Sunday 25 April 2010

"The Capitalist Tool" + "the Red Knights" = total journalistic confusion

"The Capitalist Tool" is not Joel Glazer's nickname from his time at college, but the motto of US business magazine Forbes.  Last week Forbes, enthusiastic cheerleaders for the unfettered free market, published its annual list of the world's most valuable football clubs (they do a similar exercise for NFL franchises).  No doubt you will have seen that United top the list with an estimated valuation of $1.84bn (£1.19bn).  This estimate caused much confusion among journalists, many of whom saw the numbers quoted as being very bad news for the Red Knights consortium that is hoping to bid for United.  This article from the Telegraph was typical:

The Red Knights, a group of wealthy businessmen, are attempting to raise funds to launch a takeover bid at Old Trafford, but the Forbes figures suggest they must raise well in excess of £1 billion if they are to make a viable offer for the club.

Unlike some football money surveys (yes I'm talking to you Deloittes), the Forbes one has some financial logic to it.  This is how it is constructed.....

They take EBITDA before profits and losses on player trading - this is what they call "Operating Income".  For United they have a figure of $150m which is roughly consistent with Red Football's pre-exceptional EBITDA for the year to 30 June 2009 of £92.1m (the average exchange rate for that period was $1.603 which actually gives a dollar number of $147.6m but its pretty close).

EBITDA is a very common measure of profits used for valuing companies, perhaps the most common.  It has some disadvantageous when applied to football clubs because it takes no account of transfer spending (something no club can avoid in the long-term if they don't want a team of pensioners and a cost that can sink a club - see Pompey and Leeds for example), but as I say, its a commonly used number.

When you value a business using a multiple of EBITDA (which is profits before interest), the number you end up with is a measure of the "enterprise value" (or "EV") of the company.  Enterprise value is "capital structure neutral", it measures the value of the debt and the equity of the company (see Wikipedia's perfectly sensible article on enterprise value for more details).  Forbes confirm this is their approach in the footnotes to their survey:

Value of team based on past transactions and current stadium deals (unless new stadium is pending) without deduction for debt (other than stadium debt).

Other than this footnote, Forbes give no further information on how they arrive at their chosen "multiple" of EBITDA which drives their club valuations.  United's multiple is 12.2x, whilst Real Madrid's is only 10.2x which is odd.  Forbes say they use "past transactions", but the Glazers' paid almost 17x for United in 2005, and Real Madrid is of course structurally unbuyable which means its "value" is something of an oxymoron, can something you can never buy or sell have a value?

The JP Morgan research report on United helpfully included the EBITDA multiples paid (or offered) for stakes in ten European clubs (including the Glazers buying United).  The multiples ranged from a low of 12.2x implied by the Rhone offer to buy 40% of Liverpool to the 18.9x paid by Roman Abramovich when he bought Chelsea.  His presence on the list, as well as football finance geniuses like Hicks and Gillett shows the problems with valuing big clubs.  There are so few precedents and all too often the price is crazy and irrational.  There is no efficient market for assets like Manchester United, the number of individuals who could afford the club is tiny. Anyway, Forbes' 12.2x used to value United looks perfectly sensible as United's profits are hardly depressed, indeed JP Morgan show last year being the peak for a few years to come.

So Forbes value United at £1.19bn.  Where journalists such as Mark Ogden at the Telegraph get confused is that they forget that this includes United's debt.  Forbes says there is $844m (£518m) of debt which I assume is the bank debt on the balance sheet last June.  This obviously excludes the PIKs, but that really doesn't matter.  The £1.19bn is their estimate of the value of the whole business.  The debt figure you use just drives the equity value (the value of the Glazers' shares in United).

Which brings us to the Red Knights.  Articles such as this one by the ever sensible BBC Sports Editor David Bond (ex-Daily Telegraph himself) suggest the Red Knights will offer around £1.2bn.  Let's be totally clear here, this number is the enterprise value of United, it is completely comparable with the Forbes valuation.  David Bond goes on to suggest that the Red Knights intend to keep United's bonds in place in the short-term (something I wrote about recently).  So if the offer was c. £1.2bn and they kept £534m of bonds, the Red Knights would need to raise around £700m to fund their offer.

