Saturday 27 February 2010

David Gill replies to my letter

So, somewhat to my surprise, I received a reply from David Gill to my open letter in the post this morning.  I have to thank David for replying, which he did very promptly after I had sent an email on Monday night giving him my full name and address (having concluded that I would not receive I reply writing under a pseudonym).

Here is the reply:

The letter seems to suggest that:
  1. Publishing my questions (and his reply) in public means he is not prepared to answer them (would he answer them privately?); and
  2. That all important issues relating to United’s finances and the Glazers were covered in David’s interview on BBC 5Live on 31st January. 
I wrote an open letter because I believe there are fundamental financial problems with the Glazers’ ownership of United that need to be aired in public.  The supporters have not had any adequate justification from David Gill or the family itself for the pillaging of their football club which is described so clearly in the bond prospectus.  The club will not engage with any of the democratically elected supporters groups, despite the government expressly asking clubs to do so.  I believe David Gill has a responsibility to communicate with the supporters on major issues concerning the club.  A club is nothing without the supporters, they deserve to know the truth.

Turning to the content of the 5Live interview, I can only reiterate what I said at the time.  None of the major financial issues were raised in the interview by Garry Richardson.  Areas not covered included: 
  • The scale of the cash costs of interest, financing fees, derivative losses, “management fees” and loans to the family since 2005.  The fact that none of these costs would have been incurred if the Glazers had not taken over the club.
  • The huge increase in ticket prices imposed to pay these costs with no other benefit to the club.
  • The inconsistency in David describing the PIKS as “not the club’s responsibility” when the bond prospectus clearly outlines the intention to use the club’s cash balance and profits to repay them.
  • The Glazer family’s inability / unwillingness to pay down the PIKS in the last four years and the questions this raises about their financial position.
  • The justification for replacing bank debt with more expensive bond debt, other than to permit the payment of dividends to the Glazers.       

I'll say it again, NONE of the key financial issues were covered in the 5Live interview.

At a time of enormous concern among United supporters about the financial position of the club under the Glazers, demonstrated in spectacular style by the huge number of fans wearing green and gold at every game, the Chief Executive of Manchester United does not want any detailed public discussion of the issues.  Supporters will have to draw their own conclusion from his unwillingness to enter into such a discussion.

Friday 26 February 2010

Out of control

So today Portsmouth became the first Premier League club to go into administration.  Of course more than 50 professional clubs have gone down this route over the years, some more than once.  The infamous “football creditor” rule kicks in and the taxpayer and local supplier gets screwed at the expense of other clubs and (in Portsmouth’s case at least) multi-millionaire players.

This may all seem a long way from United as we prepare for another trip to the Wembley, but the same madness that drives clubs to the wall impacts the biggest clubs too.  One of the most pressing issues, and a central feature of UEFA’s report on club finances this week, is the endemic inflation in costs.

The Glazers have always described themselves as being experts in managing sports clubs (although I imagine a few Tampa Bay Buccaneers fans would beg to differ).  Unfortunately, the reality is that they too have fundamentally underestimated the cost pressures running through football.

The bond prospectus is not the only financing document Red Football Ltd has published since the takeover.  In July 2006, the Glazers published an “Investment Memorandum” when they were raising the bank debt for their first refinancing (you can download it here).  The section entitled “Key wins under the Glazer reign” makes particularly galling reading for supporters (and not just because of the title).  Their three “key wins” are a) building the quadrants (where their only role was to say “carry on lads” to the builders), b) winning the AIG sponsorship (that “brand association” worked out well) and c) putting up ticket prices (no comment required).

