Tuesday, 21 February 2012

Manchester United Q2 2011/12 results - the amazing, expanding wage bill

The second quarter of Red Football's financial year (September to December) is the least exciting. The transfer window is firmly shut, the season ticket selling season is over, it's the dull group stage of the Champions League. Nothing is won before Christmas and from a financial point of view, not much happens...

That is largely the case with these figures for the three months to 31st December 2011 (and therefore the first half of 2011/12 too). Having said that, there are some surprises.

The trends seen in the first quarter figures were present again in Q2. Matchday income was up 3.8% compared to last year despite exactly the same number of home games. The club put through an average price increase of 2.5% this season and the additional revenue has come from better corporate hospitality sales, a real credit to the Old Trafford corporate sales team at what is obviously a very difficult time economically.

Media income rose an impressive 9.8%, but this increase is somewhat deceptive. United benefit this season from a higher share of the English "market pool" than in 2010/11 because of winning the league last season. Furthermore, the club recognises some of the Champions League media income evenly over the number of games played in the competition. With United being knocked out at the group stages, there is a paradoxically higher amount of revenue recognised in the first six months than last season (when income was spread over ten games across the whole season, not six in the first six months).

In the second half of the season, there will be no Champions League income of course and the meagre pickings from the Europa League (a maximum of about €5m if the final is reached) will depend of course on progress in that competition.

Commercial income continues to grow very fast (up 13.4% during the quarter vs last year and up 17.7% over the six months). Much of this growth comes from the c. £10m per annum DHL training kit deal. The club has also recently signed new deals with Bulgarian and Bangladeshi telecom operators. This strategy of finding a local telecom partner in a myriad of markets will eventually reach a natural end of course, but I must confess to having been too cautious on United's commercial growth. The "brand" has stretched far further than most observers (including this one) felt was possible.

In total, revenue growth of 12% in the first six months of the year is very impressive, even if the impact of the early Champions League exit is yet to be felt.

Costs - terrifying
It's a good thing that United's top-line is growing so well, because so is the cost base, and particularly the wage bill. After the 12.2% year-on-year growth in staff costs in Q1, they rose 17.2% in Q2. This increase is before any end of season bonuses obviously, so can only be put down to significantly more expensive deals for key players. When you consider that Garry Neville, VDS, O'Shea, Brown, Obertan and Scholes (his return is not included in these figures) all left the club in the summer with younger (and you would imagine cheaper) players coming in, the wage inflation is even more extraordinary.

Historically, there has been a very, very strong correlation (r squared of 0.98) between media income and wages at United. What has happened this season is effectively a breakdown in that relationship.There is no big new TV deal to drive player salaries up. Endemic wage inflation is THE financial problem in football, it is what Financial Fair Play is designed to deal with. These figures show it remains a huge issue in 2011/12.

Non-staff cash costs rose an equally punchy 14% in Q2 vs. last year. Some of this must be the club's swanky new corporate offices in Stratton Street in central London. Unlike at the old Pall Mall office, the club has the confidence in Stratton Street to have their name listed in reception.

EBITDA and below
With revenue up 8.7% and costs up 16.3% during Q2 vs 2010/11, EBITDA was virtually static (up 0.4%) and the margin was down from 48% to 44.4%. For the first half as a whole, EBITDA was up 7.7%. United remain very profitable, but the negative "jaws" between cost and revenue growth (costs are rising faster than income) is a worry in any business.

Below EBITDA, depreciation and player amortisation were virtually static. The club made its usual small profit on player sales and there was a totally unexplained £2m exceptional charge.

Interest and various marks to market
The interest charge in the profit and loss account was down 11% compared to Q2 last year. This reflects the increasing number of bonds the company has bought in during the last two years. It should be noted that actual bond cash interest payments are made twice a year in February and August.

