Tuesday, 15 November 2011

Manchester United Q1 2011/12 results: The big red money machine slowed down by debt

The first quarter of United's 2011/12 financial year saw a familiar story of a very profitable football club servicing some pretty expensive debt. Because the club is so profitable at the operating level (and full credit to the players, coaching staff and commercial team for making it so), the debt can be comfortably serviced. The threat of substantial dividends seems to have disappeared at the moment, but the sheer sums of money wasted by the Glazers' financial structure remains eye watering.


Revenue
Matchday
There were four home matches at Old Trafford during the quarter as there were in the prior year, with attendances virtually identical. Seasonal hospitality sold out for the first time in several years, adding £400,000 to income. The other c. £1.4m growth came from a bigger US tour (tour income is included in "matchday").

Media
The substantial growth here (up £3.2m) reflects a final payment from UEFA for last season's Champions League campaign which has been accounted for this financial year. United also receive a greater share of the Champions League English "market pool" this season. This is because we were Premier League champions last season rather than runners-up the year before.

Commercial
The £5.4m year-on-year growth in Commercial revenue comes from a variety of sources including the DHL training kit deal (worth around £2-2.5m per quarter), step-ups in existing deals (such as Aon) and the inclusion of partnerships signed post Q1 2010/11. On the bond holder conference call the club talked of "many" additional opportunities on the commercial side. United has by far the most successful commercial operation in English football, but still lags behind some major European clubs (especially Bayern Munich). The Stratton Street office in London now has over forty staff.

Costs
Staff costs
Despite the retirement of several senior players over the summer and the sale of Brown, O'Shea and Obertan, staff costs again increased sharply, by 12.2% vs. the previous year. The club said they "continue to face pressure" on wage costs. The club confirmed they had signed new deals with Valencia, Smalling, Park, Cleverley and Hernandez. Some of the cost pressure came from a further expansion of the London commercial team.

Despite the 12.2% rise in staff costs, the ratio of staff costs to income actually fell slightly vs. last year from 53.2% to 51.2%. By way of comparison, the figure at Arsenal in 2010/11 was 55.2% (football revenue only), at Barcelona was 58.3% and at Real Madrid was 45.0%.

Other operating costs
Other costs (ex-depreciation and amortisation) rose sharply up 13.3% year-on-year. Some of this is due to the expansion of the commercial operations and associated costs (the club revealed they pay for some elements of partner companies' advertising, such as the Turkish Airlines TV advert). The other main factor relates to the larger and more costly US pre-season tour.

EBITDA to EBIT
With revenues up 16.6% and costs up 12.6%, EBITDA (earnings before interest, tax, depreciation and amortisation) rose 29.6% to £19.3m for the quarter. This represents a 26.1% margin, which is good for Q1 (a seasonally weak quarter).

Depreciation grew slightly to £1.8m. The club achieved an accounting profit on selling Brown, O'Shea and Obertan of £5.6m. The amortisation charge (how transfer spending is recognised in the profit and loss account) was virtually unchanged at £10m. This all meant that EBIT rose substantially from £4.9m to £13.0m.

There was no goodwill amortisation charge now Red Football has moved  from UK GAAP to International Accounting Standards.

Below EBIT
The P&L interest charge was £10.0m, lower than the prior year reflecting the interest saved by the club buying back bonds over the previous twelve months.

In addition to this interest charge there were £9.3m of non-cash accounting charges. These relate to changes in the value of United's debt caused by the pound depreciating vs. the US dollar (£6.3m), the premium paid on repurchased bonds (£1.9m), the ongoing bond issue discount and issue cost amortisation (£803,000) and a small mark to market movement in interest rate swap (£321,000). In the previous year these items were a positive £11.4m and are of no real importance to the club's financial position.

Cash flow, interest and debt
EBITDA of £19.3m and a £3.2m inflow from working capital (largely prepayments on commercial deals) meant the club saw a £22.5m operating cash inflow during the quarter, virtually identical to the prior year despite the strong profit growth.


There was an August coupon payment on the bonds (the other payment is in February each year) of £21m and the club actually paid £3.2m in corporation tax, a rarity caused by group losses in 2010/11 being insufficient to offset the entire tax charge.