Because it was sent to banks interested in lending to Red Football, the document differs from the bond prospectus in the level of detail it provides and crucially, includes forecasts for the club from 2006-2011.  It is here that we can see how na├»ve they are about costs.  The following table shows what they expected operating costs to be and what they actually have been in the subsequent years:

Actual 2005
Glazer plan 2006
Actual costs

Cost overrun

% of plan


As you can see, by the end of last season, costs were almost a third above budget.  Rather than growing by 6.2% pa from 2005 to 2009, costs have actually risen by a staggering 13.8% pa, almost twice as fast.  Some of the big leap in costs in 2008 relates to winning the Champions League, but sadly in 2009 we got taught a lesson by Barcelona and no such bonuses were paid.  The wage bill went up 31.2% in 2008 and rose again in 2009, even though we lost the Champions League final.

In the bond prospectus, the club identifies the problem (my emphasis):

“This increase [in 2008] was largely due to significant increases in players’ compensation resulting from performance bonuses as a result of winning the Premier League and Champions League and a very competitive open market for players as a result of the announced increase in the contract value for Premier League media rights.”

So as the new TV contract kicked in, United were forced to follow the market and pay ever higher salaries.  Of course in 2008 and 2009 we did exceptionally well on the pitch, which pushed up TV revenues; in any sport such success can’t be guaranteed (just look at 2006).

So what is more worrying here, the fact that the Glazers totally underestimated the cost pressures in football to the tune of £113m since 2006, or the fact that extra media money is making the problem worse not better?  For United fans, the fact our owners appear to understand nothing about our “industry” should be of enormous concern given the debts they have burdened the club with.  For football as a whole, the worm has turned as the TV “bonanza” is beginning to work against clubs not for them.  Quite soon Richard “£866k a year” Scudamore will be triumphantly announcing his “success” in selling the Premier League’s overseas TV rights for over £1bn, but injecting yet more money into the system he may just be accelerating the arrival of the next Portsmouth.


Wednesday 24 February 2010

Finding a level

MU Finance's bonds have stopped their collapse in price and appear to have (for the moment) "found a level". For those who don't have access to Bloomberg or Reuters, here are the figures at today's close (all figures are from Reuters).

You can see what has happened to the price and yield since the offer in these two charts:

So still a pretty lousy performance and a yield still above 10% is not a vote of confidence in the business model. One bond manager was quoted as saying the weakness of United's bonds had made it harder for other companies to issue "unrated" bonds.

But the price has levelled out and we shouldn't ignore that.  Yielding almost 11% a week ago, that's 7.5% more than gilts (UK government bonds), they did look pretty cheap.

Of course the bonds have to be redeemed at 101% of par in the event that the Glazers sell United.  Keep an eye on the price, because if it carries on rising from here, it could be because there are some Red Knights riding over the hill.


Sunday 21 February 2010

A tale of two rulebooks

Yesterday was a bad day for United on the pitch at Everton, but United supporters, and indeed all football supporters should spare a thought for Portsmouth fans this weekend.  The defeat against Stoke at Fratton Park could, if things go wrong in court on 1st March, prove to be Portsmouth Football Club’s last ever league game.

Portsmouth’s financial problems are so hugely complex that they make the Glazers’ murky affairs look like a GCSE maths problem (if you want a decent insight into what’s going on I’d recommend Matt Slater’s excellent blog on the BBC website).  The common thread running through both United and Portsmouth’s problems as well as those of West Ham, Hull, Crystal Palace, Notts County, Chester (and I could go on and on) is the total unwillingness of the Premier League, Football League, Football Conference or the Football Association to take any action to prevent these situations arising in the first place.

There are a huge number of ways that football’s regulatory bodies could change their rules to prevent the game’s financial crisis.  One of the most often mentioned areas is the “fit and proper person” test for owners (which I couldn’t help thinking of when I heard Peter Risdale, now Chairman of Cardiff City, on 5Live on Saturday).  Assessing individuals is however, inherently subjective and thus open to legal challenge.  By contrast, adding certain financial requirements to league or FA rules is very, very easy.  To see how easy, we just need to look at the US’ National Football League (“NFL”) and its limits on debt.