Under International Accounting Standards, Red Football must recognise the initial discount on bonds over their life, any premium paid when buying bonds, any "mark to market" increase or fall in the sterling value of the US$ bonds and must also mark any swaps to market too. I don't consider any of these (largely non-cash) charges to be material to the health of the business.

Cash and debt

The second quarter is not a big one for seasonal cash flow (pre-payments of season tickets and sponsorships unwind over the quarter). Operating cash flow was slightly negative (-£2.7m) as these working capital positions unwound. As stated above the main bond interest payments fall outside this quarter and there was little transfer cash flow outside the window.The club bought another £5.2m of bonds during the quarter to take the total to £92.8m (almost 20% of the bonds issued in 2010).

The press have focused on the c. £100m fall in the club's cash balance, but £86m of this fall took place in Q1. In Q2 the cash outflow was only £14m.

The cash outflow and bond buybacks left gross debt at £439m and cash at £50.9m. Net debt has therefore risen slightly from £368m at the end of September to £388m at the end of December.

Credit has to go to the club for once again boosting revenues in a tough economic climate. United (along with Real, Barcelona and Bayern) is one of the commercial giants of modern football. Much though it pains me to say it, the Glazers have overseen extraordinary commercial growth (this year Commercial income will be more than 2.5x the level the plc achieved in their best year). The second half will see weaker media income as the CL exit bites, a timely reminder that on-pitch success is never guaranteed.

Despite United's excellent revenue growth, the dynamics of football finance remain awful (hello Rangers, hello Pompey). Any business which sees core cost growth of 16% year-on-year is going to struggle to meaningfully grow profits. Profit growth is not crucial for a football club, but it is for the owners who are no doubt still eyeing an IPO and want to tell a story of rising profits, not just revenue growth. I remain confident that FFP will eventually calm player wage inflation but such restraint is not visible in these figures.

Finally, for all the booming income and soaring wages, there can be no doubt whatsoever that the £116m Ronaldo/Aon windfall received on 30th June 2009 has gone to deal with the debts laden on the club. In the thirty months from that date 31st December 2011, the club spent the following on debt service and investment.

In almost all football clubs, surplus cash is reinvested. At Manchester United it is still far more likely to be spent dealing with debts that the club should never have had.



Gary, Chester said...

Excellent analysis once again, the last graph is heartbreaking for a fan to see! almost 2.5 x the amount being spent on players is being spent on the debt that the club shouldnt have!


Anonymous said...

If Arsenal and Chelsea don't make it to the CL quarterfinals, would that mean any more money for us, than we first have thought?


3d health animation said...

Good work and excellent blog post.Good analysis.

Anonymous said...

Hi Andy
Any chance the club has reclassified players' image rights as salaries; image rights were I believe treated as commercial contracts and categorised as an operational expense.

Anonymous said...

A question for Andy, if the Glazers were to use some of the proceeds of the IPO to buy back 50% of the bonds, the club would be effectively paying 50% of the interest to itself, would the Glazers still be able to retrieve tax back from that money? Is this why they are doing this? Thanks


david said...

Never let up Andy on analysing the glazernomics - everything goes full circle and while the florida carpetbaggers are having a descent run Fergie will not be in the picture much longer and then there could be fun and games. A question for you - how are the Bucs doing financially and I do hope their shopping malls are continuing to struggle ?eention

Anonymous said...

"Historically, there has been a very, very strong correlation (r squared of 0.98) between media income and wages at United."

That's not a very, very strong correlation. That's an astonishingly strong correlation. Can you point me towards the data for this?

Pigeonpco said...

To be honest,most of the figures £ $ % go over my head (no shame in that), what I do understand though, is my beloved club is being taken to the cleaners by these errant owners. The worst thing is, the average Joe can't do a thing about it, expect FCUM gates to increase significantly in the very near future. LUHG

Diem said...

Treating the Glazer takeover as a 'sunk cost' - i.e. there's nothing which can meaningfully be done about the bond issue etc now - what's your preferred ownership model for the future?