The club spent a substantial £13.8m on capital expenditure, including £8.2m on property near Old Trafford with the balance being spent on box refurbishment in the ground.

Unlike Q1 2010/11, there was substantial transfer spending in Q1 2011/12. The club spent a net £47.1m buying De Gea, Young and Jones (netting off receipts for the players sold).

The combination of heavy capex and transfer spending meant there was £62.6m outflow before financing. The club bought back a further £23.1m of bonds, meaning the total cash outflow for the quarter of £85.7m.

The club's cash balance fell sharply from £150.6m at the end of June to £65m at the end of September. Gross debt (excluding bonds held in treasury) is down to £433.2m, meaning net debt is £368m, up slightly on the same date last year.

Thoughts
Another £21m of interest and £23m of bond buybacks takes the total cost of the Glazers' financial model to an eye watering £578m. There have been some savings along the way (corporation tax savings of around £100m), but the net cost is clear.

There are very few football clubs that could support a burden like that, after all Hicks and Gillett's Kop Holdings Limited collapsed after a couple of years with a lower interest bill than United's. Thankfully, Manchester United can cope with its current level of interest. The club's resilience is down to good management, good luck and good fortune. It is largely of course a product of Sir Alex Ferguson's extraordinary record.

Despite the fact that the club's £100m+ of annual EBITDA can support the £40m+ of interest paid each year and still leave funds for investment, the mooted IPO in Singapore (currently on hold of course) tells its own story.

United's debt is expensive at an effective rate of c. 8.5% at a time of very low interest rates. The club's wage structure cannot apparently be stretched to afford a Wesley Sneijder type purchase, and net cash transfer spending since the Glazers took over is only £114.6m or £21.8m per year.

The House of Commons Select Committee report on Football Governance was highly critical of leveraged buyouts in football and the Department of Culture, Media and Sport response acknowledged this. The crushing cost of the Glazers' LBO are clear every time Red Football reports results. Just because United can "afford" to waste millions, it doesn't mean it's right or sensible.

If the club does do an IPO to reduce debt it appears that message has even made it to Florida.....

LUHG



37 comments:

Anonymous said...

Fine analysis Anders.

So what is your estimate of the net cost of the glazer ownership allowing for dividends and corporation tax under the alternative plc?
I do think that your estimate of 578m is effectively double counting professional fees as they have been rolled into the debt and thus their actual total cash cost to the club is reflected in the interest payments only (and bond buybacks even). You could construe the bond buybacks as settlement for all the professional fees and from that perspective you have double counted.
The corp tax bill of 3m for Q1 is unusual. Does this refect the removal of the pik to some degree and can we assume like charges going forward. I would have assumed that cum. losses todate higher up in the group were still large enough to offset the charges lower down.
The wage bill is a worry. I thought it would remain flat this year given the departures and retirements.
Interesting to note that the club seemingly paid upfront for players purchased in the summer. normally, it's the instalment plan route.

I do agree that the debt has restricted the club; some of the speak emanating from the club in relation to the reasons for IPOing testifies to that. I still can't figure why they wanted to IPO this year though- It's not as if the club is currently in a weak position financially.
If the club does IPO, surely that puts an end to the carveout business? I cant see how the glazers could take 95m for themselves post IPO when other shareholders would be in play.

andersred said...

Thanks Anonymous,

In the "costs" table.

Available here:

http://bit.ly/saMzks

I always split out costs into the three categories: rolled into debt, paid out in cash and debt repayments. People can choose what to include as a cost and what not.

I imagine the elimination of the PIK interest is responsible for the cash tax payment (albeit that RF paid £3.2m cash tax vs. a 2010/11 charge of £19.6m). We will have to see what happens next quarter. The deferred tax situation is quite complex.

Like you I was surprised by the extent of the wage increase. Five older players go (plus Obertan) and three young come in and the wage bill still rises 12%.

Who knows why IPO right now, until we know how much of any issue would be new equity and how much sale by Glazers it is almost impossible to even guess!

I agree with you on the carveout although its not precluded post IPO. It would be odd to delever through an IPO and then return capital to shareholders....

anders

Anonymous said...

Hi,

Without using the IPO, how much would the club be able to reduce the gross debt by the end of 2016.?

