the andersred blog

Why England's richest club doesn't have any money...

2012-01-19T15:49:00.000Z

I wrote this article for the latest edition of the famous fanzine United We Stand and it is reproduced here with the very kind permission of the editor, Andy Mitten.

If you don't buy it at the match I'd heartily recommend United fans subscribe to UWS here (ten editions for only £28).

Whenever things go wrong on the pitch or when injury ravages the team, I get asked whether United “have got any money” to buy new players. The last few weeks have definitely been one of those times and regardless of the footballing wisdom of January signings, the question is being asked with great urgency. Can United afford to strengthen?

I believe there are actually two answers and both are important. The first is purely factual, how much cash does United have in the bank, and the second is more subtle, what is the cash earmarked for and what are the real restrictions on transfer spending?

When it comes to cash in the bank, United has been very, very rich since 2009 (when the club received the £80m for Ronaldo from Real Madrid and Aon paid £35.9m of their four year sponsorship up front). At the end of June 2009, the club had a cash balance of £150m, a year later it was up to £164m and at the end of June 2011 was still £151m. To put that number into context, it is more than twice the club’s £67m net transfer spend in the six seasons from 2005/6 to 2010/11.

Since last summer the cash balance has fallen very sharply, by September 2011 the figure was down to £65m. A big chunk of this fall (£47m) is down to the signings of Jones, De Gea and Young (less the cash received from the sales to our Wearside retirement home). The club also spent £5m on corporate box upgrades and £8m on more land purchases around Old Trafford.

The remaining £26m fall in club’s cash pile is where “Glazernomics” kicks in. The club generated around £22m in profits during those three months, but the interest bill was £21m (interest is paid twice a year in August and February). On top of the interest paid, the Glazers decided to spend £23m buying back bonds in the market. This is not the first time the club’s money has been used in this way; since the bonds were issued in 2010 £88m has been spent repurchasing them from investors (see graph below).

These bond purchases go to the heart of how the Glazers run Manchester United and how horribly different it is from other “normal” clubs. At almost every other football club, any profits are reinvested. Real Madrid made a handsome pre-tax profit of €50m in 2010/11 and spent every penny of it on transfers. That is not the way United is managed. Over the last two years the club chose to spend that £88m on buying back bonds rather than on strengthening the squad. Just to be clear, there was no obligation to buy these bonds, it was a judgement made by the Glazers and their management team.

The financial return on these bond buybacks is pretty good, with cash in the bank earning 1.5% being used to buy bonds that cost the club 8.7% in interest. But good financial sense is not always good sporting sense if money is diverted from the football club. Which brings us to the subject of wages.

When Sneijder turned down United’s offer last summer (and again when Nasri chose City over us), the sticking point was wages. Now no football club should be held hostage by greedy players, but there is something distinctly odd about a club like Manchester United being unable to “compete” for the best talent. So what is the reason we can’t compete? As with transfer spending (or the lack of it), it is a conscious choice by the owners.

United is run not only to make a profit, that is just commonsense, but is run to maximise value for its owners. That means maximising profits and thus operating on a far lower budget than a club of United’s scale can actually afford. In 2010/11, United made so much money that the club could have paid three new players the same wages as Rooney (around £140k a week) and still make EBITDA (cash profits) of £89m. But making £89m instead of the £111m reported by club would inevitably reduce the price that could be achieved in a listing on the Singapore Stock Exchange, or the value of any future sale to a Sheikh or Oligarch. So the Glazers chose to restrict the wage bill to a level they were happy with and thus chose to make Sneijder unaffordable.

Older reds will no doubt point out that this dance with financial devil began when Edwards floated the club back in 1991, and there is much truth in that. The difference however is in the scale of impact on Manchester United. Across all the plc years, the total dividends paid were only £59m. The total cost in interest, fees and debt repayment in the six and a half years of the Glazers is £480m.

So it doesn’t really matter if we have about £60m in the bank (we do). It’s that unfortunately for us the club is run to make money for a distant family from Florida and they’ll do what they want....

LUHG

Explaining the confusing world of Everton's cash transfer spend

2012-01-17T14:39:00.001Z

Warning

This is slightly dweeby analysis of Everton's transfer spending that attempts to explain why the figures quoted by EFC Chief Executive Robert Elstone and published in the club accounts do tie in with reality. Hopefully it casts some light on the complex cash flows involved in many transfers, but it may be a bit dull!

Andy

The problem
After Everton announced the purchase of Darron Gibson last week I tweeted:

"Little known fact. Everton have been net spenders on transfers every year since Rooney left (cash figs from accounts)."

Along with this graph:

This was met by some understandable scepticism from Evertonians pointing out that in 2010/11 "we didn't sign anyone". Then by happy coincidence, Everton Chief Executive Robert Elstone published an extraordinary blog on the club's official website entitled "Where The Money Goes", which said exactly the same thing I had said.

The dichotomy between the honest opinion of Everton fans that the club has been more about selling than buying and the numbers in the club's cash flow statements in the accounts showing net spend over each of the last six years needs explaining.

The problem arises with the phasing of payments for players and receipts from their sale and from the fact that the only information we have are headline figures for deals, what you might call "the Sky Sports News number", and two numbers in a club's cash flow statement, one for purchases and one for sales.

The details Elstone gave on transfers

This is what Robert Elstone has to say about Everton's transfer activity since 2006/07 (emphasis as in original):

"[2006/07] We spent £4m net on new players (money we paid out on signingincluding Kroldrup, Davies, Johnson and Lescott less money banked on the likesof Rooney, Bent, Kilbane and Davies).

[2007/08] A net spend of £15m (further money we paid out forKroldrup, Johnson and Lescott and new spending on the likes of Howard,Jagielka, Yakubu, Baines and Pienaar, less the money banked for Davies,Kroldrup, Beattie, McFadden and Naysmith).

[2008/09] We spent £6m net on players(payments for Yakubu, Baines, Howard,Kroldrup, Lescott and Fellaini, less monies in for McFadden, Kroldrup, Beattieand Johnson).

[2009/10] We spent £3m net on players (payments out on Yakubu,Fellaini, Bilyaletdinov, Distin and Heitinga, less monies in for Johnson,Rooney and Lescott).

[2010/11] We spent a further £7m net on players (money spent on Fellaini, Heitinga and Gueye, less cash in forLescott and Pienaar)."

Modelling Everton's cash transfer spend

We can look at Elstone's long list of purchases and sales in more detail in the table below, along with the actual cash flows from the Everton report and accounts.

We can then apply some estimates of transfer prices, I have used figures from transfermarkt.co.uk except for Tim Howard for whom no figure was available on the site and I have estimated £3m, the sale of Simon Davies (est £2m) and for Rooney where the relevant stage payments for 2007 and 2010 are estimated from note 11 of MUFC's 2005 accounts.

Except in the case of the Rooney stage payments and the payments for Lescott, I have assumed that where cash is received or paid over multiple seasons all payments are equal (a modelling simplification I concede), so we can get to an estimated payment/receipt per season:

We can then apply the payment/receipt per annum estimated to the sequence of payments given by Elstone and compare the calculated figures to the actual cash flows in the report and accounts:

As can be seen from the table above, this model matches the actual numbers from the accounts pretty well, with an error of only £1-2m per annum.

Conclusion

I am not claiming the above model is perfect, but hopefully it shows why Everton's published numbers are correct. The issue of phased payments creates significant confusion when people examine football club accounts, something we will no doubt see with Chelsea and Liverpool's next few results in which the £50m paid for Torres will be spread over 5 years....

It's worth noting that for two years in 2003/4 and 2004/5, Manchester United, under pressure from the club's major Irish shareholders Magnier and McManus published detailed player by player analysis of all transfers. The example below from 2004/05 (apologies for the low quality) shows the complexity of the cash flows and conditional payments:

Only £1.4m of the £23m cash United received that year was from player sales in that season and only 58% of cash spent related to deals signed in that year.

I can see no logical reason why UEFA, FIFA or national associations shouldn't insist on this level of disclosure, prices paid are hardly commercially confidential, and then everyone could see how much their club does or does not spend and on whom.

LUHG

An open reply to steve_mcfc's questions to me on 13th January 2011

2012-01-14T13:34:00.000Z

This is an open reply to steve_mcfc,the Manchester City supporting Twitter sensation. I blocked Steve on Twittermonths ago but in a rush of blood to the head I unblocked him yesterday.... Steveproceeded to tweet me around 30 times starting at 7.48pm yesterday. The Tweetswere a combination of insults and questions and are reproduced in full below(in bold). You can check they are exactly as Steve tweeted on his timeline. Iwas out at the time.

Given that it is hard to reply to 30tweets I thought I would give more detailed answer to each of Steve’s points onthis blog. I apologise for not replying on Twitter but as Steve doesn't restrict his questions to 140 characters, I don't see why I should restrict my answers...

Before you blocked me, you said you wereopposed to a cap on squad spending where the cap is the same for all clubs. How can you claim to be impartial when yourefuse to support a cap that's fair and you will only support a cap thatprovides United with a huge long-term advantage? You're not impartial at all,are you?

I’m not impartial about which team(United) I want to win things and which teams (others, especially Liverpool,City) I don’t. That’s called “being a supporter”. I am impartial about wantingfootball organised in a fair and sensible way maintaining decent competition,preventing the exploitation of supporters and the endangering of clubs throughexcess debt and financial mismanagement.

I support FFP because I thinkexcessive owner subsidy unbalances competition and injects unsustainableinflation into the system. The labour market in football has an almost verticalsupply curve, that is to say the supply of footballers is almost completely priceinelastic. Additional cash above a certain level just increases the price(wages) of footballers. The vast majority of clubs lose money because of thewages they are forced to pay. Controlling owner support through FFP should calmthis systemic inflationary problem, helping the whole pyramid.

Whydid you refuse to support a cap on spending where the cap is the same for allclubs, & you would only support either FFP as it currently stands, or a capon spending where the cap is set to be a percentage of revenue?

Because a fixed cap would eliminateany incentive to grow and develop a club, surely a daft and unwelcome consequence?What is wrong with the “normal” equation of “play good, attractive football,attract higher gates and more sponsors, reinvest this money back in squad andcreate virtuous circle....”?

FFP doesn’t preclude massiveinvestment in stadia, youth development, training facilities etc in any way. Itjust limits inflationary bursts of wage and transfer spending.

I would have preferred FFP tohave specific debt restrictions in addition to its spending limits, debt is acancer on the game. I would like to see any English licensing rules to includedebt restrictions. See my submission to the CMS Select Committee, availablehere:

http://www.publications.parliament.uk/pa/cm201012/cmselect/cmcumeds/792/792vw13.htm

Doyou still think that FFP will land City "back in the ditch", as youonce charmingly said?

I hope City go back to the regular relegation/promotioncomedy cycle of failure they have been on for most of my life yes! In othershocking news I hope Liverpool implode with King Kenny going mad, that Leedsnever come back up and I have to tell you Steve, THE POPE IS CATHOLIC.

Beforeyou blocked me, you said you were opposed to a cap on squad spending where thecap is the same for all clubs. How can you claim to be "impartial"when the reason you oppose that is because you want FFP to provide United withan unfair advantage?

I don’t support FFP because it helpsUnited (under the current ownership all it would actually do is help theGlazers boost EBITDA and get a bigger price for any future IPO in any case).

I actually think there needs to be afinancial rebalancing between the richest clubs like United and the less welloff. I would advocate the reintroduction of league gate sharing and aredistribution of Champions League income across the PL to help this. I thinkthe FFP exclusions on stadium development are great for aiding a rebalancingbut bottom line, clubs like United should be “taxed” through gate sharing etc.If you don’t believe me, ask Dave Boyle, David Conn and Ian King (ofTwoHundredPercent) with whom I’ve been discussing this for a while now.

Whydid you assume that Etihad Airways would not grow at all over the 10-yearperiod that the Etihad sponsorship deal of City covers? Etihad is a youngairline that is looking to massively expand over the next decade, yet thefigures you assumed for Etihad's growth over the next 10 years was 0%. Yourassumption of 0% growth was dishonest wasn't it, Andy? Why would a youngairline seeking to massively expand sign a £400m sponsorship contract and expectto grow by 0%?

If you are talking about mybenchmarking of the Etihad deal to the company’s current financial in my blogpost of 13^th July you have got the wrong end of the stick. I pointedout that the company’s current turnover was £2bn and that even at a 10% EBIT marginthe deal would represent an unusually substantial proportion of profits. Whendid I say the company would never grow?

I think the deal is extraordinarily largecompared to the size of the company and can find no equivalently large deal vs.company size out there (Bayern’s sponsor Deutsche Telekom for example haveEBITDA of €3.9bn and pays Bayern €25m pa). Let me know if you can find anothermismatch between deal size and company size...

Noresponse to anything I've just said then? Does that mean you accept everythingI've just said?

No, hence these replies!

Asfor verbal diarrhoea, I would say you being interviewed by the BBC talkingabout City's finances is the best example of verbal diarrhoea I've seen. Why onearth a supposedly unbiased broadcaster has a highly biased Utd fan on to slagoff our finances I'm not entirely sure.

Why don’t you ask the BBC Steve.

You don’t like me or my views, but lotsof other people take me seriously unfortunately.

Oneother thing. Do you not consider it extremely hypocritical to campaign againstthe Glazers because they limit United's spending while you also act ascheerleader for FFP, cos it will limit City's spending? Is that impartial?

The Glazers exploit United and its fans (like Hicks and Gillett exploited Liverpool and their supporters) through an LBO. My main gripe is not spendingrestrictions, it is enforced ticket price hikes to make the LBO numbers stackup. The House of Commons Select Committee for Culture Media and Sport wasscathing of LBOs in football, it is not an unusual view that they add no value.

I am not a cheerleader for FFP, Isupport it but think that the financial structure of UEFA’s CL is a majorproblem and would like specific debt limits in the rules too. Again, see myDCMS submission for details (and note that the committee quoted my submissionon several occasions).

Noresponse to any of that then? Guilty as charged then.....

Sorry, it took me a while...

Youactually blocked me because I accused you of being a liar, Andy. I see you'relying about that too now.

Did I Steve? I knew there had to be agood reason.

Sorry,my mistake, you blocked me because I accused you of being a biased liar. That'sthe one.

OK, if you say so Steve.

Comeon Andy. I think I explained the issues I have with your claim of beingimpartial. You used to stick up for yourself, so why not now? For example, thisis a yes/no answer: Do you still think FFP will land City "back in theditch"? Yes/no - wouldn't take you very long to clear that up, would it?

I actually think City may get aroundFFP sufficiently to remain quite competitive. As a United fan I would of courselike to see you back down in the ditch!

Stoppretending to be impartial. We all know you've only started covering clubsother than Utd so that you can help to convince people of the supposed need forFFP so that Utd get their massive unfair long-term advantage. Unless you canconvince people why it's "fair" for United to spend around 65% morethan their PL rivals year in year out when on-field success has been shown tobe highly correlated with total spending on wages & transfer fees

Are you saying nobody who supports anyclub can comment on the finances of any other club or on football wideregulation? That would rather restrict debate!

As I said above, I think the big clubslike United need reining in financially through new rules. The fact that clubswithout rich owners like Everton can’t possibly compete and that clubs with quite rich owners like Sunderland canspend £100m of their owner’s money and not get anywhere suggests fundamentalflaws with the system. The answer to that is surely not a billionaire owner forevery club?

I started covering other clubs becausethe whole subject interests me and I believe fans are exploited all too often (seemy work on QPR’s ticket price hikes for example). The Football SupportersFederation were kind enough to nominate me in their blogger of the year award. I’vehelped out various supporters trusts behind the scenes too, not that you appearto care about ownership issues Steve.

In fact Steve, you are like a stuckrecord, fixated by FFP and its relative impact on City and United.

You'veprovided a great defence of your impartiality, Andy. Well done son.

Thanks Steve.

The financial cost of United's CL exit

2011-12-08T15:00:00.000Z

So it’s London 2 – Manchester nil (enjoy it while you canLondon, you aren’t going to win the thing).

The way modern football works, not only is being knocked outof the Champions League miserable enough, but the financial consequences aren’tgreat either, especially when you’re up to your eyes in debt.

Lots of people have asked me about the cost of United’s CLexit, so here’s a quick run through of the figures. The bottom line is that dueto the way UEFA makes its payments, with a big element relating to the lastseason’s domestic rankings, United will not lose a huge amount of cash comparedto last year.

What two wins, three draws and a defeat in one of theeasiest of groups says about the club is another matter.....

Last season

I’ll make financial comparisons with last season when ofcourse United were (well) beaten finalists. UEFA publish the TV cashdistribution and its shows MUFC received €53,197,000 (c. £46m) in Champions League income.

This season

There are several elements to the CL TV payments:

1. Participation and “match bonus”

Allclubs in the group stages receive a €3.9m “participation” payment and a €550,000per game played “match bonus” (nonsensical since everyone is guaranteed six matches!).So every club gets €3.9m + (6 x €0.55m) = €7.2m.

Difference versus 2010/11: ZERO

2. Group performance bonus

Forevery win in the group stages, a club gets €800,000 and for every draw €400,000.The table below shows the number of each for the four English clubs thisseason:

Difference versus 2010/11: DOWN €1.2m

Bringingthese elements together we can calculate how much the basic group stagepayments are:

3. Last season's knockout round payments

Participation in each round means another payment of the following amounts:

Last season United earned €16.1m as losing finalists.

Difference versus 2010/11: DOWN €16.1m

4. The “market pool”

Themarket pool represents around 45% of the CL money UEFA distributes to clubs.Each country has its own pool amount (reflecting the relative size of theadvertising markets). The English pool is c. €84m, around 25% of the total.

Eachmarket pool is distributed based on two formulae, 50% by the relative domesticleague position of the clubs from the relevant country and 50% by how far in the CL each club progress.

4a. Market Pool - PL finish element

AsChampions, United receive 40% of the Premier League finish element of theEnglish market pool, Chelsea (2^nd in the league) receive 30%, City(3^rd) 20% and Arsenal (4^th) 10%.

Thismeans that United receive c. €16.8m this season vs. the €12.5m they receivedlast season (when Chelsea were the reigning champions).

Difference versus 2010/11: UP €4.3m

4b. Market Pool - progress in the CL element

The 50% of the market pool determined by the relativeprogress of the clubs cannot be calculated for certain until we know how farthrough the competition Chelsea and Arsenal progress. The split is determinedon the number of games played (maximum of thirteen for finalists). The minimumthe London clubs could play is eight (if they go out in the next round).

The difference for United and City between the best and worse case is not huge (around €2m).

Difference versus 2010/11: DOWN €4.4-6.8m

5. Total UEFA CL payments

Adding up the group stage payments, and the market pool, themost United can earn from the CL this year is around €36.5m, the least is €33.4m.

Total difference versus 2010/11: DOWN €17.4-19.8m (£15-17m)

Europa League cash

United and City will both get the dubious honour of beingparachuted into the Europa League in the new year.

The UEFA distribution for this beaten up tournament is lessthan 20% of what is paid out for the Champions League. There is a market pooland payments for progressing through each of the five(!) rounds up to andincluding the final. Winning the competition could add around €10m (there is amarket pool here too).

Gate receipts

There are potentially four home games in the Europa leaguevs. three in the Champions League, so the impact on gate receipts depends on afew factors, primarily how far through the EL United progress. The club’swebsite does not have ticket prices for the Europa League yet, and we do notyet know whether the club will enforce the ludicrous “automatic cup scheme”that compels Old Trafford season ticket holders to buy tickets for all cup games(with an opt out only for the League Cup). If United enforce the ACS, if pricesare set close to those for the Champions League and if United get to thequarter finals or beyond, there will be no impact on revenue.

A nice club would waive the ACS obligation to buy Europa Cuptickets and would cut prices too (as Spurs have this season). Don’t hold yourbreath.....

Conclusion

Because of the big market pool boost from being championslast season, United will only lose a maximum of £17m in TV cash from the early exit.Some of this can even be recovered from the Europa league. The club don’tbudget to progress beyond the last sixteen in any season, so recent success hasbeen a financial bonus. To put this loss into context, it represents a maximum of 15% of last year's EBITDA.

The fact that a club who have reachedthree finals in four years can get eliminated from one of the easiest groups points to wider problems....

LUHG

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

2011-11-15T12:36:00.000Z

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

The real problem with Liverpool's media income

2011-10-12T11:06:00.001+01:00

There are few things as unedifying in any aspect of life as hearing the rich demand more at the expense of the less well off, and football is no different.