You acknowledge the improvements in commercial income which may or may not have been replicated by the plc, but if it's "Glazers out", who comes in?

The Red Knights received far too much fawning press attention over their PR stunt, eventually showing that they're no different to the Glazers by quoting "excessive valuation" as the reason for not proceeding. I don't see how a fans collective can raise sufficient capital to influence the outcome.

Frank said...

anders, I assume you know what is meant by the bottom line.

In the case of Utd's accounts for the half year in question, allow me to point out that Utd's profits have risen by 62.2% compared to the similar period last year - a percentage which you yourself have calculated but which you have chosen to ignore.

In most businesses, a percentage profit increase of 60+ per cent would be regarded as a major triumph.

As you have pointed out, the commercial/sponsorship success of Utd is unprecedented. Yes, Bayern Munich have bigger numbers, for now, but a lot of the difference between Utd and the eurozone clubs such as Real, Barcelona and Bayern is that in the last few years the pound sterling has fallen considerably against the euro.

Unlike Barcelona, Utd haven't pimped out their shirt to a middle eastern oil-rich statelet that bought the 2022 World Cup, but nevertheless are now vying essentially on an equal basis with the eurozone clubs, Barcelona, Real and Bayern, for sponsorship.

With revenues rising to £175m for the half-year and profits rising by over 60%m, much of which is down to the rise in commercial revenue, Utd's finances look in pretty good shape to me.

Anonymous said...

Another blog leading inexorably to the author's mantra. Yes, I would like to see one or two top class signings - a Donadoni rather than an Ashley Young if you will. But Fergie has bought the players he himself identified, for his squad, to fit in with the way he is developing it. This notion underpinning all the AR blogs that net spend is king and proves that Fergie is hamstrung by debt repayments is frankly nonsense. Of course the money could be better spent, but as even the blogger is forced to admit, most of it wouldn't have been generated in the first place under the previous regime - wrong about the PIKs, totally in the dark about the bonds, garbage about the Red Knights, and ignorant about commercial opportunities.

Still, at least there is an acknowledgment that the real problem football has to get to grips with is player wages.

Given that United is bankrolled by, well, banks - and you are never going to stop people who use other people's money to make themselves a fortune being greedy - you would imagine that that more people with concerns for the modern game might attack the levels of player wages. And yet here we have the arch critic of Glazernomics banging the drum repeatedly over a half decade period for throwing money at the transfer market as if we were a mickey mouse plaything of some oil-rich sugar-daddy.

For god's sake find a better way to present the bloody argument.

Anonymous said...

If we have bought about 20% of the bonds back, shouldn't we pay now about 8-9mio pounds of interest less?

They said that in Q2 we paid 1,2mio less interest, which is about 4,8mio a year. But if we already had about 87mio worth of bonds, shouldn't that be about 7mio less a year?

I understand that they put the exra money paid for the bonds (like 5,2 was bought for 5,3mio) as interest, but the 87mio worth of bonds was bought in Q1 and Q3 and Q4 of the last year, so why didn't we save more on interest, or are we gonna see it later?


andersred said...

Thanks for all the comments and sorry for not replying sooner. It’s a busy time for me at the moment.

Anon @ 23.14 on 21st Feb

United get c. €2m more from UEFA if Arsenal AND Chelsea both go out of the CL this round compared to the worse case scenario of both getting to the final, so it doesn’t make much difference.

Anon @ 03:39 on 22nd Feb

If the rise in staff costs was just due to a reclassification from “image rights”, I am certain the club would have said so. The purpose of these accounts is to inform bond holders about the financial position. A one off classification adjustment like that is “good news” (i.e. the rise is not just wage inflation).

The club statement was very clear: “This increase largely relates to growth in player remuneration, driven by new player acquisitions during the summer 2011 transfer window and further contractual negotiations together with increased costs and headcount arising from the continued growth in our sponsorship and commercial operations.”