I know that they will not be able to pay 600mio every year for it, but they still should be able to spend some money on it, without putting in danger the money left for player transfers?

andersred said...

It's hard to say definitively without knowing how we do on the pitch...

If United made exactly the same EBITDA over the rest of 2011/12 as last year, with the same working capital inflow and capex the club would generate around £70m of cash. So if £40m was earmarked for transfers that would leave £30m to buy back more bonds....

In a "normal" year with operating cash flow of £120m, there's around £60-65m available for transfers and debt repayments...

anders

Anonymous said...

THX, let's hope that the EBIDTA will be bigger :), plus there is some cash in the bank.

And another question. Is it true that the Glazer have said in the IPO prospect that they will spend some money form it tu reduce the club debt? Ofcourse, they didn't say how much (if it's true).

Anonymous said...

Hi Anders
First anon back at you.

"I always split out costs into the three categories: rolled into debt, paid out in cash and debt repayments. People can choose what to include as a cost and what not."

I understand your position but my point is that your cost table (and hence your estimate of 578m) should exclude that category (in so far as it pertains to professional fees); afterall, you have excluded the principal amount of the loan that isn't fee related.

If the club took out a loan, of say 10m, to pay Professional fees of 10m, but subsequently paid back the 10m in full, the cost to the club is 10m plus interest. Using the categories in your table, the total cost would be 20m plus interest: 10m for the rolled into debt cost plus 10m for debt repayments plus interest. Double counting. And an illustration of why I think you should exclude the fees from your table.

andersred said...

It's a matter of taste isn't it? The club could have borrowed £79m and spent the money on football related activities but instead borrowed £79m and spent the cash on professional fees...

Point taken though.

Anonymous @17.44

The club have said (off the record to journalists) that some of the proceeds would be used to pay down debt. Those briefings are all we have....


anders

Anonymous said...

So, nothing official about the loan repayment.

I am reading your conversation, and wanna ask, about how money are you talking about (that was "counted twice" - I appologise if it's the wrong way to say it).

andersred said...

£79m of the £578m....

Anonymous said...

Thx, and whatabout tax and dividends we would have paid (isn't that about 200mio)?

Also, what about the income Glazers are responsible for bringing in.

I know that we have spent a lot of money "on nothing" shorttherm (we don't know what the future brings with the new approach), but how much money was it "really", without the tax, dividends and the 79mio.

I'm asking, because I have read that sometime people include payments for PIK loans, even if the cash never "left" United, and it was only on accounts? I'm no sure if it's true.

Or is it 578mio - 79mio and that's it.

Sorry for asking so many questions, I just wanna know more about this and you know quite a lot about this subject :).

Anonymous said...

Hi Anders
In that conference call today was there mention of further buybacks after Sept 30th. I ask because your total of 578m in costs includes a bond buyback figure of 111m. You may have included the post YE 2011 buyback of 23m twice. The Q1 2012 figure is just confirmation of the figure noted in the YE accounts.
Also, I think your previous figure of 87m probably underestimates the cost of the buybacks by 5m or so (which I believe is the premium paid to purchase the bond).
On a related point, what is the make up of the 23.1m change in borrowing costs noted in the Q1 2012 accounts? I would have though that this figure would be around 25m reflecting the premium paid.

Thanks.

David said...

Thank you Anders
You must be a massive thorn in the side for the Glazers. I cannot even begin to comprehend the figures, there are 'apparently' many accountants out there that can read between the lines following your report. At the end of the day the Glazers totally, utterly and ruthlessly run OUR football club. Everything they do is for their own end with no consideration for the fans and supporters. I curse them for the way they have wasted 000's millions for what - greed, greed and more greed. The IPO has still not got off the ground and you never know, what goes round comes round. Always always LOVE UNITED HATE THE GLAZERS

andersred said...

Hi Anonymous at 5:17

That's a good spot, I was double counting, using the post year end note (31.2) in the 2010/11 accounts!

The Q1 numbers in the text and the cash flow statement don't actually tally. I'm sure there's a reason for that but I can't think of one off the top of my head. The Q1 statement says:

"During the quarter we purchased £23.7 million (sterling equivalent) nominal value of our senior secured notes in open market transactions."

