Wednesday, 18 February 2015

United - buying players on the never-never

Work and family commitments have prevented me from blogging for almost a year for which apologies.

I haven’t given up and intend to post the occasional blog as and when there is time.

Thanks for your patience!


We all know that the summer 2014 transfer splurge was unprecedented for Manchester United, reflecting the parlous state of the squad after years of under investment and the car crash season with David Moyes at the helm.

The accounts for the six months to 31st December 2014 show £120.8m of purchases occurred after 1st July 2014. This is in addition to the £60.7m spent in the three months up to 30th June 2014. In total we now know that Herrera, Shaw, Rojo, Di Maria, Blind and Falcao (well the fees associated with his loan) cost Manchester United £181,511,000 last summer.

There were sales as well of course.  Danny Welbeck, Kagawa, Vidic, Evra and Buttner were all sold and many others sent out on the loan. The accounts show the sales brought in £22.2m in cash.  That still leaves an extraordinary net spend of £159.3m. [Note: an earlier version of this blog incorrectly stated receipts of £75.4m, which was the original book cost of the players sold. Apologies].

Except United didn’t have £159.3m to spend. At 30th June 2014, United’s cash balance was £66.4m. And the club didn’t spend all that money in any case.

The last few sets of accounts show Manchester United are increasingly buying players on credit, from the clubs that sell them. Transfer fees are agreed but payments are staggered over time, with the vast majority due within a year or 18 months.

Whilst other clubs have frequently “funded” transfer with these deferred payments, this is a new practice for United. Less than five years ago, United only had £11m of outstanding transfer fees due to other clubs. Things really began to change in the 2013/14 season when the figure leapt from £33m to £82m. In this latest spending splurge it has risen again from £82m to £126m at the end of September 2014, before falling back to £116m by the end of 2014.

It’s important to understand that these huge figures owed to other clubs don’t include extra payments based on player appearances or other targets. These “contingent payments” are set-out elsewhere in the accounts and would add another £29.7m to the amount owed if all the payments became due, taking the total to £146m.

United is owed transfer money by other clubs of course, but this only amounts to £13.7m. The fact of the matter is that Manchester United owe over £100m in transfer fees to other clubs, more than a whole year’s cash profits.

Does any of this matter or is it just another financial “innovation” from ex-investment banker Ed Woodward? 

Accepting credit from the people you buy from is as old as the hills and a sensible way to fund any business. But the £100m+ owed has to be paid over the next one to two years. That’s going to put pressure on the club’s cash flow, making it even more imperative to get back into the Champions League and even more problematic if we don’t. Future transfers won’t be affected if selling clubs continue to accept stage payments on this scale, but that can never be guaranteed.

The new Premier League and Champions League deals promise ever higher revenue in the years to come, which for a Manchester United with debts of £380.5m, which owes other football clubs over £100m and only had cash in the bank of £37m at the end of 2014 is just as well…..

Edit at 19:32
A few people on Twitter have queried whether there is anything noteworthy about this sudden expansion of football creditors. For me the key thing of interest is that it's a new approach.

Take 2012/13 when we signed RVP, Kagawa, Buttner, Powell and Zaha. The accounts show spend of £51.2m and how much did we owe other clubs? £33.6m, up from £28.9m the year before.



Srikanth said...

Good post, thanks for sharing.

I have two questions

1) Is the staggered payment reflected in the transfer prices we've paid? Effectively an interest + principle component?

2) Do you think eventually we will have to refinance the 'loan' given to us selling clubs?

Anonymous said...

Do the 13,7mil owned to us include bonus payments, or is it also written somewhere else?

Steven said...

Thanks Andy both very interesting and strange.

According to my (very rough) calculations United should have spent c. 215m since Fergies retirement. If you add c. £15m installment payments for RVP and Zaha then c.£230m.
Utd have paid out cash gross £177m so that should leave a balance of less than £60m. Wonder if the £100m includes a potential obligation to buy Falcao c.£43m? Unless of course the transfer fees are much higher than stated in the media.

Also amortisation looks like it's going to hit £100m which doesn't leave a lot of room to play with in the next couple of years.

Anonymous said...