Ian Ayre, Liverpool FC's Managing Director has suggested that the current (equitable) distribution of the Premier League's overseas rights income should be looked at. Ayre believes that "big" clubs (which apparently includes clubs that finish 7th and 6th respectively in the last two seasons) should get a bigger share.

Ayre is particularly worried about "competing" with Barcelona and Real Madrid and told the Guardian:

"If Real Madrid or Barcelona or other big European clubs have the opportunity to truly realise their international media value potential, where does that leave Liverpool and Manchester United? We'll just share ours because we'll all be nice to each other? The whole phenomenon of the Premier League could be threatened. If they just get bigger and bigger and they generate more and more, then all the players will start drifting that way and will the Premier League bubble burst because we are sticking to this equal-sharing model? It's a real debate that has to happen."

So how bad is the competitive gap between Liverpool and the Spanish giants?

Well at face value, the gap is big and growing. The chart below shows Liverpool and Barcelona's media income for the last five seasons (numbers for 2010/11 are derived from the PL, UEFA, FCB's account and an estimate of LFC's domestic cup income). I have converted Barcelona's income from Euros into Sterling at the average exchange rate for each season.

Having been £20m in 2006/07, the gap has expanded enormously to £75m last season. So what's going on?

Much is made of La Liga's highly inequitable TV rights deal which allows Barcelona and Real Madrid to negotiate to sell their rights individually, creaming off the majority of the total paid between the two clubs. This has indeed been a factor as the chart below showing income from the domestic league rights demonstrates:

The chart appears to show Barcelona's league income running far ahead of Liverpool's in recent years, but it masks the key impact not of the way rights are sold, but of currency. In 2006/07, one € was worth on average 67.6p, by 2010/11 the pound had devalued substantially and one € was worth 85.7p. Once this currency impact is accounted for, a different picture emerges:

The chart above, rebases domestic league media income to 100 in 2006/7 and shows Barcelona's figures in both £ and €. From this chart it is clear that in local currency, the value Liverpool receive for domestic competitions (PL, FA Cup and Carling Cup) has actually grown faster than the equivalent in Spain.

So currency plays one factor in explaining the divergence between the clubs, but there is another huge factor at play; performance on the pitch.

To get a sense of how the relative fortunes of the two clubs have diverged and how crucial this is to media income, consider the following chart showing UEFA TV distributions (all in €).

In 2006/07, Liverpool earned €9.5m (£6.4m) more from the Champions League than Barca. By 2010/11, the positions were radically reversed with Barcelona earning €44.9m (£39m) more from their winning CL campaign than Liverpool did from the Europa league. This season, Liverpool will earn precisely zero from Europe.

Rather than bleating on about how unfair the allocation to Bolton Wanderers is, Ayre needs to look at the performance of his own club. The gap in media income with Bolton over the last five years is already £159m, how much more does he want?

If Liverpool football club had made better use of the £340m in media income they have received since 2007, perhaps they would have been closer to Manchester United on the pitch. The gap last year between United and Barcelona? Not £75m but £20m.....

LUHG

A look at Real Madrid's headline financial figures

2011-09-19T15:56:00.003+01:00

Real Madrid is one of several major clubs (hello Chelsea) who publish a gushing press release summarising their financial results several weeks ahead of the full figures. This year's summary came out on 16th September, ahead of RM's AGM on 25th September. This post takes a look at what the figures say and makes a comparison with Manchester United (the only other major club to report 2010/11 figures so far).

Revenues - performance on the pitch drives growth

Despite finishing second in La Liga to Barcelona for the third successive season, 2010/11 was a better season for RM than 2009/10. The club won silverware in the Copa del Rey and perhaps more importantly made it beyond the first knock-out round of the Champions League for the first time since 2003/04 (even if it was FCB that knocked them out in the semi-final).

The better on-pitch performance was the major factor behind the 8.6% (€37.9m) increase in revenue to €480.2m (£411m). The new three year Champions League TV deal and the club's progress to the semis increased RM's CL income from €26.8m in 2009/10 to €39.3m in 2010/11. The two cup runs meant Real Madrid played 29 home games in total, compared to 24 the previous season and this will largely account for the rest of the revenue increase. No split between Matchday, Media and Commercial revenues is given in the press statement.

Costs - wages up, other costs sharply lower

The 2010/11 season saw the start of the Mourinho era at the Bernebeu and with him came significant transfer spending and a large hike in the wage bill.

Despite the increase in income, the ratio of wages to turnover increased to 45% from 43.5%, although this is still a very healthy performance compared to other clubs (FCB reported a ratio of 67% in 2009/10, Chelsea 84% and City 107%).

We can use the reported ratio to separately identify staff and non staff costs. Despite the departure of club legend Raul as well as Guti, Diarra, van der Vaart and others, the arrival of Carvalho, Di Maria, Ozil, Khedira etc as well as Mourinho himself meant the wage bill rose a very punchy 12.4% year on year. It is reasonable to assume there was an increase in bonuses during the season to match the better playing performance.

With staff costs rising sharply, the club did very well to maintain virtually flat operating expenses (before depreciation and amortisation). With total costs only rising 0.5%, non-staff expenses must have fallen 15.9% year on year. This cost line has proved volatile in past years (non-staff expenses fell 12.7% in 2007/08 and then rebounded 24% in 2008/09) but this is still a very commendable performance. It appears Real Madrid have found significant economies at the club which has allowed them to spend more on the playing side.

EBITDA - up sharply but very low profit on player sales

With revenue up 8.6% and total operating expenses only up 0.5%, EBITDA (ex-player sales) rose very sharply in 2010/11, up almost a third to €147.7m. The EBITDA margin was a healthy 30.8%, a huge improvement on 2009/10's 25.2% and almost double the 16.9% the club made in 2004/05.

With only van der Vaart commanding any sort of proper sale fee, the club's "profit on player" sales (transfer proceeds compared to a player's book value) was sharply lower at €3.4m vs. €34.0m, leaving total EBITDA up 3.8% at €151.1m. Profit on player sales is a volatile figure for any club and I would not include it in any measures of fundamental profitability.

After EBITDA - small rise in amortisation

Between the €151.1m of EBITDA including player sales and Real Madrid's reported operating profit of €46.5m are charges for depreciation and player contract amortisation. Unhelpfully the club did not split out the two categories but depreciation is likely to be a very small element (Barcelona's depreciation charge in 2009/10 was only €8.1m for example). Player contract amortisation is how transfer spending is reflected in football club accounts. The value a club pays for the contract of a player is "amortised" or charged over the length of the contract.

The implied depreciation and amortisation charge for 2010/11 is €104.6m, up slightly from €101.7m in the previous year. This movement reflects around €50m of transfer spending (which assuming the new players were on five year contracts would add c. €10m to amortisation) less the sales of Diarra (whose original €26m cost was amortising at c. €5.2m pa) and van der Vaart (his €13m cost was amortising at c. €2.6m pa).

Real Madrid's amortisation charge is the highest in world football, reflecting years of big name signings at record breaking prices.

Debt and interest

The Real Madrid press release trumpets a 30.6% fall in debt to €169.7m from €244.6m the previous year. The club's own definition of debt is very wide, including football creditors and stadium debt. There is no breakdown of bank debt, transfer fees due and other creditors in the release.

The €75m fall in debt looks entirely consistent with EBITDA (ex-profit on player sales) of €148m, net (cash) transfers of c. €40m, interest of around €10m (my estimate based on lower average debt and the interest paid in 2009/10), tax and capex.

The Real Madrid balance sheet is pretty strong and at only 1.1x EBITDA debt is not a major concern for the club.

A quick comparison with MUFC

Manchester United is the only other major European club to have published 2010/11 results so far. I have converted the Real Madrid figures to £ (at the average rate between 1st July 2010 and 30th June 2011 of €1 = 85.65p).

Real Madrid's turnover continues to exceed United's, but the gap closed in the last twelve months as United reached the CL final and saw very strong growth on the commercial side. Both clubs have seen an enormous increase in income over the last five years, but the very significant price increases at United mean it has grown revenue faster (+13.9% CAGR 2006-2011 vs. 10.4% CAGR at Real).

There remain several structural reasons for the gap in turnover between the clubs including;

a) The membership fees Real's Socios pay (c. 60,000 people paying a total of c. £7m pa)

b) A higher proportion of executive facilities at the Bernabeu compared to Old Trafford and

c) The hugely unbalanced La Liga TV deal which brings FCB and Real Madrid around £110m each per annum (vs. the £60m United earned from the Premier League).

In addition to these factors, Real Madrid has for many years been one of the most effective drivers of commercial income in football earning over £116m from this source in 2009/10.

The two clubs have virtually identical wages/income ratios (45% for RM and 46.1% for MUFC). With Real's higher income base this means the Spanish club spend £33m more than United on wages. It should be noted however that the Real figure include around £20m for the club's basketball team and that the United number includes bonuses for winning the league and reaching the Champions League final (which RM did not of course have to pay) of £9.7m. Taking these into account, we can see that Real spend around 15% more than United on "normal" football wages.

United's other operating expenses are significantly lower than Real's, but the two numbers are converging rapidly. United has long had higher margins than Real due to lower wage costs, but the gap is now as close as it has been in recent years at only 2.7%.

It is after the EBITDA line that the major differences between the two club's business models is evident.

United's depreciation and amortisation charges are almost half Real Madrid's reflecting the far lower reliance on expensive transfers at United in the last five years.

Of the eighteen players who appeared more than 20 times for Real Madrid in 2010/11, only one (Casillas) came through the club's youth system, one was a loanee (Adebayor) and sixteen were players bought in at an average cost of £19m per player.

By contrast at United, there were also 18 players who made more than 20 appearances last season but four were youth products and those who were not cost an average of only £12m each.

The money saved by United on transfers goes on interest. Real Madrid reported an interest charge of £11m in 2009/10 and I estimate it will have fallen (as the debt has fallen) to around £8m in 2010/11. At United of course, interest on the bonds soaks up around £44m per annum, purely for the honour of being owned by the Glazer family. In previous years the Glazer's financial structure has involved other major costs for United. In 2009/10, swap losses, FX losses and other charges cost an additional £40m. In 2010/11 there was a small net gain of £5m on such items.

Putting the two clubs side by side, we can see two very profitable football clubs putting their resources to very different uses. Neither will struggle under the new Financial Fair Play regulations.

Real Madrid would benefit from having United's youth set-up of course, but United would benefit from having Real's balance sheet. Both need to find a way to beat Barcelona....

LUHG

Manchester United’s Q4 and full year results: 19 titles and a Champions League final

2011-09-01T15:07:00.002+01:00

United's Q4 and full year 2010/11 results published today reflect a great season on the pitch that was almost as good as it gets.

The financial impact of the 19th title and reaching the Champions League final were significant on both the revenue and the cost lines. The EBITDA performance was exactly in line with my forecast in my post of 17th August, United remains a predictable money machine.

The interest bill remains very high (£51.7m in cash in 2010/11), and the year can be characterised as one where operating profits were largely used to reduce debt rather than invest in the club. Bond buybacks accounted for c. £64m, whilst net transfers only cost £11.4m. The cost of De Gea, Young and Jones will fall into the current financial year.

Revenue

Matchday

United played 29 home games in 2010/11 vs.28 the previous year and also benefited from a share of gate receipts for the two trips to Wembley. The extra games and gate sharing added c. 5.7% to matchday income with a strong US tour and better corporate hospitality sales adding c 2.7% to leave total matchday income up 8.4%. This is a really as good as it gets for matchday income with virtually the maximum number of games played at 99% of capacity crowds. There was no price increase put through in 2010/11 (excluding the VAT rise).

Media

Media income rose £15m or 13.9% on the previous year. Premier League income rose £7.4m, largely from the overseas rights deal (shared equally by all PL clubs). Champions League income rose c. £5.5m due to the club reaching the Champions League final rather than quarter final (offset by a smaller "market pool" payment). The balance came from better domestic cup runs and MUTV. As with matchday, on current deals this is close to the maximum United can expect to earn from media. The extra earned from winning the Champions League would be c. £3.2m and the extra "market pool" payment for coming first in the PL is worth c. £3.6m.

Commercial

This is of course the key growth area for the club. The 2010/11 results saw Commercial income rise 27% or £22m on the previous year. This was driven by the Aon deal (adding c. £6m pa), the contracted step-up in Nike income (adding c. £2.1m pa) and the raft of secondary sponsors (Conchay Y Toro, EPSON, Singha, DHL etc). Nike and Aon now account for 47.4% of Commercial income, with the majority now coming from the secondary partners. These figures pre-date the £10m pa DHL training kit deal and Mister Potato(!).

The club remain as bullish as ever on the scale of the Commercial opportunity, with significant costs being added in the new (Stratton Street) London office. The expectation being pushed to the media by the club is a doubling of the Nike and Aon deals when they are renewed in the next two to three years. Add DHL and further secondary partner growth and a 2015 Commercial income number of c. £190m looks achievable.

Costs

The price of success on the pitch can be seen in the sharp rise in costs during 2010/11. Staff costs rose £21.2m or 16.1% to £153m. The club splits this increase between additional bonus payments of £9.7m and "normal" increases of £11.5m. So the "normal" inflation in wages was around 8.7%.

Other operating costs increased at an even faster rate than the wage bill, rising 26.4% year on year or £14m. Around £2.3m of this increase relates to higher pre-season tour costs and the costs of taking the club and its sponsors to Wembley for the Champions League final. The rest is largely related to continued spending on the club's commercial operations, on MUTV and on charitable donations to the Foundation (we will have to wait for the report and accounts for that number).

EBITDA and below

With revenue up 15.7% and costs up 19.1%, EBITDA rose 9.6% to £110.9m, a margin of 33.5%. Although the margin was down 1.8% on 2009/10, it remains well within the normal range seen since 1991.

The club has moved from UK GAAP to IFRS, eliminating the goodwill amortisation charge. The player amortisation charge was down 2% (reflecting a quiet year for transfers). Depreciation fell sharply (no explanation given). There was a £4.7m exceptional charge largely related to a bad lease in Ireland.

Cash flow, interest and debt

With EBITDA of over £110m and a positive working capital movement of £14.3m (pre-payments), operating cash flow was again very strong at £125.1m (up from £103.5m).

The major cash outflow was of course interest of £51.7m which must include some residual swap loss payments as flagged in the bond prospectus (although they are not identified separately).

Cash flow after interest and tax was c. £74m and the club chose to use the majority of this to reduce debt, buying back c. £64m (face value) of bonds and making its small regular payment on the Alderley property loan.

Investment in the squad (£11.4m) was low compared to recent years and infrastructure spending (£7.2m) was in-line with recent years. As stated above, the summer spending on De Gea, Young and Jones falls into the current year's accounts.

Taking all these items into account, the club's year end cash balance fell slightly to £150.6m, very much in line with the average year end balance (£155m) since the sale of Ronaldo. Around £45m will have been spent since the year end on new players, and a bond coupon payment of c. £20m was made on 1st August. The club therefore has a current balance of around £85-90m.

The bond buyback left gross debt at £458.9m and net debt at £308.3m. This is debt secured on United and excludes any family debt that may or may not be hidden in the US. The graph below shows how the club's debt position (net of any cash) has changed since the takeover. The key event is of course the vanishing of the PIKs in November 2010....

Thoughts

These are very strong operating results, but then they "should" be given the success of Fergie and his players on the pitch. Seasons don't get much better than 2009/10 and therefore the Matchday and Media income streams are very close to being as good as they can be. The performance of the commercial operations remains excellent, although the thing that really shows how strong they are is the DHL training kit deal which doesn't even appear in these figures.

The club thus remains a prodigious cash machine attached to a lot of debt. The £51.7m spent on interest takes the total spent on interest and fees since 2005 to £373m. Another £105m has been spent repaying debts taken on by the Glazers. The total of £478m is equivalent to 67% of the money spent on wages since the takeover or more than 7.5x the net transfer spend of the club.

It is hard to pronounce on the future until we know more about the proposed IPO. At the moment, surplus cash is being used to repay debt, a prudent waste of our club's money.... With net debt (at 30th June) down close to £300m, a debt free club is not unimaginable. That would be a huge improvement on the position in early 2010, but would have come at the cost of almost half a billion pounds of unasked for expense over the last five years.

You can read the results and see the club's presentation to investors here.

LUHG

Some more thoughts on United's Singapore IPO

2011-08-19T13:20:00.004+01:00

Now that the Glazers' plans for a partial flotation of Manchester United on the Singapore stock exchange have been confirmed, here are a few more observations.

Some of the proceeds will be used to pay down the club's debts - good news but we need details

The club and its bankers are briefing journalists that some of the proceeds from the IPO will be used to repay some of the club's debt. The Telegraph even suggests that the family have realised that the debt burden is hampering the club's ability to compete in the transfer market.

This is an extraordinary turn around in my view, with the club and its owners apparently finally falling in line with the view of supporters! It also stands in stark contrast to the evidence David Gill gave to the House of Common Select Committee on 8th March 2011 (my emphasis):

David Cairns MP: "There can’t be any ambivalence about this. Obviously it would be much better if Man United was not carrying those levels of debt and servicing them, surely?"

David Gill: "In isolation, yes, but there is no issue in terms of asking whether Manchester United has been hampered in terms of what we have had to do as a club in respect of investing, as you quite rightly say, in facilities, players or player contracts. I personally believe that there has been no impact in that respect."

The devil will of course be in the detail,with the following areas particularly important:

How much will the IPO raise?

The BBC suggest between £400m and £600m.

How much of this will actually be used to pay down the club's debt?

Will we have to wait for the prospectus, expected to be published in six to eight weeks time. To make a real difference to the cash flow, a substantial amount would need to be paid down, £200m+. Debt repayment reduces the interest bill but increases the corporation tax bill so this will have an impact too.

What will the club's policy on dividends be?

This is crucial as paying down debt and reducing the £45m interest bill doesn't improve the club's financial position if interest payments are just replaced by dividend payments. The club does not have to pay dividends post flotation, but twenty eight of the the thirty companies in Singapores's Straits Times Index (the "STI", the equivalent of the FTSE) do. The STI yields over 3%. If United had a market capitalisation of (say) £1.2bn, and yielded 3%, that's an annual dividend bill of around £36m.

Looking at valuation

When considering the success of the IPO, its impact on the club and whether fans can or should invest once the shares are listed, valuation is key. I apologise if what follows gets a little technical.

When I wrote about valuation in my post on Wednesday I compared a suggested EV/EBITDA multiple for United of over 21x (on the basis of no debt repayment) to the 14.6x paid for Stan Kroenke for Arsenal. Whilst United may or may not deserve a premium valuation to Arsenal (and you have to ask which club has the most upside in improving its commercial operations in the future), it is worth noting the Kroenke was paying for control of AFC in a contested situation. In such circumstances one would expect to pay a premium price. The United IPO will be an offering of minority position, a very different situation.

I thought it might be useful to look at possible valuations in various scenarios.

Using some IPO proceeds to repay at least some of the club's debt impacts on valuation itself when looking at measures using "enterprise value" (i.e. debt plus equity). What is in effect happening is that debt is being swapped for equity. The briefing to the press has suggested the Glazers are looking to raise £400-600m, a huge range. I have assumed 2010/11 EBITDA of £110m (we will know the exact figure in October). It is worth noting that 2010/11 was a very good year on the pitch and the media income earned from winning the league and reaching the Champions League final cannot be assumed to recur in the future!

The charts below show the EV/EBITDA valuation in two scenarios, a flotation of 1/3 of the club for £400m and for £600m and how various levels of debt repayment impact the valuation. I have deliberately kept the scales constant.

In Scenario A above, 1/3 of the club is sold for £400m, implying a market capitalisation of £1.2bn. If all the proceeds are used to repay the £400m of net debt, the club is debt free, has an enterprise value of £1.2bn or around 11x 2010/11 EBITDA. By contrast if only 25% (£100m) of the net debt is repaid, the enterprise value is £1.5bn or 13.6x EBITDA.

Scenario B above shows the same process but at a far higher IPO price with 1/3 of the club sold for £600m, giving a market capitalisation of £1.8bn. In this scenario, even if all the debt is redeemed, the EV/EBITDA multiple is still 16.4x and if only £100m is repaid, it's a very punchy 19.1x.