The P&L includes a £1.9m premium on repurchase of senior secured notes. That would imply a price paid of £25.6m.

However, the cash flow statement has a net change in borrowing of £23.126m and this will include the amortisation of the Alderley mortgage on the container terminal (c. £110k per quarter)....

I've updated the "costs" table to include two numbers, the consideration paid in 2010/11 of £67.357m (from note 22) and the £23.1m change in borrowings figure from the Q1 cash flow statement.

That looks like a sensible compromise!

anders

Anonymous said...

And what about the "savings" on dividends and tax?

Now it looks like 578m-102m, which is still huge (476m), but how much is it with the tax and dividends (I know, huge, but how much exactly)?

andersred said...

The dividends "what if" is always very hard to get at (unlike the tax where they report the "charge" and then don't pay due to group losses).

During the whole plc period (1991-2005) total dividends paid were only £58.6m. Annual dividend growth was around 8%.

If we use that 8% figure for the 2006-2011 period we get a projected "what if" dividend cost of £58.6m (coincidence). At 10% growth it's £62.7m and at 15% growth it's £74.4m.

For reference, EBITDA growth under the Glazers has been 9.6% pa.

Hope that helps answer the question.

anders

Anonymous said...

Hm,, so together it is about 100m tax, ca.60m dividends, and 102m from before. All together aboaut 260m.

Whatabout the 30m or so per year for the PIK loans, which again weren't paid, but were in the accounts. Was that included?

THX.

andersred said...

Sorry, what is the £102m from before? Is that referring to the costs added to the debt? That number is £79m.

I'd say £160m of corporation tax and dividends SAVED vs. the plc.

The PIK interest is NOT included.

anders

Anonymous said...

Aha, fair enough.

102. was thinking 79+23 (you said that you included twice the 23m for bonds).

Even with 102m there is still 316m which left the club for "nothing" which s HUGE. Let's hope that the gain on the end will bi bigger, if that's possible.

GCHQ said...

Hello Anders

I see you're still twittering away about 'waste' and Glazer related costs, some of which you've plucked out of thin air! This is your default setting after being highly embarrassed when the dividend carve-outs that you insisted would happen, never in fact materialised.

When are you going to start giving the Glazers the credit they deserve for being the brains behind our phenomenal commercial success? What they've achieved in that division more than makes up for some of the slightly negative aspects of their ownership. We'll generate £125m in commercial revenue this year which is 80 MILLION POUNDS more than the PLC amateurs achieved in their final year in charge.

You really need to look at the big picture although I'm reminded that you're the same bloke who 18 months ago dismissed our ever growing number of commercial partners as, and I quote, 'not that significant in the grand scheme of things'. Well let me tell you Anders, they are VERY significant indeed. We're gaining a very significant competitive advantage over the non sugar daddy clubs due to the very deals that you so ludicrously wrote off.

Turning briefly to other matters...

Do you know what the applicable premium will be on the bonds if they're redeemed with the proceeds of the IPO prior to 2013? I've heard 18.5% mentioned but can you confirm that?

On another point that's been raised, I'm fairly certain that the £1.9m premium paid on the repurchase of the bonds in the first quarter is included under 'interest paid' on the cash flow statement. The £3.5m premium paid on the bonds repurchased in the full year 2010/11 accounts was also included under 'interest paid'.

GCHQ

David said...

Capital expenditure: Utd spent some £8.2m on property around the stadium in the quarter.

This is quite a lot in the context of previous purchases in and around the stadium.

Does anyone have any idea what property was purchased? Does anyone know if the club are buying houses on Railway Road?

David

Anonymous said...

It would be interesting to see a line graph comparing profit after tax/interest (discounting non-cash accounting losses etc)for the period of the Glazers owning the club in the following three scenario's:

A: The Glazer situation vs if the PLC had continued the same year on year growth of their commercial operations (discounting the likes of shirt sponsors which have naturally increased - see Liverpool).

B: The Glazer scenario vs good commercial growth (ie between A & C)

C: The Glazer scenario vs if the PLC performed exactly the same.

Each situation would have to take into account the PLC's corp. tax and the same dividend % increase year on year.

I suspect that scenario B would probably show the closest comparison, as I don't believe they would have been as commercially successful as the Glazers.

andersred said...

