Friday, 18 May 2012

Manchester United Q3 2012 results: getting hard to square the circle

Since United had its bond issue in early 2010, the club has reported increased year-on-year revenues every single quarter. This revenue growth has more than offset rampant wage inflation. Meanwhile of course the club has clocked up Champions League finals and Championships. This season the performance on and off the pitch has stalled somewhat. The numbers for the next quarter (which runs from April to June) will be worse again.

For the Glazers, the clever trick of football success on a limited budget with high and seemingly ever increasing profits may well coming to an end. Will they spend at the expense of those profits? If they don't, will the success and hence the profits still be achievable?

It's getting harder to square the circle.

Revenue and EBITDA - both down a little
The poor performances in Europe and the domestic cups can be seen in these quarterly figures. Matchday income fell 13% compared to last year as the club played seven home games compared to last season's nine. Of the seven played, two were in the Europa League in front of smaller gates paying lower prices.

Media income fell 19% compared to 2010/11 despite the higher share of the UEFA CL "market pool" this year. The explanation is simply the exit from the Champions League. The impact will be far more severe in the current quarter of course when there will be no CL media income at all compared to the previous year's run to the final.

Commercial income was again the star, with the new contracts signed since last year; DHL, Epson etc and a step up in Nike income and income recognition boosting revenue by 15% compared to 2010/11.

In total, revenue fell 5.8% year-on-year in the quarter and revenue growth for the nine month period was 6.1% (down from 11.9% in the first half of the year). United may be a commercial powerhouse, but old fashioned football success and failure can still have a major impact.

Staff costs only rose 1% compared to last year, reflecting lower bonuses (presumably linked to qualification for the CL knock-out stages). The wage bill for the year to date is still 10% higher than last season, although the fourth quarter will not see any of last season's bonuses.

The major fall in operating expenses (down 16.3%) is largely due to the lack of domestic home cup games. The club accounts for the gate sharing for such games as an expense and this season there were no such games.

With revenue down 5.8% and costs only down 4.7%, EBITDA fell 8.4% and for the first nine months of the year was only up 3.3%. There will be a larger fall in Q4.

These falls shouldn't be overplayed, with United still making cash profits before transfers of £85m in the first nine months of the season. That is more than any other English club has made over any twelve month period. The worry for the Glazers, is that the profits are stagnating this year at a time when investment is needed to keep up with City and others, and none of that is good if you hope to float your club on a stock exchange.

Below EBITDA - not much of note
The club made a small £2m profit on player sales during the quarter (Gibson and Ravel Morrison). The amortisation charge (how transfers are "charged" in accounts) was basically unchanged at £9.7m for the three months. To put this in context, the c. £40m annual amortisation charge compares to a figure of £83.8m at free spending City in the last reported season (2010/11).

There was a £4.3m "exceptional" charge during the quarter which the club says related to "professional advisory fees" and the need to top up the Football League pension fund. I suspect the "fees" element accounts for the great majority of this £4.3m and relates to advice on the mooted IPO.

The interest charge is spread evenly over each quarter even though bond interest is paid twice a year in February and August. The club recorded a "gain" of £6.5m as the pound rose against the US dollar, reducing the sterling value of the club's dollar denominated bonds.

Taking all these charges and credits into account, pre-tax profit for the quarter was £2.8m, down from £7.4m last year.

Cash - a lot less money than there used to be
As I always say in these pieces, I do not consider the profit and loss account described above to be particularly informative when looking at football clubs below the EBITDA figure. The cash flow statement is often more informative. Cash flow includes real spending on transfers which are after all cash transactions (the amortisation charge is a significant simplification by contrast). For United, lumpy bond interest payments and bond buybacks are also a fact of life that constrain what the club can spend.

