Thursday 23 December 2010

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

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

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

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

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

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


Thursday 9 December 2010

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

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

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

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

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

So what's going on?

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

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

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

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

Watch this space.


Tuesday 7 December 2010

Where United makes its money - the definitive guide

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

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

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

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

Matchday revenue

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

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


Media revenue

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

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

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

Commercial revenue

As is well known, commercial is the engine room of United's profit growth at the moment, although so far during the Glazers' ownership it has not been nearly as important as growth in TV deals. We know the exact payments each year under the plc's Nike deal from the 2006 IM (during the current 2010/11 year there is another contractual step-up to £25.4m per annum). The 2006 shirt sponsor was of course Vodafone and the (ill-fated) AIG deal marked a 50% increase on this. From this year the club is recording c. £20m of income from Aon although given the prepayment of £35.9m in 2009 this will actually bring in less cash (only c. £11m) each year than was received from AIG.
Other than Nike and the shirt sponsor, by far the most important source of commercial income are the 2nd tier sponsors and partners who between them brought in c. £33m in 2009/10. This area has shown the most growth of any part of United's business, but it should be remembered (given the hype) that it only represents 20% of the increase in revenues in the last four years. One of the key questions looking forward is whether United can continue to add 2nd tier sponsors at such a prodigious rate. Company's desire to be associated with the club is clear, but to a certain extent these deals are unproven for corporates. Only time will tell whether companies gain any real value from these tie ups and the cache of a relationship with MUFC must be diluted by the huge number of brands the club are signing up (we await to hear the identity of the official club laxative with interest)....
The first quarter results for 2010/11 showed commercial income reaching £24.2m (equivalent to c. £97m annually). The £4.8m increase in Q1 compared to the previous year includes the £1.5m extra from Aon and c. £0.5m from Nike mentioned above.

The Glazers' impact

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

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

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

Summing up

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

Next time - costs.....


Notes: sources and methodology

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday 16 November 2010

Q1 results – running very hard to pay the going rate

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

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

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


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

In media income, United benefitted from the new three year PL deal which began this season. Whilst domestic rights growth was low, the overseas rights bonanza added around £1.5m. This offset the £1.6m fall in CL media income (the "market pool" element) due to United coming second in the PL last season.
Commercial revenue was again the star rising 25%. This is the first quarter to included the Aon deal (worth around £1.5m more per quarter, although this extra cash was pre-paid in 2009). The growth on last year also reflects all the smaller deals done during last season (Concha Y Toro, Smirnoff, Turkish Airlines etc).

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

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

Interest, debt and cash

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

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

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


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

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


The full details on the terms of the PIKs

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

There are two documents:

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

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

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


Monday 15 November 2010

Known unknowns and unknown unknowns

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

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

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

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

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

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

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

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


Thursday 11 November 2010

Spurs results 2009/10: desperately in need of a new stadium

Tottenham Hotspur plc published its summary figures for the year to June 2010 this morning. We'll have to wait a few days until the full report and accounts are published to get all the details (like an accurate number for the wage bill) but the press release covers most of the key points.

Excluding transfers, Spurs is reasonably profitable at the operating level. The club focuses on "operating profit" (which includes depreciation), but I prefer the more commonly used EBITDA which rose 20% to £25.4m from £21.2m the previous year.

The profit improvement was driven by turnover up 6% whilst operating costs were only up 3%. Almost all the increase in turnover came from higher PL TV receipts. Although the total paid to all 20 clubs only increased 5%, Spurs' share increased 16.4% due to their fourth place finish and higher number of broadcast games. This increase in PL TV income offset falls in gate receipts and corporate hospitality due to the club not qualifying for Europe the year before and therefore only playing 24 home games (vs. 28 in 2008/9). Merchandising and "other" income both rose sharply.