Thanks for the comments.

David, details of the £8.2m property purchase can be found in this MEN article:

http://menmedia.co.uk/manchestereveningnews/news/business/s/1461258_manchester-united-pays-82m-for-land-around-old-trafford-stadium

GCHQ,

You are the last person who thinks everything is hunky dory with United's leveraged structure. In August even the club capitulated and briefed the press that the debt needed to be cut to keep the club competitive. To quote Mark Ogden in the Telegraph on 18th August:

"And sources close to the application process have confirmed that, within the draft prospectus submitted to the Singaporean financial authorities, United’s owners have laid out their reasons for the 30 per cent sale of their holding in the club.

Central to their submission is the confirmation that the £480m debt, a result of the £500m bond issue in Jan 2010, will be significantly reduced in an effort to make United more competitive in the transfer market.

The proportion of debt reduction has not been specified in fine detail, but it is understood that cutting the club’s borrowings, rather than servicing the personal financial commitments of the Glazers, is the primary reason for the partial flotation."

If even the Glazers want to deleverage (as shown by them spending £90.5m on bond buybacks in the last 18 months), perhaps you should too!

anders

PS. Will come back to you on the technicals and on Anonymous' interesting three "what if" scenarios....

Anonymous said...

The Applicable Premium by my reading of the prospectus is roughly a bit less (discounting) than the sum of the coupons foregone to Feb(?) 2013 plus the 8% penalty that would apply at that date. A rough calc (without discounting) gives 20% (from (8.5%/2)*3- 3 coupons remaining- plus 8%). I don't think the discounting is significant; gilt and treasury yields at the short end are less than 1 percent.
So a 20% penalty I reckon, or 19% after discounting. This will fall after the next coupon date.

andria said...

Thanks for sharing such a nice information with us it is quite informative .
Stock Market Analysis

Anonymous said...

Anders, There are reports that the Glazers ,along with another family ,will help finance the construction of a new football stadium at Tulane University in New Orleans.See JoeBucsFan.com and other sites for this story. Wonder where the money came from for this ...Chris,NZ

Anonymous said...

So at the moment, we rake in around £125m in commercial revenue alone? So in 2017 when the debt is paid off, shouldnt we see the club start raking in bucket loads of money year on year?

By the time the debt is paid, how long do you think it would take to get back the money paid out in interest and so on, from the money the Glazers alone have brought in on the commercial side?

The situation isnt ideal, but in 4 years we will be debt free and the biggest money making club in the world, even more than now, with no money coming out. Look at the bigger picture. Money wasted, yes, but we have so much to gain in the long term.

Anonymous said...

You are the last person who thinks everything is hunky dory with United's leveraged structure.
In August even the club capitulated and briefed the press that the debt needed to be cut to keep the club competitive.
--------

Trying to be devil's advocate here perhaps, but do both of you not have a point to a degree...

Firstly I think we have to acknowledge who we're trying to stay competitive with: primarily a gamechanger with unlimited wealth. It's not a normal situation, and if FFP proves ineffective, what's stopping them from setting an initial high price and then just repeatedly adding an additional £5m and £30k wages every time we bid. If we match that, and they say to the selling club "well add another £5m then", how far do our club sensibly go?

Either ways, the footballing landscape has changed. City can outbid us, and have inflated salaries, not just in prospective signings, but existing players (eg. Rooney) and knockon effect throughout the squad.

Which brings us to how we adjust and negotiate that problem. Is the associated costs to carrying debt conducive to competing transfer wise with a financial behemoth with unlimited resources. Clearly No. Less interest means more potential money to compete in those transfers/pay top wages to retain key players.

Conversely without the aggressive expansion of our commercial portfolio under the Glazers (and sadly for us fans, increase in matchday), would our revenues be in any position to compete moving forward with this new threat. Debatable. GCHQ is correct in that it is a long term process. Had the PLC been sitting on say £60m commercial revenue as opposed to £125m or whatever, then whats to say they wouldn't right now be thinking "cripes, we need another £100m a year pronto or else" (assuming matchday revenue would be lower), and whilst that could see them start a period of aggressive expansion regards commercial, I don't believe its as easy as clicking your fingers and suddenly having 20 new sponsors within a week. Too much dilution if procure and announce that many too quickly. Sponsor wants initial exposure etc.
We have a more developed commercial infrastructure now. New "tester" schemes (such as the telecommunications deals) have been allowed to mature, to where presumably the initial sponsors have got results enough, for us to entice additional firms (Since we now have around 14 covering 35 countries I believe, and 5 since the summer).

