Monday 1 June 2015

Good housekeeping at Manchester United – explaining the May 2015 refinancing

In the decade since the purchase of Manchester United by the Glazer family, the debt placed on the club has been “refinanced” four times. This week marked the latest of these refinancings.

A refinancing is where old debts are swapped for new debts. They are the corporate equivalent of switching mortgages or consolidating credit card debts into a single loan. The aim is usually to make the debt more affordable, sometimes by locking into a cheaper interest rate, sometimes by extending the life of the loan, sometimes both.

This post explains what United have done on this occasion. It is intended to explain what’s going on in layman’s terms.

The previous situation

Before this latest change, Manchester United plc (acting through two of its subsisidiary companies) had a $315.7m (£206m) “Secured Term Facility” (a bank loan) with Bank of America Merrill Lynch International Limited and $269.2m (£176m) of US dollar bonds called “8 3/8% Senior Secured Notes due 2017”. There was also a “Revolving Credit Facility” (essentially an overdraft) with a group of banks. The Revolving Credit Facility has never been used.

The Secured Term Facility paid an interest linked to LIBOR (a benchmark interest rate) plus a “margin” (markup) based on the level of United’s debt compared to its profits. The maximum margin was 2.75% if net debt was more than 4x EBITDA (cash profits) and the minimum margin was 1.5% if net debt was less than 2x EBITDA. This financial year net debt will be around 3x EBITDA meaning the total interest rate (using 3 month LIBOR of 0.29% and a margin of 2.25%) will be c. 2.54% per annum.  The interest cost is therefore c. $8.0m or £5.2m. The Term Facility is repayable in one amount in 2019.

The Senior Secured Notes are the remaining bonds that were originally issued in 2010. They pay a fixed interest rate of 8.375% per annum and therefore cost $22.5m or £14.7m. The notes are repayable in one amount in 2017.

The total debt today is $585m or £382m. The annual interest cost is c. $30m or £20m.

After the refinancing

United are changing both elements of the debt and increasing the size of the Revolving Credit Facility.

The Secured Term Facility, still with Bank of America Merrill Lynch, is being reduced from $315.7m to $225.0m. The repayment date is being extended from 2019 to 2025. The interest rate margin range is reduced from 1.5% - 2.75% to 1.25% - 1.75%.

The $269.2m of Senior Secured Notes are being redeemed (paid off) and $425m of new Secured Notes are being issued. The new notes are repayable in 2027 not 2017. Crucially, the interest rate on the new notes is 3.79% rather than 8.375%.

The total amount of debt is increasing from $585m (£382m) to $650m (£425m). The extra £43m will be available for the club to use.  None of this debt requires repayment or refinancing for another 10 -12 years. Following the refinancing, the interest bill will fall from around $30m/£20m per annum to around $20m/£13m.


This refinancing is an unequivocally good thing for Manchester United.

The amount of debt has increased slightly but the increase provides more cash for the club.

Crucially, the interest cost is now very low for a club of United’s profitablity. Even in this season of no Champions League football the club will make over £100m of EBITDA. An interest bill of £13m is therefore covered over 7x. Back in 2008 over 70% of EBITDA went on interest, next year it is unlikely to be 10%.

Around 75% of the interest is at a fixed rate for the next twelve years. Even if rates rise (as they must do at some point), United will be protected from much of the impact.

The financial story of Manchester United is no longer about the debt. It is about how effectively and wisely United spends its money.

Wednesday 18 February 2015

United - buying players on the never-never

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

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

Thanks for your patience!


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

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

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

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

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

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

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

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

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

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

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

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

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


Thursday 13 March 2014

Baron Capital's stake in Manchester United - getting the numbers right

This post is a brief apology for bad maths.

Earlier this week I noticed Manchester United had made a "13G filing". This is an American regulatory declaration required when an investor has taken a significant stake in a quoted company.

The filing said that Baron Capital Group Inc and various related companies and funds now own 9,581,636 "A" shares in Manchester United, 24.07% of the total number of "A" shares in issue.

I didn't bother looking up how many "A" shares there were in issue (something I had written about on this blog), but remembering that 10% of the total shares in United were available on the stock market, I assumed that these were all the "A" shares. I therefore tweeted:
Well I should have looked up the figures, because that isn't right.

There are actually 39,807,000 "A" shares in issue of which 16,666,667 were floated on the NYSE and the balance are owned by the Glazers. The "A" shares are themselves c. 24% of the total number of "A" and "B" shares in the company.