The NFL’s rulebook (or to give it its full name, “The Constitution and Bylaws of the National Football League”) came into force in 1970 and has been amended by 106 resolutions since.  The rulebook covers a myriad of topics, including “unsportsmanlike conduct”, Superbowl tickets and the coaches’ pension plan.  Club debt, is covered by various resolutions which set a “debt ceiling” (formerly called a “debt limitation”) for each member franchise.  The first ceiling was set in 1988, with all clubs being limited to $35m of debt (other than trade creditors).  The 1998 resolution put in place a provision for the limit to be re-examined every year.

Fast forward to the most recent resolution on the subject (in 2005, page 264 of the pdf version) and the limit today is $150m, with provision that within this sum, only $25m of the owners’ liabilities could be secured on club assets.  There is also the following, relating to borrowing incurred when buying a franchise (my emphasis):

“…in connection with any acquisitions of a member club or any controlling interest therein, the principal and/or controlling owner shall be required to invest equity (cash on hand or funds borrowed against other current or determinable futures assets of such owner) in a minimum amount to be determined by the Finance Committee, and no acquisition transaction that the Finance Committee finds to be excessively leveraged shall be recommended by the Finance Committee for membership approval. 

So if you want to buy an NFL franchise, you need your financial structure approved by league’s Finance Committee, with the additional warning that anything “excessively leveraged” won’t be approved. It almost goes without saying, but if the Premier League had the same rules, the Glazers’ takeover of United and the Hicks / Gillett takeover of Liverpool would have been forbidden.

I’m not advocating for one moment that English football becomes like American “football”, but the NFL debt rules are almost breathtakingly simple and show how easy it is to impose financial discipline.  In the Premier League, a debt limit based on a single number for all clubs would be madness of course.  Wigan Athletic has a turnover of around £50m and United has a turnover of around £280m, so to set them both the same limit would make no sense.  Tough though it is to admit it, Dave Whelan of Wigan probably had it about right last week when he suggested a debt limit of 25% of turnover for Premier League clubs.  Any new rule would probably need additional limits relating to borrowing to build or enhance grounds, nobody would want a system that prevented Arsenal building the Emirates.  The principle remains however that it is extremely simple, if a sporting league chooses to do so, to impose rules restricting member organisations debts for the good of the sport.

All this is obviously an anathema to not only the Glazers, Hicks and Gillett but also to Richard “860k a year” Scudamore, the self styled football “traditionalist” and Premier League Chief Executive.  Scudamore, who must drive his in-house PR people insane with his constant forays into the media has several objections to limiting football debt, each more perverse than the last.  The weirdest I have read is his suggestion that debt is too hard to define, yet the NFL rules manage it in forty-five words.

A current favourite, pedalled in the News of the World recently under the optimistic (or fatalistic depending on where you place the emphasis) headline “We Haven’t Lost Any Clubs Yet” was the argument that clubs should run their own affairs.  To quote the great man:

“……I'm sure you don't want the Premier League running your club. Club directors have the opportunity to run their clubs how they see fit - all the ones I meet want what every fan wants; success on the pitch.

Now of course nobody wants the Premier League to run anything important, given its lack of action at Portsmouth, you wouldn’t let it look after your cat whilst you went on holiday.  But Scudamore’s is of course a specious argument.  Some sort of NFL style “debt ceiling” does not mean the league “runs” clubs, it is a criteria for allowing a club into the league.  The Premier League’s rulebook (a lot glossier than the NFL’s) is full of requirements for clubs (such as the away dressing room having to exceed 30m2 for example or more importantly the collective negotiation and sharing of media revenues).  It is in the nature of sports leagues that they have rules, and a debt ceiling would just be another rule (albeit an important one).

The problem with Scudamore of course is that he is one of the last true believers in capitalism in football.  In a Telegraph interview last week (imagine those Premier League PR people crying themselves to sleep again) he came out with this:

“There is some emotiveness about leveraged debt. I understand that. We go through this constant struggle between people saying 'clubs should be more professional and businesslike’ but actually a lot of people don’t like some of the business methods brought into the game — like leveraged debt.’’