As said, just playing devil's advocate but possible argument that we're further along in terms of narrowing that deficit to City's unlimited wealth, than had we been if short on revenue, and needing time for a commercial operation to reach maturity.

I don't see it as black and white.

Ahmad Syafiq said...

Interesting that Manchester United's net debt increases, but I guess gross debt is more important in the layman's point of view. How much potential does Manchester United have to reduce the current gross debt of 433m pounds by the end of the season?

Anonymous said...

Since 2005 I've got the following totals (up to the end of FY 2011/12 Q1):

Revenues
Matchday-----------------£605,218
Media--------------------£544,903
Commercial---------------£459,485
Costs
Staff Costs---------------£755,038
Other Operating Costs-----£334,079

Assets
Player Purchases----------£291,895
Player Sales--------------£177,382
Fixed Asset Investment-----£90,512
Increase in Cash-----------£25,807

If you do all the math you find that income exceeds expenses plus asset increases by around £289m.

Now if we assume we were still a plc and that they had achieved the same revenue growth (unlikely as they hadn't grown Commercial in the 6 years prior to the buyout), we would have paid in the order of £212m in taxes and dividends. That leaves £77m as the "Glazer premium". Now I'm prepared to accept that I could easily be out by up to £20m or so, but that still "only" gives us a "premium" of around £100m. That's the maximum - if you assume that the plc was a little less aggressive in growing revenues the "premium" would be correspondingly less. Of course £50m-£100m is not to be sneezed at, but it isn't £578m.

Anonymous said...

Anon@03:58 26 Nov
Tax and dividends is not a percentage of gross profit. Where is your allowance for amortisation of contracts and asset deprec. You overestimate tax and dividends by 60m or so. Still confident about your "20m or so" error margin?

What about the impact of loan capital repayments not only on the bond but on the previous term loans. In all about 130m was paid in debt repayment. No debt repayments then the "increase in cash figure"( or investment alternative) above would read 155m give or take a million or two for interest earned. You seem to have ignored the fact that the shadow plc in your comparison would be 130m to the good! So that makes your estimate of a 20m error margin roughly 2000% out. Still confident?

There is other stuff of course; all will have impacted the cash asset negatively: the swap loss of 40m (15m of which has been paid); fees of 25m or so- all in another 40m or so that the "increase in cash" figure above is shortchanged.
So far I make it your estimate of 77m plus 230m you have somehow ignored.....Hmmmmmmmm!

But well done on the research aspect of your post; You need to work on the analysis a wee bit before you present to the big boys.

Anonymous said...

"Tax and dividends is not a percentage of gross profit." Of course they aren't - that's why you have to build pro forma models to estimate them. However dividends were approx. 35% of PAT for the six years before the takeover, so it seems reasonable to work on that assumption going forward.

"Where is your allowance for amortisation of contracts and asset deprec." I'm looking at cash in and out - amortisation and depreciation are non-cash charges. Of course I use them when I'm modeling the putative PLC to get a handle on their tax and dividend liabilities.

"You overestimate tax and dividends by 60m or so." No, I actually underestimated them by about £13m - modeling error. The tax is pretty unambiguously in the £125m range. Dividends are probably a little under £100m (with a degree of error due to the Ronaldo sale year - who knows how big the dividend would have been that year.)

That's all about modeling the PLC. It's just getting a handle on the cash flows that are different to those we've actually seen. The rest of the analysis is looking at the cash flows in and out generated by the football side of the club - and assuming that the PLC would have been able to achieve what we have seen over the last six years. The question I am asking is a very simple one. Given that we know the operating cash flows, how much is left over to pay the costs associated with the financial structure of the company. What I suggest is that about £75m more cash has been taken from operations than would have been necessary if we were still a PLC. I'm not saying any thing about what the cash has been used for. Obviously interest payments and swap costs will be part of the £289m, but that's not really relevant to the analysis.