So Baron Capital owns 24% of "A" shares and therefore owns more than 5.5% of the club. What's more noteworthy perhaps is that the firm has hoovered up over 57% of the shares available on the NYSE, which goes a long way to explaining the strength of the share price in recent weeks.

Before anyone gets too excited, Baron Capital aren't looking to takeover United, they just think the shares are cheap. Are they right? I don't think so, but stock markets are always about matters of opinion.

Anyway, apologies from me for not looking things up properly. Apologies too to Bloomberg and the Associated Press who both quoted my incorrect calculation.

We should all be extra embarrassed for reporting that a 13G filing showed an investor had 2.4% of a company. Why? Because 13G filings are only used when an investor has bought more than 5% of a company. Ooops.


Tuesday 21 January 2014

Manchester United – the potential financial cost of failure

It’s crystal clear that a Champions League place, that sad modern non-trophy victory we’ve watched Arsenal "win" in recent years, is the most Manchester United will achieve in the league this season.

But what if even a top four finish or, whisper it, the Europa League, prove out of reach? How much would United’s profitability be harmed?

This post looks at how much the club earned last year from the Champions League, how much a Europa League spot would provide instead and the implications of no European football at Old Trafford for the first time since the Berlin Wall came down.

The lessons from LFC

In the long-term, repeated failure to qualify for the Champions League would damage the club’s ability to negotiate the sort of commercial contracts that have been so important to United’s finances in recent years. In the short-term I do not see significant risk to commercial revenue from one (or even two) seasons on the sidelines. If this seems blasé, the evidence from Liverpool is that such damage takes a very, very long time to have an impact.

In 2011/12, the last season for which we have figures, Liverpool FC had the 6th highest commercial revenue in European club football (of course City, with the fifth highest, have the benefit of a suspicious number of Abu Dhabi companies queuing to give them money). Liverpool, who haven’t played in the Champions League since 2009/10, had higher commercial income than Arsenal that season. Furthermore the club’s decline hasn’t prevented more deals being signed since 2012, with companies like Chevrolet and Garuda.

Where United may be vulnerable if the current slump persists, is the very fact that the club has pushed the boundaries when it comes to sponsorship. Manchester United have identified numerous industry “verticals” where football clubs have never attempted to find commercial sponsors, hence the official “office equipment supplier”, “medical systems partner”, “savoury snack partner”, “motorcycle partner in Thailand”. These deals are unproven for the “partners” and may be more vulnerable if the football club isn’t on the top stage for several seasons.

TV cash

The most obvious impact of not finishing in the top 4 (or implausibly winning the Champions League to ensure qualification, hello Chelsea), is the loss of TV income.

In 2012/13, United earned £31.3m in CL broadcasting revenue, which accounted for 8.6% of the club’s income (the third most important source after PL TV money and the Nike contract).

The bloated Europa League is the financial poor relation of the Champions League. A club getting from the group stage all the way to the semi-finals in 2012/13 would have earned €4.7m (around £3.8m) before payments from the competition's market pool. For a club from a large nation like Italy, Germany or England, the market pool payment could add €3-4m more. The most United could earn from actually winning the Europa League (hardly a certainty obviously) would be around €14m (about £11m), a loss of £20m compared to 2012/13. A more plausible run to the quarter finals would bring in around £7m, a loss of £24m.

Europa League (to the quarter-finals): £24m lost income
No European football: £31m lost income


At United, Champions League matches command premium prices for season ticket holders and members. Cup games, including European matches are however included in seasonal hospitality packages. What would happen to hospitality prices if there was no European football for a season is one of the great uncertainties in analysing the financial impact on United. I find it hard to believe the club could hold the prices of executive seats and boxes whilst the number of home games falls from a “normal” 29-30 per season to as potentially few as 19 or 20 (the exact number in a season with no European football obviously depends on the draws for the domestic cups).

The Europa League clearly lacks the appeal of the Champions League, and another factor to consider in the event that United ended up in the second tier competition, would be whether the EL would be included in the daft “Automatic Cup Scheme” that compels season ticket holders to buy their ticket for cup games even if they don’t want to/can’t attend. When the club ended up playing in the competition in 2011/12, the games were excluded from the ACS, to much relief from many fans. Would the management be so generous if the Europa League was the only European football on offer?