Mark @ 9:16 on 22nd Feb

The club do not receive interest on bonds bought back in the market. They are held “in treasury”. Interest would be paid if the club sold such bonds back to the market. The tactic of reducing debt through an IPO would probably be through compulsory redemption of bonds, not through buybacks in any case. There are provisions for such redemptions in the bond documents.

David @ 9:53 on 22nd Feb

I think the Bucs are doing fine financially. Collective TV income is hugely important and that side of things is going well even if the team / attendances aren’t.

The malls are still suffering, although US retail sales have picked up along with the economy.

Anon @ 17.12 on 22nd Feb

The media/wages data and regression is on this spreadsheet:



Hi Diem,

My favoured model is some element of supporter ownership and board representation. I think ALL clubs would benefit from that. In United’s case one major improvement would be owners who ploughed all earnings back into the club, rather than on servicing debt.

That isn’t too outlandish a concept given that every other major club is run that way (Spurs, Milan, Real Madrid etc, etc).

I think the fans could assemble a reasonable stake over time, but that time could be a decade….


That 62.2% increase is not “the bottom line”. That number is an adjusted figure calculated by ME to exclude the FX impact on the bond. The “bottom line” is a FALL in the pre-tax profit for the half of 41.9%.

That simple point shows the subjective nature of analysing company results. The key performance metrics – EBITDA and EBIT growth are OK but no great shakes…

United is fine financially as I hope I point out in the piece, but the cost of the financial model remain very, very high.

More to come…..

andersred said...

Anon @ 12.31 24th Feb

Sorry if the message is boring you. It’s rather in the nature of periodic updates…

You can spend your time thinking that “multi-transfer record breaker” Fergie has truly decided that absolutely no expensive, big ticket signings could improve our squad if you wish. You can ignore the step-change in investment levels (73% of EBITDA spent on transfers and stadium from 1992-2005 vs. 73% of EBITDA spent on interest and debt repayments 2006-2011) as just a coincidence.

I’m not “campaigning” for a certain net spend number, I just want what MUFC earns to be available to MUFC to be spent on whatever will benefit the club and its fans. Forget transfers if you wish, consider we could have 2005 ticket prices and the same bottom line profits if we didn’t have to pay bond interest. Isn’t that something to be angry about? Perhaps you can’t see that.

Who knows what the Commercial income would be under the plc, I somehow doubt it would have just flatlined. Things like the Nike deal (STILL the world record in the area after all these years) show they were hardly slouches. Who was the CEO under the plc? Oh yes, David Gill.

As for your list of my errors, I put my hands up to the PIK repayment, although I note that when the bond prospectus was published my concern was the £95m carve-out being used to rob the club’s cash balance to pay down debt…. Here we are two years on and what’s happened? £100m has gone to repay bond debt instead. The fear was entirely well founded even if they baulked from deleveraging through a dividend straight to RFJV.

You have no idea about the Red Knights. The fact that some people won’t pay whatever the Glazers want doesn’t mean they don’t exist!

Final Anon @ 20.41 24th Feb

The impact of the bond buyback is slow and needs to annualise before the full impact is seen. Bonds had already been bought back by the end of H1 2010/11 (£24m). Since then a further £69m have been purchased. That £69m is c.13% of the total and you can see that the H1 interest charge fell 14.3% so the impact is coming through (it’s more complex than this due to currency moves).

Hope that helps.

Thanks again everyone.


Swarbs said...


A quick thought - do you have figures for commercial revenue growth before and after the takeover? Would be interesting to see how the additional commercial income the Glazers have brought in over and above the plc, that IIRC was 90% dependent on kit and shirt deals for commercial revenue.

If we assume that the plc would have carried on as it was doing, i.e. just selling shirt sponsorship, kit manufacturing, and advertising boards, to what extent does the extra commercial revenue created by the Glazers balance out the cost of the debt?

Anonymous said...

Thx a lot, so it means that we are "saving" more on interest payment, then I first thought (I know, saving is probably not the best word, but I don't know what other word to use).