In these figures we do not have details of how the £94.4m of operating costs split between wage and non-wage expenses. In total however, operating costs only rose 2.8%. Assuming non-wage costs were flat (as they were the previous year) we can estimate that wages only rose 4.3%, which is commendable and better than the 7% growth seen at Arsenal and United.

The profit on player sales was down sharply from £56.5m to £15.3m. This reflects the very profitable sales of Berbatov and Keane in 2008/09, compared to those of Darren Bent, Zokora and Boateng in 2009/10. The amortisation charge continues to rise albeit slowly (this is the cost of transfer spending spread over the length of players contracts and is an important component of the new Financial Fair Play regulations). The amortisation charge was £39.5m up 3.6%. Actual net cash spending on transfers was £27.5m, more than the club's EBITDA.

Net interest paid rose to £5.0m on gross debt of around £90m (up from £80m). The club issued £15m of new shares during the year.

So the £25m of EBITDA was insufficient to cover the £5m of interest and the £27.5m of net transfer spending. The gap was small, but existed despite Spurs having the lowest wage bill of any of the clubs with a realistic ambition to achieve a top 4 finish.

Challenges and opportunities

Spurs' wage bill of c. £63m makes it a minnow compared to the "big 4" and City (see table below). Having broken into the Champions League, Spurs' financial and footballing challenge is to maintain a good enough squad to stay there (or at least have a good chance of achieving a top 4 finish each season).

* 2008/09 **Esimated
This season, Spurs will benefit from at least three Champions League home games (and almost certainly at least one knock-out stage game) as well as the TV income from the competition. The club do not publish a total "matchday" number and include corporate hospitality in their "Commercial" turnover but assuming gate receipts account for 75% of total matchday revenue, each home game is worth around £1.5m in additional income. Assuming elimination in the first knockout round of the competition, the club will earn around £6m in matchday income and around €30m (c. £25m) from UEFA TV money. The dual Autonomy/Investec shirt deal is reported to be worth £25m over two years, representing an increase of c. £4m pa on the previous sponsorship by Mansion. Like all Premier League clubs, Tottenham will receive an additional c. £5m from the new overseas PL deals. Assuming a roughly consistent domestic performance, Tottenham should earn c. £40m more than last season.

This Champions League bonanza could clearly help finance a squad with more strength in depth, one able to compete both domestically and in Europe. History shows that relying on continual Champions League football is highly dangerous (see Liverpool or Leeds) and Daniel Levy is too smart to fall into this trap. Whilst this season's CL run is very helpful (even if the wage bill rises this year with the arrival of van der Vaart and Gallas), Tottenham need to close the earnings gap with United, Arsenal and Chelsea who have turnover £84-167m higher. Beyond playing performance related revenue, this means building a bigger stadium.

Last season, White Hart Lane was full to 98% of its theoretical capacity for the club's 24 home games. The waiting list (a proper one which fans have to pay to be on) is 33,000 or 90% of the Lane's current size. The comparison with Arsenal is instructive, with the Emirates bringing in £3.5m per home game vs. Spurs' £1.5m and with Arsenal's blended revenue per seat around £58 vs. Spurs' c. £42 (reflecting fewer and lower quality corporate facilities at WHL). A new stadium could allow Spurs to increase their matchday income by around £40-50m per annum, easily giving them the means to pay the £100m+ wage bill their competitors can afford (or in City's case can't).

The stadium question links to how well prepared the club are for UEFA's Financial Fair Play rules. On my estimates (see table below), Spurs would have squeaked in last season by £2m, but were reliant on their profit on player sales to do so. This season the CL income will easily cover any shortfalls, but the margins are tight in years when they aren't in the European Cup.

So the big question for a prudently run club like Tottenham is can they finance and build their new home? Liverpool fans know how hard it is to do and there is no Highbury-like property bonanza to be had in N17. Debt is already at £90m, albeit much of this has funded property investment around the ground.  Without the additional income that a new ground would bring, it is hard to see Spurs competing consistently with the big boys. The alternative is relying on Redknapp's wheeling and dealing and accepting the role of a feeder club (G. Bale anyone?).