There is also a possible impact on summer tour revenue if United had to play in July Europa League qualifiers (although there would be home gate receipts to compensate). All these uncertainties make it very hard to predict accurately the impact on Matchday revenue of either time in the Europa League or no European football at all.

One useful way to consider the sums involved is to look at how Matchday revenue has changed in recent years in response to the changes in the number of home games. A home game generates around £3.8-3.9m of revenue.

Assuming a season with no European football at all and two home cup games, to make a total of 21 home games, the impact would be around £20-25m of lost income. In my view a season in the Europa League might be expected to cost around half that figure from lower attendances.

Europa League (to the quarter-finals): c. £10m lost income
No European football: c. £20-25m lost income

Cost savings

The current terrible season means of course no substantial bonuses for the playing squad, which could save the club around £7m compared to the title winning year of 2012/13.

Fewer cup games saves the club money on match day staff, policing and other related costs. In total, a season with no European football could see cost savings of £2-3m from a locked up Old Trafford.

No European football: c. £2-3m cost savings

The Glazers, the share price and investment

Manchester United’s owners and the club’s board are not stupid and the possibility of one or more years out of the Champions League has no doubt crossed their minds.

The SEC filings the club has had to publish since the IPO show that the scenario is part of the club’s planning. The club can actually be released, twice (in non-consecutive years), from the covenants built into its “Revolving Credit Facility” (think of these as the financial rules governing United's emergency overdraft) if it fails to qualify for the Champions League.

One season, or even two, of failure to qualify for the Champions League doesn’t destroy the Glazers’ business model which envisages ever more commercial relationships and ever greater TV deals. What it definitely does do is make the already expensive shares look very expensive.

A fifth place league finish this season means the club will make EBITDA (cash profits) of around £120m (depending on what happens in the Champions League knock-out stages). At the current share price that values the club at 15x EV/EBITDA ("EV" is "enterprise value" which is market capitalisation plus net debt). No Champions League football, even allowing for more commercial growth (such as the Chevrolet contract and a new kit deal) pushes that multiple up to around 19x. For a company where profitability is failing and which needs to invest more cash to remain competitive that is very expensive.

Europa League (to the quarter-finals): EBITDA down c. £30m in 2014/15
No European football: EBITDA down c. £45m in 2014/15

The big question the owners and Ed Woodward face if things continue poorly on the pitch, is whether they will properly back David Moyes and invest in the squad. The club proudly stated in the IPO prospectus that average annual net transfer spend over the last 15 years (from 1997/98) had been £14.3m (or £20.1m excluding Ronaldo, which one shouldn’t). That level of spending is far too low for any major club, let alone one that has let its engine room decline over years, a decline masked by the genius of the manager.

There is no shortage of cash to strengthen the playing side. At 30th September the club had over £80m in the bank. This season the club will generate at least the same amount again. Debt is down to a manageable level. There really are no excuses.


Monday 18 November 2013

Debt down, fan communications restored - where next for MUFC?

Apologies for the lack of regular posts. Work and family have to take priority over football finance….

The beginning of a new phase?

In some ways this week marks something of a watershed in the saga of the Glazer family’s ownership of Manchester United.

In Moston, FC United of Manchester are beginning the building of their own ground, more than eight years after their formation in the wake of the Glazer takeover of MUFC (I heartily recommend Danny Taylor’s piece on FCUM published in today’s Observer).

Two hundred miles south, the week saw the first formal meeting since 2005 between the management of Manchester United and the Manchester United Supporters Trust. The club’s meeting with MUST follows one with IMUSA and an interview by Edward Woodward with UWS.

Woodward himself has apparently told the club’s Fans Forum that he would consider the introduction of safe standing. There are early signs the end of the Ferguson/Gill era may herald a new approach by the club to its core domestic support.

The financial background to all this is radically different from 2005 too.

The decline of the financial importance of the match going fan

In the year of the takeover, United generated revenue of £157m of which Matchday income was the largest element at 42% of the total. This year (2013/14), revenue will be around £425m and Matchday will be the smallest element at barely over 25%.

Total gate receipts in 2012/13 were £54.2m, 15% of the club’s revenue. Although ticket prices have risen on average 55% since the takeover, the importance of normal season ticket holders and members has declined at the expense of the execs, corporate box holders and other hospitality clients. It is unlikely that ticket income from the c. 60,000 non-exec supporters contributes more than 10% of the club’s revenue these days. This dramatic reduction in the financial importance of normal match going fans should put to bed once and for all any ideas of boycotts or similar actions against the owners (the idea of which I have entertained in the past).