Discounted cash flow ("DCF") valuation

As I have said before, EBITDA is not a particularly good measure of a football club's profitability. Below EBITDA comes transfer spending which can be very significant. In 2010/11, net transfer spending equalled 30% of EBITDA. A more rigorous valuation method is to look at free cash-flow after transfers and capex. Assuming annual net spend on players and infrastructure of £35m, unlevered free cash-flow is around £65m (assuming only £3m of cash tax is paid, a low rate than cannot be relied on indefinitely).

DCFs are notoriously bad predictors of value, but a simple two stage model growing free cash at 10% per annum to 2015, then 5% to 2021 with 3% perpetuity growth and a 9% discount rate gives an EV of £1.5bn (so a market cap around £1.2-1.3bn assuming some debt is left in place). If that sort of growth rate only justifies a valuation at the lower end of the range, the higher prices mooted rely on some very heroic assumptions.

There will no doubt be further twists and turns in this story in the weeks to come. I will endeavour to keep readers up to date.

LUHG

The key issues surrounding a United flotation in Singapore

2011-08-17T15:17:00.004+01:00

Readers will no doubt have seen the story, initially reported by Reuters’ International Financing Review news service yesterday, that the Glazers are planning to float a minority stake in Manchester United on the Singapore stock exchange (the "SGX") later this year. This story follows rumours in recent months of a listing in Hong Kong.

What could it mean for the club?

The first thing to say is that we have few details to go on. IFR mentions a “$1bn” listing, around £600m. How much of the club that would represent depends on the valuation on flotation the Glazers could achieve. Suggestions in the media that £600m could be raised with the Glazers only selling around 30-35% would indicate a very high valuation in excess of 21x EBITDA[1]. By comparison, Stan Kroenke’s acquisition of Arsenal earlier this year was at a valuation of around 14.6x EBITDA and Fenway paid 11.4x EBITDA for Liverpool in 2010. The suggested United numbers may of course be bankers’ puff, but they are certainly aggressive.

The second obvious statement to make is that actions the Glazers take are generally for the good of the Glazers and nobody else. It is notable that neither the club nor the family have made any attempt to consider supporter involvement in any flotation. Information is, as usual, very scarce.

In my view there are three main issues for supporters stemming from this news:

1. What will the Glazers would do with the proceeds of an IPO?

One obvious answer is to pay down some of the club’s £400m (net) debt, the bonds issued in 2010. That would, without question, be good for the club, reducing the interest bill (currently around £45m per annum) and freeing up more cash to invest in the club.

The other answer, and in my view far more plausible, is that the cash will go to Florida to bolster the Glazers’ personal finances. As has been well documented, the Glazers obtained £249.1m (c. $400m) from an unknown source in November 2010 to repay the infamous PIKs. I have it on good authority that this money was borrowed. The family’s highly leveraged US strip malls business, First Allied, continues to struggle. In 2013, NFL teams will have to meet a wage “floor” which will (on current figures) reduce the profitability of the notoriously low spending Tampa Bay Buccaneers. All in all, the family could do with a significant injection of cash.

It seems logical that the flotation plan is really just the “Plan B” adopted by the family after they decided (in the face of the green and gold protests) not to use United’s cash to deal with the PIKs (for evidence of this fear of supporters see this Bloomberg article from October 2010). With the club's cash pile not available, a minority IPO is the logical next choice to get the Glazers out of their financial hole.

If I am right and the Glazers are intending just to take some personal profits, there will be little short-term impact on United’s finances, although the club's dividend policy may change. The club would not be obliged to pay dividends after flotation, but there is a risk that further cash would have to leave the club under the new structure. On the flip-side, if an IPO relieves the financial pressure on the family, the risk of them taking dividends out (which they are already able to do) is reduced. Once again we need more information.

2. Should supporters try/want to buy shares?

Looking back, many fans realise that we missed our chance between 1991 and 2005 to build a meaningful supporters’ stake in Manchester United when it was listed on the London Stock Exchange. Leaving ownership to City institutions led to the Sky bid, the manipulation of the club by Magnier and McManus and eventually the Glazer takeover.

A flotation of United, even in Singapore, gives an opportunity to own shares in our football club again and that cannot be dismissed out of hand. The problem is of course that any supporter stake would be as a minority in a Glazer controlled business. With the suggested valuation so high the sums needed for a meaningful stake look very difficult to achieve.

Despite these issues, I think as details emerge, we should as supporters look very carefully at this new opportunity. A minority sale is a major change in approach by the Glazers and looks likely to be the beginning of the process of them selling the club (although this may take some years). If that is the case, supporters need to be thinking now about how they can be part of a new ownership structure.

The sheer size of Manchester United may appear to preclude any major stake for fans, but in some ways the scale of our support provides the opportunity. MUST have 172,000 registered “e-members”, the club claims 330m “fans”. Looking at those two numbers, could 1 million supporters be brought together in the next twelve months and commit to invest £100 each? That would be a significant toe hold. A great first step on the way to greater supporter involvement in years to come.

3. What should we do now?

In the short-term, we all need more information on what the Glazers are planning. How much will they sell, to whom, when, what will the board structure be, what will the dividend policy be, how long will the family’s remaining stake be “locked up” etc, etc, etc. Without this information we can only talk in generalities.

As these facts come out, I passionately believe we need to achieve some new unity amongst our support. MUST will, as the mass membership official supporters trust, take the lead, but we need to try and build a consensus with all groups including IMUSA, the three fanzines, principal forums, FCUM (who remain part of the family), and possibly members of the “Red Knights” consortium and groups like Stretford End Flags and others who some feel haven’t been sufficiently “anti” in recent years.

It may be that none of the numbers stack up when we see them. It may be that unity is not possible, but we screwed up our last opportunity to get meaningful supporter ownership in our club and we would be wrong not to look at this opportunity closely. Together. United.

LUHG

1. 21x EBITDA calculated as follows: Estimated 2010/11 EBITDA £110m. £600m for 30% of equity implies equity valuation of £2bn. Current net debt (outstanding bonds less cash at bank) c. £400m. Enterprise value therefore £2bn + £400m = £2.4bn or 21.8x EBITDA.

Are United trying to cut the wage bill?

2011-07-26T16:56:00.002+01:00

It pays not to believe anything Sir Alex Ferguson says about potential transfers. This is not a man who loves sharing secrets with the media. So we should all take his comments in the US yesterday with a pinch (or perhaps a bucket) of salt. Having said that, Fergie said some quite specific things about the financial implications of the club's summer sales and purchases which are worth a closer look at. This is what he said (my emphasis):

"At this moment, I can't see another addition. The type of player we might have been looking for is not available.

"We lost five players in their 30s this summer. That helped finance the three younger players I have brought to the club. I am happy with the players I have got at this moment in time."

The "five players in their 30s" are presumably Wes Brown, John O'Shea, Owen Hargreaves, Gary Neville and Paul Scholes. In addition of course, one rather important player in his forties, Edwin van der Sar, has also left the club.

Of these six departures, only Wes and JOS were sold for a fee, so presumably when talking about exits helping to "finance" new arrivals, Fergie is talking about wages. The question therefore is how much has been saved in wages?

Needless to say, we are entering a world of guesswork when it comes to players' salaries. These are my best guesses, but if anyone can find sensible sources for more accurate figures, please let me know.

On these figures (and indeed on anything roughly near them), the club is currently sitting on some significant cost savings. The estimated £10.7m per annum in annual wage savings is 8% of the total club wage bill in 2009/10 and around 11% of the club's annual cash profits (EBITDA).

The estimated saving of c. £200k per week is also (coincidentally?) around the level that the press has speculated United would have to pay Wesley Sneijder to prise him from Internazionale.

So what is going on here? The cash for transfer spending is definitely available. As I wrote in June, when the club publishes it's full year results in October, they will show a cash balance of c. £180m at 30th June 2010. Only around £47m of this has been spent. There is over £130m still available.

The club is clearly crying out for more creativity in central midfield. Scholsey made sixteen league appearances last season and has gone, Gibson is for sale, isn't good enough and hasn't travelled on the US tour, Fletcher is still ill, Giggsy is a stand-in midfielder entering the end of his career. Meanwhile, Barcelona passed through us and around us at Wembley in a way that makes the need to strengthen crystal clear.

I don't know why Fergie said what he said yesterday. I hope it is more smoke and mirrors to keep the rest of the world confused. I hope it isn't a sign that not only do new signings need "financing" by player exits, but that the edict has gone out to reduce the wage bill. Is the subject of dividends to the Glazer family back on the agenda? Is this an attempt to boost short-term profits for a Hong Kong float (at the cost of the long-term development of the club)?

Frankly, what's the point of being the most commercially successful club in England with a "global fan base" of 330 million and £130m+ still in the bank if we can't afford a decent new central midfielder?

Good old Glazernomics.

LUHG

A look at Manchester City’s commercial income

2011-07-13T16:51:00.001+01:00

NOTE:

I am a United supporter, if you feel this makes me a "biased rag bastard" who is incapable of writing about Manchester City's finances in an impartial way then I believe you are mistaken. If that is however your view, I suggest you don't waste your time reading on!

Alongside the usual summer transfer speculation, the biggest football news of last week was Manchester City’s new ten year naming rights and sponsorship deal with Etihad Airways. Reports indicate that Etihad will pay City between £300m and 400m over the life of the contract making it by far and away the largest ever club football sponsorship deal. With UEFA’s Financial Fair Play rules around the corner, the Etihad deal has caused huge controversy with figures such as John W Henry of Fenway Sports Group and Arsene Wenger questioning the transaction given that Etihad is owned by the Abu Dhabi royal family of which City's owner Sheikh Mansour is a senior member.

This post takes a closer look at the sources of City’s commercial revenues and how they have grown over recent years. I have assumed a figure of £400m for the Etihad deal throughout for ease, but readers can obviously make the easy mental adjustment if they believe £300m is a more realistic figure. As with all my posts, I will correct any inaccuracies readers point out.

Splitting out commercial income from the report and accounts

Most football clubs adopt a three way split of revenue between Matchday, Media and Commercial sources. Unusually Manchester City include corporate matchday hospitality business under a catch all segment called “Other commercial activities” and then publish a separate figure for “Gate Receipts”. To make sensible comparisons with other clubs we need to deduct matchday hospitality from the “Other commercial activities” total. Thankfully the 2009/10 accounts give the details on page 55 allowing us to strip hospitality and to then disaggregate the total Commercial (ex-hospitality) revenue into Commercial partnerships (i.e. sponsors), retail and merchandising and “other” (I have rounded to the nearest £100k for ease).

2008/09 – the bad old days

The accounts show that in Sheikh Mansour’s first year of ownership the deals he inherited from the previous owner only generated £6.5m in sponsorship revenue and £17.9m in commercial income as a whole (by comparison United’s commercial revenue for the same year was £70m).

The two key commercial arrangements in force that season were the shirt sponsorship with Thomas Cook and the kit deal with Le Coq Sportif. The kit deal was widely reported to be worth £10m over four years and the Guardian reported that the Thomas Cook were paying £3m for their two year deal with City. The only other current sponsor involved with the club at that time was the local radio station Key 103. I’ve estimated that at £500k pa, leaving £2m from other small deals.

2009/10 – transformation

The 2009/10 accounts say:

“Financial highlights for 2009-10 include: Corporate partnership revenue increasing by £25.9m to £32.4m, an increase of nearly 400% on the previous year, driven by new long term deals with a number of key partners, including Etihad Airways, Abu Dhabi Tourism Authority, Aabar and Etisalat.” (page 55)

By the end of the 2009/10 financial year, the four new sponsors mentioned above, along with Umbro, had replaced all the club’s previous sponsors (with the exception of Key 103). In other words, the £32.4m generated by the club in 2009/10 came solely from six companies. The original Etihad shirt sponsorship was widely reported to be worth £7.5-8m pa. To get to a total of £32.4m therefore (and assuming Key 103 continued to pay £500k pa), the other three Abu Dhabi owned sponsors and Umbro had to generate approximately £23.9m in revenue between them. The table below shows my estimate of how this splits between sponsors:

I have used a figure of £2.9m pa for Umbro to reflect some sort of premium over the Le Coq Sportif deal, despite several press reports suggesting the ten year partnership was only worth £25m. With The Etihad shirt sponsorship in at £8m, the £7m each for the other three Abu Dhbai companies is just the residual needed to get to a total of £32.4m. This figure of £7m each (or rather a total of c. £21m for all three) is pretty staggering given they are second tier sponsors.

2010/11 – broadening the base

If the first year of Mansour’s ownership reflected the financial failures of Thaksin Shinawatra and the second year saw huge deals being signed with friendly companies from Abu Dhabi, the third year saw a decent diversification of the base of sponsors.

The German heavy engineering group Ferrostaal signed a sponsorship deal at the end of calendar 2009 shortly after being taken over by International Petroleum Investment Company of Abu Dhabi. Strangely Ferrostaal no longer appears on the club’s list of sponsors and the pre-season “Ferrostaal Cup” competition promised for 2010, 2011 and 2012 doesn’t appear to be happening this year.

More importantly than whatever is happening with Ferrostaal, the last financial year saw City sign deals with Amstel (i.e. Heineken), Malmaison Hotels, Thomas Cook Sport and Jaguar, none of whom are owned by Abu Dhabi or its royal family. Assuming £2m per partnership (and the same for Ferrostaal), this will add c. £10m to the £32.4m achieved in 2009/10.

2011/12 - The second Etihad deal

A massive deal

The £400m, 10 year deal announced last week is a staggering piece of business for City. A club that could only muster £6.5m in total sponsorship income under Thaksin has signed a deal worth over six times that from just one source.

It appears that City and Etihad are suggesting the partnership splits into three areas; shirt sponsorship, naming rights for the (former) City of Manchester Stadium and naming rights for the wider “Etihad Campus” in East Manchester (see below). Even with the c. £40m split into these three areas (and perhaps £4m pa going back to Manchester City Council for the first five years), these are sums that match or exceed the best deals seen in European football. United and Liverpool’s shirt deals with Standard Chartered and Aon respectively are worth around £20m pa. Bayern Munich’s 2009 three year extension of its shirt sponsorship with Deutsche Telekom is worth around £23m pa. Precedents for naming rights in Europe are somewhat scarce, and if City’s Etihad deal is worth around £10m pa, it is the highest seen in European sport.

Etihad is a young airline benefitting from significant investment from the Abu Dhabi royal family but it is hard to see the business logic for a deal of this scale. Etihad’s annual turnover is only around £2bn (annualising its recent half year figures). On 12^th July it proudly announced it had broken even for the first six months of 2011 (the first breakeven result in its eight year life), but this “breakeven” is as measured by “earnings before interest, tax, depreciation, amortisation and rental payments (on leased planes)”. Few airlines ever achieve an operating margin of more than 15%, and even if Etihad could hit that sort of level of profitability, this deal would mean it was then paying out 10-15% of its annual profits to City. For such a company to pay out £400m over ten years to a not especially well known European football club is somewhat strange from a business perspective.

Other sources of commercial income

So far I have just discussed commercial partnership income. Like all clubs, City has a merchandising operation (in conjunction with Umbro) which turned over £7.9m in 2009/10, an impressive increase on the £5m figure for 2008/09. It seems unlikely that this growth rate can be sustained, but it is reasonable to expect some growth as City’s international profile begins to rise.

Streets soon to be paved with gold....

Far more intriguing than shirt sales is what City can do with the 80 acres of development land around the stadium. Formally called (by the council) “Openshaw West”, this is now going to become the “Etihad Campus”. So far nobody knows exactly what will be built on this land, although suggestions include retail and office space (including a new Etihad call centre), a new training ground for the club, a sixth form college, a sports science complex etc, etc. Any construction costs borne by Sheikh Mansour fall outside the scope of “expenses” under Financial Fair Play rules but any profits from activities on this land can be included (as the “campus” is on land adjoining the ground).

How City compare to other clubs

The £46.7m City earned from all Commercial activity in 2009/10 took it above Arsenal and Spurs for the first time.

In the season just finished the five additional sponsors will have added another £10m and no doubt merchandising revenue will have risen too on the back of the club’s first trophy in thirty five years. When the additional income from Etihad is added from this year onwards, City will almost certainly overtake Chelsea (2009/10 Commercial revenue £56m) and be close to Liverpool (2009/10 Commercial revenue £62m but this predates the Standard Chartered and Warrior deals) and will be reporting total commercial income of around £90m (depending on the exact size of the Etihad deal). In English football only United (where commercial income will exceed £100m in 2010/11) can rival this.

The elephant in the room - Financial Fair Play and the reliance on Abu Dhabi

Unlike most clubs, City’s search for additional income is not about boosting their firepower in the transfer market or (as with the Glazers) boosting the club’s value, it is about compliance with Financial Fair Play. In my piece on 8^th April I estimated that City would have reported a deficit on 2009/10 results of around £121m under the new FFP calculations (although importantly this is before the permitted adjustment for player contracts which were entered into prior to June 2010 that applies to the first two years of the new regulations).

The incremental c. £44m the club has added in Commercial income since 2009/10 reduces that deficit by a third, and Champions League participation and top four finishes (if repeated) will add another c. £30-35mpa. That begins to make the €45m (c. £40m) loss allowable over two years under FFP look achievable, but there is still much to do, especially with a bloated squad costing £130m+ in wages and £70m+ in annual amortisation charge on transfer spending.

The club’s reliance on companies owned by Abu Dhabi’s royal family is stark. Although the deals with Malmaison, Jaguar etc reduced the percentage of sponsorship income coming from such companies from 90% in 2009/10 to c. 73% last season, the new Etihad deal takes it back to 85%. Other clubs are understandably aggrieved at what they see as an attempted flouting of the new FFP rules. My personal view is that UEFA will not stand in the way of any of the Abu Dhabi related transactions, as each could just about be justified individually.

Manchester City clearly believe they have found a way through the FFP regulations that effectively channels Abu Dhabi's wealth into the club in bite sized and UEFA compliant chunks from various nominally independent sources. It will be very hard for UEFA to argue against these deals, but there is surely a limit to how far City can push this process. With commercial revenues now rivalling United, Real Madrid and Barca, further closing of the FFP gap is going to have to come from the more traditional source of controlling costs and winning trophies.....

LUHG

The facts about Manchester United’s cash pile

2011-06-09T15:11:00.001+01:00

Yesterday on Twitter I mentioned that United enter this transfer window with over £180m of cash in the bank. This sits alongside around £478m of bonds (i.e. debt). My cash estimate met with some scepticism, so I thought I'd show how this state of affairs arose.

Seasonal cash flow

All professional football clubs have seasonal swings in their cash balances (or overdrafts) during the year. Cash levels are at their highest in the summer following the distribution of TV money and when fans buy season tickets (and often when sponsors pay in advance for the next season). This seasonally high balance falls over the season as players are paid (there are uplifts at various points as TV money is distributed across a season). The cash balance at clubs' year end (usually May, June or July) are therefore not representative of the money "available" for the whole season.

Because United now publish quarterly accounts we can see this seasonality quite clearly. The graph below shows cash flow before capital expenditure and transfers (but including interest payments). In 2008/09, incentives for early exec ticket renewal boosted cash flow in Q3 at the expense of Q4. In 2009/10 most season ticket income came in Q4. The overall seasonal pattern is however very clear.

So United's cash balance is always high in June. The graph below shows how the total has varied over the last few years. I have added the unusual impact of the quadrant expansion costs in 2005 and 2006 to show the underlying numbers. What is striking about this graph is that having had year end cash balances averaging £47m up to 2008, from 2009 onwards the average balance has been over £166m (including my estimate for this year).

Ronaldo and Aon

To understand how the club has come to have such huge sums of money in the bank we need to disaggregate the cash flow between June 2008 and today. The chart below shows this. The blue bars represent the cash balance at 30^th June 2008, 31^st March 2011 (the most recently published figure) and my estimate for June 2011 (excluding this week's transfers). The black bars represent inflows of cash and the red bars represent outflows.

What the graph shows is that two windfall receipts, Real Madrid's payment for Cristiano Ronaldo and Aon's prepayment of 45% of its four year sponsorship (both received on 30th June 2009 coincidentally), provided a "one time" boost to the club's cash balance that remain to this day.

The rest of the cash flows from 30th June 2008 to 31st March 2011 are pretty much a wash. The club generated £276m of cash profits (EBITDA), and paid out £328m in interest, debt finance costs, debt repayments and transfer spending (see table):

Those are the totals up to the end of March this year. As described above, the club will receive significant sums in Q4 from season ticket renewals, TV (Champions League final payments for example) and sponsors. That should add £70m+ to the total.