Monday 18 October 2010

Why Barcelona are entering a period of “austerity” and probably can’t afford Rooney....

The shadow of UEFA's Financial Fair Play Regulations ("FFPR") continues to fall over European football. Whilst most commentators see the FFPR as being designed primarily to clip the wings of the sugar daddy financed Manchester City or Chelsea, the last few days has seen their practical impact on a club that should require no external financing; FC Barcelona.
On Saturday, new President Sandro Rosell and CEO Rossich Anthony not only persuaded Barca members to vote for court action against former President Joan Laporta but presented a budget for the current 2010/11 financial year which imposes breathtaking cuts on the formerly spendthrift club.

The Rosell revolution
In some ways, the plans for 2010/11 contain the usual Barca swagger. Matchday and media income is projected to increase slightly implying progression to semi-finals of the Champions League for what be the fourth year in a row. What has gone however is the enormous spending of the Laporta era. Sporting salaries (84% of which relate to football according to the most recent accounts) are projected to fall 6.2% having risen 17% last season. Player amortisation (the cost of transfer spending recognised over the contract life of acquire players) is projected to fall 17% and other costs are supposed to fall a George Osborne like 24%!

Bringing costs back in line with income is of course just good practice, and Barca's need for an emergency credit line in the summer told us all we need to know about how overstretched the club had become. After all, Laporta's regime oversaw the ludicrous saga of Zlatan Ibrahimovic's transfers which the club claim cost €33.4m including no less than €8m to his agent, the lucky Mino Raiola.

What has not been mentioned in all the gnashing of teeth in Catalonia is the threat to Barcelona from UEFA FFPR. Without the full 2009/10 accounts (which are yet to be posted on the club's website) we cannot fill in all the details, but the table below shows my estimate of how Barca would have done on the regulations' "break-even" test last season, as well as how the 2010/11 budget stacks up (footnotes at end of post):

On my calculations, FC Barcelona would have missed UEFA's "break-even" target by a staggering €48.5m if the rules had been in place last season. The "Acceptable Deviation" UEFA say they will permit each year is only €5m and of course Barcelona do not have a Sheikh Mansour to fill some of the gap.

The Rosell plan, shows the club squeaking in this year with a c. €10m surplus putting the club on a firmer footing for the first "monitoring period" for the new regulations, the 2011/12 season. Plans are of course plans and football is inherently unpredictable. Rosell and his board know all this of course which is why I think we can probably rule out the Catalans in any future bidding war for W Rooney esq.

Footnotes to FFPR table
* Only net finance costs provided by the club
** Non-football sporting revenue/costs assumed to be permitted for inclusion under Annex X B(1)(k) and C(1)(k)
*** 2008/09 youth teams costs assumed constant in 2009/10 and 2010/11

**** Estimated

The new UEFA regulations can be downloaded here.


"United Against Glazer" march on 30th October

Too often football supporters in England believe they are powerless against the financial exploitation of our game and our clubs.

I do not believe this. In fact I believe that pressure is mounting on the Glazers and other carpetbaggers looking to personally profit at the expense of fans. I also believe that the Glazers have only delayed taking their £95m dividend "entitlement" because of their fears about how supporters would react....

Ticket sales are weak, the waiting list is gone, Gill et al fear more supporters making the tough decision to abandon their season tickets in the future. We know from sources inside the club that during the height of the green and gold campaign the hierachy were extremely worried about damage to the "brand" in the eyes of potential sponsors (note, not the club, the "brand").