The change in the club’s revenue should also be an opportunity. There is now absolutely no need for, and little financial merit in, the sort of price increases the club put through after the takeover. The expansion of executive facilities, the building of the quadrants and the price hikes added c. £40m per annum to United’s revenue between 2005 and 2009, around 25% of the 2005 total and roughly the annual interest bill in those years. Season ticket prices haven’t moved up for several years, and there is no need for them to do so. The daft ACS could also comfortably be abolished. The extra revenue from those who are forced against their will to buy certain cup tickets is absolutely irrelevant to the club’s finances.

The financial state of the club after the debt gamble

The Glazer family took a huge gamble when they conducted a leveraged buyout of MUFC. A quick look down the East Lancs Road shows how far a major club can be set back by excessive debt. Three years after the takeover, the financial crisis hit and the PIKs began to run out of control. Only the genius of Alex Ferguson and the sale of Ronaldo to Real Madrid allowed the whole rickety show to remain on the road.

But now that phase is over. The club has over £83m of cash in the bank and net debt is down to £277m. That latter figure is roughly 2x EBITDA, down from almost 6x (including the PIKs) in 2010. The annual cost of the debt burden has fallen from £72m (including the PIKs) or £42m (excluding the PIKs) in 2010 to around £20m this year. The £600m of interest costs, fees etc will never be recovered but the risk of damage to the club a la Liverpool FC is effectively over. Because of the exploding value of TV rights, a smart commercial strategy and a once in a life time manager the gamble has paid off for the Glazers.

Where next?

The departure of Fergie and the reduction in debt means Edward Woodward faces a very different set of challenges and opportunities to those David Gill faced during most of the post 2005 period. The club can genuinely afford to compete with the likes of Barcelona, Bayern, PSG and City in the transfer market if it wishes, but showed little ability to make its financial muscle work for it in the summer window.

For match going fans the signs of early promise must be followed up with concrete action. As the financial importance of the season ticket revenue falls, the importance of the Old Trafford “brand” increases. Whilst that has a tacky sound to it, it provides the opportunity for supporters to be aligned with the club. Proper singing sections of German style rail seats behind the Stretford End and Scoreboard goals, an end to the ACS, and at the very least a continued freeze in prices are all comfortably affordable by the club and would boost the atmosphere for the benefit of everyone. No subsidy by supporters is necessary for rail seating, it is a win-win.

In the next two to three years, it is very likely the club will start paying dividends to shareholders again. There is an inevitability about this after the IPO in New York. However unwelcome for fans, dividend payments didn't hamper the club in the plc days and don't have to this time.

Looking further into the future, the irony of a football club trying to build brand loyalty whilst at war with some of its most loyal fans is laughable. Supporter engagement through fan groups and yes, an element of ownership, helps bind fans to their club, even one the size of United. Perhaps David Gill had spent too long in the trenches of United fan politics to realise this. Over to Ed….


Friday 24 May 2013

The history of Manchester United's debt

Last night United announced to the New York Stock Exchange that it was repaying around half of its outstanding bonds using a new bank loan from Bank of America. This will reduce the club's interest bill from around £31m per year (pro-forma post the IPO) to around £21m per year.

This blog sets out how United's debt has risen and fallen since the 2005 takeover and how much it now costs.

The history
For completeness, the table below shows flow of borrowings and repayments from the original takeover up to the most recent (March 2013) accounts. Initially the debt sat in either a subsidiary of Red Football Limited or Red Football Joint Venture Limited. Following the pre-IPO reorganisation, MU Finance Limited holds the debt for the new parent, Manchester United plc.

The table above can be more easily summarised in this graph, which shows the total gross debt at each stage.

The story is one of rising debt after the takeover as the preference shares accumulated rolled up interest. These were repaid in the 2006 refinancing, adding to the debt on the club itself and bringing in the famous PIKs. By June 2010 after the bond issue, total debt including the PIKs had spiralled to a terrifying £753m. 

The story thereafter is well known. The PIKs were mysteriously repaid (at a cost of £249m) in late 2010. The club spent around £90m (the Ronaldo cash) buying back the bonds it had just issued. Last year another £63m of bonds were repaid from the element of the IPO proceeds that the Glazers didn't keep.

