Some more thoughts on United's Singapore IPO

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

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 

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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?

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

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

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

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

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