Will (can) they spend?

The Ronaldo and Aon monies arrived almost two years ago and Fergie has yet to go on a major shopping spree. The club even had £122m in the bank when it announced its bond issue in January 2010. This huge cash pile has sat around unspent for some time.

Regular readers will know that I believed this money was sitting in United's bank account earning next to nothing because it was earmarked to be paid to the Glazers (to repay the PIKs). The bond issue allowed significant sums to be extracted from the club (a current "entitlement" of c. £120m) that had not been permitted under the terms of the old bank loans. In the event those "entitlements" have not been used and it looks like they managed to refinance the PIKs without dipping their sticky fingers into United's kitty.

That leaves this enormous sum as a huge mystery. So don't ask me what our transfer budget is, all I can say for certain is that United have £477m of bond debt and £180m+ of cash available for something.....

LUHG

Huge price rises for QPR's fans are small potatoes for the club and its owners

2011-06-07T09:36:00.001+01:00

Despite the "boom" in football driven by ever higher TV income, fans across the country have faced years of inflation in the cost of following their team. Yet from the Taylor Report of 1990, through various government task forces, to the current DCMS Select Committee enquiry, the need to keep football affordable has been widely recognised. The incredible loyalty engendered by the sport means it is not a normal "substitutable" good, football fans are highly price inelastic and vulnerable to being exploited. The lack of supporter ownership means fans rarely have a say in the business models of what are really "their" clubs, whoever the short-term legal owners may be.

The last few months have seen some truly shocking examples of aggressive price increases, including the Champions League Final, the Conference Play-off Final and of course the price rises at Queens Park Rangers where, for example, a “Gold” season ticket will go up from £599 last season (£26 per game) to £759 next season (£40 per game). That’s a rise of 54% per match.

Of course, most promoted clubs raise ticket prices. Last season, Newcastle increased prices by 10% and West Brom by 13% (Blackpool held them flat). The other automatically promoted club this year, Norwich City, have announced rises of 8-15% for 2011/12.

What is puzzling is the scale of the QPR price rises which hit the club's core support so hard when a) they only bring in a tiny amount of extra money and b) the club and its owners really don’t need the extra cash.

Modelling ticket income

Looking at QPR’s most recent report and accounts (for the 2009/10 season), the commentary states that 34% of revenue comes from ticket sales, so we know that in that year ticket sales totalled c. £4.9m. The club played 25 home matches in 2009/10 with average attendances of 12,720 (around 69% of capacity at Loftus Road). That's c. £196,000 per match. With no price increase in 2010/11, we can use this as a base for forecasting figures for 2011/12.

Next season, back in the top flight the club, no doubt expects very high attendances. Assuming average gates run at 95% of capacity, that would take ticket income to around £268,000 per game (at constant ticket prices).

Ticket prices per match are going up by between 48% (Bronze season tickets) and 73% (Platinum season tickets). Taking a weighted average of 55%, that will boost the projected revenue per home game (at 95% of capacity) of £268,000 by an additional £147,000 to a total of c. £416,000 per match.

Spread over a 19 home game Premier League season, that's 19 x £147,000 = £2.8m extra revenue for the club next season from the ticket price increases.

A price hike in-line with the norm for promoted clubs of (say) 10% would add £509,000 to QPR’s revenue in 2011/12. The question is, why do QPR feel the need to be so aggressive on pricing at a time when most supporters are seeing falling real incomes? Is the extra c. £2.3m in 2011/12 compared to a “normal” promotion price increase worth the pain it inflicts on fans?

Putting the £2.8m extra in context

The extra revenue from the 55% price increase is insignificant in comparison with the Premier League TV income the club will earn next season which will range from c. £39m (the amount Blackpool received in 2010/11) to £45m or more (Fulham received £47.4m in 2010/11 for example). Each Championship club (not in receipt of parachute payments) receives £4.6m per annum.

On top of the extra TV money, promotion should improve QPR's ability to earn income from corporate relationships. Given the club's long exile from the top division, QPR's commercial performance is actually pretty good already, perhaps reflecting the three co-owners' ability to attract big brands. In March 2008, QPR signed a 5 year kit deal with Lotto Sport Italia reported to be worth £20m, a record for a Championship club. In the same year a three year £7m shirt deal was signed with Gulf Air.

The club do not split out corporate income in the accounts, but we can derive a number for 2009/10 by estimating media income (around £4.6m).

This £4.9m compares very favourably with many Premier League clubs' commercial operations (Bolton earned £4.8m and Everton £8.8m in 2009/10 for example). There may be some definitional variations (the QPR estimate includes corporate hospitality not covered by tickets for example), but QPR has a strong commercial base that can only improve following promotion.

Before any ticket price increases, QPR should see its income in 2011/12 rise from around £14m to c. £54m. Non-staff operating costs will be around £10m, leaving significant room to improve the squad and pay Premier League wages (the wage bill could rise 2.5x and the club would not make an EBITDA loss).

The rationale for the huge price rises (other than greed of course) is very hard to identify. Which brings us to the owners.

The owners' motivation

"Here they come, the beautiful ones...."
Photo: Max Rossi/Reuters/Guardian

Unlike most clubs, QPR has owners with very deep pockets. Shareholders Bernie Ecclestone, Flavio Briatore and Lakshmi Mittal rival Roman Abramovich or Sheikh Mansour as the richest owners of a Premier League club.

Although QPR fans are no doubt grateful to their club's famous owners for saving them from financial oblivion in 2007, the motivation of the trio in owning QPR remains unclear. None are natural fans of the club, and whilst they have bankrolled losses (injecting £41m up to 31st May 2010 on top of the £14m paid originally), there has been no substantial investment in the playing squad or ground. Briatore has famously spoken of turning the club into a "global brand", but no mechanism to achieve this has been suggested.

In the three seasons up to 2009/10, the club spent a net £4.8m in cash on players and a net £5.3m on the ground. Net transfer spending in 2010/11 was close to zero. Success has come from finally finding a manager who is a proven promotion specialist, not from spending.

Meanwhile Ecclestone placed a £100m price tag on the club in April and there were abortive talks about he and Briatore selling out to Mittal in May this year (ending with the Mittal offer being dismissed as "insultingly low").

So QPR and its owners remain one of football's mysteries. These are the mega-rich owners who haven't bought any players and who, despite the £40m windfall coming the club's way, feel that what QPR really need to do is screw another £2m out of their fans....

Edit at 2.30pm 7th June 2011:

In the comment section, "this is my England" points out that the ticket price increases are even higher than the 55% I quote above. By restricting the number of season tickets to around 9,000, QPR is ensuring more fans pay the new “match day” prices. These haven't been published yet, but judging from the "savings" mentioned in the season ticket brochure, "Gold" “match day” tickets will cost £58 per match, a rise of 90% on the £30 charged last season!

Taking into account these higher price rises, the weighted average price increase per match is probably around 75%. In one season QPR are inflicting a larger ticket price increase on their fans than the Glazers have imposed at United over six years!

All this means the club will take close to £4m in extra revenue next season rather than the £2.8m I had estimated. That’s a nice extra of course, but still only 10% of the TV cash coming QPR’s way and a mere 0.02% of the combined wealth of the club’s owners.....

LUHG

Liverpool’s 2009/10 results underline the challenges Fenway face

2011-05-23T16:30:00.002+01:00

NOTE:

I am a United supporter, if you feel this makes me incapable of writing about Liverpool FC's finances in an impartial way then I believe you are wrong. If that is however your view, I suggest you don't waste your time reading on!

The Liverpool Football Club and Athletic Grounds Limited accounts for 2009/10

Under Hicks and Gillett, the Liverpool structure became more complex than in the days of the Moores family. There were two main UK holding companies; Kop Football (Holdings) Limited ("KFH") and its subsidiary Kop Football Limited ("KF") which in turn owned The Liverpool Football Club and Athletic Grounds Limited ("LFAG"), the football club itself. KF was the entity that borrowed the vast majority of the money from the banks. At 31^st July 2010 LFAG's debt was limited to an inter-company loan to KF of £104.6m and bank loans and overdrafts totalling £37.7m.

The two Kop companies are late filing their accounts (not surprising given they no longer have any operating businesses). The accounts I look at in this post are for LFAG so they tell us about the operations of the football club, but not much about the debt, although this is not a major issue as the debt was largely eliminated after the purchase of the club by John W Henry's Fenway Sports Group (through its UK vehicle, UKSV Holding Company Limited).

The LFAG accounts for 2009/10 include the club's digital and online business which were bought in from a separate company, LiverpoolFC.TV Limited ("LFCTV") in July 2009. To make a sensible comparison between the 2008/09 and 2009/10 we have to adjust the 2008/09 numbers to include the operations that were in LFCTV during that year. The club also brought its catering activities "in-house" in 2009/10, but we have no numbers on this business and it is unlikely to be material.

Results 2009/10

Revenue in 2009/10

At a headline level, revenue appears to have risen 4.1% in 2009/10 but adjusting for LFCTV, the club actually saw a decline of 0.1% during the period.

Matchday income rose 0.9% as the club played the same number of games as the previous season (27), with slightly lower attendance (-1.8%) and slightly higher ticket prices (there is probably a mix effect in here too as the club could not command premium hospitality prices for Europa Cup games).

Media income is clearly a factor of both playing performance and the cycle of TV deals (note Liverpool include their own media operations (formerly in LFCTV) under "commercial" in their accounts). Liverpool earned £79.6m from 3^rd party media in 2009/10, up 7% on the prior year. This can be broken down as follows:

Although Premier League income fell as the club finished 7^th vs. 2^nd the year before in the league, this was more than compensated for by higher Champions League receipts. Last season was the first of a new three year cycle of Champions League TV rights and Liverpool benefited in particular from their 2^nd place league finish in 2008/09 which increased their share of the English "market pool". Early exit from the Champions League at the group stages was rewarded with entry into the Europa League. The difference in TV income between the two competitions is stark, with Liverpool's run to the semi-final only earning £2.5m, barely 10% of their Champions League income.

Commercial income fell 8.3% last season (taking into account the buying in of LFCTV in July 2009). The accounts blame this on a "decrease in royalty and merchandising revenue", but the fall is quite severe to just be blamed on this. It is possible that some of the club's sponsorship deals contain Champions League qualification or league position clauses which kicked in after the poor season.

Costs in 2009/10

As with income, it is important to adjust for the LFCTV business (in the 2009/10 numbers but not in the 2008/09 figures) to see the underlying cost trends at play.

Adjusting for LFCTV, and pre-exceptional charges, the club's salary bill rose £16.5m or 16.8% on 2008/09. With the obvious exception of Manchester City, this is by far the largest rise in salaries of any non-promoted Premier League club last season. It also compares very unfavourably with the fall in revenue (City's wage bill rose 61% but at least turnover rose 44%). The increase compares to Chelsea's 4.2% increase, Spurs' 4.3%, Arsenal's 6.5% and United's 7.0%.

The huge increase in salary costs did not coincide with major spending in the transfer market. The 2009/10 season saw Liverpool sell Alonso and Arbeloa to Real Madrid with Hyypia and Pennant also leaving the club. Aquilani, Johnson and Kyrgiakos joined in the summer and Rodriguez in January. Those moves would probably suggest a small fall in wages in total.

Given a relatively stable squad, the only explanation for the enormous rise in staff costs during 2009/10 is the raft of contract extensions signed by the club during the period. In March 2009, Benitez signed a four year extension, Gerrard a two year extension in April 2009, with Agger signing in May, Benayoun in July and Torres(!) in August. In April 2010, toward the end of the financial year Reina signed an extension too. It is these six deals, especially Benitez and Gerrard's that drove up the total salary bill so much.

Liverpool's wage bill sits in the middle of the pack of clubs with aspirations of Champions League qualification, higher than Arsenal's, but around 15% lower than United's and City's.

Adjusting for the inclusion of LFCTV in the 2009/10 figures, the club managed to hold other costs in line with the prior year (the small cost of sales line was down 4.3% and other costs, ex depreciation and amortisation fell 0.6%).

Operating profits ("EBITDA")

With underlying income down 0.1% and wages rocketing up, the impact on EBITDA (earnings before interest, tax, depreciation and amortisation) is going to be obvious. Pre-exceptional EBITDA fell to £26.4m from an adjusted £42.4m (which includes £5.1m of EBITDA from LFCTV), a fall of 37.8%. The unadjusted headline decline was 29.3%.

As a measure of profits, EBITDA has certain drawbacks, and in football it clearly ignores the significant expense of transfers, but I believe it is a decent proxy for comparing the financial strength of clubs. EBITDA can be seen as the pre-transfer cash profits a club generates. It can be used for transfer spending or to support debt (such as any borrowing a club takes on to build a new stadium). It should be noted that of United's impressive £100m EBITDA, c. £45m goes out of the club each year in bond interest payments.

What is concerning for Liverpool's new owners, is that EBITDA has fallen so sharply (and so far behind rivals such as United and Arsenal) in a season when the club actually earned significant sums from the Champions League. The fall is not really due to a poor season (although 2009/10 turned out badly), but because of costs running out of control. It was with this inflated cost base that Liverpool entered the truly poor 2010/11 season. The club is undergoing a margin squeeze that has pushed EBITDA back below 2008 levels even as income has held up.

The EBITDA of £26.4m is before exceptional items. In 2009/10, there were exceptional costs of £7.8m relating to firing Rafa Benitez and his backroom staff. In 2010/11 there will of course be further charges relating to the departure of Roy Hodgson and his team.

Amortisation

Until recently the player contract amortisation charges reported by football clubs was of only academic interest. The charge reflects the accounting rules relating to transfer spending. Transfer fees are spread or "amortised" over the length of a player's contract. The introduction of UEFA's Financial Fair Play rules, which includes the amortisation charge in a club's "relevant expenses" calculation makes this number suddenly quite important. Because transfer fees are spread over the life of each contract, a period of high transfer spending will linger in a club's accounts for several years.

Liverpool's amortisation charge rose to £39.9m in 2009/10 from £37.4m the previous year. With the exception of Chelsea (in previous years) and Manchester City (now), the major clubs amortisation charges are quite similar. Amortisation is effectively a reflection of gross transfer spend (profits on player sales are dealt with elsewhere) and in recent years United, Liverpool, Spurs and Chelsea have spent roughly the same as each other on gross transfer fees. The January 2011 transfer window is a sharp break from that trend of course.

Liverpool's wage bill and amortisation charge both reflect the fact that the club has been run for a decade on the assumption of regular Champions League football.

Cash flow

The fall in Liverpool's EBITDA in 2009/10 and the exceptional costs of getting rid of Benitez are reflected in the club's operating cash flow which fell from £36.5m to £23.3m (after c. £4m of working capital inflows each year). In 2008/09, Liverpool spent considerable cash on capex, transfers and other investments. In 2009/10 by contrast (reflecting no doubt both weaker profits but more importantly balance sheet problems) total net investment fell from £56m to £17m.

Challenges and prospects for the future

Matchday revenue

This season's attendances (for a constant 27 home games) are down 4.1% on last season, reflecting the lower appeal of the Europa League vs. the Champions League and the very low attendance for the Northampton Carling Cup game. League attendances remain strong at an average of 42,820. From a revenue perspective, the fall in overall attendances will be more than compensated for by the 10%+ ticket price rises put through last summer. In recent days the club announced 6.5% increases for the 2011/12 season, or 4% excluding the VAT rise. Even taking the latest price rise into account, Liverpool will only earn around £1.7m per home game next season vs. United's £3.6m and Chelsea's £2.4m.

Failure to qualify for Europe will reduce the number of home games played next season, offsetting most of the price increase the club are putting through.

Media revenue

This season the club will have earned around £6m from the Europa League (using Fulham's run last season as a benchmark). In addition the club will receive an additional £5m from the new Premier League international rights deal and £756k extra for finishing 6^th rather than 7^th. Total media income of c. £64m for 2010/11 will represent a fall of around 19% on last season which shows how crucial Champions League qualification is to the major clubs. Next season Liverpool will not play in Europe at all, again reducing media income (as well as matchday).

Commercial revenue

Commercial is the area where Liverpool have kept up with their major peers with the signing of two record breaking deals. In September 2009 the club announced a four year shirt deal with Standard Chartered at a total value of "up to £81m". The "up to" presumably relates to playing performance milestones in the deal. If the club earns the maximum £81m, the Standard Chartered deal will be the highest in English football (by way of comparison United's Aon deal is worth £80m over four years and Chelsea's Samsung deal is reportedly worth £36m over three years).

Liverpool's first major commercial deal signed under the new owners is with US sportswear company Warrior Sports, a subsidiary of New Balance Athletic Shoe, Inc. of Boston. The deal which starts in 2012/13 is worth a reported £25m a year putting it on a par with United's deal with Nike (the Nike deal is often quoted as being worth £23.3m pa but there was a contractual step-up to £25.4m in 2010/11). The Warrior Sports contract is a fantastic piece of business by Liverpool that doubles the club's income compared to its previous agreement with adidas.

As the two new deals kick in, Liverpool's commercial income will become one of the highest in English football. Comparisons are complicated by LFC's inclusion of their in-house media business under "commercial", but excluding this, the Warrior and Standard Chartered deals will push commercial income up to c. £77m pa compared to United's £100m, Arsenal's £44m and Chelsea's £56m. Further progress from this level will depend on the new management team's ability to sign secondary sponsors. This is the area where United has proved so adept in recent years. United's secondary deals (Turkish Airlines, EPSON, DHL etc) will bring in around £44m in the current year, equivalent to all Arsenal's commercial revenue. In total, United earn around £55m from non-shirt and kit related deals compared to Liverpool's c. £30m.

Can costs be brought down?

As they largely relate to wages, costs are far harder to predict than income and we are left relying on newspaper "estimates" of various players' salaries. Looking at changes to the Liverpool squad since July 2010, it is hard to believe that the salary bill has gone down at all. The summer 2010 transfers may have led to a modest fall in costs as Mascherano and Benayoun departed and Cole and Meireles joining, but the January flurry probably increased the wage bill. Torres was reputedly paid £110,000 per week, whilst most estimates put Carroll and Suarez on c. £80,000 per week each.

Daglish's new three year contract is presumably on comparable terms to the £3-4m per annum Benitez and Hodgson earned at Liverpool. More importantly, it is widely agreed that the squad needs strengthening and that in today's inflationary environment (and despite a number of promising home grown youngsters) that almost certainly means another increase in the wage bill.

Debt and the stadium

Whilst the Fenway deal extinguished the pointless and ruinous "acquisition debt" Hicks and Gillett had imposed on Liverpool, it did not leave the club debt free. The 2009/10 accounts contain a "Post balance sheet events" note detailing the following facilities with RBS, put in place following the takeover:

Working capital revolver £20m

Stadium term debt facility £47m

Letters of credit facility £25m

It will not be clear until next year when the 2010/11 accounts which of these facilities have been used by the club (and possibly not even then if the revolver and letters of credit are used to support seasonal cash flow). In interviews, J W Henry has mentioned the retention of £37m of "stadium debt" and again it is not clear how this relates to the £47m term facility (is £10m undrawn?). The club's previous working capital facility (totalling £97m and including £37m of stadium debt) had an average cost of 450bps over LIBOR, and it would be reasonable to assume that margin had fallen with the new facilities (to perhaps 350bps). With 3 month LIBOR still at a rock bottom 0.26%, this would make the new facility pretty cheap for Liverpool, costing c. £1.4m for the aforementioned £37m rising to £3.5m if all the facilities were fully drawn.

At 31^st July 2010, Liverpool's (seasonally high) cash balance was £18.9m, a level that is unlikely to have changed much in the subsequent financial year given the low net transfer spending and moderate EBITDA.

The challenge for the club and its balance sheet is of course what to do about the stadium. Despite recent ticket price increases, the matchday income per game generated by Anfield is far too small compared to the club's principle rivals if Liverpool want to maintain a competitive squad and firepower in the transfer market.

Since Fenway took over there has been much debate and speculation about whether the new owners will decide to build a new stadium in Stanley Park or refurbish Anfield. Financially, neither option is easy. A new stadium would cost £350-400m but could generate significant naming rights and allow a huge expansion of corporate hospitality facilities (a necessary evil in a modern ground). The cost of the refurbishment option would be significantly lower but still expensive given the configuration of the ground, the possible need to move roads etc. A refurbishment would not increase hospitality facilities as much as a new build and naming rights would be lower. The previous owners' plans envisaged a 73,000, whilst any remodelling of the existing ground would only increase the capacity to c. 60,000.