By the end of March this year, the debt (made up overwhelmingly of the remaining bonds plus a small MUTV loan and the mortgage on the freight terminal) was down to £367.6m. The figure oscillates with the movement between £ and $.

The costs
As I have frequently pointed out, the interest bill from all this debt has totalled c. £350m  since the takeover and the total cost (including fees, derivative losses and debt repayments) is almost £600m. Paying interest has taken far more of the club's cash than has been spent on transfers.

The annual  interest cost is falling however, both in absolute terms and as a proportion of profits. From over 80% of EBITDA (cash profits) going on interest in 2006, next year the figure will be around 12%.

The future
I have predicted before that the club would refinance as quickly as possible (there are penalties on repaying bonds early but these expire over time).

Over the next three to five years the club should generate enough cash to pay the remaining sum off. It is tax efficient to keep some debt, and future dividends may take priority over further repayment.

The reduction in the amount and cost of United's debts is an unequivocal good thing.

The question for supporters is who benefits? Will David Moyes be given significant funds? Will ticket prices continue to be frozen (or indeed will the club contemplate reversing some of the 50% plus hikes they implemented after the takeover)? Or will the extra cash from TV deals, commercial income and a lower interest bill flow out of the club in dividends.

Most major football clubs reinvest the bulk of their money back into fans and football. In England at clubs like Arsenal, Liverpool and United, profit still remains the focus. On the weekend the German model is on display at Wembley, that's too often the English way of football.


Friday 8 February 2013

£500m of costs later, could we see a debt free Manchester United again?

For almost eight years, Manchester United has been subject to a financial experiment to see whether a highly leveraged buyout could “work” on a football club. The only other experiment, at Liverpool, ended in a failure that continues to hurt that club to this day. At United, the Glazers’ purchase of the football club with borrowed money has been hugely costly both financially and emotionally, driving a schism between the club and its core support, sometimes even setting fans against each other.

In the last six to twelve months, there have been major developments which mean that the eight year experiment is probably nearing its end. A combination of unexpectedly high growth in TV deals, new commercial revenues (especially new shirt and kit deals), the impact of new regulation on the behaviour of other clubs and the pay down of significant bond debt means we are entering a new phase in United’s finances where it very possible that debt is virtually eliminated in the next few years.

Although undeniably a good thing, supporters should not become too excited about the prospects of a debt free Manchester United. The club has made it clear on its IPO roadshow that it doesn’t expect to spend more on transfers than it has historically. There is no sign whatsoever that the ticket price hikes that followed the Glazer takeover will be reversed. The club continues to refuse (against the advice of government and Parliament) to engage with supporters’ groups. The listing on the New York stock exchange means the owners will continue to prize profits over football. But financially, a big change is underway. This post explains that change.

The story so far: stacking up debt 2005-2010, paying down debt 2010-2012.....
As this blog has described in detail over the last few years, huge debts were loaded onto Manchester United when the Glazers bought the club. By June 2010 these had escalated to over £784m.

The infamous PIK loans were mysteriously repaid in late 2010. At roughly the same time the Glazers started using the cash earned from selling Ronaldo and signing the Aon shirt deal to repay a significant amount of the bonds that had been issued in February 2010. Finally, in August last year, half of the IPO proceeds were used for debt reduction (the other half going to the Glazer family of course). In total, the bond debt has fallen from £509m in June 2010 to £360m at 30th September 2012.

The next chapter..... rapid revenue growth AND higher profit margins
There can be no doubt that United’s media and commercial income is going to rise very significantly in the next three to four years. Unusually in football finance, I believe the club will capture more of this extra income than usual, in other words profit margins will rise above their historic level. This will generate significant cash, allowing debt to be largely eliminated.

Three sources of highly certain revenue growth
There are a number of factors which mean the club’s revenue growth is highly likely to accelerate in the next three years: 
  • Chevrolet. The new shirt deal adds £11.6m pa for the next two years (on top of what Aon pay) and then a further £11.9m pa (for a total of £43.5m pa) from the 2014/15 season.
  • Premier League rights. We have already seen the value of domestic live PL rights rise 70% in the next three year cycle. Total domestic rights (including highlights, online etc) will probably increase around 60% and we are awaiting the outcome of the international sales processes. Taken together, a rise of at least 50% in PL TV income is virtually guaranteed in 2014. Assuming only low growth from the CL and owned rights (MUTV), that would still drive media revenue up 35%.
  • Nike renewal. The long running Nike contract is beginning to pay out back ended profit share AND is up for renegotiation. Looking at other kit deals, an increase of £25m on the current £35-38m pa looks very achievable. Some analysts think the deal will double in value and they could easily be correct.