I think this could have been the best Scudamorism yet.  Putting aside which “people” are saying that clubs should be more “businesslike”, why on earth should particular “business methods” be brought into football if they add nothing?  Certain very common “business methods”, such as clubs being able to takeover their competitors for example, are banned already and I don’t hear a clamour for this to change.  Supporters of Liverpool and United aren’t “emotive” about leveraged debt, they are rightly appalled by it.  Leveraged buyouts have some limited value in commercial life, I’ve invested in some over the years, but their principle positive, driving efficiency in companies, has operated in a perverse way at England’s two most successful clubs.  Neither United nor Liverpool were “inefficient” operationally, in United’s case it was the most efficient football club in the world.  The Glazers have “improved” United financially in only one way, they have tested the supply/demand balance for tickets by raising prices.  At Liverpool, the owners have blown a hole in the balance sheet that has hugely delayed (at best) the one “efficiency” the club needed, a new stadium.  So, zero out of ten for this particular “business method”.

Scudamore and his trappist equivalents at the Football Association (you’d almost think it was World Cup bidding year) are the King Canutes of the modern game, shouting at the tide of debt  as it begins to seep under their toes.  Football might be a business (a strange one where the vast majority of companies make no money), but it is first and foremost a sport and sports can have rules, sports DO have rules.  Big bad capitalist American sport has rules.  If the NFL can limit debt in its clubs with one page of A4, there is room in the Premier League’s 165 page rulebook too.


Thursday 18 February 2010

An open letter to David Gill with 10 key financial questions

Following David Gill's somewhat unsatisfactory radio interview with Garry Richardson on 31st January (his only formal statements about United's finances since the bond issue) and the emotional exchange of views he had with two supporters at Birmingham University last week, I am today sending David an open letter with ten key financial questions about the Glazers' stewardship of the club.

The full text is set out below and the letter can be downloaded in pdf form here.

I have a lot of time for David who is clearly an excellent administrator in an "industry" lacking in such people.  In the plc days I met him on several occasions.  I do however think he is not being straight with the media or supporters about key aspects of the club's financial position and my questions attempt to get to these aspects.

The amount of interest costs and fees imposed by the Glazers on the club (including monies taken for the Glazer family's personal benefit) since the takeover compared to exactly zero the family have invested in the club (rather than in buying it).  Without these costs, ticket prices could have been frozen at pre-takeover levels and the club would still be worse off.

David's dismissal of a potential sale of Carrington, a prize footballing asset built by the club entirely from its own resources.  Such a sale is definitely envisaged by the bond document and would be another direct transfer of value from the club to the Glazer family.

Of most importance, the crystal clear mechanisms put in place by the bond covenants to allow club profits to be used to pay down the PIKS, which totally refute David's many statements that this debt is not Manchester United's "problem".  These mechanisms are the only "benefit" the bonds provide.

I don't know whether David will reply to my letter, but in any case I believe (from a professional point of view as well as that of a supporter) that my 10 questions represent the subjects on which the United management and the Glazers must be challenged.


Sunday 14 February 2010

Politicians watch no.3

Who are you going to vote for in the forthcoming general election (apologies to those too young or too foreign or too incarcerated to vote in this exciting poll)?

Many people say the big parties are all the same with pretty similar plans for cuts, tax rises and promises to clamp down on bankers.

But what if politicians started taking a look at that other example of get rich quick capitalism gone mad, English football?

Sounds fanciful?  Well yes and no.  The Taylor Report led to legislation that governs aspects of the game so the precedent is there.  The Labour government has considered regulating football in the past but was convinced by the Football authorities that "self regulation" worked.  Now we know it really doesn't.

Take the travails of United, Liverpool, Pompey, West Ham and Hull (just to focus on the Premier League) and that's a lot of unhappy voters looking for something to be done.

