Monday, 16 May 2011

Manchester United’s Q3 results: not nearly as interesting as the football

Published last week, Red Football's results for the three months to 31st March 2011 have been absolutely rightly overshadowed by events on the pitch since. Becoming the most successful English league side ever (to go with our long record as the team with the most FA Cup victories) is a stunning achievement and I was privileged to be in the Darwen End at Blackburn on Saturday to see the job done.

By contrast to the drama of a season's finale, the Q3 and nine month results contain absolutely no surprises. From a financial point of view a great season is only recognised in the final quarter of the year when TV income from winning the league and reaching the Champions League final is recorded in the accounts. The third quarter is therefore a time when nothing unexpected really happens and with United staying out of the January transfer window there was nothing to report there either!

To maintain a decent service for interested readers, here's a brief run through of the main points.

Matchday income was actually quite weak in Q3 compared to last year (down 9.1%). This is a little odd given the number of games (9) was identical to last season and the average attendance (74,628) were only 148 lower. There was one additional cup game and one less league game, but prices are identical for both and shared gate receipts are treated as an expense. For the nine months, matchday income was down 3.7% due to one fewer game than last season. The fourth quarter will be better than last year as there will be two more games including a Champions League semi-final for which ticket prices are higher. Adding in the US tour, matchday income should be up around 4% for the season compared to 2009/10. The twenty nine games played by United at Old Trafford this season is about as good as it gets in terms of number of matches (unless there are several FA Cup replays in a season).

Media income is recognised as games are played. The 9% fall for the quarter and 1.6% fall for the nine months mainly reflect the one fewer Champions League away game vs. last season, something that will clearly reverse this quarter. With United progressing to the Champions League final, the media results for the full year will depend on whether we win or lose. Winning is worth €9m and losing €5.2m. In total, United will receive either c. €52m (£44m) or c. €56m (£48m) from UEFA for 2010/11. This compares to c. £39m last season. Next season, winning the Premier League will increase United's share of the English "market pool" from 30% to 40%, automatically adding €4.2m (c. £3.6m) to media revenue.

In the Premier League, the new international rights deal is mainly being allocated to parachute and other solidarity payments. Each Premier League club will receive an additional £5m each. United's total Premier League media revenue will be around £58m.

The impact of the automatic Nike step-up, the extra Aon income and the raft of secondary sponsors continues to drive this area of the business. Continued growth into next year relies on further deals, something the ever optimistic Edward Woodward spoke confidently about on the conference call.

Q3 is a quiet quarter on the wages side, especially with no major transfer business in January. The club announced new deals for Carrick and Fletcher during the quarter. Looking at the year to date figures, wages are still rising faster than turnover and were up 8.1% during the nine months vs. last season. Other costs were also up 8.1% but were flat in Q3 on the prior year.

Wage growth remains THE financial problem in football. Woodward expressed some confidence that the Financial Fair Play rules would dampen wage inflation in the future, but that this effect would not be seen for a while. The transitional mechanisms in FFP mean that clubs have another couple of years to get their houses in order before the rules bite, and that probably means a couple more years of rising costs.

Operating profits
EBITDA (ex-player sales) was down 2.8% for the quarter and up 1.5% for the nine months. As mentioned above, the timing of games and extra revenue from progressing all the way to the Champions League Final will appear in the next quarters' figures. The successful season on the pitch should lead to moderate profit growth for the year. Woodward warned that winning at Wembley on 28th May would cost the club a large (unspecified) amount in bonus payments to players and coaching staff. In modern football winning is expensive...

Interest, cash and debt

The club recognised an interest charge of £34.9m for the nine months (£11.2m in the 3rd quarter). Because bond interest is paid in February and August, the cash interest cost year to date is actually £47.0m. This brings the total cash interest paid by the club since the 2005 takeover to £239m and total costs including fees etc to £369m.

The third quarter is working capital negative for all football clubs (cash received from ticket sales and sponsors at the start of the year is being run down as wages are paid). Operating cash flow for the nine months was £40.6m after this working capital outflow. In addition to the £47m spent on interest, the club invested £5.7m in capital expenditure (box refurbs at Old Trafford). Net cash transfer spending (stage payments on Hernandez, Bebe, Smalling and Lindegaard) was only £12m during the nine months. This left cash before financing down £24m. There will be a huge seasonal rebound in cash flow in Q4, last season this amounted to over £60m.