These three areas alone will add almost £110m to revenue by 2015 (35% of the 2011/12 figure). To put that in context, that’s the equivalent of doubling matchday income.

Other, less certain, sources of growth
Whoever thought of it, the commercial strategy of targeting diverse product categories and geographies has been revolutionary. There remains considerable potential to add new “partnerships” in a number of industry “verticals”. The club have identified 40 industry sectors where it is believed it can sign a global partner, compared to 13 such contracts currently. Add regional partnerships and I see no reason why such sponsorship income should not double again over the next four years, adding another 12% to 2011/12 revenue.

The same argument applies to the new media and mobile segment. Emerging market telecom companies appear to value the “content” link with United and there are plenty more territories to go for.

My forecast is that revenue will increase by over £150m (c. 50%) over the next three years (assuming top 4 PL finishes and CL quarter finals each year), and that of this increase, over £110m (35% growth) is virtually certain, with and the balance is very likely to occur.

Rising margins
If a huge increase in revenue can be forecast with some confidence, there remains more uncertainty over costs. Since the beginning of the PL era, United have reported stable EBITDA* margins in a tight range, throughout the plc and Glazer eras. In other words, costs have tended to rise in line with revenues.

[*EBITDA – “earnings before interest, tax, depreciation and amortisation” – is effectively cash profits before transfers. It is calculated by deducting cash costs from revenue. In 2011/12 cash costs totalled £228.7m and comprised wages and salaries (£161.7m or 71%) and other operating costs (£67m or 29%).]

I believe this pattern of stable margins will change in the future, and that margins will rise sharply above 40%. For this to occur, United’s wages to income ratio will have to fall. United will have to hold onto more of its revenue gains than has historically been the case.

Why margins will rise
The suggestion that a company that has consistently earned margins within a tight range is about to make a step change in profitability should always be treated with great scepticism. This is true even if new revenue sources are supposedly “high margin” (as sponsorship deals are), as such margin can easily leak away to other stakeholders – in this case players and agents.

On this occasion, however, I believe there are new factors that mean United will not have to pass on as much of every extra pound earned in income to the playing squad as it has in the past, in other words that margins can rise sharply.

There are two primary reasons behind this, firstly that much of United’s revenue growth is unusual to the club and not something competitors can replicate, and secondly that Financial Fair Play will effectively work to slowdown wage growth, forcing other clubs to “bank” rather than “spend” their own incremental revenue.

Factor 1: "United only” vs. collective revenues
The first point is very straightforward, if United can grow its income faster than other clubs, it can hang on to more of it. There is an important distinction to be made between collective revenue increases (such as bigger TV deals) and “United only” revenue gains (such as the DHL training kit deal). It is the former that tend to “leak” into player wages because by definition all clubs (or in the case of the Champions League, all major competitors) receive the same income boost. The last PL international rights deal gave every clubs c. £7m extra pa and pretty much without fail they all went and spent it on transfers and salaries. By contrast, if United sign a unique £7m sponsorship deal, the club has far more chance of retaining the cash. Much of the club’s expected revenue growth is going to come from “uncommon” sources; the new Nike deal, the Chevvy deal, the mobile partnerships etc, etc.

At United, the strength of the relationship between wages and (mainly collective) media income since 2000 can be seen in the chart below. The r-squared is 0.69.

By contrast there is not a very strong relationship between total revenue growth, (which includes the expansion of Old Trafford, commercial growth, ticket price rises etc) and wage growth as can be seen below (the r-squared is only 0.26).

Factor 2: FFP and Premier League regulation will change behaviour
Second and more importantly, both FFP and the new Premier League rules are coming and will inevitably change behaviour. The new regulations do not have to work perfectly to have an impact, rather they just have to alter the way other clubs operate. The main impact will be that clubs that risk breaching the rules will “bank” rather than spend additional revenues they earn. Thus the new PL deal will see a large number of clubs not thinking “let’s use this to boost the squad”, but rather “let’s hang on to this money to improve our UEFA breakeven result”. Both City and Chelsea need the £30-40m pa in extra PL revenue to have a hope of complying with FFP. If they spend the windfall, they will fail the test. The Premier League rules are specifically designed to dampen down wage inflation by limiting the amount of additional TV money that can be spent on player salaries.