The new Financial Fair Play rules exclude investment in facilities from "relevant expenses" and the owners could theoretically just pay for a new stadium for Liverpool. It is clear from the debate over Liverpool's future ground that Fenway Sports Group are not the "benefactors" in the mould of an Abramovich. It is likely that the vast majority of any stadium costs will come from debt (as was the case with the Emirates of course). This debt burden will have to be serviced by the club and with EBITDA running below £30m per annum, the challenge is clear, especially when investment in the playing side is needed to get Liverpool back into the top four.

Conclusion: Treading a narrow path

Football clubs normally end up in financial trouble when they spend in anticipation of a level of success they do not achieve, and persistent finishes outside the top 4 increase that risk for Liverpool.

Having qualified for the competition in all but one season from 2001 to 2009, Liverpool is set-up as a Champions League club in terms of its wage structure and transfer policies, but to get back into the Champions League it needs to invest even more on the playing side and in the longer term it needs to take on substantial stadium debt just to catch up with its peers. That is a very difficult and narrow path to tread for owners who seem unlikely to inject significant equity and wish instead to rely on self-generated funds.

In 2009/10, the Champions League and Europa league contributed £12m (28%) of the club's matchday income and £27m (34%) of media income. In the current season that combined £39m has probably fallen to around £16m. In 2011/12, Liverpool will earn precisely zero from these European competition and even with the Standard Chartered sponsorship contributing and the Warrior Sports deal to come, the revenue outlook is poor without a major improvement on the pitch. Weak revenue in 2010/11 and 2011/12 means that EBITDA will remain under pressure at precisely the time when the club needs both long and short-term investment.

Liverpool fans will no doubt be optimistic that Kenny Daglish can swiftly return the club to the upper echelons of the table, but the scramble for Champions League places has of course become more competitive with the rise of City and Spurs; six into four doesn't go. Financial Fair Play and the Champions League bonanza in combination impose a dangerously perverse set of risks on top clubs. Consistent CL qualification can only be achieved with a £100m+ squad, but a £100m+ squad is really only affordable under FFP if a club qualifies.... Failure risks leaving clubs breaking the FFP rules. To avoid this catch 22, clubs must scramble around for more commercial or matchday income, but in LFC's case the latter route is fraught with problems.

Will Fenway's famed US sports experience steer them through all this? Only time will tell.

LUHG

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

2011-05-16T15:50:00.001+01:00

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

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

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

Revenue

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

Media

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

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

Commercial

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

Costs

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

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

Operating profits

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

Interest, cash and debt

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

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

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

Other bits and pieces

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

Thoughts

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

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

LUHG

Old Trafford Season Ticket price increases 2004/5 - 2011/12

2011-05-04T15:27:00.002+01:00

I keep getting asked for this so here it is (can send an Excel version if anyone wants one).

Summary of ticket price changes 2011/12 compared to 2004/05.

Full data set (corrections welcome)!

LUHG

What Stan Kroenke’s takeover of Arsenal might tell us

2011-04-11T14:55:00.002+01:00

After years of jostling between American businessman Stan Kroenke and his Uzbek rival Alisher Usmanov, the deteriorating health of Danny Fiszman looks like it has broken the log jam in the control of Arsenal.

The price paid by Kroenke of £11,750 per share, values the club’s equity at £731.05m. To read across from this valuation however we have to take into account the debt on the club’s balance sheet.

The last reported balance sheet figures are for 30^th November 2010 (the 2010/11 interims). This showed the following debt and cash structure:

If we add this £147.4m net debt to the value of the equity offer we get the “Enterprise Value” (“EV”) of the business.

In the case of Arsenal however, a simple EV calculation is not appropriate because the club is still selling off development properties at its old ground. The interim accounts showed the remaining properties were valued (at the lower of cost or realisable value) at £28.2m. I have assumed that these will convert into cash at a 50% premium to this carrying value and have thus adjusted the EV calculation to take this into account:

So Kroenke is acquiring control of Arsenal at an Enterprise Value of c. £836m (adjusted for the remaining property) to £878m (unadjusted).

This is a pretty hefty valuation on any measure. In 2009/10, the club generated EBITDA from its football business of £57.4m (excluding volatile profits on player sales). This implies historic adjusted EV/EBITDA multiple of 14.6x and a historic adjusted EV/Sales (football only) of 3.8x.

Comparing the valuation to Liverpool

In contrast to the Arsenal deal, Fenway Sports Group paid an EV of £300m for Liverpool last year, a historic EV/EBITDA multiple of 8.6x. At face value on that basis either FSG got a bargain or Kroenke is overpaying hugely. So what’s going on?

I think the answer here is that FSG actually paid a higher multiple for Liverpool, and Kroenke is probably getting a slightly better deal than the headline numbers imply.

The multiple of 8.6x is calculated using the £35m of EBITDA generated by Liverpool in the 2008/09 season. We do not have numbers for 2009/10 yet, but it was a poor year for the club. Having finished third in 2008/09, Liverpool only managed 6^th in 2009/10 and exited the Champions League at the group stage. The failure to qualify for the Champions League in the current season will of course significantly impact profits in the current financial year too. It seems likely that it will take several years to bring Liverpool’s EBITDA back to the £35m level seen in 2008/09 and FSG’s £300m takeover should be compared to a depressed level of profitability, possibly as low as £25m which would take the multiple paid to around 12x.

Arsenal’s depressed profits and the shirt deal opportunity

In the case of Arsenal, it is possible to argue that last year’s profits of £57.4m were quite depressed. The previous year the football side of the company made EBITDA of £66.3m. The club played fewer home games in 2009/10 compared to the prior year, and this will partially reverse this season (28 played vs. 27) adding c. £3.5m to turnover and perhaps 75% of that to profits. The new overseas Premier League TV deal will also add around £5m to the club’s income this season. Even with player costs continuing to rise, EBITDA should bounce back close to 2008/09’s £66m in the current season, reducing the multiple paid to c. 12.6x:

Arsenal is also “structurally” underperforming on its Commercial side due to the (at the time prudent) decision to sign a very long stadium naming rights and shirt sponsorship deal with Emirates in 2004. The shirt element which runs to 2012 is reportedly only worth £5.5m per annum compared to the c. £20m Aon and Standard Chartered pay United and Liverpool respectively and the c. £25m pa Barcelona are to receive from the Qatar Foundation. Arsenal “should” be able to earn a similar sum to its domestic rivals from the next deal creating a step change in profitability.

Taking the expected bounce back in profits into account (and even ignoring a on better shirt deal in the future), the multiple Kroenke is paying for Arsenal looks closer to 13x than 15x EBITDA, more in line with FSG’s acquisition of a Liverpool missing out on the riches of the Champions League.

Reading across

Takeovers of Europe’s biggest clubs are very rare things, and it is therefore worth taking note when they happen. In the case of both Liverpool and Arsenal, American investors are taking a bet on the continued growth of English football which is in itself interesting. At Liverpool, John W Henry has spoken publically about UEFA’s Financial Fair Play being a key factor in buying the club and it seems reasonable to think that Stan Kroenke’s takeover show he is also a believer in the impact of the new rules. Wage inflation is a big problem even at Arsenal, where the salary bill has risen an average 7.5% per annum over the last four years. The move to the Emirates has made this affordable, but with that now complete, it is hard to see significant profit growth without the fall in player wage inflation that UEFA hope FFP will usher in.

Turning to United, the other major club around which takeover speculation always swirls, today’s benchmark doesn’t really help the Glazers. The c. 13x “normal” EBITDA multiple Kroenke is paying would value United at c. £1.3bn. Unlike Arsenal the commercial side is already highly developed, meaning there is less “upside” to go for. Unlike Liverpool, there is no new stadium growth story to hang onto. If 13x EBITDA really is the “market valuation” for a major English club and with the Glazers reportedly looking for a £1.5bn+ price tag, it doesn’t look like much will happen soon.

LUHG

Financial Fair Play - crunching the numbers

2011-04-08T08:39:00.135+01:00

This is the first in a series of posts looking at the challenges faced by English clubs in complying with UEFA's Financial Fair Play ("FFP") rules. Next season (2011/12) is the first year when clubs' "break-even result" are calculated. The tables below shows what "break-even result" the seven English clubs that played in Europe this season would have achieved on last year's figures (Liverpool numbers are for 2008/09 as they have not yet published 2009/10 results).

Relevant income

The "relevant income" calculation is the simplest bit of the FFP rules. All football club revenue (which I have divided into the common matchday/media/commercial and retail split) is of course included. In addition, the profit from selling players is included too. Profit in this sense means the difference between a player's selling price and the book value of his registration on the club's balance sheet. Players that come through a club's youth system have a zero book value and thus any sale proceeds are 100% "profit" in the FFP calculations.

Income from non-football operations is excluded, except where they are based at or close to a club's ground (such as hotel or conference facilities). Chelsea's hotel would therefore be included in the income calculation, as would Manchester City's "Sportcity" redevelopment around Eastlands. Arsenal's property income from the re-development of Highbury would be excluded.

The other major exclusion, and one no doubt likely to cause controversy, is revenue received from "related parties" (effectively the owner or people/corporations connected to them) in transactions that are carried out "above fair value". This rule (described in Annex X B 1j) says that transactions with a related party must be compared to the "fair value" that would have been achieved if the transaction was done as a normal commercial deal. Any income above this "fair value" is disregarded when calculating a club's income. This rule is designed to prevent owners subsidising their club by, for example, paying £50m per year for a box that would normally cost £250,000.

Relevant expenses

The expenses element of the FFP is more complicated and less intuitive than the income side. Staff costs are included and are by far the largest element, indeed it can be argued that the whole aim of FFP is to bear down on staff costs across European football. Other cash operating expenses are included (the basic costs of running a football club), but depreciation of fixed assets is not included. This means that there is no account taken under the FFP calculation of any costs from investing in stadiums or training grounds. Owners can finance such capital expenditure without limit under FFP.

Finance costs such as interest payments are included, but not if they relate to borrowing taken on to construct "tangible fixed assets" such as stadia, training facilities etc. In the table above, I have deducted the c. £14.5m of Arsenal's £20.8m of interest costs that relate to the club's financing of the Emirates.

The interest figure for United excludes the significant one-off refinancing costs the club recognised in 2009/10. My understanding is that such costs would not be included under FFP. On an ongoing basis, United's bond interest will be around £44.5m per annum.

A vital element of the expenses calculation is the inclusion of the "amortisation of player contracts" charge, which is how the cost of transfers is accounted for.

The accounting treatment of transfer spending is one of the least intuitive elements of finance for most football supporters. In the UK, the treatment is covered by "Financial Reporting Standard 10: Goodwill and Intangible Assets". In a transfer, the asset that is being bought and sold is not of course the player himself but the player's registration. This "asset" has a finite length of course, being the length of the player's contract with the acquiring club and FRS 10 says that the cost of buying the registration must be "recognised" over that life.

So when a club "buys" a player on a five year deal for (say) £20m, the cost is recognised over the 5 years at £4m per year, this is the "amortisation charge" for that player that appears in the profit and loss account. The timing of cash payments is irrelevant. The money could be paid up front or in agreed stages but the "cost" is recognised evenly over the contract. If after (say) three years the player negotiates a new five year deal, the remaining value (£8m in this example) plus any costs of negotiating the new contract (hello Paul Stretford et al) are added together and then recognised over the life of the new contract.

By including the amortisation charge in the expenses calculation, FFP captures transfer spending over an extended period. Even if a club stops spending after a period of heavy investment, the amortisation charge will stay high for a prolonged period. The chart below shows my estimate of Manchester City's charge over the next five years assuming no further purchases or sales (other than those players currently out on loan).

Dividend payments are captured in the calculation (in order to ensure debt is not disguised as equity). If the Glazers exercise any of their dividend rights (currently around £95m), such payments would have to be included in the FFP calculation.

As with the income calculation, transactions with "related parties" not done at "fair value" are adjusted for in the relevant expenses calculation. This is to prevent owners subsidising their clubs through taking on club costs (such as directly paying players for example).

The final major adjustments in the expense calculation relate to spending on youth development and community activities. Both are excluded from the FFP numbers, meaning clubs can spend as much as they wish on these areas. I have estimated figures for all seven clubs as they are not separately disclosed in the accounts.

Income minus expenses = "break-even result"

Subtracting "relevant expenses" from "relevant income" gives us the all important "break-even result". This is the key figure under the new regulations. In the first two "monitoring periods", seasons 2011/12 and 2012/13, clubs are not permitted to make a loss greater than €45m (c. £39.5m) over these two years combined if they are to receive a licence to play in Europe in 2013/14.

As you can see from the table above, only three or the seven English clubs would have made a profit under the break-even calculation last year, and Spurs' profit was only due to profits on player sales. United would have shown a loss if the exceptional financing costs were included. The losses at both Chelsea and City stand out. The figures for Liverpool are misleading, because they include significant finance costs relating to the debt Hicks and Gillet loaded on the club which have now been cleared.

Enforcement and exemptions
Meeting the new rules is going to be hard for many clubs across Europe. A key question is the extent to which UEFA actually enforce their new rules. The credibility of Michel Platini and UEFA as an organisation are clearly on the line, and I believe they will be enforced, although that may well mean banning a major club from European competition.

The rules do give one notable exemption to the calculations I have outlined for the first two seasons in which the rules apply (2013/14 and 2014/15), set out in Annex XI 2, the final page of the regulations. If a club breaches the "break-even" target in the "monitoring periods" for either of these seasons because of a loss in the 2011/12 season caused by wages paid to players under contracts signed before 1st June 2010 (when the FFP rules were published) the club will be let off (as long as losses are reducing over time). That is quite a big get out, and may well mean that City and Chelsea do not face the imminent prospect of a European ban. The exemption is only temporary however and the principle remains the same, if UEFA enforce FFP, many clubs are going to have to cut their wage bills and/or radically boost their revenues in the next few years.

LUHG

The world's "richest club" sues one of its fans - but where's the damage?

2011-03-24T00:54:00.002Z

The Telegraph has today revealed what many involved in opposing the Glazers have known for a while, Manchester United is taking a single fan to court over the leaking of the names of 400 corporate hospitality clients last April. The supporter in question was arrested during a police investigation into the leak, but was released without charge. The club itself has failed to track down the source of the leak (not surprising given that the majority of staff at Old Trafford detest the owners and there must therefore have been a lot of suspects).

The Telegraph report that United's High Court writ says that the leak caused "loss and damage" to its business. This does not tally at all with the club's public statements on executive and hospitality sales.

In its third quarter 2010 presentation to bond holders published on 28th May 2010 (available here), the club said:

"Season ticket & seasonal hospitality sales processes initiated. Trends consistent with prior years."

Almost two months later on the 23rd July last year, the BBC website quoted United's official spokesman as saying that:

"Executive sales are exactly in line with last year"

So publicly and to bond holders, the club has been adamant that all was well with executive sales.

Why then are they suing this supporter?

How much money is the club claiming it has lost through this leak?

Obviously it has not lost enough money to make it worth mentioning to the holders of its bonds... Or was it trying to play down the impact of protests and direct action on its business?

Whatever the answer, this litigation smells horribly of action being taken out of spite and that makes me ashamed of my club.

LUHG

How much of United's profits are reinvested?

2011-03-10T17:27:00.000Z

A few people commenting on my recent posts about net transfer spending under the Glazers have asked how investment levels as a percentage of profits compare between the Glazer era and the plc.

Here's the answer:

Whether looking at net or gross investment, the Glazers are ploughing a significantly lower proportion of the club's profits back into Manchester United.

Where could all that money be going? Oh yes.....

Welcome to Glazernomics!

LUHG

Update on David Gill's misleading comments to Parliament

2011-03-09T13:52:00.001Z

Paul Kelso, the Telegraph's steely Chief Sports Reporter has challenged United on David Gill's misleading comments to the Select Committee. The response he got was:

"they say David Gill referred to net spend excluding the Ronaldo cash (in bank). Glazers: £27.2m a year vs. £16.3m 99-05"

Two things strike me about that statement.

Firstly, since when does "net spend on players" mean "net spend on players except the sale of Cristiano Ronaldo"? Why exclude such a huge item from the calculation? Why not start excluding major sales from the plc era (Beckham's for example)? The answer of course is that excluding the Ronaldo money makes the numbers look better. But spin and truth are not synonymous....

Which brings me on to my second thought. The weird "ex-Cristiano" calculation may be what David Gill meant to say, but it is absolutely not what he actually said, as anyone can see from the video. How ironic to mislead during a rant about how well the club communicates....

LUHG

How not to communicate with Parliament and supporters

2011-03-08T15:37:00.001Z

I had the pleasure of attending the Department of Culture, Media and Sport Select Committee hearing into "Football Governance" at the House of Commons this morning. The first witnesses were David Gill (CEO of Manchester United), Peter Coates and Tony Scholes (Chairman and CEO of Stoke City), and Niall Quinn (Chairman of Sunderland).

During questioning from Labour MP David Cairns about the impact debt had had on United, David Gill made an extraordinary statement (you can watch for yourself at 11.02:58 on this video):

"our net spend on players since the owners taken over [sic] was greater than in the five or six years before that"

Now that statement is not correct.

In the five years prior to the Glazer takeover (2001-2005), United spent a net £89.4m on players. From 2006-2010, the club spent a net £56.0m on players. You can see the full figures in this table:

I didn't make these figures up, they come from ten separate cash flow tables from the Manchester United plc and Manchester United Limited accounts filed at Companies House. I have chopped out the individual sections and you can see the originals below:

Pre-takeover cash flows

Post takeover cash flows

David Gill went on to explain at some length why he felt no need to engage with MUST or IMUSA and dismissed those fans concerned about the club's finances as "domestic" (outrageous!). He said the club was very good at communicating with its supporters and cited social media in Saudi Arabia as an example (let's hope they don't mention democracy).....

I think he needs to work on his communication strategy and he could start by giving Parliament the correct information.

LUHG

“A distant subsidiary” – Who is Peter Pannu trying to kid?

2011-03-07T17:27:00.001Z

Background
Last week Bloomberg and the various other media ran reports that Birmingham International Holdings Limited (“BIH”), the direct parent company of Birmingham City PLC (“BC”) which is itself the sole parent of Birmingham City Football Club PLC (“BCFC”) had some financial problems.

Statements published to the Hong Kong Stock Exchange by BIH relating to its interim results to 31^st December showed that the Chairman, Carson Yeung, was having to take out a HK$150m (c. £12m) personal loan (secured on his own Hong Kong properties), and that BIH was raising HK$310m (c. £25m) through a placing of new shares to keep the business going.

Today the press is full of vehement denials by the BCFC board that anything is wrong. Peter Pannu (BCFC’s acting Chairman) said on the club’s official site (my emphasis):

"It is important to note that BCFC (the club) is a separate corporate entity from BIHL (a listed company in Hong Kong). Although a distant subsidiary, BCFC's accounts are separate and it operates on its own financial basis.

"BCFC is in credit with their bankers and there is no financial impediment to its operations. We will have no problem securing UEFA licence approval for which the club had already filed the papers.

"As for BIHL, the financial support by a major shareholder is a common occurrence and there is no cause for concern or any direct links to BCFC's wellbeing."

This is a completely ridiculous and totally misleading statement that insults the intelligence of Birmingham City's fans.

"Material uncertainty"
BIH’s interim accounts show a “material uncertainty” that the group (i.e. including subsidiary BCFC) can continue as a “going concern”, in other words there is a major risk of insolvency. That is the source of press stories last week.

BC and BCFC’s full year accounts (published in October 2010) both contain exactly the same “material uncertainty” as BIH’s accounts (see pages 7 and 13 respectively). In note 1 of the BCFC accounts (page 13) more details of the club’s cash needs are given:

“The forecasts show that the Group [i.e. Birmingham City Football Club] needs funding of around £7.5m from its parent company [BIH] in the short term in order for the Group to continue to operate within its agreed bank facilities..... The sensitised forecasts [that BCFC stays in the PL but at a lower than hoped level] shows a further requirement for funding of up to £3m in June 2011.”

The BCFC accounts then go on to talk about the placing of new shares in BIH (also page 13) and say that:

“The directors of the parent company [BIH] have confirmed that £7.5m of the funds to be received from the placing are expected to be transferred to the Group by the end of November 2010 and have also confirmed that additional funds of up to £3m will be made available to the Group from the placing proceeds noted above later in the year as and if required.”