Keeping this pressure up is important, so I would encourage all United supporters who can attend to join the:


On 30th October (before the Spurs match) from 3.30pm

Whether you have given up your ticket or still go to games, turn out and show the world what United supporters think of our owners. As the organisers say:

"There are only two sides to this fight"

Details are available at


Friday 15 October 2010

United’s 2009/10 results: Understanding the cash flow

Apologies in advance for the slightly technical nature of this post. It is an analysis of the cash flow dynamics in United's business. It is not trying to make a political point, rather to help those without a financial background get their heads around what is happening and what the outlook is for the next few years. Please email me if you require any clarification on the more technical aspects and I'll endeavour to reply.

The club had a lot of debt (£522m) and a lot of cash in the bank (£164m) at the 30th June. The source of the debt is obvious, the original takeover and the subsequent refinancings in 2006 and most recently in January 2010 when the "Senior Secured Notes" (aka "bonds") were issued. The cash in the bank has come from several sources which I describe below.

The reason all this is important (even if it is quite technical) is because not all the cash reported is "available", some of it will be needed to pay costs during the season when less cash flows in. In addition, the Glazers have large and growing "entitlements" to take dividends out of the club. They have not done so as yet, but supporters should be aware what impact taking up these rights would have on the bank balance. Finally, most agree the ageing squad will need investment in the coming years, probably more than the £31m spent in the 2009/10 season. By understanding the cash dynamics, people can reach their own conclusions about whether high investment and dividend payments are compatible.

Where has this £163m come from?

The "seasonal" effect and the need for a "buffer"
Football clubs receive a lot of money in the summer from season tickets and seasonal hospitality sales but "recognise" this income in the profit and loss account as games are played. In addition, a high proportion of TV money is paid at the end of the season. At the 30th June, the amount received from season ticket and executive sales for the 2010/11 season was £52m (interestingly £2m lower than the previous year). Clubs' costs are incurred more evenly over the year (over 70% of costs are wages). This means that there is a substantial seasonal difference between when cash is received (mainly in the April to June quarter) and when profits are recognised (more evenly but with the October to December quarter with the most home games being the most important).

With the results just published, we can see for the first time how these seasonal effects impact on cash flow over each quarter of the financial year (the club has only had to report quarterly since the bond issue). The  seasonality can be seen in the pie charts below which compare how EBITDA is split and how operating cash flow (EBITDA + changes in working capital) is split. The difference is very, very pronounced, with over 70% of cash (remember this is before transfers, interest and spending on the stadium) coming in the final three months of the year, three months that only generate 19% of the year's operating profit.

So United has its highest cash balance at the end of the financial year in June. In fact the cash balance actually fell in each of the first three quarters of the year, reaching a low point of being down £55m on the year at the end of March (note the cash draw down excluding changes in borrowing was a still significant £38.5m at the end of Q3):

This seasonality explains why United have a history of holding substantial cash balances at the end of each season and has occasionally had to use its "Revolving Credit Facility" ("RCF"), a sort of overdraft facility. Since the bond issue in January, the club's current RCF is £75m which is available to cover short-term cash requirements. The bond prospectus gives some details about the RCF, including that it costs c. 3-4.5% above LIBOR (currently around 1%). More importantly, the RCF has a five day "clean down" to £25m each year. This means the club has to reduce the drawn balance of the facility to a maximum of £25m for at least five days a year. This is to ensure the facility is used for short term borrowing, not long term investment.

The table below shows the season end cash balance over the last few years (and also what percentage of turnover that represented at the time).

As the table shows, large cash balances are the norm for United (except when there is a one off hit to cash such as Lazio failing to pay for Stam in 2002 or the building work on the quadrants in 2006). From 2003 to 2009 (and excluding the quadrant impacted 2006), United had balances averaging £48m at its year end. So what changed in 2009 and 2010?

