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

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

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

Revenue

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

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

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

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

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

Costs - terrifying

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

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

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

EBITDA and below

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

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

Interest and various marks to market

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

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

Cash and debt

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

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

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

Thoughts

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

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

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

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

LUHG

Income up, costs down - Chelsea getting in shape for FFP

Chelsea have a rather irritating habit of issuing an anodyne press release trumpeting their financial results (this year on 31st January), several days before the real accounts become available at Companies House (today). Normally, the detailed figures hide a whole host of nasties not in the release. This year however, the accounts show real progress in the club's aim to meet UEFA's new Financial Fair Play rules.

Rising income and falling costs - the holy grail of football finance

Football clubs find it incredibly hard not to pass increases in revenue straight on to players, managers and agents in the form of higher staff costs. It is the achilles heal of the financial side of the sport. These results from Chelsea show revenue rising by 8% and pre-exceptional costs falling by 5%, including a 2.6% fall in wages. That is a remarkable achievement. To put it into context, in the last five years there has only been one other occasion when the wage bill at any of the old "big 4", City or Spurs has fallen year-on-year.

Readers who think "oh cutting the wage bill is easy, CFC let loads of old, expensive players go", should remember that United did the same last summer when VDS, Neville, O'Shea, Brown, Hargreaves and Scholes (temporarily) all left, yet we can see from MUFC's Q1 results that wage costs are still up on last year (by 12.2%). The trick is not just offloading players, it is preventing endemic wage inflation amongst the remaining squad, especially when TV money is increasing as it was in 2010/11.

The only cautionary point to make about Chelsea's wage control in these figures is that Fernando Torres and David Luiz will only be in these numbers for six months. On an annualised basis they would add c. £4m to these salary figures (although there have been offsetting cost reductions from the sales of Alex, Anelka etc).

Revenue

Chelsea's revenue (excluding the digital JV) rose £16.5m or 8% in 2010/11. Chelsea unhelpfully do not give the usual "matchday/media/commercial" split other clubs provide. We know from UEFA figures that CFC received £10.3m in CL TV income in 2010/11 vs. 2009/10. We also know from Premier League figures that CFC's receipts from the league rose £4.9m. 

Using these PL and UEFA figures, Deloitte's estimated segmental split for last season and adjusting for one fewer home game in 2010/11 vs. 2009/10 and we can get quite a good estimate for the club's segmental revenue performance for 2010/11:

The table above shows quite an encouraging growth in commercial income, especially in difficult economic conditions, although at c. £60m pa, CFC's commercial revenue is far behind that of MUFC (£103m) or Real Madrid (£127m).

Decent revenue growth and tight cost control meant that Chelsea made positive EBITDA (before profit on player sales and exceptionals) for only the second time since Abramovich bought the club (the other occasion was a £1m profit in 2007/08). The c. £4m EBITDA in 2010/11 is not huge (Arsenal made £47m from non-property activities) but being able to cover cash costs (pre-transfers) from earned income is a key first step in achieving financial sustainability, . The contrast with City's £71m EBITDA loss is stark.

Below EBITDA - messy

Unfortunately neither the profit and loss account nor UEFA's FFP "breakeven" calculation finishes at the EBITDA line.

On the plus side, Chelsea made a profit on player sales of £18.4m, boosting EBITDA to £22.4m. After that, things get worse quite fast.

Chelsea are still hampered by a very significant amortisation charge (the way transfers spending is recognised across the life of a player's contract). This charge has fallen in recent years, something that is key for meeting FFP, reflecting a reining back of the very aggressive transfer spending of the early Abramovich years. The charge rose in 2010/11 however, and this rise only includes six months of amortisation from the c. £75m spent on Torres and Luiz in the January 2011 transfer window (see chart below):

At around £40-45m, the amortisation charge nowhere close to being covered by EBITDA. Once depreciation is added too, the club made on operating (EBIT) loss of £26m (inc player sales), a loss but a great improvement on last year's £71m.

Exceptionals (again)

In the last four years, CFC have reported "exceptional" costs relating to firing their manager on no less than three occasions. Nothing very exceptional there.... In 2010/11 there were £41.9m of exceptional charges. These split as follows:

Termination of Ancellotti + back room staff contracts/compensation to Porto for AVB: £28m

Impairment of player registrations: £7.4m

Payments to HMRC for unpaid NI on "image rights": £6.4m

Now these costs are individually "one-off" in nature, but Chelsea's managerial merry go round has cost the club no less than £64m in compensation to various parties over the last four years. That is equivalent to 25% of the club's matchday revenue over that period, a staggering waste.