Despite their advantages, cash figures come with a warning however. Football is a seasonal business with season ticket revenue collected in the summer, boosting cash balances. The end of the season also see large TV payments from the Premier League and UEFA. Furthermore, prepayments on sponsorship contracts can lead to large positive and negative swings in cash and at United there are large interest payments in the first and third quarters of each financial year. It should be remembered that United are the only football club to publish quarterly figures (a requirement of the bond issue), all other club accounts are struck at the seasonal high point for cash in the summer.

You can see the volatility in United's quarterly cash flow in the chart below which shows how cash builds up in the fourth quarter and runs down through the rest of the year:

Manchester United is not like other football clubs of course, because it has £420m of outstanding bonds. Since the bonds were issued in February 2010, the club has periodically gone into the market and repurchased them (usually paying more than the issue price). These buybacks make financial sense (the bonds cost c. 8.5% whilst cash at the bank barely yields 1.5%) but risk depriving the club of cash needed for investment. It is a choice made by the Glazers and their management team. 

There were no buybacks in the third quarter of the 2011/12 financial year, but since 2010, the club has spent over £92m on them. You can see their impact on the "gross" debt which has fallen by the amount bought back (plus currency fluctuations) and on the cash balance below:

Since June 2011, the club has spent £71m on buybacks and interest payments which together with the other seasonal cash outflows described above has pushed the club's cash reserves down to a low of £25.6m at the 31st March.

As described above, there will be the usual rebound in the club's cash position in the current quarter, although the precise amount is very hard to estimate. Judging from previous years and taking into account the lower profits caused by the CL exit, I estimate the cash position will improve to c. £75m by the end of June.

Will they spend?
The big question supporters want answering is not about buybacks or EBITDA, it's about spending to keep the club competitive after a season when the squad was found wanting at home, but especially in Europe. I can't give an answer to whether the club will spend, only the Glazers can, but the very issue raises big questions over their strategy for running the club.

Since the takeover, Fergie's genius has allowed United to consistently win trophies (with a couple of rebuilding dips on the way) whilst keeping the club's wage spending to turnover ratio very low (45.7% so far in 2011/12 for example) and whilst spending very little on transfers (average net spend of  £16m per season). This combination of controlled wages and low transfer spending is vital for two reasons. Firstly it theoretically boosts the value of the club (if you look at valuation based on EBITDA). Secondly, it frees up profits to service the enormous debts taken on to buy the club. Since the takeover, 18% of revenue has gone on interest. This has been "affordable" because the club hasn't ever really had to "pay up" in either wages or transfers.

Since 2005 the challenge of achieving this financial balancing act has been aided by a number of factors. In the years immediately after the takeover, the 40%+ ticket price rises were crucial. The Ronaldo windfall in 2009 and, to be fair, the rapid growth in Commercial income in the last two years have also been significant pluses. Now however, the trick is becoming more difficult to pull off.

Bond buybacks and interest have eroded the club's previously huge cash balance. There has been spending (£47m last summer) but not on crucial areas of the pitch (United haven't bought a central midfielder since Ronaldo departed). Major transfers cost money twice over, both driving up wages and demanding immediate cash. Wage inflation and transfer inflation across football remain endemic and the advent of FFP appears not to be having any impact on this.

If United are to strengthen, money will be needed and that means no more bond buybacks. It probably means lower profitability, in at least the short-term, with negative implications for the valuation achievable at any IPO. The alternative may well be under investment and the club going further backwards relative to its main competitors.

The Glazers know their structure hampers the club. There was heavy briefing of journalists in the run up to the aborted IPO process last year, suggesting debt would be paid down from the IPO proceeds to make United more "competitive". If the IPO can't be delivered however, the club is stuck with its debt and the owners will have to accept lower profits or further relative decline. Can they square this circle?



s7_rocks said...

Great post as usual but do we still have overdraft facility of £75? and the growth in cash reserves during q4 2011 was £37m and the club spent around £41m on bond buybacks so I think club's Cash balance during q4 2012 will be higher than £75m.

andersred said...