Cash Boost No.1 The Aon and other commercial upfront payments.
United negotiated a strange but useful pre-payment when it did the sponsorship deal with Aon in June 2009. Aon agreed to pay £35.9m (45%) of the £80m four year deal upfront and a year before the sponsorship started. This boosted the 2008/09 and 2009/10 cash balances, indeed it represents 24% of the 2008/09 closing balance and 22% of the 2009/10 balance. Such prepayments along with season ticket money received for the following season are called "deferred income" in the accounts. Deferred income from commercial contracts totalled £65.7m at 30th June 2010, up £8.2m on the previous year. So United is sitting on £65.7m of cash from various sponsors and partners for sponsorship that has yet to happen. That represents 40% of the club's cash balance at 30th June 2010.

This cash is great for the club of course, but as time goes on, will have the effect of reducing the club's cash flow compared to its profits. In each of the next four years, the club will book c. £20m of Aon related revenue (and profits as the costs of being sponsored are virtually zero) but will only receive £11m in cash (the other 45% having already been paid). On the Aon contract alone therefore, operating cash flow will be c. £9m a year lower than operating profit each year. Add in the other £29.8m of commercial deferred income and the hit to cash flow could be even greater (although we do not know any details of the other commercial prepayments).

Cash Boost No.2 Ronaldo and other transfers
The existence and potential use of "the Ronaldo money" has been a hot topic ever since he his sale to Real Madrid was announced on 11th June 2009. The £80m received by United days before the end of the 2008/09 financial year represented 53% of that year's closing financial balance. Since that date, the club has spent £44m in cash on players (both new and ongoing payments for players already signed) and received £14m for selling players; a net spend of £31.8m. I think we can safely say therefore that "the Ronaldo money" is still there. It represents 49% of the club's current cash balance.

Cash Boost No.3 Virtually no interest paid between January and June 2010 but some swap costs
Interest on the old bank debt used to be paid quarterly. Interest on the bonds is paid twice a year on 1st February and the 1st August, with the first payment on 1st August 2010. The cash flow statement for the period January to June 2010 therefore includes virtually no interest actually being paid (the interest is charged to the profit and loss account of course). The £15.2m of "interest" in the cash flow statement actually refers to a £12.7m payment on the swap closure and interest on the "Alderley Mortgage" taken out to buy the freight terminal next to Old Trafford. In future years around £45m (depending on exchange rates) will be paid out in cash each year and another c. £5m for swap costs. So in the 30th June 2010 cash balance is a one-off interest rate holiday of c. £10m (c. £22m bond interest which would "normally" be paid in the second half of the year minus the large swap cost).

The outlook for the club's cash position
Movements in cash flow can be divided into a series of categories, some of which are described above. Of primary importance of course are the cash profits (EBITDA) a business makes. I am going to deliberately leave the outlook for profits for another day, and focus on the other dynamics at work further down the cash flow statement. The following table shows the actual cash movements in some detail in 2008/09 and 2009/10 and my comments on the outlook (assuming flat EBITDA).

Thinking about dividends and the squad

United is a great business, and as the table above shows, if profits just remain flat, will still generate around £14m of cash next year (assuming a net £30m is spent on transfers). That £14m is before dividends, and in 2009/10 of course the Glazers did not take any of the £95m in dividends to which they were entitled.
Assuming flat profits, by the end of the financial year 2010/11 the dividend entitlement will have grown by another £28m. In total the entitlement will be £123m. Obviously if all this was paid, the net cash flow in the model above would be a £109m outflow not a £14m inflow. This would take the cash balance at the club down to around £55m, totally swallowing up the one-off benefits of the Aon prepayment and the Ronaldo money. The club's cash balance would be back to where it has been in previous years, the amount needed to cover seasonal fluctuations. If that wasn't enough, the ongoing dividend entitlement (roughly 50% of EBITDA minus interest) would make the club cash negative at current profitability.

Of course the vast majority of supporters don't spend a moment thinking about the year-end cash position of the club, but do spend time wondering what investment will be needed to keep our squad competitive in future years as Giggs, Scholes, Neville, Van de Sar, potentially Ferdinand and probably Hargreaves bow out.
I think the questions supporters need to ask are this:

    Will the Glazers take the £95m (soon to rise to c. £123m) in dividends they are "entitled to"?
and if they do....
    Will there be enough be in the kitty to adequately replace our ageing squad in the year or two ahead?