Adding the exceptional charge, a small interest bill and the share of profit from the media JV takes the £26m EBIT loss to a pre-tax loss of £67.4m. Ignore the exceptionals and the loss would be £25.6m. This compares to £70.4m in 2009/10. There is definite progress being made.

Cash flow and Roman's support

With £34.3m of the £41.9m of exceptional charges being real cash payments (the impairment is a non-cash charge), Chelsea's operating cash flow was weak in 2010/11, with an cash outflow before investment of £5.5m, but this is still an improvement on 2009/10, reflecting the far better underlying EBITDA performance and strong working capital inflows.

In 2009/10, Chelsea had negative net cash transfer spend. That all changed of course in January 2011 with the (panic?) purchases of Torres and Luiz. These accounts show £112m of "intangible asset" additions on the balance sheet and a  gross cash spend of £85m. As I have explained before on this blog, cash flows from transfers are very volatile but the pattern is clear. Chelsea are spending again (at least for now).

Even adding in £24m from player sales, the accounts show net cash spending on transfers of £60.6m. Add in capex and there is a £72m cash outflow before financing. This hole is filled as it is every year by loans from Abramovich's parent company Fordstam Limited. In the past, such loans are converted to equity after a while and no doubt the same will happen again.

Some FFP maths

So how close are Chelsea to meeting the FFP rules? On the assumption that UEFA ignores exceptional items (and I believe it is reasonable to make that assumption, especially in the early years of the new rules), the club has made good progress.

I have assumed that within Chelsea's cost base is c. £8m of spending on youth development and c. £1m of spending on community development. These items are effectively "deductible" under FFP. 

The table above shows that based on these assumptions about spending on youth and community activities, Chelsea have closed their "break-even" deficit quite substantially over the last three seasons. Revenue is up and costs are down. This calculation is before any player wages based on pre-June 2010 contracts are excluded under the Annex XI exemption, which will reduce the loss further.

Most big clubs should be able to generate profits on player sales (academy products have zero "book cost"). Assuming Chelsea can match the £18.4m profit achieved in 2010/11, the core deficit is only around £8m. That is well within the the €45m (c. £38m) allowable loss over the first two years of the new rules.

As discussed above, the main risk to this happy position is a big rise in the amortisation charge (i.e. a further splurge of transfer spending). Five years ago the amortisation charge was £70m. A return to that level would blow a big hole in the FFP calculation.

The other, ever present, risk if of course that the club will abandon it's cost control in an attempt to stay competitive on the pitch. I have written before how "six into four doesn't go" when it comes to Champions League places. Chelsea can only meet FFP with the sort of squad cost they have now by being in the Champions League. The stakes are high.

Concluding thoughts

Ignoring the exceptional charges (and Chelsea will pray UEFA do just that), these are impressive figures. To continue to meet FFP and to ween the club off Abramovich's cash, Chelsea will need to repeat the trick of holding down wages whilst achieving top four finishes. That is no easy task when every other club's wage bill is rising and when the squad needs a significant overhaul.

The other long-term option of course is boosting matchday income from the current c. £65m pa to an Emirates Stadium like £90-100m. Maybe Nine Elms/Olympia/Earls Court etc is the answer.

LUHG

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

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

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 signing including Kroldrup, Davies, Johnson and Lescott less money banked on the likes of Rooney, Bent, Kilbane and Davies).

[2007/08] A net spend of £15m (further money we paid out for Kroldrup, 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, Beattie and 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 for Lescott 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 2012

This is an open reply to steve_mcfc, the Manchester City supporting Twitter sensation. I blocked Steve on Twitter months ago but in a rush of blood to the head I unblocked him yesterday.... Steve proceeded to tweet me around 30 times starting at 7.48pm yesterday. The Tweets were 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. I was out at the time.

Given that it is hard to reply to 30 tweets I thought I would give more detailed answer to each of Steve’s points on this 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 were opposed to a cap on squad spending where the cap is the same for all clubs. How can you claim to be impartial when you refuse to support a cap that's fair and you will only support a cap that provides 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 wanting football organised in a fair and sensible way maintaining decent competition, preventing the exploitation of supporters and the endangering of clubs through excess debt and financial mismanagement.