One of the issues in this type of analysis is separating the cash flows occasioned by the business operations from those that are entirely part of the financing structure. Much of the famous £578m had little or no connection with the operating side of the business - the entire escapade of the mezzanine financing is a good example of this. This does not abstract from the probability that there will be significant cash outflows in the future related to the paydown of the debt - although that may change in the event of the Singapore IPO actually happening. What it does say is that the cash impact to date on the club as a business is generally wildly overstated, primarily because of the failure to differentiate between the operating and financial sides of the business.

Anonymous said...

To anon. 03:16

1) Tax and dividends as a % of EBITDA (more indicative of profitability for the counterfactual plc as it makes no assumption about profit from player disposal) averaged about 33%for the plc. Assuming a like ebitda profile, then the tax and dividend burden would have been 33% of 510m (total ebitda under the Glazers); so about 165m reducing if you believe that EBITDA growth under an alternative plc would be less.
2) Dividend philosophy under the plc was clear; profit from player disposal did not factor in the dividend calc. Read the Chairman's comments in the 2003 plc report; monies form sales were to be invested back into the team. Aside from such comments, there is another reason why this would be the case: dividends were smoothed to reflect fundamental (repeatable) profitability- a large dividend based on the Ronaldo money could not be repeated in future thus conflicting with an expectation of progressive dividends.
3) You are confusing operational and financial costs; The extra costs under the Glazers are entirely financial and LBO related. Excluding them from the analysis is irrational and your comments are plain daft. Andersred's cost total is a bit rich but he is not confusing operational and financial costs. You however are, and that is quite funny given the following gem: "What it does say is that the cash impact to date on the club as a business is generally wildly overstated, primarily because of the failure to differentiate between the operating and financial sides of the business"
You calculate the glazer premium for the club using a cash flow approach and base that figure on an "increase in cash position" of 25m. Do you understand how that figure is derived? Do you understand that a large portion of our cash position is down to heavy commercial prepayments; monies received in advance of our recognising it as revenue? I'm sorry but your estimate of 75m for the Glazer premium is just absurd and your implication that it is an operational cost is incorrect.
4) My estimate for the Glazer premium is about 250m: Andersred's 578m less 79m for professional fees
less 25m (for double counting the last reported bond buyback) less dividends and tax of 165m less an allowance for extra ebitda under the glazers of 60m (with a deduction for dividends and tax). That gives a figure of around 250m.
So to sum up, the alternative plc, would have no debt, greater growth prospects, more money for internal investment or business development- that 250 wouldn't be sitting in the bank- and much greater flexibility to adopt to changing circumstances.

Anonymous said...

1)a) We don't actually have to make assumptions about the profitability of disposals - because the PLC is assumed to be operating identically to the post takeover club, we already know exactly what the profits were.
b) 33% of EBITDA is a nice theory but it has little explanatory power when you look at the dividends paid from 2000-2004. The reality is that dividends doubled between 2001 and 2003 - a period when we made substantial profits from disposals. The dividend was then cut 32% in 2004 when we made no such profits. Throughout the period the payout ratio remained approximately 35% of PAT.
2) The concept of progressive dividends is a sound one. Unfortunately it is a path that the PLC didn't follow. The Chairman's statement was interesting in the light both of the doubling of the dividend over the previous two years supported primarily by profits from disposals and of the dividend cut the following year as those profits didn't materialise.
3)a) I apparently confused you in an attempt to simplify. Sorry. I was trying to differentiate between financing costs that have an impact on the cash available to the operating side of the business (the club), and costs that are external to the business in the sense that their impact is on the ownership structure. So, interest and paydown related to the senior debt impact on the operating business as do the costs associated with the swaps; interest and paydown of the mezzanine financing did not impact on the operating business - those costs were isolated in the ownership structure. I - perhaps rather loosely - was describing costs that impacted on the operating entity as operating costs and those that impacted on the ownership structure as financing costs.
b) Again, the assumption is that the PLC would be operationally identical to the post merger club. It really doesn't matter where the cash came from as long as the putative PLC would also have received it. The assumption is that all cash inflows and outflows, other than those related to taxation and the financial structure, would be identical. In accounting terms we're doing a very simplified sources and uses analysis of the business and estimating what the 'plug' would be that made sources and uses equal. The plug is the available cash that would be used differently by the club as is and the putative PLC. The club as is would use the cash to pay interest, swap costs and paydown the senior debt (among other things); the PLC would pay tax and dividends and have some amount left over as discretionary cash. The lack of that discretionary cash is what the Glazers have cost us.
4) Given that the difference between sources and uses is about £289m, you clearly cannot have a 'Glazer premium' of £250m unless you are counting costs that were external to the operating business. Even using your estimate of £165m for the tax and dividends, the excess is no more than £125m.