Friday 8 October 2010

Manchester United results 2009/10: first thoughts

Results review

Revenue up 2.9% year on year, compares to 10.2% pa achieved 2000-2009. Lower growth down to "poor" season vs. 2008/09 impacting matchday and TV income. Media is boosted by the start of the new three year CL deal. Commercial growth remains strong.

Costs control at United has been very good. Like all clubs, wages continue to rise sharply (up 7% despite lower player bonuses) but other costs are down 15% leaving total costs flat. Much of this is due to fewer home games than last year and lower travel costs (not flying to a CL final sadly) and there is also an impact from lower expenses relating to various commercial contracts (these are not detailed or quantified and look to be a one-off).

With costs flat and revenue up 3%, EBITDA (pre-exceptionals) was up 9.5% to £100.8m. As ever United is a very well managed football club.

Below the EBITDA line we are back in horrible world of Glazernomics.

The £35.4m goodwill amortisation charge should be ignored, it's an non-cash accounting charge caused by the 2005 takeover and isn't a real cost.

The interest bill of £40.2m includes seven months of bank interest and five months of bond interest. It will be closer to £45m in the coming year.

The "amortisation of issue discount" of £6.7m reflects the fact that the bonds were issued at c. 2% discount to their face value (of £100 or $100) but must be repaid at that face value. The difference is accounted for every year to 2017, but the cost won't actually be incurred until they are repaid in 2017.

The big "nasty" in these number is of course the cost of terminating the swaps (which we learned about at the third quarter results). These swaps are derivative contracts taken out to hedge the interest paid on the old bank debt. The club fixed at a high rate in 2007 and by the end of 2009 when it came to unwind the contracts was sitting on a £40m loss. Although the whole amount is reflected in these accounts, only £14.6m has been paid in cash in 2009/10, the balance will be paid over the next six years. These derivatives were only required because of the debt placed on the club in 2005. This is £40m of costs incurred for no benefit to the football club at all.

The final interest related cost is the unrealised foreign exchange loss of £19.2m. This is another non-cash item reflecting the fact that at today's exchange rate, the cost of paying back the US dollar denominated bonds would be £19.2m higher than their original (sterling) value. As with the "amortisation of issue discount", this can be ignored. Who knows what the exchange rate will actually be in 2017.

Other key points

No money has been paid out of the club to redeem the PIKs. I have no rational financial explanation for this and nor does anyone else I have spoken to in the market. Without sounding like a poor man's Mystic Meg, I can only reiterate that I can see no other source to repay the PIKs other than United and that £70-95m will be used to do so at some point soon.

Net transfer spending (in cash so including ongoing payments for players acquired/sold in previous years) was £30.4m. Actual "additions" in note 11 of the accounts are shown as £25.7m, i.e. players with a value of £25.7m joined the club during the year regardless of the timings of payments. The club reveal that since the 30th June year end, further players have been bought for £8.3m. I can only assume this is Bebe.

Initial conclusions

Thankfully United is not Liverpool off the pitch or on it. This is (operationally as a business) the best run football club in England, it has been for nigh on twenty years. Manchester United are at no risk of going bust.

The tragedy for the club is that so much of the profits are wasted in interest, fees and charges. To ensure the club can cover these, ticket prices are far above the level they would need to be if the club was debt free. Net investment in the playing squad is low and the coincidence with the need to service the debt is too great to ignore.

More to follow.....


Wednesday 6 October 2010

LFC: many unanswered questions

Edit at 12.45pm:

In his Sky Sports News interview, Broughton has just said that NESV would "do the right thing" on getting LFC a 60,000+ stadium but that they hadn't decided whether to build a new one or rebuild Anfield. I find this pretty extraordinary. Is this really a good deal for LFC without this issue agreed? Either NESV can't have a great deal of equity for investment or much confidence of raising debt finance for a new stadium. Time to put that scouse champagne (aka Diamond White) back in the fridge?