So I was pleasantly surprised by this article in the Telegraph suggesting a football regulator is being discussed in Whitehall.  To quote the Telegraph:
"In what would be one of the most controversial political interventions into sport in history, football could effectively lose the right to run its own affairs in the wake of a string of financial crises that have hit a number of leading clubs.
Instead the game would be effectively run under licence from a regulator similar to watchdogs which currently oversee the communications industries and privatised utilities."

Now with an election coming, thoughts being mulled in Whitehall now will probably be of no relevance in the summer, but the subject is something for politicians and voters to consider.

This is our national sport, it is a disgrace and its administrators and owners have proved themselves incapable of reforming it.

If I was a parliamentary candidate I'd be wondering why my party didn't adopt such a popular and cheap policy. And as a voter, maybe it would become harder to dismiss them as "all the same".


Friday 12 February 2010

Mortgages, filings and security

There's been some excitement in the last day or so about the filing of two security documents by Manchester United Limited relating to the recent bond issue. Bloomberg covered the story here:

and various wire services and blogs have now run with it.

You can download the two documents here:

MU Ltd mortgage
MU Ltd debenture

The first thing to say about this is that there is nothing really new in this. All the club's property was mortgaged after the takeover (with these arrangements amended after the August 2006 refinancing). The new documents are merely the latest arrangements now the bonds are in place. Bloomberg say:

"Manchester United, the 18-time English soccer champion, included its stadium and training ground as security in its 504 million-pound ($785 million) bond sale, according to documents filed with U.K. regulators."

This is wrong because Carrington is actually explicitly excluded from the mortgage. As I described here, Carrington is not part of the security because the Glazers want the ability to take it from the club (for no cost) and then sell it. Ironically, it would be better for the club if it was part of the mortgage security as it would be more protected from such an action. I say more protected because Old Trafford itself can be sold under certain circumstances. I don't for a minute think this is their "Plan A", its more a fallback arrangement if things go wrong, but its instructive that provisions to do a sale and leaseback (where its called a "Specified Asset Sale and Leaseback") were included in the bond document - it shows what sort of "custodians" of our club they really are.

In the centenary year of our stadium (which the club are actively promoting of course), the news is not that the Glazers have mortgaged our heritage, they did that five years ago, its that they have deliberately reserved the right to sell Old Trafford if things don't go their way....


Monday 8 February 2010

Money for nothing (part 2)… Years’ of unprecedented success for no gain

In my last post, I showed how the £109m of revenue gained from higher ticket prices and the opening of the quadrants had gone not to the club but to pay a “Glazer tax”.  The tax is made up of the cash interest costs from the bank debt (now replaced by bond debt) and the “management fees”, “consultancy fees” and loans paid to the Glazer family.  From the takeover to June 2009 this tax totalled £194m (and this takes no account of the PIKs, professional fees and the losses on the interest rate derivative).

In this post we’ll look at the other enormous financial windfall the club should have benefited from, the extra media income generated not by the men (and woman) from Miami, but by the men in red shirts, by Sir Alex Ferguson and his staff.

Last season was almost perfect on the pitch.  Except for an unlucky FA Cup exit on the ploughed field that passes for our national stadium (I wouldn’t let the FA run my bath) and a warm night in Rome when we got taught a lesson, the team did us proud again.  With the exception of not being in the FA Cup final, United couldn’t really have had any more competitive televised games than they did in 2008/09.  And its televised games and progressing through competitions that brings in media income.  Last season was a good one, and United have had three good seasons out of four since the takeover (this is not something we should shy away from saying, we could have achieved all this and more without our owners).  The exception was of course 2005/06 when a Carling Cup trophy was not adequate compensation for coming last in our Champions League Group and eight pounds behind Chelsea in the league.

So how much money has our success brought in?