We do indeed have the £75m overdraft facility. Estimating the June number is very hard because of the timing of sponsorship deals. The "working capital" swing can be enormous...


ja said...

solid analysis as usual. However, I wonder if there is a 'not' too many in the following:
The worry for the Glazers, is that the profits are stagnating this year at a time when investment is needed to keep up with City and others, and none of that is not good if you hope to float your club on a stock exchange.
Keep up the good work. Amused you are slagged off for being biased by the GCHG types of the world!

andersred said...

Cheers Ja. I need an editor. Now corrected.

Is GCHQ still yelling away in his little padded cell? Poor lad.


ja said...

Thanks Anders,
"Andersred's anti-Glazer prejudice makes him an untrustworthy source of information about the club."

one of GCHQ's accolytes. Strange because presumably your main source of information about the club is from club communications?
But heh,what's logic when they tie themselves into tighter knots defending Glazernomics than even Alexander the Great's sword could sever.

Anonymous said...

Great work as always, Andy.

Just wondering if you would have time (and the inclination) to add a post at some point on your thoughts re. the scenario where the IPO fails to get away this year? Hard to see anything getting away in the current market, and even if things stabilise soon surely it's going to happen at a lower base such that the Glazers don't get the price they want for their shares...

I appreciate that it would be a speculative opinion piece as opposed to your usual hard-edged analysis, but I think it would be of great interest to the less financially literate members of your audience, like me.



Anonymous said...


I thought net spend was around £7.5m per season since the Glazer's took over (see table at the bototm of this article:

Is that not right?

JIM said...

A balanced and fair analysis.

Is not by accident that the wage/turnover ratio is the lowest in the PL (<50%) or that net spend is very modest for a club of our size. These are constraints imposed by the owners about which the club has to operate. The idea that the Glazers have imposed no restraints on squad investment is laughable really. We do not have limitless revenues and thus our transfer policy (salary and player expenditure) is restricted to deliver the level of profitability desired by the owners.
The level of profitability required to deal with the LBO debt
(interest and repayments) and to achieve strong valuations in an IPO scenario.
The Glazer imprint can be clearly seen at the BUCCS; the NFL franchise is one the most profitable concerns (despite blackouts, poor on-pitch achievement, a declining fanbase) because they have the lowest salary expenditure in the NFL.
They can persist with such a policy in the NFL because underachievement isn't financially punished to the extent that is in the PL.
The emergence of the sugar-daddy clubs and the strength of the big 2in Spain have increased the cost of success. The latter are mutuals designed to maximise reinvestment (and not shareholder value) and the former though they might be restricted by FFP will seek to maximise investment in squad and facilities. It should be noted that FFP requires clubs to break even and not turn a profit.

The for profit clubs have to operate in an environment where the
costs of success are being dictated more and more by clubs for whom better financial results means more money to spend on better players. Wasn't this how "clubs" used to be run before the profiteers came to town?

Has the club been as profitable as the Glazers forecasted back in 2006? Absolutely yes, but in the literal sense; the club has reached the targeted profits (EBITDA) but the costs have been far greater than envisaged meaning that more revenue had to be generated to compensate.

David said...

Andersred, keep up the pressure on these disgraceful owners. Because so many United fans chose not to boycott the club when the carpetbaggers first took over they now rule the roost and can screw the club and fans as they choose. There will be no major signings this close season, Fergie is nearer the door than ever ( age ), then watch the Glazers sweat as they see how extraordinary SAF has been on limited budgets and a new man comes in who will expect big transfer budgets from the 'biggest' club in the world. Oh yes, watch the club sell more than buy these next few months. Interesting times, hope MUST and others maximise pressure on the Yanks

Anonymous said...

Another interesting a thought-provoking update. Couple of things though again stand out for me...