So BCFC is entirely reliant on funding from BIH to stay within its banking facilities. This money is needed even if BCFC fight off relegation and no forecasts have been presented to the auditors on the basis that BCFC (currently in 18^th place but with games in hand) go down.

Far from being a “distant subsidiary” of BIH, BCFC is entirely reliant on it for financing as is described in detail in UK Companies House filings from October. Peter Pannu is significantly misleading supporters by claiming the financial fortunes of BCFC are not tied to those of BIH. If BIH fails, so does BCFC.

Where things stand in March 2011

The comments by the auditors in the BC and BCFC accounts were from October, so perhaps Birmingham City fans should heed Pannu’s words that there are no “financial impediments” at the club? Well what the BIH statement to the Hong Kong Stock Exchange on 3^rd March 2011 tells us is that things have not got any better since October:

1. It is not clear whether Carson Yeung has actually taken out a personal loan secured on his Hong Kong property. The 3rd March statement by BIH say that he will “apply [for] a credit facility”. The BIH accounts in October 2010 said the same thing (page 56). Does the loan exist?

2. The placing referred to in the BCFC accounts as the source of funds to keep the club within its banking facilities has still not taken place. Although the BCFC accounts said the money would be transferred to the club “by the end of November 2010”, on 25th February 2011, BIH announced the placing would be extended until 25th March 2011. Only 29% (around £7.2m) of the placing is “underwritten” (i.e. guaranteed by the broker leading the placing), the majority may or may not be raised.

3. BCFC represents 94.5% of BIH’s turnover in the six months to 31st December 2010. BIH has no other material businesses.

4. BIH has announced and then aborted two deals to buy businesses apparently owned by Carson Yeung since it bought BIH. BIH has also announced two property deals with Mr Yeung to acquire land he owns or is intending to buy in China. The largest of these two property deals includes the payment by BIH of £5.6m in cash to Mr Yeung (see page 4 of BIH circular published on 19th January). No information is given as to where BIH will obtain this cash.

5. At 31st December 2010, the BIH balance sheet showed a cash balance of only HK$ 18.5m (c. £1.5m). In addition to its HK$ 125m (c. £10m) of debts (all related to BCFC), the club also owes a further HK$ 128.3m (c. £10m) in stage payments on previous transfers.

Unknowns
Carson Yeung may or may not be a wealthy man, we have no way of knowing.

Mr Yeung (who has already lent the club £15m) may or may not have borrowed £12m to support Birmingham City. Whether the loan has been taken out is not clear.

Mr Yeung may have property assets in mainland China which he intends to sell to Birmingham City’s parent company, but the ownership of the land is not properly disclosed. The source of any cash consideration for these deals is not clear.

If one of these deals takes place (the purchase of development land in the Liaobin Economic Zone, Panjin City, Liaoning Province, PRC announced on 19th January 2011), unnamed "guarantors" may end up holding convertible preference shares allowing them to become majority owners of BIH and hence Birmingham City Football, but again disclosure is inadequate.

Birmingham City’s parent company may be about to raise around £25m in new shares through a placing to help the club, but the placing is four months late and only a third of the money is guaranteed.

The Premier League may be on top of all this. But maybe not....

If I was a Birmingham City supporter I'd want answers rather than patronising bullshit from Mr Pannu.

LUHG

United’s Q2 2011 results: running on one engine

2011-02-25T14:48:00.001Z

Red Football Limited reported figures for the three months to 31^st December this morning. The media will probably focus on the following statement:

“The Board notes recent press speculation regarding a possible bid for Manchester United. The Owners remain fully committed to their long-term ownership of the club. No discussions have taken place, Manchester United is not for sale and the Owners will not entertain any offers.”

So “United, United, not for sale” remains the mantra. I’ll let readers make up their own minds about that....

Results overview

These were solid figures, United’s money machine is actually quite a predictable beast (as long as we qualify for the Champions League each year).

Revenue

Revenues rose 7.1% in Q2 vs. last year, all driven by the Commercial side of the business. Matchday income was down 1% despite the club playing exactly the same number of home games as last season (10). This was driven by a tiny dip in average attendances from 72,862 to 71,851 (the Wolves Carling Cup game was not a big draw).

Media income rose 0.5% in the quarter. United (like all PL clubs) benefit from the new international rights deal this season, but received less CL income as a consequence of finishing 2^nd in the league last year vs. 1^st the year before. The eventual outturn for the year will depend obviously on how far we progress in Europe and whether we win the league...

The “star” was again the commercial operation. Revenue was up by a third vs. last year at £25.5m for the quarter. The rise of £6.3m on 2009/10 splits roughly; £1.5m extra from Aon compared to AIG, £0.7m extra from Nike and £4.1m from the plethora of “partners” signed up in recent years (DHL and Epson being recent examples). The big question of course is how much further the club can push these “partnerships” in the future. Can £15-20m continue to be added each year or will the growth flatten out?

Costs

Endemic cost inflation remains the bane of football. The cost growth in Q2 was actually lower (7%) than in Q1 (15%), which may be due to the timing of bonuses. Over the first six months of the financial year, United’s wage bill rose 10%.

Other operating expenses rose 22%, which the club blamed on (non-staff) expenditure “largely associated with the Company’s commercial and media business”. A £3m rise in these items year on year is pretty large, and may reflect commissions paid to acquire commercial partners. In aggregate, costs are growing slightly faster than income.

Profits, transfers and investment

EBITDA (“earnings before interest tax and amortisation”) growth remains subdued and does not (as I wrote in the Guardian this morning) justify a very high valuation. EBITDA in Q2 rose 2.8% and over the first six months of the year 3.2%. It is striking that very fast revenue growth from the commercial arm is unable to drive any real profit growth.

The club spent £1.3m in Q2 on capital expenditure at Old Trafford (further development of the executive boxes in the North and East stands).

Net (cash) transfer spending was £3.5m for the quarter (which obviously falls outside a transfer window). This included stage payments for Smalling (well worth it) and Bebe (hmmm).

Cash and debt

The second quarter of the year is very working capital negative as prepayments unwind. There was a seasonal working capital cash outflow of £31.8m, to leave operating cash flow for the quarter at £12.7m. Bond interest is paid in February and August so there was no payment in this quarter’s numbers. Deducting the investment described above, the club saw a cash inflow of £7m.

During Q2 Red Football bought in (but did not cancel) £24m of the sterling bonds. With cash sitting in the bank earning c. 1%, and bonds costing 8.5%+, this is obviously a sensible bit of housekeeping. The buyback and a small fall in the pound vs. the dollar left the company with £489.4m of gross debt. On the asset side, the club has £134.5m of cash in the bank. Regular readers will know that this is effectively the money received from selling Ronaldo in 2009 (£80m) and the pre-payment of the Aon sponsorship in 2009 (£35.9m) and the cash in the bank at the end of 2007/08 prior to these events. These windfalls remain unspent.

On the conference call with bond investors, Ed Woodward (“Chief of Staff” and architect of United’s financial plan) explained that having such an unusually large amount of money in the bank was to ensure “flexibility”. People like me think that the money is earmarked to be paid out of the club in dividends at some future point (there seems no financial logic for sitting on it). Woodward reiterated however that there are “no plans” to pay dividends.

There was (unsurprisingly) no comment on the PIK repayment in November or the move of the holding company to Delaware. These are matters outside the scope of these results. No explanation of where the Glazers suddenly found £249.1m to repay the PIKs has been forthcoming of course.

Thoughts

United as a business is in good shape. The club will (barring a calamity on the pitch) makes £105m+ of EBITDA in the current year. That places it in a league of one in European football. Pre-transfer cash flow will be less strong as interest, swap loss payments and working capital outflows impact, but the club will be cash positive.

From a growth point of view however United is like a plane running on only one functioning engine; commercial partnerships. Between 2006 and 2010, largely through ticket price increases, matchday revenue rose 9.4% per annum, it is now not growing at all. Over the same period, media income rose a staggering 23% per annum, it is now growing 1-2%. Everything rests on commercial partnerships. None of this is particularly gloomy as the club already makes so much money, but what it does show is that future growth is going to be very hard to find.

Meanwhile the great “cash mystery” remains. Why issue expensive bonds at 8.5% interest whilst keeping so much money in the bank? Why has there been so little transfer spending by the serial smasher of British transfer records? Where did the PIK repayment money come from? Woodward claims the money in the bank is there to provide “flexibility”, but the club was happy to run with an average cash balance of £45m between 2005 and 2008. Now £135m is seen as prudent, far in excess of what any football club anywhere has needed before. Why the sudden change?

As ever with the Glazers, more questions than answers.

LUHG

“Unbelievable and disappointing”

2011-02-22T16:47:00.000Z

To much anger and dismay across football, UEFA announced last week the ticket prices for this year’s Champions League final at Wembley. Prices for “neutral” seats range from £176 to £326 each including the laughable £26 booking fee. So called “Category 4” tickets at £80 will be distributed to the two clubs who get through to the final.

Whilst the FA (who of course own Wembley) rushed to distance themselves from a decision they were party to, Sir Alex Ferguson shrugged off the years to put his Govan shop stewards coat back on. Fergie told the press:

““It’s unbelievable and disappointing. It’s a killer and a corporate deal, that. Managers and players can’t do anything about it. I don’t know what you can do. You have a booking fee also of £26 or whatever it is, so dearie me.”

United legend and MUTV presenter Paddy Crerand was also underwhelmed:

“Is football leaving working class fans behind these days? How can UEFA justify the European Cup ticket prices?”

I agree with Fergie and Paddy, but of course their employers have hardly led the way in keeping football affordable. The graph below shows the cost of a season ticket in Tier 2 of the Stretford End at Old Trafford from when it opened in 2000/01 to now. The graph slopes upwards until this season’s ticket price freeze, but the rate of increase in the first four years (under the plc) is radically different to what happened after the Glazers took control.

The average rate of increase from 2000/01 to 2004/05 is 4.3%, but from 2004/05 to 2010/11 it’s 8.1% (9.9% pa until this season's price freeze). The Glazers are very proud of their price increases, calling them one of the “Key Wins under the Glazer Reign” in their 2006 Investment Memorandum.

United report their second quarter results this Friday and will show another quarter of profits and a large cash balance. So perhaps Paddy and Fergie should take their concerns about supporters to David Gill and suggest using some of that money to reduce prices next year. With the economy so weak and inflation eroding real incomes, United could easily afford a 10% across the board price cut to help supporters. Now that would be "unbelievable".

LUHG

Everton 2009/10 results: a very typical PL club under very typical financial pressure

2011-02-10T15:33:00.001Z

Everton are a well run club. There has been no unsustainable "living the dream" at Goodison. The club typically sells to buy players, has had the same well respected manager for nine years and has an active and successful youth set-up. Despite all this, the club struggles to compete financially with better resourced teams and has seen its debt rising steadily year after year. TV income has been securitised (borrowed against) and the club also has bank debt.

The fact that a well supported, prudently managed club like Everton, one that has seen moderate success in recent years, can still find itself under financial pressure during this era of huge TV deals speaks volumes for financial issues in top level English football.

2009/10 results – rising costs and flat revenues

Like almost all the Premier League clubs that have reported results for last season, Everton's income is not really growing (the exception is City who have an uncanny ability to do commercial deal with companies owned by Abu Dhabi). Turnover was down 0.7%, caused by an 11.6% fall in matchday income. The club played 26 home games in 2009/10 compared to 23 in 2008/09, but the prior season included the club's successful cup run (and thus receipts from the FA Cup Prize Fund and gate receipts from the semi-final and two away ties).

Media income rose 3.2%, with the sale of Europa League rights offsetting a fall in Premier League money after coming eighth vs. fifth the season before. Premier League media income represents 85% of broadcasting revenue.

The new tie-up with Kitbag meant commercial income grew 6.1% despite weak economic conditions.

On the cost side there was a depressing familiarity to the results with wage costs rising 10.7% and other costs (ex-depreciation and amortisation) rising 12.2%. Of the seven PL clubs that have reported figures for 2009/10, only Spurs have managed to grow income faster than wage costs. The chart below shows how much wage growth (in percentage terms) exceeds revenue growth (in percentage terms). It is clear that Everton are seeing some of the greatest cost pressure relative to income growth.

The cost vs. income squeeze at Everton caused EBITDA ("Earnings before interest, tax, depreciation and amortisation") to fall from a reasonable £9.4m to just under £1m. That's an EBITDA margin of only 1.2%. The club made a profit of £19m on the sale of Joleon Lescott to Manchester City and this caused the pre-tax loss to reduce from £6.9m in 2008/09 to £3.1m.

2009/10 results – cash flows weak, debt rising

To understand the problem Everton has, we have to look at the cash flow. As described above, EBITDA (cash profits) were very low as wages and other costs grew rapidly. Operating cash flow was only £1.4m, but the club had to pay a net £4.5m in interest on its securitised debt, bank debt and overdraft. This meant the club was already cash negative before any investment spending. [Please not in an earlier version of this blog the entries for player sales and purchases were incorrectly labeled.]

Net player capital expenditure was only £3.5m, reflecting the "sell to buy" disciplines imposed on Moyes by the board. Other investment was tiny (£0.3m), but there was still a cash outflow before financing of £6.9m. The club is paying down the securitised debt over 25 years at a rate of £2.8m per annum. With the club not generating any cash, the club is effectively having to add to its bank debt to repay its securitised debt. In total, net debt rose £6.9m over the year to £44.9m.

The future – a buyer and a new ground?

There are really only two routes out of Everton's financial cul de sac, a new owner with deeper pockets than Bill Kenwright and the current board and/or a new, larger stadium.

Each home game only brings in revenues of around £750,000, way below the "big" clubs who earn £2-3m per home fixture. The government rejected Everton's plans to relocate to a 50,000 seater stadium in Kirkby in 2009 (a plan opposed by many Evertonians). There have been talks between the club and Liverpool City Council about alternatives sites within the city, and there has been some talk of a potential groundshare with Liverpool as and when a new ground is built in Stanley Park. Not only is Goodison too small, it lacks the corporate hospitality facilities needed to generate significant matchday income. Income per available seat was only £19 per game in 2009/10 vs. £30 for LFC (2008/09).

Kenwright has been looking for a buyer for the club for some time, and commented in these results that he was working:

"Tirelessly to find that rich and generous benefactor."

Until Everton secure a new and bigger ground or that elusive "rich and generous benefactor" it looks likely that they will struggle financially. That such a well established, prudently run club with the eighth highest attendances in the Premier League is struggling like it is, tells us much about the finances of the modern game.

LUHG

Deloitte “Football Money League” – vanity vs. sanity day

2011-02-10T10:46:00.000Z

Accountants Deloittes today published their annual Football Money League (“FML”) look at club football. The press love the FML and there will no doubt be much comment about who the “richest club” is, who is on the up and who is heading down.

Deloitte’s work is pretty thorough and their numbers are useful for people like me who look at football finance, especially when examining those clubs whose disclosure is poor (hello Chelsea). It is worth remembering however that the FML focus solely on revenue. The “riches” it lists take no account of any of the costs of running a football club. Revenue is not a major problem for participants in Europe’s main leagues, the financial problems of the game are on the cost side.

As the famous business saying goes:

“Revenue is vanity, profit is sanity, cash is reality.”

To help maintain some sanity on FML day, here are some figures for 2009/10 for the seven English clubs who appear in the Top 20 of the FML.

* Arsenal turnover excludes property development

** Liverpool figures assume flat costs on 2008/09 and are proforma to exclude all interest payments (to reflect pay down of debt)

*** Villa figures assume flat costs on 2008/09

So there you can see the real picture of England’s biggest clubs. Only one makes a pre-tax profit (although United would do excluding non-cash goodwill amortisation and last year’s exceptional finance costs).

In total the clubs only make EBITDA of around £149m, a paltry 12% margin. The big loss makers obviously have wealthy owners to bankroll them, but in aggregate, for all the talk of resilience through the recession, English football remains systemically loss making and the only people getting rich are players, managers and agents.

LUHG

Exclusive: The FA blueprint for reform killed by the Premier League

2011-02-08T15:13:00.000Z

Giving evidence to the Department for Culture, Media and Sport ("DCMS") Select Committee this morning, Lord Triesman, the first independent Chairman of the FA, revealed how FA proposals to reform football had been killed by the Premier League in 2009. Triesman described how carefully considered proposals for the FA to regulate finance, debt, licensing, supporter ownership and other key areas across the English game were killed by representatives of the professional game, led by the Premier League "in two minutes" with no discussion.

Lord Triesman has been supplied with a copy of those proposals by someone inside the FA and gave them to the Committee. The Committee will at some point publish them, but in the meantime thanks to key supporters of reform within the FA, I publish them here for the first time.

These proposals, that were never properly debated, aim to restore the FA's historical role as regulator of English football and to tackle issues of key concern. This is not a revolutionary blueprint, but a well thought out set of ideas to bring sanity to the sport. They were killed by financial interests within the game.

I suggest interested readers compare them to the FA's head in the sand submission to the DCMS Committee (available here). The contrast is stark and damning.

Key proposals of the May 2009 document

On finance:

On debt (note review of the idea of debt limits):

On encouraging supporter ownership following insolvency:

On reforming the "Football Creditors" rule:

On the "Fit and Proper Persons Test":

Why were the Premier League so keen to kill this measured and reasonable document?

Why won't the clubs allow the FA to regulate the game (Triesman called the current regulatory system "outsourced" to the leagues)?

Time to put this right.

LUHG

Chelsea 2009/10 results: spin and red ink

2011-02-04T15:43:00.003Z

Chelsea FC do not want the public to know much about their finances. On 31^st January they put out a 326 word press release entitled "Chelsea Becomes Cash Positive" which went on to laud the club's financial achievements in the last financial year. Including the statement:

"Operating Loss for the financial year reduced from £72.3m to £68.6m"

Today (at the same time Torres was doing his first press conference at the club) Chelsea FC plc's accounts became available at Companies House. They paint a very different picture from that set out in the press release.

Revenue

Chelsea do not give a proper income split in their accounts (unlike United, Arsenal, Spurs, City, Liverpool, Villa, Bolton etc, etc). Instead they divide revenue between "Football activities" and four other tiny categories including Car parking and Hotel/Catering. Overall, turnover from "Football activities" (90% of turnover) only rose 0.1% despite the far better Champions League TV deal that came in last season. This was also the season that Chelsea won the domestic double. Total turnover rose 1.2%, roughly in-line with Arsenal (-1% ex-property) but behind United (+3%) and Spurs (+6%). All major English clubs are struggling to grow the top-line.

The JV with Sky (Chelsea Digital Media) saw decent turnover growth of 19%.

Costs

Football has a problem with cost inflation, especially wages, and Chelsea is no different. In 2008/09 Chelsea paid £12.6m in termination payments to Felipe Scolari and his backroom team. Stripping out this exceptional item, Chelsea's total staff costs rose an eye watering 12.8% in 2009/10 (see table).

No doubt there were bonuses payable following the league and FA Cup wins, but it is an unpleasant upward spike given that staff costs had fallen the previous year. Staff costs are 84% of revenue vs. 46% at United and 47% at Arsenal (and a bonkers 107% at City). Other costs (excluding depreciation and player contract amortisation) rose 8.0%.

EBITDA

With (pre-exceptional) costs up 11.5% and revenue up only 1.2%, EBITDA losses rose sharply to £23.8m from £2.5m. EBITDA (earnings before interest, tax, depreciation and amortisation) is effectively cash profit before transfers and interest. This number shows CFC running a long way behind break-even even before considering transfer spend and in a pretty good season.

Player sales and amortisation

Most large clubs make a book profit on selling players (because their value is written down over their contracts). In 2008/09, Chelsea made £28.6m from selling Bridge, Ben Haim and Sidwell. In 2009/10 by contrast, the sales of Pizzaro and Shevchenko netted a loss of £1m.

Shifting players off the books and little transfer spending caused a big fall in the amortisation charge for player contracts. This is an important number as UEFA will include it in "costs" when assessing clubs for Financial Fair Play. Amortisation was over £57m in 2007/8, fell to £49.0m in 2008/9 and only £37.6m last year. By contrast City's amortisation last year was £71m.

Operating profits

Adding amortisation and depreciation and the £1.5m profit from the TV joint-venture gives an operating loss of £68.6m. This is the number Chelsea were so keen to quote in their press release. They compared it to the £72.3m loss the previous year, but this number includes the £12.6m paid to Scolari and his boys. Excluding that exceptional, the loss actually increased by £9m. Nice spin.