This is difficult to answer precisely, because there is no definitive benchmark.  To deal with this, I suggest that “success” is defined as the extra media money United gets compared to a theoretical season when we:

1.      Come fourth in the Premier League
2.      Perform as we did in the Champions League in 2005/06
3.      Only play one televised FA Cup game and lose (hmmmm)
4.      Play no televised League Cup games and  get knocked out in the 4th round

We are always told that Champions League qualification is the minimum we should aspire to and it underpins the Glazers’ business model so as a benchmark, the above scenario looks reasonable.  Rather than trying to track the changes in TV contracts and prize money since 2005, we’ll look at the actual income in 2008/09 and compare it to what we would have earned in the “4th place” scenario to see what percentage of the club’s media income has been driven by the team's amazing outperformance.

The real 2008/09
United’s total media revenue last season was £99.7m of which £86.5m came from the four major competitions (the rest is MUTV, MU Interactive and other in-house media rights all of which broke even and are of no relevance to this analysis).

Premier League 2008/09
Domestic TV money from the Premier League, after various deductions, is distributed partially on an equal basis to each club (“the basic award fund” which also includes parachute payments to relegated clubs), partially on the basis of final league position (the “merit award pool”) and partially on the basis of how many televised games a club plays (the “facility fees fund”).  In addition, overseas income is split equally between the clubs.  Here is United’s income for the season and what the club would have received if it had come fourth (using Arsenal’s income for last season):

Premier League

% total net
United %
Total £m
United £m
4th place using Arsenal no.s
Basic fund
Merit fund
Facilities Fund




Total 2008/09


Champions League 2008/09
Participants in the group stages of the Champions League received a fixed €5.4m.  For every group stage drawn game there was a payment of €300,000 with €600,000 for a win.  Qualifying for the group stage brought in a further €2.2m and so on (see table below).  There is also a large “market pool” payment determined by which country a club is from, how clubs from that country perform and how a club performs relative to its peers from the country (this can throw up some strange anomalies; because the German pool is bigger than the Spanish pool, Bayern Munich actually made more money from the Champions League in 2009 than Barcelona).

If United had gone out in the same style as we did in 2005/06, the impact on TV revenue would be huge (see below).  I have assumed a “pool” payment of 50% of what was actually achieved.

United 08/09 €m
Using 05/06 €m

Qualifying for group stage
Per group game
Each group stage win
Each group stage draw
Group stage qualification

QF qualification
SF qualification

Losing finalist
Winning finalist

Market pool payments



FA Cup and Carling Cup
The Carling Cup brings in virtually no TV revenue even if a team wins it!  In 2008/09 United won the cup and earned £300,000 including prize money.  The FA Cup is more lucrative (although clubs earn no TV revenue from semi-finals or finals).  In 2008/09 United earned £900,000 from TV income and £1.3m in prize money from being a losing semi finalist.

A “4th place” 2008/09
So how much less would United have earned if we’d suffered the doom laden scenario I outline above?  The table below shows the outcome:

"4th place" scenario
CL €
CL £
Total collective

MU Interactive


As you can see, the team’s success last year brought in just under £25m more than it would have been in my scenario, 25% of the total.

The fruits of success
In the last three seasons, United have been in two CL finals, reaching the semi-finals in the other year, have reached one FA Cup Final, one semi-final and one quarter-final and won the Carling Cup in 2008/09.

In financial terms, I believe it is reasonable to conclude that around 25% of United’s media income in those seasons can be put down to the incredible work of the playing squad, the 2005/06 season was a poor.

So taking all the media income the club has earned since the takeover, a total of £235m, £63m has come from beating the “4th place” benchmark. In a world without the Glazers, this huge extra income could have been reinvested in the club, but with our owners, the Glazer tax has to be paid first.  So we can add the £63m to the £109m of “extra” matchday income they have wasted.  That’s £172m of the £194m in interest and fees accounted for.

All that success, all that extra money, and absolutely none of it for the club’s benefit.  We can’t go on like this.