Where's the money for this coming from?

The fog hasn't cleared around the potential takeover of Liverpool Football Club by John W. Henry's New England Sports Ventures group, but already there are several key questions which Liverpool supporters should be asking:

  1. Although the LFC statement talks of the NESV offer "removing the burden of acquisition debt", is the c. £300m offer purely equity financed?

  2. If any new debt is being incurred in the purchase, what will this cost compared to the current c. £40m pa interest bill?

  3. With the current c. £100m pa wage bill, can LFC comply with the new UEFA Financial Fair Play rules without Champions League football? If not, will one of Gerrard or Torres have to be sold?

  4. The club requires around £400m to build its planned new stadium in Stanley Park, how will NESV finance this? Will further borrowing be incurred? Is any debt financing already arranged and on what terms?

  5. Part of NESV's success with the Boston Red Sox has been driven by increasing revenue through aggressive ticket price increases at Fenway Park, will the new owners pursue a similar strategy at Anfield/the new stadium?

Hicks and Gillett have boasted of "doubling profits" at LFC, but in reality the club is a financial pygmy on the European stage. Looking at the last accounts, revenue was almost £100m less than United's but the club's wage bill was only £20m less. That was in a season when Liverpool came second in the league and earned £20m from the Champions League...

The one thing that is certain is that there is no easy fix for Liverpool's financial troubles.


Friday 24 September 2010

Arsenal’s 2009/10 results: overall business in excellent shape but industry headwinds persist

Arsenal Holdings plc today published preliminary results for the year to 31st May 2010 (full accounts will be available in due course). This is my initial take on the figures.

The business is in very good shape overall. The strategy of borrowing to finance the building of the Emirates and the redevelopment of Highbury into apartments has clearly paid off. Net debt has fallen to £135.6m (2.4x football EBITDA) compared to a peak of £318.1m two years ago. All the debt incurred to redevelop Highbury has now been repaid and the Emirates financing is on a fixed rate of 5.3% with a maturity of around 20 years. The Highbury Square development generated operating profits of £15.2m, almost double last year's £7.8m. Now the property business is debt free, it should provide a useful fillip to cash flow in the next two years after which all sales will be complete.

Football profits (before player sales) are down because of rising costs and flat turnover. Higher profits on player sales compared to the previous year means profit before tax is up.

On these figures Arsenal will comfortably meet the new UEFA Financial Fair Play rules, in fact in this area it is probably the best placed of all the major English clubs.

Football revenue

All general admission and "Club Tier" season tickets sold out for the current season. The stadium brings in almost £3.5m of revenue per home game which is almost as much as Old Trafford (£3.6m per home game in 2008/09) despite the latter having a capacity 26% higher. This impressive sales performance is only part of the story of course. The further a team progresses through competitions the more income is generated and matchday income actually fell 6% in 2009/10 due to fewer home games being played (there was no CL semi-final for example).

Reflecting the improved Champions League TV deal that began in 2009/10 (and despite being knocked out a round earlier than the previous season), broadcasting income rose 15% to £85m. Arsenal significantly underperform United on media income due to a smaller share of the important CL "market pool" (Arsenal received €16.4m to United's €28.8m last year). The division of the pool is determined by the relative performance of clubs from each country and finishing places in the domestic league. Next year (in common with every other PL club), the new overseas rights deal means PL media income will rise by an estimated 10%.

Commercial and retail turnover declined year-on-year with both areas seeing falls of c. 9%. The club blamed this on their "...sensitivity to the recessionary climate". Arsenal are miles behind United, Real, Bayern and Barca when it comes to commercial revenue and recruited a new Chief Commercial Officer a year ago to improve in this area.