Hopefully you can see how the confusion has arisen between the £700m described in the paragraph above and the £1.2bn Forbes valuation.  If the Glazers sold Manchester United to the Red Knights at Forbes' valuation, the Red Knights would pay them around £700m in cash, the Glazers would have to pay off the PIKs, leaving them with around £500m for their (and our trouble).  And the rest of us would go back to worrying about Rafael Da Silva's immaturity vs. his undoubted natural talent.


Friday 23 April 2010

The gilded stable doors of the Premier League – the new rules that won’t stop the next Portsmouth

The Administrator’s “Report to Creditors” of Portsmouth City Football Club Ltd which was published yesterday is at its heart an idiots’ guide on how to bust a football club in a very short space of time.

Lesson 1:
“Live the dream” and increase your wage bill by 163% in three seasons whilst your turnover only rises 66% (thanks Harry).

Lesson 2:
Spend money on planning for a new ground, fail to finance it and fail to build it (the so-called “scouse gambit”).

Lesson 3:
Let every other cost go through the roof, doubling in only two years.

Lesson 4:
Open and then close a pointless chain of shops, invest in a radio station and start a ticket financing business in order to “diversify your income”.

Lesson 4:
Borrow, borrow and borrow to fund lessons 1, 2, 3 and 4…..

I’m not going to dwell on the detail of Portsmouth’s situation, thankfully there has been a sea-change in the amount and quality of investigative journalism about the financial crisis in football in recent months, but instead I want to show how inadequate the Premier League’s (self) vaunted new rules which aim at avoiding repeats of the Pompey debacle really are.  The Premier League of course accept no responsibility for Portsmouth's problems (or anything else that goes wrong to be honest).  But just to be safe, the league introduced tough new financial rules last September.  Richard "under wraps during the election" Scudamore said at the time: “It's absolutely crucial that these clubs are run as ongoing viable concerns. These financial rules apply immediately.”

The new rules
Rather than reprint all of rules 71 to 82 of the Premier League rule book, here is a very good summary published by the BBC on 18th February (with my emphasis and explanations):

-   Clubs must submit independently audited accounts to the Premier League by 1 March each year, with requirements to note any material qualifications or issues raised by auditors.
-   Requirement for clubs to submit future financial information [i.e. financial projections] to the Premier League by 31 March each year. This will act as an improved early warning system should any club take undue financial risks which may have consequences for future financial stability.
-   An annual requirement to demonstrate to the Premier League board that a club does not have outstanding [i.e. overdue amounts] debts to other clubs.
-   An annual requirement to demonstrate to the Premier League board that a club is not in debt with regard to income tax or National Insurance and payroll taxes [i.e. overdue amounts].
-   These rules are to ensure that Premier League football clubs can meet their obligations throughout a season including being able to fulfil all fixtures, fulfil contractual obligations to the Premier League and demonstrate that they can meet all payments due during a season.
-   Any qualification raised in accounts or risk seen by the Premier League board could result in action to help prevent a club from exposing itself to financial difficulties that may be deemed unsustainable or put at risk the future financial sustainability of a club.
-   Clubs that fall into such financial difficulty could be subject to financial controls relating to transfer activity and/or player salaries.

There are some sensible things in here, especially the requirement to demonstrate that clubs aren't using Her Majesty’s Customs and Revenue as a piggy bank by not paying PAYE and national insurance on time.  Nor of course should clubs be able to avoid paying transfer fees or debts due to other clubs.  And the introduction of these rules is the first time the hands off, laissez-faire Premier League has ever contemplated imposing financial controls on a member club, even if it has taken seventeen years to put the powers in place.

But beyond these small positive steps, the rules are totally inadequate and crucially would have not have stopped Portsmouth FC from collapsing in the way it did.