And please, can you explain what this means:

The tactic of reducing debt through an IPO would probably be through compulsory redemption of bonds, not through buybacks in any case.

I don't know much about finance, so can you explain it in a more simpe way. Thx.

andersred said...

Hi Swarbs,

It's hard to say precisely but here are some figures.

In 2005/6 (first year post takeover, last year with all plc Commercial deals in place) the club achieved:

Shirt + Nike: £30.4m
Other Commercial: £16.7m
Total: £47.1m
The plc grew all commercial income from £7m in 1993 to £47m in 2006.

In 2010/11 the numbers were:

Shirt + Nike: £49.0m
Other Commercial: £54.4m
Total: £103.4m

That growth of £37.7m in "other commercial" is the impressive bit. It's equivalent to an extra 23% on total club income since the takeover. That sounds very good but it's only 4% per year. It is clearly a big chunk of extra cash.

The shirt deal is bang in line with other clubs and the Nike deal was down to the plc.

Nobody knows how much of this extra £37.7m the plc would have captured. Other clubs (Real, Barca, Bayern etc) have done even better than United when it comes to commercial deals.

If you believe that none of this extra income would have been captured by the plc then even then it isn't as much as the annual interest bill....

Anon @ 20.18

What I mean by that is that so far the club has been reducing debt by buying bonds in the market (like people buy shares on stockmarkets). If an IPO raised (say) £500m and they wanted to reduce bond debt by (say) £200m it would be very hard to do it through that mechanism. Instead, the club has the option to effectively "call in" and redeem a big chunk of bonds from current holders. They HAVE to sell them back to the club. Unlike with the buybacks,the bonds would be cancelled for good...

Hope that makes sense!


Anonymous said...

What it means is that in the event of a public offering (IPO), the club can redeem up to a certain percentage (35%?) of the bonds at par. This would be a compulsory redemption and is allowed for by the bond prospectus.
Currently, the club is paying a market premium by buying the bonds from the bond market- around 5%. Paying a par value would be a bit cheaper and from the perspective of investors in the IPO a more certain use of proceeds.

In any case, this bond provision working in tandem with the much speculated IPO has probably dampened the market price of the bond thus enabling the market purchase of bonds (bond buybacks) to happen at a price lower than it might have been otherwise.

The club can force the redemption of more than 35% of the bonds, but it would require a sizeable premium. The premium would be a function of the redemption date; the later the redemption date, the smaller the premium.

Anonymous said...

OK, i get it now (on the bond buybacks).

Thx :)

Anonymous said...

Hi Andy

The growth in Other Commercial reflect the greater investment in the London operation; But how much is the operation costing? I know that commercial revenue is high margin but it would be interesting to get your take on the running costs.

Commercial staff numbers increased from 23 in 2009 to 53 in 2011. The "other commercial" revenue you refer to above really started to come through from 2009 onwards.
The H1 2012 report shows that staff numbers have increased by an extra 70 since 2011 YE; presumably this increase is due to the further expansion of the London operation.
Along with staffing, there have been other costs like rent etc. Probably doesn't amount to a whole lot given the increased commercial performance. I do remember the club showing a rather substantial drop in operation expenses at YE 2010(?) as a result of the termination of a non specified commercial arrangement. Do you have any details? I recall Richard Arnold saying that the club utilised the services of some of the leading marketing firms; perhaps they acted as facilitators in some of the deals.


Josh Tarrant said...

Fantastic read - as always.

really interesting to get to a detailed look at the books and have it told in an easy to understand way.

Will be interesting to see what happens over the next 12 - 18 months especially if they float.

I know I am in the minority - but I have a lot of respect for the Glazers - I know the ride has been a bit rocky but we have had one of our most successful periods under them.

Anonymous said...

"Historically, there has been a very, very strong correlation (r squared of 0.98) between media income and wages at United."

That's not a very, very strong correlation. That's an astonishingly strong correlation. Can you point me towards the data for this?