Overall, the increase in media income was not sufficient to offset weak commercial sales and the impact of fewer home games to leave football turnover down marginally.

Football costs

On the cost side, Arsenal have a good reputation for controlling wage costs with the move to the Emirates transforming the club's wages/turnover ratio, but these figures show the significant pressures still evident across football. Total wage costs (for all staff not just players) rose 6.5% and the club warns that there is more to come because "the full cost of a number of the new and revised player contracts entered into in the last 18 months has not yet fully translated into the reported wage cost". The ratio of wages to (football) turnover increased to 49.7% from 46.2%, still very good compared to a number around 80% at Chelsea and over 100% at City. In words that should concern all football clubs and supporters, Arsenal say:

"...there continues to be very strong upward pressure on players' wage expectations."

Football profits and margins

The wage pressure and slightly weaker turnover meant that EBITDA (before the impact of player sales) fell 13.5% year-on-year (a decrease of 375bps in the margin to 25.7%). The player amortisation charge rose by a moderate 4.8% to leave football EBIT down 34% at £20.4m.

Thankfully for the club, the sales of Adebayor and Kolo Toure to the ever generous Manchester City generated a profit of £38.1m vs. £23.2m in the prior year. This allowed EBIT including player sales to actually rise 8.5% to £58.5m. Football interest costs (the Emirate bonds) were down 1.7% to leave football PBT up 12.1% at £45m.

What we should take from this

Arsenal is a very well run club. Debt is totally under control, the business is profitable and cash generation is strong. Industry pressures (and underperformance on the pitch) means,  however, that there is little growth in the business.

These results also tell us quite a lot about the current economics of English football.

For those clubs with large modern stadiums, matchday still remains the most important element of turnover but growth in this area is hard to come by and revenue is of course highly dependent on the number of home games played.

The current growth cycle from media is clearly illustrated in these figures with Arsenal showing an increase year-on-year despite a weaker performance on the pitch as the new CL deal kicks in. But media growth is not a one way street and at 37% of media income the importance of CL qualification is obvious. I remain sceptical about ongoing football rights inflation. The domestic PL rights for the next three years have declined in real terms compared to the last deal perhaps showing early signs of maturity. International growth has been phenomenal, but may also be nearing a peak with some broadcasters now paying more per capita for PL rights than Sky/ESPN in the UK!

Commercial and retail revenue is obviously under pressure from the recession and with the prognosis for the UK economy dull at best, this trend seems likely to continue. Arsenal are determined to catch up with the best in class performance of United and the major Spanish clubs.

Whilst revenue for Arsenal and for most large English clubs looks to be stagnating, cost pressures remain very pronounced. Many hope that limits on squad sizes and the new UEFA Financial Fair Play regulations will moderate transfer and salary inflation, but there is no evidence of that from these figures.

Along with other big English clubs, Arsenal rely quite heavily on profits and cash from player sales (excluding the sale of Ronaldo the top seven English clubs reported an average profit on player sales of £19m in the 2008/09 season). The sharp decline in transfer activity over the summer means this year this source of profits cannot be relied upon. Arsenal say:

"There has been very limited player sale activity during the summer transfer window. As a result, in contrast to each of the previous three years, we do not have a significant profit on disposal of player registrations on the books at this stage of the new financial year. Subject to any transfer activity in the January 2011 window this may impact the final level of profits to be reported for the financial year 2010/11."
The flipside to lower receipts from sales may in the longer run be lower amortisation charges for clubs, but in the shorter term the impact may well be negative.

These results show what a prudently financed, well managed football club should look like. The sharp decline in net debt (debt taken on only for the purposes of investment, not to finance an LBO) stands in stark contrast to position of Manchester United and Liverpool.

Finance does not of course win trophies, and it has been five years since Arsenal has won one (and that was totally undeserved), but in a difficult world Arsenal look financially well placed.