Firstly there's an acknowledgement that the ticket price rises post 2005 have been crucial to the financial position, but no acknowledgement that pretty hefty ticket price rises had already been agreed before the Glazers took over. I think this is important to emphasise, since it shows - in my opinion - that the club were headed down that path. This may well have been part of the attraction for the takeover. It is certainly not uncommon for a business to use new investors/takeovers as a way of getting a big price hike through, either.

Secondly, the thorny issue of transfer spending. Now it is true that United have not signed a centre mid since Ronaldo was sold. But it is also true that the real problem has been that they've had expensive players doing sod all out injured for the last few seasons in that area of the team. Now if you were City you'd probably write off their wages, get shot, and just sign someone else for even more money and even higher wages. But United don't do that and never (rarely) have.

The line about how United have gone backwards "relative to the competition" was the most curious of the lot. Obviously it's true they fluffed the CL group this season, but does anyone who knows what they're on about really think that was because any of the other teams in that group were better than United? Of course not, they just tried to coast through as normal, and this time it bit them on the arse - nothing more, nothing less.

In terms of the league, to not go backwards relative to the competition then surely United would have to have won the league and picked up a record points tally in the process, at least matching Chelsea's 2005 total of 95pts. Last season United got 80pts, 9pts more than City. This time they both got 89pts. 3rd place were miles behind, something like 5 matches behind iirc. United haven't gone backwards, they've been ravaged by injuries and have been joined at the top despite an improved performance on last season. United have progressed this season if anything, and provided you don't only measure success on the field in trophies alone then there is nothing at all to suggest that they cannot be at least as competitive at home next season and there's every reason to be confident that they will take the CL group phase a little more seriously and hopefully get their mojo back there too - don't forget it was only a year or so ago that United were the top ranked side. Slagging them off for taking what happened at Wembley into the first half of the following season seems a bit ignorant to me, although plenty of United fans couldn't help themselves.

An Old International said...

I don’t subscribe to the idea that Ferguson is not as culpable when admonishing the Glazers. It was his absolute greed over the Rock of Gibraltar affair that accelerated their takeover of the club. The Glazers paid a premium for the shares, in fact I remember at the time Harry Harris the Mirror journalist clearly stating that if Magnier and McManus had refused to sell their shareholding, Malcolm Glazer would have had to start selling his shares as he didn’t have the cash to buy them, a fact borne out by the eventual leverage takeover.
I don’t accept that Ferguson had to toe the line. He was rich enough to walk away when the Glazers took over, yet he chose to stay, earning himself a small fortune in the process. Alongside lapdog debt is the road to ruin Gill, who incidentally has quadrupled his salary since the takeover, they both continue to champion the Gimps as exemplary owners, a view that is an insult to the intelligence of ordinary supporters.
I’ve never liked Ferguson, and as Roy Keane so eloquently recently stated in his newspaper column stated “Ferguson’s priorities are not necessarily United’s”.
I lost all respect for him when he supported the proposed Manchester Congestion Charge, particularly as they were going to introduce it before any improvements to the public transport infrastructure. If it had been introduced Mancunians would have been shafted financially, however, and thankfully the proposed scheme was defeated in a referendum by 4 to 1. Another example of Ferguson completely misjudging the public’s mood.
Nothing has been made of the recent injection of funds into the Tampa Bay Buccaneer’s. They are spending up to 140 million dollars on free agent contracts to arrest the steep decline in the Bucc’s fortunes.
They lost 10 out of the last 11 games, which resulted in the sacking of coach Raheem Morris, who, incidentally was reported to have received a 10 million dollar payout.
I’ve supported United since 1957, held a League Match Ticket Book/Season Ticket for 45 years, through the good times and not so good times, and believe me there were plenty of the latter.
Along with many others I gave up my tickets when I realised what the Glazers were about. They have split the support, forcing some to form their own club. Others have just drifted away totally disillusioned.
What sums it up, perfectly to me, was a situation that arose before this seasons Liverpool league game. I was in the Trafford Centre on the morning of the game when I noticed two so-called fans sitting in Starbucks. They both had half and half scarves around their necks displaying Liverpool and United.
What the fuck is that about?
Ferguson’s record and achievements are there for all to see. An amalgam of genius, good fortune, exceptional players and brilliant support has elevated him to legendary status, however, no one will ever convince me that both he and Gill have hidden behind the Glazers, making themselves both a small fortune in the process.