This is a totally new dynamic in English and European football where previously every extra penny earned (and more) was spent on players. In the longer term, both sets of regulation makes the next Oligarch/oil sheikh takeover less likely too. If a loss of only €45m is permitted each year, it becomes impossible to repeat a Chelsea/City/PSG and initially run up €150m+ losses. In the last fifteen years a new big spending club has come along every few years. This is likely to end and as in any other market, the lack of disruptive new competitors should boost margins.

Wages are still going up, just less quickly than revenue
Despite the dampening effects of regulation, it would be naïve to believe that football wages will stop rising. I would expect United’s wage bill to continue to grow substantially over the next few years (in my forecast I have assumed 24% up to 2015, only slightly slower than the 31% seen in the last three years). The key thing to note is that this wage growth is far slower than forecast revenue growth. With income rising c. 50% as described above and costs by only half this, EBITDA would rise 112%, taking margins from 29% last year to over 40% by 2014/15.

Margins over 40% would generate over £100m of surplus cash per year
EBITDA and margins are just a means to an end when looking at a company. Cash is king.

For United, many of the main cash outflows below the EBITDA line are quite certain. Interest this year (post the IPO debt reduction) will be c. £33m. Tax paid will rise as tax losses are used up and profits rise, but in a predictable way. The big uncertainty is transfer spending, and I have assumed £40m net this year and £30m thereafter. Add in £10m per annum of capex and the huge turnaround in “free” cash flow driven by the higher EBITDA becomes clear.

On these forecasts, United will be generating £80-100m of free cash flow in two to three years, and thus there is the opportunity for substantial debt repayment and/or dividends. 

I have assumed a 50/50 debt pay down and dividend split from 2014 onwards. This leads to a sharp fall in the club’s net debt position. Net debt would fall from c. £344m at the end of the last financial year (pro-forma for the IPO) to under £200m in three years. If no dividends were paid, the figure would be near £100m.

When measured against the size and profitability of the company, debt at this level is of no material consequence. The remaining bonds will be easy to refinance well before they are due to be repaid in 2017 at a significantly lower rate than the current 8.75%.

Even if margins don’t break-out, cash flow will rise sharply
Even if margins don’t expand from the historic range, United will generate very significant cash flow in the years to come. If we apply a flat margin of 33% (the average in the last five years) to consensus revenue forecasts, free cash flow in 2015 is still £67m, allowing £25-30m of annual dividends to paid and net debt to fall to 1.1x EBITDA by 2016.

Summary and thoughts
If United continue to qualify for the Champions League and make it out of the group stages, we can say with a high degree of confidence that revenue will rise by at least 35% over the next three years, and is likely to rise by 50% or more.

It is also likely in my view that EBITDA margins will break out from their historic range and could exceed 40%.

If this occurs, United would generate £80-100m of surplus cash each year from 2014/15 and be able to pay material dividends (a yield of almost 2%) AND repay most of the club’s debts. Even if EBITDA margins are only maintained at the average level of the last five years (c.33%), free cash flow generation would still be around £50-70m per annum, allowing substantial debt pay downs.

Many people, including me, have been highly sceptical of the United business model. It appears however that through a combination of luck (the TV boom) and judgement (the commercial strategy), the management have managed to deleverage the balance sheet and keep the club (reasonably) competitive on the pitch. With the net debt down to under £300m, FFP coming in and continued strong commercial growth, we are now facing a radically improving financial position.

None of this make the Glazers good owners for Manchester United. It will take many years before the club makes enough in profits to compensate for the huge costs incurred. If it wasn't for Fergie's miracle work United could have followed Liverpool or even Leeds down the slippery financial slope. However, in light of the rapidly improving finances, the terms of the debate on ownership will inevitably change. The costs will have been incurred (I estimate total costs from the Glazer structure will top £1bn by 2016) but they will start to become an unpleasant historical footnote

As the eight year LBO experiment comes to an end and the financial risk to United ebbs away, the club and its supporters surely need to re-connect. On issues like away allocations, ticket prices and engagement with supporters’ groups the club needs climb out of it bunker. For fans, the financial experiment is thankfully coming to an end, but much remains to be done; on supporter ownership and having a voice in our club and in making sure the cash flows into the football club itself and not the pockets of owners who still show no evidence of caring one jot for supporters.