Cash flow

The other area the press release was keen to focus on was cash flow. The club was cash positive in the year (by £3.8m before financing), but only because net cash transfer spending was an in-flow of £18.2m. Before transfers, there was a cash outflow of £14.4m. Obviously this year, Chelsea have gone on an enormous spending spree, incurring c. £87m of net transfer spending.

Financial Fair Play

There is a lot more to be written about Chelsea and FFP, but for the moment, this is my estimate of the "break-even result" for Chelsea for 2009/10. I have excluded the one-off exemption for player contracts signed before June 2010 in the first monitoring period. This will help the club materially but only in looking at the 2011/12 year.

On these estimates, Chelsea have a £50m+ deficit on the UEFA calculation and that is before Torres, Luiz etc (offset by losing Ballack, Cole, Deco etc). "Challenging" would be the word that comes to mind when wondering whether Chelsea can comply with FFP.

Thoughts

Chelsea have a major structural problem, they have the highest wage bill in English football (see chart) but a small ground and already very high ticket prices.

On Deloitte's estimates (Chelsea don't give "matchday" revenue numbers) CFC earn around £74.5m from Stanford Bridge or £2.7m per game. Arsenal and United earn around £1m more per match than that due to their far bigger grounds. Add in Chelsea's failure to grow commercial income (around the same as City's unbelievably and half Barcelona's) and this wage bill cannot be sustained without Abramovich's money. To hit FFP rules in the medium term, something has to give.....

LUHG

PIK repayment trail goes colder as United's ownership shifts to Delaware

2011-02-02T10:32:00.001Z

Followers of the United finance story will know that unexpectedly on 22^nd November last year, the Glazers found the £249.1m required to pay off the infamous PIKs.

In December, filings at Companies House showed that this money had been raised by issuing two new shares in United's UK parent company Red Football Shareholder Limited (2 new shares being 0.0002% of the issued share capital). RFS then bought two shares in its subsidiary Red Football Joint Venture (which owed the PIKs) for the same sum and RFJV used the money to repay the debt.

Today, with the filing at Companies House of Red Football Shareholders' "Annual Return", we learned a little bit more about that strange share issue. The Annual Return shows that 100% of RFS' shares (including the two new and very expensive ones) are now owned by a new company called Red Football LLC. Previously, all the shares had been owned by Red Football Limited Partnership, a Nevada company.

A quick search in the usual places shows that Red Football LLC is a new company in Delaware, the most secretive of all US states when it comes to corporations. The company, which through a string of four UK subsidiaries now owns 100% of Manchester United was formed on 4^th November 2010, just under three weeks before the PIKs were repaid.

A 2009 report by the Tax Justice Network named Delaware, home to half of all US corporations, as the most secretive financial location in the world (beating strong competition from the Cayman Islands, British Virgin Islands etc). It is virtually impossible to get information on Delaware companies and it is almost as if the Glazers are trying to keep information about the PIK repayment secret. We don't know who the directors of Red Football LLC are, who its shareholders are or how it obtained the £249.1m.

This matters because there are really only two explanations for the repayment of the PIKs; either the Glazers have found some sort of equity to repay them (even though nobody can identify where that could have come from) or Red Football LLC has borrowed the money to repay the debt and the threat of the club's cash being used to service this new debt is still there. If it's the former then United are in a strong financial position despite the wasted £45m spent annually on bond interest. If it's the latter then the there is a high chance of the Glazers taking the £100m+ (and rising) of dividends to which they are "entitled" at some point in the future.

Naturally, we can't ask the Glazers anything about this as they won't talk to the fans and their employees in M16 don't appear to know. In my view that is not how the biggest football club in the world should be managed.

LUHG

Football governance - learning from the Edwardians

2011-01-31T10:52:00.002Z

With a Commons Select Committee investigating football's governance and ministers railing against the way the game is run, the latest edition of United fanzine Red News, had an interesting press clipping showing how things were done back in 1909.

Having finished Champions in 1907/08 (see photo), United won the FA Cup in the 1908/09 season and had upset the FA in various ways (including outrageously having a replica of the FA Cup made). This was also the time of the ill-fated player rebellion over their attempt to unionise. United were being bankrolled by local brewer John Henry Davies who put up the £60,000 to build Old Trafford. As you can see from the clipping from the Daily Sketch on 7th December 1909 below (reproduced with kind permission), the FA had suspicions that United were not a "genuine" club under its rules.

Whatever the rights and wrongs of United's actions in 1909, it is worth noting what the FA rules said at the time.

On what made a club "genuine":

"...that is to say, that it was formed by the voluntary effort of a number of people resident in the locality of its headquarters, and that there were many shareholders who, with separate interests, had the right to elect directors."

And on what sort of ownership was permissible:

"The Football Association does not allow the private proprietorship of clubs carried on for the purpose of speculation and profit."

And finally on financial monitoring:

"they [the FA] have been prosecuting inquiries. They demanded the balance-sheet, which is never made public. The share list has been examined [any Qataris on there?]. The increases of capital, the alteration of the articles of association (without permission), and the alleged issue of debentures [bonds] for large sums in connection with the building of the new ground at Old Trafford have been matters for consideration."

None of the stipulations above exist in the current FA rules of course, but wouldn't the game be better off if they did? Why were restrictions on "speculation and profit" removed? Why are individuals allowed to own clubs, rather than diverse groups of supporters? Why is there so little financial scrutiny of debt and accounts?

When we scratch our heads as to how to improve the governance of football, perhaps we should start with the FA rules of Edwardian England and see how they did it....

LUHG

Unintended consequences – could Financial Fair Play kill small clubs’ youth development?

2011-01-24T15:04:00.002Z

The Telegraph ran an interesting piece last week on possible changes to youth development among Premier League clubs. Suggestions include doing away with reserve team football in favour of an under-21 development league, the end of Centres of Excellence and (possibly) the abolition of the "90 minute" rule that stipulates that youth players must live within a 90 minute commute of their club.

These suggested changes are being considered at a time when UEFA's Financial Fair Play ("FFP") rules are coming into force for clubs seeking entry into the Champions League and Europa League. Together, they could have radical and possibly dire consequences for smaller clubs' youth set-ups. Here's why.

Financial Fair Play – "good" and "bad" spending

FFP has the laudable aim of stopping clubs spending unsustainable amounts on short-term investment such as player wages and transfers whilst allowing unlimited funds (if available of course) to be sunk into longer term activities such as youth development and stadia.

The new rules list what is to be included in the famous "breakeven" calculation. There is a list of "Relevant Income" in Annex X, Part B and a list of "Relevant expenses" in Annex X, Part C. It is the net result when comparing Relevant Income and Relevant Expenses that determines a club's breakeven result. When it comes to youth set-ups, what is important is what is excluded from the "Relevant expenses". Annex X, Part C (g) says (my emphasis):

Expenditure on youth development activities

Appropriate adjustment may be made such that youth development expenses are excluded from the calculation of the break-even result. Expenditure on youth development activities means expenditure by a club that is directly attributable (i.e. would have been avoided if the club did not undertake youth development activities) to activities to train, educate and develop youth players involved in the youth development programme, net of any income received by the club that is directly attributable to the youth development programme. The break-even requirement allows a reporting entity to exclude expenditure on youth development activities from relevant expenses because the aim is to encourage investment and expenditure on facilities and activities for the long-term benefit of the club.

So clubs can spend as much as they want on youth development and none of the cost is included in the calculation of their breakeven figure. Increasing youth expenditure doesn't reduce losses, but for clubs with wealthy owners which are constrained from traditional spending on transfers etc, this is a permitted outlet for their largess.

Why would such clubs want to invest heavily in youth? Firstly, of course because it is a cheaper way of building their squad. It is far less expensive to develop players in-house than dip into the always over-heated transfer market. Secondly, it has been shown to be something of a winning strategy at clubs as diverse as Crewe, Barcelona and United. Finally (and crucially), because a successful youth set-up can itself be a good engine for income under FFP. And this could have unintended consequences for all clubs.

Financial Fair Play – "profit on disposal of player registrations"

Whilst youth development spending is specifically excluded from "Relevant expenses", profits from selling players are specifically included. The notion of "profits" from selling players often rings hollow with supporters are they represent the transfer fee received compared to the "book value" of the player, not what was originally paid. For players who came through youth systems, with no (or very low) transfer fees being paid, the "profit" on selling the player = the transfer fee received. Developing players and selling them on generates "pure" profit under FFP which can be included in the breakeven calculation.

Youth spending excluded and transfer fees included = a big incentive to spend

Taking these two treatments of expenses and income together, it is clear that there is a huge incentive under FFP to spend on youth development with an eye to selling on most of the players who come through the ranks. None of the spending on this is included in the UEFA calculations, but any transfer fees received are. And these transfer fees could be quite material. Here are some of youth players who United have sold in recent years and the estimated transfer fees:

United made a profit of c. £5.4m per year in the last four years from selling on players who came through their youth programme. That's a serious amount of money, from a part of the club that "costs" zero under the FFP rules.

Loosening of Premier League rules and FFP could lead to a feeding frenzy

As clubs look to comply with FFP, spending to create a United-like "factory" that produces young players will become more and more popular (indeed we can see City doing it already). Add in the mooted changes to the Premier League rules (especially the "90 minute" rule) and such a strategy becomes even more attractive.

The consequences of this for smaller clubs, who have traditionally looked at youth development as a key part of their model (selling on the most bankable to Premier League clubs and keeping others to avoid transfer fees) could be very bad. Bigger clubs, especially those with benefactor owners, will step up their search for the brightest and best nationwide and internationally. It doesn't matter if such players are needed by the big clubs, they can just be sold at 100% FFP "profit" to teams lower down the pyramid. Ironically, FFP and the new PL rules could mean that smaller teams end up buying back players from Premier League clubs who they would otherwise have developed themselves.

UEFA and the Premier League need to keep a careful eye on this area as the rules are developed and implemented. The obvious solution to prevent big clubs building "youth factories" largely with the aim of selling players on would be limits on youth squads and/or retaining rules on players joining their local clubs. It's certainly an area to watch.

LUHG

The Government and football – strong words need to be followed up with action

2011-01-21T13:11:00.002Z

Sports Minister Hugh Robertson had some harsh words to say about the governance of English football yesterday:

"If you look across sport, it is very clear to me that football is the worst-governed sport in this country, without a shadow of a doubt. The levels of corporate governance that apply to football, a point often addressed by [Labour], lag far behind other sports, and other sports are by no means beacons in this regard."

Not only did Robertson (correctly) identify the problem, he promised action.

"So, action is needed and the Government will take it, but it wants to see the results of [the Department of Culture Media and Sport] select committee first."

That's quite a bold statement, and also very clear. Football supporters need to hold that promise to account. Here is my list of what's wrong with football. Others may agree or disagree and no doubt views on the relative importance of each problem will differ:

Debt and financial mismanagement

How is it that no Bundesliga club has ever gone bust or into administration yet dozens of English clubs have?

Leveraged buyouts

Impossible in most European leagues, banned in the NFL(!). Adding debt to a club for the privilege of having new owners. Nothing added, nothing invested.

Supporter ownership

Why is there no help (or even preference) for the most natural owners to take a stake in their clubs? Instead we end up with the crooks, carpetbaggers and dodgy dealers who have ruined so many.

Ticket prices

Record income flows into our game and yet prices rise inexorably upwards with supporters priced out. £100 for a non-executive ticket at Arsenal? Laughable.

The FA

Responsible for the debt ridden shambles of "Nu Wembley", the decline of the FA Cup and the shambolic England team and its manager. Not fit for purpose.

Financial inequality in the game – Champions League qualification makes you rich, PL mid-table makes you worry, relegation could send you broke. Lower than that clubs fight for scraps.

Standing

Why hasn't there been a proper debate on this? Visit a German stadium and see how they do it (no doubt they would sell us some of their highly engineered safe standing barriers).

You may have your own issues you would add to the list. Some, such as the level of player wages, seem to me to stem from the no. 1 problem, financial mismanagement.

I believe that if Hugh Robertson is serious about taking action on football "governance", these are the issues and benchmarks against which he and the government must be measured.

Over to you Hugh.

LUHG

David Gill says Manchester United can compete with City in the transfer market – but we aren’t spending

2011-01-19T17:16:00.003Z

David Gill today reaffirmed his confidence in United's business model and our ability to compete financially with City. I don't disagree that United generates excellent profits. It's also worth remembering that the club has built up (at 30^th September 2010) a cash pile of £151.7m primarily from the unspent Ronaldo money and the Aon prepayment.

David says that "We can compete, we can compete for top players". That may be true, but all the evidence is that whatever we "can" do, we haven't chosen to spend very much, certainly no where near as much as City. For whatever reason we have allowed huge amounts of cash to build up on the balance sheet and have spent little on either transfers or capital expenditure (except in 2006 when c. £30m was spent on completing the quadrants).

I and many other commentators thought the cash pile was going to be used to repay the PIKs, but they have been dealt with from a mysterious, unknown source.

The Glazers retain the dividend rights (currently they can take around £120m if they wish) that were secured with the bond issue, at a cost in higher interest payments of course. Perhaps that is why we are sitting on all this money.

In any case, and rightly or wrongly, whether we "can" compete with City's funny money, we are most certainly choosing not to at the moment (see charts below, all numbers are £'000s):

Our record on the pitch in the last few years hardly cries out for a Cityesque splurge of transfers, but it's also worth remembering that none of United's cash has been used to reduce ticket prices or on expanding the ground since 2006.

Given all the surplus cash at United, the club could take £100m of the cash, cut all ticket prices (STs, members' tickets, juniors, seniors and execs) by 15% and then freeze them for seven years. We'd still have £50m in the bank plus the profits generated each year. Unless the Glazers are keeping the money there for some other reason......

LUHG

What United spends its money on - the definitive guide

2011-01-07T16:11:00.002Z

This is the second in a series looking in detail at Manchester United's finance. In December I wrote about the various sources of revenue the club has. This post looks at operating costs. Revenue minus operating costs equals the famous "EBITDA" (earnings before interest, tax depreciation and amortisation). I will write separately about the costs that come below EBITDA, namely those relating to player transfers and of course interest and related charges.

Compared to the complexity of revenues, the costs involved in running a football club are pretty straightforward. The cost of the playing squad and coaching staff dominate the total expense bill. Whilst wages have always been the single largest cost, their explosive growth in recent years have made them even more important. By way of illustration, in 1998/99 when United won the Treble (paying out significant bonuses in the process) wages represented 50% of total operating costs. In the most recent year, 2009/10, wages had risen to 73% of total costs. Over the eleven years since the Treble, United's wage bill has grown 356% or 12.2% per year. A staggering £959m has been paid in wages, bonuses, social security costs and pension contributions. It has been a good time to be a Cheshire Ferrari dealer.

As with revenues, the 2006 Investment Memorandum (the "2006 IM") provides a breakdown costs (£114.6m) in 2005/06 and I have used this document along with recent report and accounts to analyse the club's cost base.

The following table shows the split in 2005/06 and my estimates for 2009/10 (the totals for staff cost, other club costs, Red Football and MUTV costs are actual reported numbers, only the splits are estimates):

Wages and salaries

In 2005/6, player wages, bonuses and social security (National Insurance) costs totalled £61m or just over half the cost base. Directors were paid £2.6m and other staff (including of course Fergie and his coaching team) cost £20.7m (18% of the cost base). The report and accounts for 2010 do not give such a full split, but looking at the various subsidiary accounts (see footnote) it is possible to estimate the split of the 2009/10 total wage bill of £131.7m. On my estimate player costs have risen by two thirds over the four years (13% per annum). The accounts show directors' remuneration has increased 47% (10% per annum). On the assumption that other non-coaching staff costs have risen with inflation, the cost of Sir Alex and his coaching staff has risen c. 40% (9% per annum).

The 13% per annum increase in player wages is far greater than the Glazers had expected when they published the 2006 Investment Memorandum. In that document they only forecast player salaries to rise 6.6% per annum. In total, the actual 2010 wage bill is 21% higher than forecast only four years ago. This hasn't proved to be a problem because revenues have also grown far faster than expected (almost all due to better than expected TV deals). United's enviable wages/turnover ratio hasn't budged (see graph):

This massive increase in staff costs is not of course unique to United. We do not yet have figures for 2009/10 for Liverpool and Chelsea but the graphs below shows how all the major clubs have seen wage inflation running at very high levels over the period (City's wage bill increase is not of course "inflation" in the same sense).

Other club costs

The 2006 IM identifies three other types of cost.

"Matchday variable costs": these relate to the expenses of running Old Trafford itself and clearly will alter from year to year depending on the number of games played. In 2005/06 there were 27 home games meaning each one cost around £470,000. In 2009/10, there were 28 home games played in a bigger stadium (consuming more power, needing more security and staff etc, etc). Taking inflation and the stadium expansion into account, I estimate each home match now costs around £750,000 (this tallies with figures for a reduction in variable costs due to fewer home games given in the 2009/10 full year results presentation).

"Other variable costs": this includes travel for the squad and coaching staff. This fluctuates depending on where United go on pre-season tours and how far they progress through the Champions League.

"Fixed costs": everything else! This element appears to have risen very sharply over the last four years. I have two theories about this, firstly that this includes some of the (non-staff) costs of the club's Pall Mall commercial operation (such as rent and fees paid to intermediaries on commercial deals) and secondly that "fixed costs" may include player image rights. United and other clubs claim that image rights are not income, but rather commercial arrangements with players. HM Revenue and Customs dispute this and there is a case slowly chugging through the courts at the moment that will determine who is correct. The January 2010 bond prospectus gave an insight into the scale of image rights payments by United. The prospectus said that in the event of HMRC winning any future litigation against the club, there may be a liability of £5.3m relating to the employer's NI not paid on image rights from 2000-10. Employer's NI is around 12% and so that figure would imply total image rights payments of c. £44m over the ten year period, equivalent to 4.6% of the published wage bill. The accounting treatment of such payments is not clear, but I find it unlikely that the club accounts for them under "wages and salaries" when it is so adamant that they are "commercial" payments. This could be where they sit.

Red Football costs

Since the takeover Manchester United Limited (the old plc) has had a parent company, Red Football Limited. This entity needs its own auditors, lawyers, bankers etc and costs around £1.2m per annum.

MUTV

In 2006, MUTV was not consolidated into United's accounts. Since ITV's one third stake was acquired in November 2007, it is consolidated as a subsidiary. MUTV's operating costs for 2008/09 (the last year on which it has reported were £4.7m.

The future

Cost growth of 12% per annum is very high for most industries but not a problem if income growth keeps pace. For Manchester United, the even faster growth in revenues over the period has meant that EBITDA margins have actually risen from 30% in 2005/06 to 35% in 2009/10. The questions for the future are whether costs will continue to rise as quickly as they have over the past few years and whether revenue growth can continue to outstrip cost growth.

The principal driver of football wage growth has been the explosion in the value of TV deals. Put simply, players, agents and managers demand a share of the growing cake and generally they get it. The chart below shows how the two years when United's wage bill increased the most in the last decade (2002 and 2008) were years when new higher value Premier League rights deals came in. By contrast the three year deal beginning in 2004/05 (when Sky bid alone for domestic rights) saw a reduction of 18% in the value of domestic rights compared to the previous deal and it is noticeable that wage growth was very low during this period.

The most recent premier league deal covers 2010/11 to 2013/14. Although international rights were sold for more than double the value of the 2008-10 deal, a very small increase in domestic rights and changes in parachute payments means that each Premier League club will only see a c. 10% increase in PL TV income. In addition to this slowdown in media growth, many commentators expect the looming UEFA Financial Fair Play rules to dampen wage pressure across Europe as clubs look to bring costs in-line with income. This seems logical, but so far there is little sign of it.

United's 7% increase in staff costs in 2009/10 vs. 2008/09 is worrying as the increase happened despite lower bonuses (we didn't win the league or reach the Champions League Final as we did in 2009) and also despite the departure of Ronaldo and Tevez. This trend was further confirmed in the first quarter figures for 2010/11 which saw staff costs rising 14.8% compared to the previous year. This first quarter figure is particularly surprising given that it didn't include Wayne Rooney's much publicised pay rise (I appreciate one shouldn't read too much into one quarter's numbers). If press reports about Rooney doubling his salary from £90k to c. £180k per week are correct, he alone will drive up United's wage bill by 3.5% this year.