Danny Welbeck, Kagawa, Vidic, Evra and Buttner were all sold and many others sent out on the loan. The accounts show the sales brought in £75.4m

Transfer sites I looked at totaled only £41M for the 14/15 season, and that included £6M for Zaha. No one of note was sold in the 13/14 season so I am not sure where that £75m comes from.

andersred said...

Thanks for the comments. I picked up the wrong transfer receipts number from my model, apologies.

The £75m was the original book cost of the players sold, not the proceeds. The cash receipts from 1st April to 31st December 2014 were £22.2m.


Brian said...

Hi Andy.
Good to have you back.
Noticed this trend as well. A lot of near future net spend is pre-committed. I don't think it's a long term strategy, but reflects the nature of the recent spending; clubs optimally invest to proactively deal with problems that might arise, United invested in reaction to problems that had already occurred. Fail to replace pivotal players and eventually under-investment in quality will make itself known.
The downturn in form has caused some panic in management and hence this reaction.
I guess with the new Adidas deal, and the next PL TV deal, we can afford to be hawkish, though another comparable splurge this summer will see cash flow run low. The big unknown in terms of immediate cash flow is how much we can expect from Nike at the end of the year. While the club has recognized profit share for a while, I don't believe cash in that amount (or in the amount of the unrecognized share) will exchange hands until the contract is terminated. The Nike arrangement has always been somewhat opaque. A hefty sum at year end might help explain the buy on credit approach.
A closer look at the recent quarterly and half year also reveals another potential problem; commercial performance is sluggish- negative growth (in the first quarter) for the first time since quarterly reporting began in 2010. Half year is barely break-even and the forward statement doesn't envisage much commercial growth this year. New Mobile, a pillar of commercial growth, has been in continuous quarterly decline since YE 2013 and is trending to be about half its 2013 value at the current YE. A look at new contract activation also reveals a big decline in the first half of 2015- 7 new contracts in the first half against 16 and 18 new contracts in the previous 2 years.
Of course, Adidas, on its own, will provide about 10% commercial growth next year, but with over 50% of our commercial income contracted (flatish) until 2020-2021, a lot of pressure falls on other sponsorship to deliver meaningful growth going forward.
Are we plateauing, facing procurement problems because of poor form and lack of European night? Maybe NB is more difficult to procure because we have already harvested most of the low hanging fruit? Who knows? It might be just a one-off, but I am surprised it has received such scant mention.
Interesting to note that the accounts partly explained commercial negative growth in the first quarter as being due to lower tour revenue. I assumed that tour revenue was part of Matchday, and it was until a discreet (as in not explicitly stated) switcheroo took place in preparation of the 2012 Q3 accounts, the accounts used in the pre IPO registration form. That account and subsequent annuals have restated the revenue breakdown accordingly- touring has moved to commercial and non matchday catering and museum revenues have moved in the other direction. While not material in 2012, the new allocations make older accounts (pre 2012) redundant in this regard.

Anyways, to reiterate, good to have you back.


Brian said...

Just to correct myself.
"Of course, Adidas, on its own, will provide about 10% commercial growth next year"
10% is too low. it's more likely in the region of 15 to 20%.

Anonymous said...

Debtchester Untied were beaten by a club owned by the fans (the Trust is the second biggest shareholder) which operates at a profit.
Causing massive player inflation is NOT a sound way to operate a business.
Louis Van Squidface was lucky not to lose 3-1 to the Swans.

Anonymous said...

Genuinely worrying reading this. Have no faith in Van Gaal either to deliver champions league football. 7 months and the football is still crap.

Need to get rid of the deadwood like Evans and free up some funds.

Anonymous said...

Is that really how its done. Have we replaced the onerous Glazer debt finance with borrowing from other clubs? The difference being we now face repayments of principal rather than interest

s7_1992 said...

Nice article and it shows we're in far worse state than I imagined although we're still in decent shape because of new commercial deals, my calculation that we could afford to pay 200 million for messi easily seems wide off the mark....You mentioned on earlier comments that net cash received from sales was 22 million but how much was the total amount including credit? They must have recorded some sort of loss on that 75 million book value? Can't you deduce the net figure from that?

David Jcobs said...

Thanks for the comments. I picked up the wrong transfer receipts number from my model, apologies.

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