Anonymous said...

You blame the Glazers too much. This season has been disappointing, though 89 points is a decent achievement. Fergie has been derided for his 'lack of value' approach, but maybe it is true when you consider the tiny number of players he would consider for United. Just because Demba Ba turns a revelation doesn't mean there's value for Fergie, he wouldn't have been interested in a player with such a profile. He tried to sign David Villa but it would have cost over £200k pw to match the net wage he gets at Barca, so yeah that to me is a lack of value. Maybe now that City/Chelsea have to bring in their horns we'll get a shot at players like Hazard ... but results over the last 5 years have proven there's not much wrong with the squad and back up Fergie's contention that only a limited number of players are worth considering.

Cheers and thanks for the great blog,


David said...

Old International, absolutely spot on, my son and I packed in when the scum bag glazers took over, and YES Fergie will go down in history as the guy who ultimately was responsible for the club being sold . Never forget Professor Roland Smith warned him not to get into a conflict with the Colmore mafia-he was is arrogant self and the rest........

David said...

Old International, absolutely spot on, my son and I packed in when the scum bag glazers took over, and YES Fergie will go down in history as the guy who ultimately was responsible for the club being sold . Never forget Professor Roland Smith warned him not to get into a conflict with the Colmore mafia-he was is arrogant self and the rest........

Anonymous said...

Those blaming Fergie are absolutely clueless and should be ashamed of themselves! He is a legend in the history of our football club - of course everyone makes mistakes but Fergie should be cut some slack, he deserves it after all he has done for us.

It is fair enough to have a go at the Glazers, but when that spreads to criticism of SAF then things have gone too far.

Anonymous said...

Nobody is bigger than the club including SAF. He knows what he did when he messed with coolmore over a flippin horse! Just stop giving United money and bring this thing to an end.I'd happily swap United's position with glasgow rangers. Better than a long slow death with ever increasing debt.

Anonymous said...

We know the pics were replaced with another debt which must have large interest charges. The Glazers must have to either have to sell, an IPO or take even more money out of the club. The club is controlled by debt, the Glazers hands are tied by the debt they have taken on. Another Point if Glazer had not taken so much out of the club and invested united would be even more successful and would have a much bigger revenue. See how cities revenue has increased with investment.
PS I always look forward to your excellant reports.

Anonymous said...

So, Chelsea spend £78m (spread over 5 years) on one of the hottest prospects in recent times. United spend £71m (in one year) servicing the debt placed on the club.

It's very clear where our financial priorities lie. And that is servicing debt, not collecting the quality player our rivals are.


Anonymous said...

Great review as ever.

Anders, Have a couple of "what if" questions for you ?

If the club was still on the stock market, with the current revenue streams, would the club be able to pay great dividends but also have the cash to buy the like of a Ronaldo , Messi "superstar" signings on an almost yearly basis ?
Did McManus & Magnier actually sell to soon ? Related to that did the Rock of Gibraltar row actually have any influence on the sale ?


ja said...

Amused at this morning's headline of Fergie allegedly refusing to pay £72 million for 3 transfer targets and not being 'held to ransom'.
Would be an admirable stance had he also taken similar umbrage at United paying out virtually the same amount in interest, fees and other charges over the past year to gain absolutely nothing.

Anonymous said...

I gather, from Daily Mail info (University of Barcelona), published this year that both Real Madrid £477M and Barca £473 and Atletico Madrid £420, have higher levels of debt than United. Doesn't seem to have received much publicity amongst the Anti-Glazer legion or the anti-United press.

andersred said...

