Saturday, 30 January 2010

The Empire strikes back.....

So here we go, released from the legal restrictions during the bond roadshow, David Gill and the club hierarchy are coming out fighting against all the criticism they have received. Tomorrow morning, Gill will do an "exclusive" interview on Radio 5.

Football Focus on BBC1 this morning had a piece on the gold and green protests and spoke to MUST, Keith Harris (banker not ventriloquist) and a rather ill informed academic. The club was obviously given the chance to take part but instead sent the BBC this statement:

"Manchester United is the most profitable football club in the world, last year, on a record turnover of £278m, the club made a record cash profit of £91m. Interest payments were £41m and wages accounted for less than half of the turnover.
"The recent bond issue has been very successful and provides the club with certainty in its interest payments, as well as great flexibility with the removal of bank covenants.
"The cash from the sale of Cristiano Ronaldo is available for Sir Alex to spend and it will be spent on players who are available for purchase and who the manager thinks can improve the squad, not to prove to pundits that it exists."

Let's take a look at this statement bit by bit:

"The recent bond issue has been very successful" - They have indeed raised £504m, £4m above the initial target.  That is a successful bond issue.  Well done all.

[The bond issue] "provides the club with certainty in its interest payments" - This is also true.  From now until February 2017, the club will have to pay a fixed £44m per year (unless it chooses to redeem some bonds). The 8.72% they are paying on the £504m is indeed certain.  It is also higher than the actual interest rates on the bank debt they are replacing and is even higher than the fixed rate (5.0775%) that the management chose to lock into in 2007 and is now costing the club £35m to unwind.  But yes, they get certainty.

[The bond issue gives] "great flexibility with the removal of bank covenants" - hmmm.  Let's be very clear about this.  The bond does indeed remove the bank covenants and replaces them with bond covenants.  These are a lot less onerous than bank covenants.  They allow Red Football Ltd flexibility to do the following:
  1. Pay an immediate dividend to Red Football Joint Venture Ltd of £70m (page 130 note 13).
  2. Pay an additional dividend to Red Football Joint Venture Ltd of £25m whenever they wish (page 130 note 14).
  3. Transfer Carrington (for free) to another Glazer company, sell it and let the new owners lease it back to the club (page 78 and onto 79 "Real Property").
  4. Pay £6m a year to the Glazers in management fees (page 100).
  5. Pay £3m a year in "general corporate expenses" to Glazer companies (page 129 note 10b).
  6. If EBITDA is at least twice the interest bill, pay 50% of the net cash profits of the club to parent companies in dividends (page 127 note c(i)).

So who benefits from the "flexibility"?  The football club or the Glazers personally?

"The cash from the sale of Cristiano Ronaldo is available for Sir Alex to spend and it will be spent on players who are available for purchase and who the manager thinks can improve the squad, not to prove to pundits that it exists." - Now I don't want to use rude words in a family blog, but this is a bit much.....

Look at this table from page 44 of the prospectus.

At the end of September 2009, Red Football Ltd had £146.6m in cash (that's the first column entitled "Actual").  Why so much?  Firstly because £80m of Ronaldo money was in the bank and secondly because Aon, our new sponsors paid £35.9m of their £80m four year deal up front.  So that's a bonus inflow of £115.9m in the £146.6m.

The second "As adjusted" column shows the impact of the bond issue (as if it had happened in September because those are the most recent figures).  See how the cash mysteriously falls from £146.6m to £116.6m. This is explained on page 43 of the prospectus.  The bond cash needs to be topped up with club cash to pay off all the old debt, plus some of the losses on the interest rate derivative and the £15m in fees the bond deal cost.  So there goes £30m.

Then look at little note 1 below the table,  "we may, without restriction, make a distribution or loan of up to £70.0 million to our immediate parent company, Red Football Joint Venture Limited, that may, in turn, use the proceeds of that loan for general corporate purposes, including repaying existing indebtedness."

They "may" do that.  If they did that of course, no less than £100m would have gone out of the club.  Have they done it as of today 30th January 2010?  No.  Why not?  Because the settlement date for buyers of the bonds (the date they pay for them) was yesterday the 29th January.  It wouldn't have been possible to pass the money up to Red Football by today because they need to do the "Closing Funds Flow" whereby money moves around group companies.  So today it is true the money is there.  You can guarantee it won't be around for long.

Will they pay up the £70m?  We won't know for certain until the accounts for the year to 30 June 2010 are published next year.  But with the PIK time bomb ticking under the Glazer family (and their other businesses struggling in the US) the answer is obvious.  My bet of a pint to anyone who wants to gamble on the money staying in the club is still there.

So what of buying players?  Even if the cash goes as I described, the club can still buy, with even more debt. The Glazers can take the money from Ronaldo as set out above but out of the kindness of their hearts they've fixed a new £75m bank facility for the club.  Now of course cash is cash whether its Aon cash, cash paid by TV companies over the rest of the season, Ronnie cash or cash drawn down under the £75m facility.  Maybe they have put the Ronaldo money in a separate account called "Look, look it's the Ronaldo fee account" so they can show journalists the bank statement.  It doesn't matter of course,  sell the best player in the world for £80m and push at least £100m of cash out in fees, dividends, derivative payments etc and you end up in exactly the same position.

So if you happen to hear David Gill on the radio tomorrow, remember this, the money IS there this weekend, but the whole design of the bond issue is structured to mean it and a whole lot more will walk out of Old Trafford in the weeks, months and years to come.