In the third quarter United repurchased £5.5m of bonds to take the total buyback for the year to £29.5m (face value). Not all this cash spend fell into the period. At 31st March the club had a cash balance of £113m. With the dollar weakening vs. sterling (and therefore reducing the sterling value the dollar denominated element of the bonds), gross debt fell to £478m. The fate of the repaid PIKs remains a mystery.

Other bits and pieces
The club's amortisation charge was down slightly due to limited transfer spending in the last few years. The goodwill amortisation charge should be ignored, it is an irrelevant non-cash accounting rule.

The machine hums on at United. These results were dull but next quarter's will be good due to an excellent season on the pitch. The run to the Champions League final will boost both media and matchday this season, but of course such years can't be relied on and underlying, the only real growth is from the commercial arm. So far the commercial arm has done enough to offset cost inflation, and this remains the long term challenge.

With the PIKs "disappeared" and Fergie proving he didn't need to spend much last summer, United remain awash with cash. The £113m will rise sharply from now to the end of June. Will SAF spend it? Will it be kept for the next manager? Will the Glazers swoop in and grab it in dividends, something they haven't done so far of course. Only time will tell.



Morten said...

Thanks for a great rundown.

Just out of curiosity, where does that "Goodwil" come from? Normally it would originate from an aquisition, but has there been any by United? I understand why it should be ignored, just wondering why it is there.

Thanks again.

GCHQ said...

Afternoon Anders,

''The goodwill amortisation charge should be ignored, it is an irrelevant non-cash accounting rule.''

Can I please start by thanking you for the above statement. How very sporting of you!

I'm pretty confident the full year results will reveal substantially better than ''moderate profit growth''.

I'm projecting Pre-exceptional EBITDA of £110m-£112.5m on total revenue of £325m-£330m. So you're looking at c. 10% year on year EBITDA growth and total revenue growth of c. 15%.

The size of the bonus payments for winning the PL and potentially the CL are of course a key factor. The breakdown of staff costs in the notes of MU Limited's 2008 accounts reveal that bonuses of £13.37m were paid in the year (Prem & CL double). The notes also show that in 2007 (when we won the League but not the CL) the total bonus payments were £8.26m. I think it's fair to make the assumption that this staff cost spilt was provided in order to show the bonuses paid out to players and coaching staff for winning those trophies. So with that in mind, we can assume that the total bonus payments for winning the League were c. £8.25m and for the CL, c. £5m. Those bonus schemes will have presumably increased in value since then but the 2011 numbers shouldn't be too different.

''Matchday income was actually quite weak in Q3 compared to last year (down 9.1%). This is a little odd given the number of games (9) was identical to last season and the average attendance (74,628) were only 148 lower. There was one additional cup game and one less league game, but prices are identical for both and shared gate receipts are treated as an expense.''

The bond prospectus revealed that the club only recognises seasonal hospitality revenue for League games in the P/L account and not for Cup games. The figures for 08/09 reveal that the total matchday revenue (or total ticket sales related revenue) recognised for a League game was on average c. £3.6m and c. £1.9m for an FA Cup game. That £1.7m difference accounts for the majority of the fall in matchday revenue in the quarter, the rest can be attributed to a fall in revenue from domestic away cup games.

To conclude, it has to be said that the club's reponse to last year's protests has been nothing short of tremendous. To quote Sky's Martin Tyler: ''The response of Champions!''

PS. It's May 2011 and no dividend has been taken by the Glazers. The beers are officially on you!

andersred said...


The goodwill amortisation doesn't relate to any acquisitions by United, it stems from Red Football Ltd's purchase off United. These are the RF accounts.


You are of course right about the revenue recognition for hospitality, I'd forgotten. Nice one.
I've owed you a beer since November haven't I?


GCHQ said...

Well I can't quite remember the exact terms of the bet to be honest. If it was simply a question of whether or not the Glazers would use any of United's cash to pay down the PIKS, then yes, you have owed me a beer since November. But if it was based purely on whether or not we'd see evidence by May 2011 that the Glazers had taken a dividend, then obviously you haven't.

Doesn't matter now anyway!

What are your full year projections for EBITDA and Revenue?

Anonymous said...