Hi Anonymous @19.54

That's not correct, but don't take my word for it, read this piece by (Arsenal supporting) Swiss Ramble:

At the end of 2010/11 on the International Accounting Standards definition United had debt of €551m compared to around €150m at Real and Barca.

Plus of course, whatever debts they had were taken on to improve the clubs, unlike ours which adds nowt.


Anonymous said...

Anders , I have read a site NESN which claims that United are getting ready to list on the US stock exchange.("Report: Manchester United Prepares to Sell Shares on U.S. Stock Exchange" by Marcus Kwesi). If this is case , your opinion as it appears judging by recent cases e.g. Facebook listing , the U.S. stock exchange , despite claims about reforms,is not as regulated as that in Singapore.Chris-NZ

Julian said...

Whatever happened to the PIK debt? Is this IPO launch somehow connected? In other words whoever took the debt off the Glazers' hands insisted on the IPO to make United shares more liquid. If this is true then the IPO has little to do with making UNited "more competitive"

Anonymous said...

Good question by Julian.The initial announcement of the IPO came ( about 6 months) after reports of the PIK debt being paid off. Maybe the Glazers paid off the PIK debt with a lower rate loan from elsewhere , but are trying to meet a payment deadline ,of which failure to do so results in penalties e.g. higher rate of repayment etc..Or it could be ,A) without the Glazers dipping into their own pockets , the Bucs / malls need a cash injection. or B) their pledge to help construct a new sports stadium for Tulane University ( and if they are not going to use Uniteds money for that , they certainly have access to funds from elsewhere.A fair bet it would not be debt the Glazers will use .) Chris-NZ )

Anonymous said...

Yeah, There could well be a connection between RF LLC, Delaware and the IPO. No need to add a further rung to corp ladder if PIKS were repaid from Glazer's own resources. IPO pre convertibles might be a possibility- carrying benign rates if IPOed by a certain deadline with penal rates if deadline is missed. Might explain their rush to IPO in unfavourable market conditions.

Julian said...

Thanks Anon. It would be good to have Anders' opinion on this theory.

John Grace said...

A few Quick Questions

Firstly any Comment on rumour of Floatation on New York Stock Exchange?

Looking through your Archive you did a lot of work on First Allied,Wonder if any developments have taken place in recent mths

Anonymous said...

"it's about spending to keep the club competitive after a season when the squad was found wanting at home"

As observed above - 89 points (only got more twice in the 20 team Premiership); 89 goals (only got more once in the Prem); G.D. 57 (beaten twice - by one goal - in the Prem). Put it another way - we had one of our best seasons ever in the Prem, pity that City were marginally better. And that's being "found wanting" - talk about muppets.

Anonymous said...

Forgot to mention that we tied the most wins (28) that we've ever had in the Prem (or indeed in the old first division - and that was in 42 matches). I just can't get over the apparent sense of entitlement that anders and the other muppets seem to feel. The lauding of City and the denigration of United by these people is a little sickening. According both to EA and to whoscored's interpretation of the Opta data, United's players performed slightly better than City's over the Prem season. But to anders and his ilk, apparently we were outclassed and should be panicing. Pathetic.

Frank said...

So, despite not getting out of the group stage of the CL last season and not getting to the final of the CL, Utd's revenues only fell by £10m, from £330m to £320m.

It is reasonable to assume that Utd will get out of the group stage of the CL this season and, with the increased revenues from this season in the CL whose revenues increase due to a new TV package kicking in, accordingly Utd's revenues this season, with additional commercial revenue, will probably hit the £350m mark.

With the increased Premier League revenues from next season kicking in, probably worth an extra £35m a year to Utd, and with the Chevrolet deal worth £50m a year from 2014, Utd's revenues will be over £400m a year, the year after next!

All in all, things are looking pretty good on the financial front - remember the debt has been paid off substantially over the last three years or so.

The way things are going, there will be no debt left in four or five years' time!

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