It isn't just United who are seeing very aggressive increases in player costs. Arsenal (probably the most prudently run major English club) warned in their 2009/10 report and accounts that "...there continues to be very strong upward pressure on players' wage expectations." Some of this pressure is the "City effect" of course and is likely to dissipate, but it is striking that despite Financial Fair Play, player salaries continue to grow at double digit rates....

Thoughts

There are two schools of thought about football's runaway costs. Some (like NESV, who bought Liverpool last year) believe that UEFA's new rules will naturally end the arms race in player salaries. If the biggest clubs have to breakeven or face a ban from European football then costs will have to rise in line with revenues or even fall for a period. That view certainly tallies with the actions of Chelsea who have trimmed their playing squad and allowed expensive older players to leave on free transfers. The other view is that so few clubs will meet the Financial Fair Play criteria that the rules will be fudged and that things will continue as they are. The Rooney-United tussle ended with the player winning the battle and another £4m+ being added to the salary bill showing the jury is out.

Why does any of this really matter? I think it's important for United fans because where we go from here will be a big determinant of what the Glazers decide to do with our club. The fact that costs have risen so much faster than expected since the takeover hasn't mattered so far because revenue growth has been even better. If revenue growth stalls in the future (and there is little TV or Matchday growth left if any) AND costs continue to rise, that could mean profits have also peaked and it may be time to sell....

LUHG

Footnote:

Estimating the wage split

The separate accounts of Manchester United Limited ("MUL"), Manchester United Football Club Limited ("MUFC") and MUTV give us some detail on who is paid what.

Of the £131.7m total salary bill, MUL pays £19.8m and MUFC (which employs all the players, ground staff and ticket office staff) pays out £111.9m. MUL pays for its Directors (Gill et al) and also pays for the MUFC board (Sir Bobby Charlton etc).

We can deduce from these figures that Fergie and the coaching staff must be employees of MUL, otherwise the average MUL salary for the 179 non-directors/MUTV employees (including 64 people employed in catering) would be an implausible £70k each.

I have had to estimate (using various press reports) what Fergie and the coaching staff earn and have come up with a figure of £6m. People may think this is too high or low, but at 4.5% of total staff costs small errors are not material.

Using this estimate, gives an annual cost of £38,500 per head for the all the admin, ticket office, Pall Mall, catering and ground staff.

This leaves the princely sum of £101m for the 68 players on the club's books in 2009/10 (£1.49m pa or £28,600 per week). That of course is an average.

Red Football parent companies issues two new shares each: for £249m!

2010-12-23T14:03:00.005Z

As expected after passing resolutions on 22^nd November allowing the issue of new shares to repay the PIKs, the two parent companies of Red Football (Red Football Joint Venture and its parent Red Football Shareholder) have today filed documents at Companies House confirming they have issued new shares. You can see the documents here (RFJV) and here (RFS).

Both companies issued two new shares each on PIK repayment day (22^nd November). For both companies, one share has a paid up amount of £31,578,649.41 and the other share £217,525,995.10 for a total of £249,104,664.51 (that is how much was paid for the shares). Crucially, these new shares rank pari passu with the existing shares in each company, that is to say that they have no additional rights that the existing shares do not have. Could the split between two shares (13% and 87%) represent the proportions of the PIKs owned by the Glazers and third parties respectively?

Prior to these share issues, RFJV had 988,183 shares in issue and RFS had 990,002 shares in issue. Given these new shares represent only around 0.0002% of the shares already issued, we can pretty safely conclude that they have not been issued to a third party (who would pay £249m for 0.0002% of United?) and have therefore been issued to a Glazer company. We will know definitively in January or February when the "Annual Returns" are filed at Companies House.

We are thus left with the mystery of where the Glazers got £249m from. I stand by my view that this money probably came from a debt financing at the level of one of their US holding companies (the next company in the chain above Red Football Shareholder Ltd is "Red Football Limited Partnership" of Nevada). Others may think that the family had the cash knocking around somewhere. Today's filings probably mean we will never find out the truth as if there has been new debt issued it is in America where we cannot see the details.

At least we're top of the league.... Happy Christmas and happy New Year.

LUHG

PIK repayment: The Glazers issue shares to someone (or maybe themselves)....

2010-12-09T13:40:00.002Z

Two of the Glazers' UK holding companies; Red Football Joint Venture Ltd (the company which owed the PIKs) and Red Football Shareholder Ltd (its parent) filed documents with Companies House today. The two identical documents are dated 22^nd November 2010 (the day the PIKs were repaid) and are records of Ordinary Resolutions of each company authorising them to:

"....allot ordinary shares in the Company or grant rights to subscribe for, or convert any security into, ordinary shares in the Company...."

That means the companies are now authorised to issue new shares (or rights to subscribe for or buy new shares).

You can download the documents here for RFJV and here for RFS (if you really want).

So what's going on?

Well all we know for certain from this is that in order to pay off the PIKs, the Glazers are issuing more equity (or rights to equity) in one or both of United's parent companies. The mystery of course is who they are issuing such equity to.

It could of course be themselves. If they have found the £243m needed to repay the PIKs down the back of a sofa in one of their many Florida properties, they could be subscribing for more shares themselves using that money. Or it could be a third party who has provided finance to repay the PIKs (i.e. new debt for old).

Will we ever know? It's hard to say, as it depends on the exact structure used in any refinancing and whether it took place in the US or UK.

There will be a "post balance sheet event" note in the RFJV and RFS accounts when they are published in the new year. That may tell us more.

Watch this space.

LUHG

Where United makes its money - the definitive guide

2010-12-07T12:47:00.001Z

One of the consequences of the frenetic financial re-engineering of the Glazers since the 2005 takeover of Manchester United is the huge amount of information the club has published about its finances. Starting with the August 2006 refinancing Investment Memorandum (the "2006 IM"), running through the bond prospectus and into Red Football Ltd's annual and now quarterly accounts, we have been given an incredible insight into the club's financial affairs. This insight allows us to see in extraordinary detail the different sources of income and what this money is spent on. This post lays out in full where United's income comes from (I will do a separate post on costs) and compares the most recent figures (for the 2009/10 season) to the first year of Glazer ownership (2005/06).

Methodology

The 2006 IM splits revenue into 24 component categories and costs into 8 categories. The 2006 data relates to the twelve months to June 2006 (rather than the 14 months reported in Red Football's statutory accounts for that year, caused by the change of year-end from June to April). Using the bond prospectus, Premier League and UEFA figures and the 2009/10 accounts, I have rebuilt these revenue splits for the last financial year. I have supplied footnotes at the end of this post setting out the source or method of estimate for each number. Only a few of the smaller categories are pure estimates. Please contact me if you spot any errors or have any queries.

Revenue overview

Between 2006 and 2010, United's turnover (looking at the 12mths to June 2006 not the 14mth period) increased by £123m or 75%, equivalent to 15% pa. Of this, c. £8m (5% growth over the four years) comes from MUTV being consolidated into Red Football's accounts.

Although the expansion of the club's commercial operations is much commented on (and is now the only area showing major growth), over the Glazers' ownership better PL and CL media deals are actually more important factors, and the impact of the stadium expansion and ticket price rises are also key to the overall performance.

Matchday revenue

Matchday income has grown by 43% since 2006 with the vast majority of this coming in ticket sales (STs, execs and boxes). The upper quadrants started under the plc were completed in 2006/7 so the 2006 figures reflect the final year of the smaller Old Trafford. The quadrant expansion added 11.8% to capacity, so we can strip this out of the ticket sales figures to see how prices and "mix" (the higher proportion of execs) have impacted revenue. Of the c. £28m increase in PL ticket revenues, around £5m has come from the stadium expansion with c. £19m from higher prices and £4m from mix. The CL and domestic cup comparisons are obviously more complicated as the number of games played changes season by season. 2006 was a dark year for United in Europe as we went out (in last place) at the group stage. Taking this into account, we can split the £5.9m increase in CL ticket revenue into £600k from stadium expansion, £5m from higher prices and £300k from mix. The domestic cups are largely immaterial (and the revenue is shared of course).

Hospitality and catering income has grown over the four years, but is actually relatively unimportant at just 4% of total revenue. In aggregate, the club has reduced its reliance on matchday income as media and commercial have grown. Of the £86.2m of total ticket revenue, it is unlikely more than £40m (or 14% of total club turnover) comes from normal season ticket holders and One United members.

Media revenue

Media is the largest element of United's income and is still dominated by the collective TV deals for the PL, CL, FA and Carling Cups (the latter two being very small). The figures for media income are published by the Premier League and UEFA so we can be very confident about the split. The non-collective media now includes MUTV which was not consolidated in the accounts in 2006. Neither MUTV nor MU Interactive make any money and the club's aspirations to develop "owned" media rights have so far not met with any great success.

United came second in the league in both 2006 and 2010 so the £22.4m rise purely reflects the improved collective deal achieved by Scudamore and his team. In Europe, there are three factors at play in the £28.6m growth; currency moves, better playing performance and a greatly improved overall TV deal. The pound has declined vs. the Euro and Swiss Franc by 24% over the four year and this adds around £5m to the underlying improvement. Progression to the quarter finals last year compared to group stage elimination is worth c. £10m, with the remaining £13-14m coming from the far better overall deal negotiated by UEFA. Adding CL TV money to ticket sales, the total of £50m is equivalent to 17.5% of turnover and 50% of profits. Although a bit of Thursday night Channel 5 participation in the Europa League would bring in income, CL qualification remains vital to the financial health of the business.

In the unlikely event that United (or any other English club) won the "quadruple", the total media income under the current collective deals would be around £116m.

Commercial revenue

As is well known, commercial is the engine room of United's profit growth at the moment, although so far during the Glazers' ownership it has not been nearly as important as growth in TV deals. We know the exact payments each year under the plc's Nike deal from the 2006 IM (during the current 2010/11 year there is another contractual step-up to £25.4m per annum). The 2006 shirt sponsor was of course Vodafone and the (ill-fated) AIG deal marked a 50% increase on this. From this year the club is recording c. £20m of income from Aon although given the prepayment of £35.9m in 2009 this will actually bring in less cash (only c. £11m) each year than was received from AIG.

Other than Nike and the shirt sponsor, by far the most important source of commercial income are the 2^nd tier sponsors and partners who between them brought in c. £33m in 2009/10. This area has shown the most growth of any part of United's business, but it should be remembered (given the hype) that it only represents 20% of the increase in revenues in the last four years. One of the key questions looking forward is whether United can continue to add 2^nd tier sponsors at such a prodigious rate. Company's desire to be associated with the club is clear, but to a certain extent these deals are unproven for corporates. Only time will tell whether companies gain any real value from these tie ups and the cache of a relationship with MUFC must be diluted by the huge number of brands the club are signing up (we await to hear the identity of the official club laxative with interest)....

The first quarter results for 2010/11 showed commercial income reaching £24.2m (equivalent to c. £97m annually). The £4.8m increase in Q1 compared to the previous year includes the £1.5m extra from Aon and c. £0.5m from Nike mentioned above.

The Glazers' impact

The Glazers' and their apologists would like the world to think that the club's rapid revenue growth in recent years is largely down to them. This is almost exactly half true. Half of the rise in revenue (stripping out the impact of consolidating MUTV) comes from decisions the Glazers have taken, primarily the change in approach to commercial tie ups and the sharp rise in ticket prices. Higher prices and commercial deals each increased revenue by c. £30m over the period. The remaining growth has come from better collective TV deals (£36m), the stadium expansion started by the plc (c. £6.5m), factors outside the club's control such as currency fluctuations, the step-ups in the Nike deal and the PL's improved sponsorship deal with Barclays (c. £6.5m) and finally a far better Champions League campaign compared to 2006 (for which I am not giving credit to the owners).

Other than the genius idea of ramping up the cost of going to the game, only 26% of the rise in revenues since 2006 can be ascribed to the Glazers' management "talent". The rest is largely the bonanza of TV money and the true talent of Fergie and his players over the years.

You can see the impact of each category in the graph below (I've marked out ticket price increases in red and TV deals in green).

Summing up

United's consistent CL participation over many years, regular titles or second place finishes in the league, the (still just) sold out 76,500 capacity stadium and global cache makes it a phenomenal money machine. This post will hopefully have explained exactly where the money comes from and help people decide what the future may hold.

Next time - costs.....

LUHG

Notes: sources and methodology

1. 2008/09 Premier League ticket income from page 51 of bond prospectus increased by 2% average ticket price increase in 2009/10.

2. 5/6ths of 2008/09 CL ticket income from page 51 of bond prospectus increased by 1% to reflect ticket price increase in 2009/10 offset by lack of higher priced home semi-final.

3. 4/5ths of 2008/09 domestic cup ticket income from page 51 of bond prospectus. Price not adjusted to reflect higher proportion of lower attendance Carling Cup home games in 2009/10.

4. 2006 IM shows £200k hospitality revenue per home game and £250k of catering revenue per home game. These numbers assumed to have reversed due to expansion of hospitality facilities (offset by reported weak sales in bond prospectus) and impact of recession on supporter spending.

5. One United membership has declined since 2006 (as ST no.s have increased), income from membership and travel assumed £2m.

6. Relatively short tour in Asia in 2009/10 pre-season estimated to have generated £4m.

7. Intra-group matchday cross charge assumed constant at 2006 level of 4.3% of gross matchday sales.

8. PL TV distribution for 2009/10 as published by Premier League.

9. Assumed £100,000 for televised FA Cup tie vs. Leeds.

10. Assumed flat £200,000 Carling Cup income vs. 2006 (when we won it as well).

11. CL TV distribution for 2009/10 as published by UEFA. € amount converted at average exchange rate for the year.

12. MUTV income assumed flat on 2008/9 and derived from MUTV accounts for that year.

13. MU Interactive income derived from that company’s 2009/10 accounts.

14. Other media is residual to take total to the reported £104.7m.

15. Nike income is set by contract with progression published in 2006 IM.

16. Widely reported £14.1m pa received from AIG.

17. Residual after all other commercial areas have been estimated.

18. 2006 figure assumed to have grown 5% per annum.

19. PL sponsorship (Barclays) as reported by BBC.

20. Assumed to have grown in line with inflation since 2006.

21. Assumed to have grown in line with inflation since 2006.

22. Assumed to have grown in line with inflation since 2006.

23. Assumed to have grown in line with inflation since 2006.

Q1 results – running very hard to pay the going rate

2010-11-16T15:34:00.004Z

Red Football Limited's Q1 results (3 months to 30^th September 2010) were published today. They are available on www.mufplc.com.

No information was given on the reported PIK redemption other than confirmation that no dividend has been paid out of the club. A Glazer family spokesman has told the BBC that no equity stake has been sold in the club. We are thus left with a total mystery as to where the money to redeem the PIKs has come from. A refinancing would seem the most likely route, but neither the club nor the Glazers seem minded to tell us anything.

These were not exciting figures and mainly confirm the trends we saw in the full year results.

Income

Matchday income was up very marginally (0.6%). This reflects one fewer home game this quarter (drawn away in the Carling Cup), offset by higher tour income. Tour income is not split out separately from home games but a back of the envelope calculation suggests it is around £6m. The club is still generally selling out home games (Wolves in the Carling Cup being the exception), but it is clearly a struggle with local newspaper adverts for home games now a common feature.

In media income, United benefitted from the new three year PL deal which began this season. Whilst domestic rights growth was low, the overseas rights bonanza added around £1.5m. This offset the £1.6m fall in CL media income (the "market pool" element) due to United coming second in the PL last season.

Commercial revenue was again the star rising 25%. This is the first quarter to included the Aon deal (worth around £1.5m more per quarter, although this extra cash was pre-paid in 2009). The growth on last year also reflects all the smaller deals done during last season (Concha Y Toro, Smirnoff, Turkish Airlines etc).

In total, revenue rose 9.8%. The profit on player sales was only £2m vs. £6m last year as Possebon, Cathcart and Tosic left.

Costs

On the cost side, I have to say the rise in salaries at 14.8% is totally staggering. Last year wages rose 7% so this doubling reflects a huge acceleration in wage increases. Note, these figures do not include Rooney's pay rise! Salary inflation shows no sign of slowing down in the run up to UEFA's Financial Fair Play rules coming in. Other costs rose 5% year on year. In total, costs rose 12%, ahead of the rate of growth in revenue.

Interest, debt and cash

The interest charge was £12.2m. This is one quarter of the bond interest paid annually. Actual cash interest paid was £22.7m (the bond payments are in February and August) and probably includes c. £1.6m in swap losses. The £26m of swop losses not paid last year are being paid over the next four years but we do not have the exact payment dates.

Gross debt (including MUTV and the Alderley mortgage) is reported at £509.4m (down from £522m at the year end). This fall is due to the strengthening of £ vs. the US$ during the quarter. The gross debt figure does not include the unamortised issue discount and financing fees of c. £22m. Total debt repayable is therefore c. £531m.

The cash balance fell £12.1m since 30^th June to £151.7m. This seasonal fall is normal for the club. There was an explained inflow from working capital of £6.6m which limited the fall in cash.

Conclusion

These figures show United running very hard to keep up with quite extraordinary wage pressures. So far the commercial growth is delivering, which is essential as there is little growth in Matchday or Media to compensate.

These figures cast no light on the refinancing or redemption of the PIKs. The silence from the Glazer family and the club on this issue is a disgrace. If all is good, tell us the details please.

LUHG

The full details on the terms of the PIKs

2010-11-16T09:36:00.001Z

Following the news that the Glazers are redeeming the PIKs, this is now only of academic interest, but I thought it might be useful for readers to see the full terms and conditions of the PIKs. I was supplied these documents a few weeks ago in confidence by a bond market participant who is now happy for them to be published.

There are two documents:

PIK Loan Agreement 16^th August 2006

This confirms the interest rate (14.25% rising to 16.25% if debt to EBITDA exceeds 5x), the redemption terms and other details of the loans. It shows that the PIKs can be repaid at any point with at least five business days notice. It also shows that there are no penalties for early repayment after the first two years. In other words, there is no structural reason why the PIKs could not be repaid without penalty since 16^th August 2008. The issue has always been availability of funds.

Share Charge 16^th August 2006

This confirms that the PIKs are secured on 100% of the equity of Red Football Limited.

As I wrote yesterday, we are left with many questions about the future financial structure of the Red Football group. I think it is time the Glazers and their employees answered some questions on all this.

LUHG

Known unknowns and unknown unknowns

2010-11-15T23:55:00.002Z

This evening Bloomberg's Tariq Panja has broken a story that Red Football Joint Venture Ltd (the parent company that issued the famous Payment In Kind loans) is to redeem all £220m of the PIKs on 22^nd November. Perhaps more importantly, Bloomberg report that none of the funds to redeem the PIKs will come from Manchester United.

As has been well documented, under the terms of the bond issue, the Glazers can take £95m from the club whenever they wish. The fact that they are NOT using this dividend entitlement to repay the PIKs raises the obvious question; where is this money coming from?

There seem to me to be three main possibilities (and probably a few dozen less likely ones):

1. Refinancing

The PIKs are being refinanced with a new form of debt, secured (as the PIKs are) on RFJV's shares in Red Football Ltd. If this was the case, it would be reasonable to suppose that the interest rate on this new debt was lower than the 16.25% currently being paid on the PIKs. The question would remain as to how this debt would be repaid in the long-term and whether the burden of this repayment would fall on the football club.

2. Sale of an equity stake

The Glazers have sold a stake in Red Football Limited to a third party outside investor and are using all or some of the proceeds to repay the PIKs. The consequences of this would obviously be hugely uncertain. Who could this investor be? What stake would they own? How would their ownership impact the running of the club?

3. Sale of other assets

The Glazers have secured significant sums from another source, perhaps by selling assets. I find this incredibly unlikely as the only asset valuable enough is the Tampa Bay Buccaneers. The fact that redemption notices for the PIKs have already been issued suggests the funding is already in place which does not tally with a sale of the NFL franchise.

As someone who has repeatedly and vehemently stated that the club's money would be used to repay the PIKs, I can only eat humble pie at this point. Another source has clearly been found and that means I was wrong. I do believe however that until we have concrete answers about the source of this £220m it is best to reserve judgement about what this means for United.

Tomorrow (Tuesday 16^th November) Red Football Limited announces its results for the three months to September 30^th. These results may cast more light on what is going on, but there is a good chance that no further information will be forthcoming as the PIKs are held by the parent company that is not reporting its figures. I will be blogging about the figures tomorrow.

LUHG