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

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

Because a fixed cap would eliminate any 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 and create virtuous circle....”?

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

I would have preferred FFP to have specific debt restrictions in addition to its spending limits, debt is a cancer on the game. I would like to see any English licensing rules to include debt restrictions. See my submission to the CMS Select Committee, available here:

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

Do you still think that FFP will land City "back in the ditch", as you once charmingly said?

I hope City go back to the regular relegation/promotion comedy cycle of failure they have been on for most of my life yes! In other shocking news I hope Liverpool implode with King Kenny going mad, that Leeds never come back up and I have to tell you Steve, THE POPE IS CATHOLIC.

Before you blocked me, you said you were opposed to a cap on squad spending where the cap 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 with an unfair advantage?

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

I actually think there needs to be a financial rebalancing between the richest clubs like United and the less well off. I would advocate the reintroduction of league gate sharing and a redistribution of Champions League income across the PL to help this. I think the FFP exclusions on stadium development are great for aiding a rebalancing but 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 (of TwoHundredPercent) with whom I’ve been discussing this for a while now.

Why did you assume that Etihad Airways would not grow at all over the 10-year period that the Etihad sponsorship deal of City covers? Etihad is a young airline that is looking to massively expand over the next decade, yet the figures you assumed for Etihad's growth over the next 10 years was 0%. Your assumption of 0% growth was dishonest wasn't it, Andy? Why would a young airline seeking to massively expand sign a £400m sponsorship contract and expect to grow by 0%?

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

I think the deal is extraordinarily large compared 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 have EBITDA of €3.9bn and pays Bayern €25m pa). Let me know if you can find another mismatch between deal size and company size...

No response to anything I've just said then? Does that mean you accept everything I've just said?

No, hence these replies!

As for verbal diarrhoea, I would say you being interviewed by the BBC talking about City's finances is the best example of verbal diarrhoea I've seen. Why on earth a supposedly unbiased broadcaster has a highly biased Utd fan on to slag off our finances I'm not entirely sure.

Why don’t you ask the BBC Steve.

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

One other thing. Do you not consider it extremely hypocritical to campaign against the Glazers because they limit United's spending while you also act as cheerleader 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 spending restrictions, it is enforced ticket price hikes to make the LBO numbers stack up. The House of Commons Select Committee for Culture Media and Sport was scathing of LBOs in football, it is not an unusual view that they add no value.

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

No response to any of that then? Guilty as charged then.....

Sorry, it took me a while...

You actually blocked me because I accused you of being a liar, Andy. I see you're lying about that too now.

Did I Steve? I knew there had to be a good reason.

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

OK, if you say so Steve.

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

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

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

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

As I said above, I think the big clubs like United need reining in financially through new rules. The fact that clubs without rich owners like Everton can’t possibly compete and that clubs with quite rich owners like Sunderland can spend £100m of their owner’s money and not get anywhere suggests fundamental flaws with the system. The answer to that is surely not a billionaire owner for every club?

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

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

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

Thanks Steve.

The financial cost of United's CL exit

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

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

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

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

Last season

I’ll make financial comparisons with last season when of course United were (well) beaten finalists. UEFA publish the TV cash distribution 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”

All clubs in the group stages receive a €3.9m “participation” payment and a €550,000 per 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

For every 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 this season:

Difference versus 2010/11: DOWN €1.2m

Bringing these elements together we can calculate how much the basic group stage payments 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”

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

Each market pool is distributed based on two formulae, 50% by the relative domestic league 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

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

This means that United receive c. €16.8m this season vs. the €12.5m they received last 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 relative progress of the clubs cannot be calculated for certain until we know how far through the competition Chelsea and Arsenal progress. The split is determined on the number of games played (maximum of thirteen for finalists). The minimum the 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, the most 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 being parachuted into the Europa League in the new year.

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

Gate receipts

There are potentially four home games in the Europa league vs. three in the Champions League, so the impact on gate receipts depends on a few factors, primarily how far through the EL United progress. The club’s website does not have ticket prices for the Europa League yet, and we do not yet 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 prices are set close to those for the Champions League and if United get to the quarter finals or beyond, there will be no impact on revenue.

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

Conclusion

Because of the big market pool boost from being champions last 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’t budget to progress beyond the last sixteen in any season, so recent success has been 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 reached three 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

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