So with that in mind, we can assume that the total bonus payments for winning the League were c. £8.25m and for the CL, c. £5m. Those bonus schemes will have presumably increased in value since then but the 2011 numbers shouldn't be too different.

Would any difference in bonuses paid, both domestic and european, not be offset slightly by not having to pay out too much in performance related add-ons as most of the squad have already won the Champions League and premiership once already.

For example Rooney;

"They will also receive a £3m "contingency payment" if Rooney is still a United player in three years and a maximum £4m in performance-related top-ups.

For example, United will pay Everton £1m if they win the Champions League, £500,000 if they are runners-up. Winning the Premiership will cost them £500,000 and for finishing runners-up they will pay £250,000. An FA Cup success has been priced at £250,000 and another £1m will go Everton's way when Rooney has won 40 England caps. Should he sign a contract extension, Everton will receive £1.5m."

Not sure the breakdown of everyone at the club's transfer fee contigent on performance, but should mean no extra amount paid to ex clubs for the guys that have been here 4-5 years; likes of Evra, Vidic, Rio, Nani, Anderson, Rooney, Carrick, Park etc.

GCHQ said...

Anonymous 01:21,

Those performance related add-ons fall under capital expenditure and so wouldn't have an effect on either total staff costs or EBITDA.

You make a fair point though that any add-ons relating to success in 2011 should be significantly less than what was paid out in 2008 in particular.

Anonymous said...

Thanks Ander. It's great to get a clear breakdown of the finances.

Can you tell me if your estimate of total costs including fees of £369m is inclusive of the bond buybacks? As they haven't been cancelled and are convertible to cash in the market, I am not sure they can be considered a cost (though it's unlikey that they will be converted). Looking at your figure and allowing for the swap loss, and fees & loan, I don't think you are including the buybacks but I'm just seeking clarification.
A while ago, you published a spreadsheet with an estimate of the net cost of the Glazer ownership (costs allowing for dividends and taxation payable under a virtual plc ownership). Do you plan to update it?
I recall doing some rough number-crunching of my own at the time and based on a lower growth in EBITDA (lower ST price growth rate), and taxation\dividends based on the plc profile( taxation and dividends came to about 52% of ebitda over the last 4 years of the plc), the virtual plc would have a cash pile of close to £180m in the bank assuming that capital expenditure was the same.
Of course we do have a cash pile now but is has been bulked up by commercial prepayments- the Aon downpayment for one.
The point- very academic I know- is that had we enjoyed as much success on the pitch under a Glazerless regime but were as frugal, the club would be seriously awash with cash.
Of course, the club under the plc was pretty cash efficient and short of cash piling for no good reason, you have to think they would have invested more heavily in squad (without extra gain) and facilities (stadium expansion in particular). They (the virtual plc) could have increased their dividend take of course.

Anonymous said...

The bond buybacks are clearly a stockpiling of virtual cash to eventually, at the next major refinancing, feed up the chain to Delaware to pay down the debt which has replaced the PIK debt. I imagine we'll see a regular £25m or more per year of bonds being bought to offset the interest that will be accruing on the Delaware debt. Those bonds that the company now 'owns' will be refinanced with new debt, and the proceeds upstreamed in a series of transactions to the ultimate parent company.

Anonymous said...

An interesting take, anon@22:03.
I think you are supposing that the debt in Delaware is a PIK too and that the terms of it are pretty generous. If they did a dividend recap on refinancing there would still be the issue of dealing with the original PIK(Delaware) principle. Total debt at the Delaware level would remain steady or even rise a little throughout.

I am not sure what the bond covenants have to say about regular bond buybacks. As for the FFP regs, I don't think the buybacks would be expensed (unlike dividends) and the finance interest bill would fall. Is thar right Andersred?

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LUHG said...

Hello Anders!

Thanks for a topblog and a topred. I enjoy reading your excellent work and follow your brlog closely as a Utdfan myself.

I´ve found out som shocking reading at a rivalforum called RAWK (you know it surley). Som of our rivals have a long debate about our financial state. If thats true what some ppl saying were in for a tough ride (more that you seems to tell?

I would love to hear your opinon about that arguments that been put forward in the specific thread. If you have time.


The real debate starts from post 1297 were a guy post some part of our financial result for the post-Glazerera.

Is there any truth in that doom and gloom predictions some make out?