Not really astonishing. Consider the series:

12,13,14,16,14,15,18,21,23,24 and

One series doubles; the other more than triples. Both series have a single dip - they are not perfectly synchronised. The series have an R-squared of 98.2%. A high degree of correlation is a statistical artifact that you will find in any pair of series that are predominantly increasing in a fairly regular fashion - i.e. that are broadly linear. (I had to be a little careful constructing the series - it's easier if they are monotonically increasing or if the dips are synchronised.) The bottom line is, it's not astonishing, it's expected.

Anonymous said...

Oops, forgot my conclusion.

The 98.0% r-squared between Media and Salaries is very impressive but, paradoxically, it provides no evidence of a relationship between them - other than that they both increase in a broadly linear fashion.

Anonymous said...

It's hard to say precisely but here are some figures.

In 2005/6 (first year post takeover, last year with all plc Commercial deals in place) the club achieved:

Shirt + Nike: £30.4m
Other Commercial: £16.7m
Total: £47.1m
The plc grew all commercial income from £7m in 1993 to £47m in 2006.


Here are some more figures for Commercial (the seven years before the acquisition):

1999 46,263
2000 43,833
2001 46,569
2002 37,861
2003 46,190
2004 45,330
2005 42,487

Not exactly dynamic growth - in fact, not exactly any growth. Now, the PLC might have magically got religion about Commercial if the takeover hadn't happened - but there was nothing in their recent history to support the supposition. The slight growth in 2005-06 was the Air Asia sponsorship - this required no initiative from the Commercial "department" as Air Asia came to us with the proposed deal. Contrast that with the five new deals (and three extensions) signed for 2006-07.

Anonymous said...

Anders 27/2/12

Yes I am aware that Ferguson has smashed a few transfer records over the years, but he's also bought a string of players in recent seasons for what I for one think are incredible prices; Nani, Hargreaves, Carrick, Jones, De Gea, Berbatov, Anderson, Young, Valencia - all these players have cost shed loads. Despite that the reality is that it has always taken a bit of a power struggle to get United to pay the going rate in wages. There were 10 years between Keane and Rooney taking the club on in that regard. Can you honestly say that the Glazers ownership has changed that battle much? Of course not, not unless you're prepared to admit that the shackles have actually been taken off a bit in the last 7 years.

As for the Red Knights, no-one said they didn't exist. It's just that the idea that they would have been better for United was hopelessly flawed logic. Your point about the ticket prices is undeniable - if people didn't want to make money off United then ticket prices needn't necessarily go up at all. Not really sure that's a realistic position though to be honest, desirable though it may be.

The point on the PIKS isn't to revel in your embarrassment, rather it's just to highlight the fact that the argument was daft from the start. This is often the case with long term projections based on limited access to facts or indeed plans. Everyone's talking about EBITDA and amortisation these days and it's very important that the likes of you continue the good work in trying to keep tabs on what the Glazers are doing. But ultimately what the Glazers are actually doing is staying in the background while the club continues the most successful era of its entire history on the pitch.

Unknown said...

RE: "Other clubs (Real, Barca, Bayern etc) have done even better than United when it comes to commercial deals."

That is not a fair comparison. Barca and especially Real have a much better position with regards to domestic TV money than United because they're not part of the global deal. Not sure about Germany but Bayern must be in a similar situation.
These 3 clubs you mention are the only big things in their respective leagues. So they get/buy the best local talent. Compare that with United who compete with 4-5 clubs locally for good players, 2 of those clubs bankrolled by billioners. Fergies job would be much much easier if he could just sing any player in the premier league

Bottom line, most decisions glazers made have been good. The club is making tons of money which you should know is the hardest job for any CEO. All that with failing local currency, global recession and PIK loans taken right before the interest rates collapsed.
It would be awesome if they had no commercial interest in United and did it all for free, but all in all, as business owners, I think they have done well you have to admit.