not an article on Arsenal's newly published numbers?

Anonymous said...

The 2Q reports show that we still have very healthy financies with a strong EBITDA, cash balance, debt going down and an increase in the revenue. Come the final report in the summer we should reveal revenue of more than £300m, EBITDA of more than £100m and a strong healthy bank sheet. Cant wait, the future is bright, regardless of the Glazers.