I repeat what I said in the original post. This analysis reflects cash costs incurred to date (i.e. over the 6 completed financial years and Q1 FY 2011-12). It does not reflect costs embedded in the senior debt that will be paid implicitly as that debt is paid down. These are primarily the issue discounts for the first, second and third rounds of senior financing.

Anonymous said...

Anon @00:38
1) That assumption is rather spurious if extended to a counterfactual plc 6 years on; It is also self-negating: as in we are trying to derive a glazer premium or "discretionary" sum the magnitude of which would impact operations. If my estimate of 250 is correct then the counterfactual plc would have in excess of 400m in its bank account at YE 2011. That is clearly absurd; investors don't invest in a club so that the club could stockpile cash in a low return account. Surplus funds would have been invested thus impacting operations.
2) The 33% ebitda charge for tax and dividends is not a theory. It is a statistic derived from historical public data. For the period from 2001 to 2004 inclusive, total EBITDA was 195m, tax was 33m, and dividends were 31m. 33% of 195 equals 65m which is slightly more conservative than the actual total of tax and dividends. So a good independent guide to what the counterfactual plc might do without resorting to an assumption that is ultimately unreasonable. In any event, I believe Andersred using a 10% pa compounding increase for dividends and using actual tax figures from the MU accounts arrived at a combined figure of 160m or so.
3) You really need to look closer at the club's dividend policy. It consisted of an ordinary or base dividend and from 2002 they introduced a special dividend. The base dividend increased at 6% approx. pa except in 2003 (where after an exceptional year for profitability -pre disposal of players- it increased by 19%). It reverted to 6% increments for 2004 and 2005. The special bonus was paid in 2002 and 2003 but not 2004 or 2005. The chairman's comments regarding a progressive dividend poicy were indeed valid as the payment of a special bonus every year was not an expectation. It was also a polciy for the club- again stated in the accounts- to use proceeds from the sale of players to invest in the team- as indeed was the case in 2003 when Beckham was sold.
4) You need not apologise for your inability to explain yourself concisely or clearly. I fully understood what you are were trying to say the first time; you are still incorrect!
As I commented previously, you make no allowance for the acc. of commercial prepayments and other elements that reflect the change in working capital over the 6 year period of the Glazer reign.
You have put together the nuts and bolts of a 6 year cash flow account(depite using "increase in assets" when you really mean increase in asset expenditure) but without an essential element: change in working capital. The change in that period is positive and needs to be added to your Ebitda figure (your total revenue less total costs) to get operational cash flow for the period; from that figure you need to deduct net player expenditure (your player purchase less player sale) and fixed investment expenditure. That leaves you with total available cash created by the business from which you can deduct glazer costs or plc costs accordingly. Of course, you need to allow for the increase in cash position too. Check any of the accounts in Andersred's resorce section to see how cash flow accounts are constructed.
To sum up:
Your estimate of Glazer costs = 289m (I assume your figures are correct) + change in WC.
(For 2009, change in WC was +19m-Aon commercial prepayment, in 2011, I believe it was around 15m.)

Even then, your estimate of glazer costs would be incorrect. Management fees of approx 25m are treated as an operational expense but are really Glazer specific and wouldn't be an operational expense under the plc.

5)I am sure the remainder of your post is great. I recommend though that before you condescend to lecture us all, you might consider taking on board the advice I gave in my very first post:

"You need to work on the analysis a wee bit before you present to the big boys."

marketing consultants Manchester said...

It looks as though you have a better idea of financial analysis than whoever's advising the red's at the moment. Great Blog, Great questions too.

vinothkumar said...

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