Don’t rely on qualified accounts and future financial information
The fundamental problem with the new Premier League rules is that the things that can trigger Premier League intervention (other than breaking the two new rules about taxes and overdue transfer fees) are so, so weak.  Intervention can take place if:

Rule 81.1 the club fails to deliver annual accounts to the league by 1st March; or
Rule 81.2 the club fails to deliver interim accounts to the league by 1st March (which set of accounts are required depends on the club’s year end); or
Rule 81.3 the club fails to deliver “Future Financial Information” by 31st March; or
Rule 81.4 the club fails to deliver additional information requested by the Premier League relating to the auditor’s qualifications of its accounts; or
Rule 81.5 the club has failed prove its doesn’t owe HRMC or other clubs money it should have paid; or
Rule 81.6 the accounts supplied are qualified or part qualified by the auditors; or
Rule 81.7 the Premier League Board, having looked at the information supplied by the club doesn’t believe the club will be able in the next season:
Rule 81.7.1 to pay its “football creditors” or employees; or
Rule 81.7.2 be able to play its 38 league matches the following season; or
Rule 81.7.3 be able to fulfil its league obligations to broadcasters

Putting aside the rules about delivering information on time (something tells me even the most rotten club will manage to comply with those), the other main triggers are whether the club’s accounts are qualified or part qualified and whether the PL board thinks the club might not be able to play its matches or pay its football creditors the next season.  This is totally inadequate and no form of “early warning system”. To see why, just look at the Portsmouth situation.

March 2009 – all well in Pompey world?
Under the new rules, to play in the Premier League in the current season, Portsmouth would have had to file accounts with the league last March.  They actually had their 2008/09 accounts signed off on 27 February 2009 and crucially, there was no qualified auditor’s opinion in the accounts.  Grant Thornton did not issue a qualified opinion about the accounts because they were convinced by the club’s board that although the club had massive liabilities, loans would not fall due before the opening of the next transfer window when player sales could be made.  No doubt the club had a business plan at the time the accounts were signed off which it shared with its auditors and helped satisfy them that the business would continue as a going concern.  Under the Premier League’s new rules, this plan would have to be submitted to the league board of course.  But would the Premier League board have disagreed with the club’s own auditors about the viability of the business?  It would be an extraordinary, effectively inconceivable thing to do.  So the whole new system now relies on the auditors identifying a problem.  If they don’t, whether through their own fault or because they are misled by the management, the whole new system falls over.  No red lights flash.

You may be wondering if the collapse of Portsmouth was a sudden event, unpredictable by anyone in March 2009.  Since the Administrator published the details of the club’s financial position, journalists have expressed shock and dismay at the £122m of liabilities on the balance sheet.  If they looked a bit closer, they’d actually see that the last published accounts showed even greater liabilities.  You can see this in the following table (I have kept the classifications of assets and liabilities as they are described in the Administrator’s Report to Creditors and the Report and Accounts respectively, but the total numbers are completely comparable):

May 2008
Liabilities from administrator

Owed to Portpin

Owed to finance co.s

Owed to financial instituions

Staff holiday pay arrears

Unsecured creditors

Liabilities from 2008 accounts

Short term creditors

Long term creditors


Total liabilities


Freehold property
Other fixed assets



Financed Assets

Player transfers

Cash at bank

Total assets

Net liabilities

Now the net position has indeed worsened (unsurprisingly the club lost money between May 2008 and today), but the key point is that when these accounts were signed off by the auditors in 2009 (when no doubt the Premier League also would have nodded them through if its new rules had been in place), the situation was already hopeless without huge injections of new capital.  None of the Portsmouth’s recent owners had or were willing to inject the money required of course, but none of this is even considered in the Premier League rules and most importantly there is absolutely nothing in the rules to prevent a club getting into such a state in the first place.  As long as the accounts aren't qualified, all is well....

The answer of course is to take a far more fundamental approach to regulating football.  Specifically, English football needs binding rules limiting wages and salaries as a percentage of turnover, and limiting debt as a multiple of profits (with due allowance for borrowing for proper football investment like Arsenal building the Emirates stadium).  Such rules would have gone a long way in stopping Portsmouth or Leeds or Cardiff or Chester (or dozens of the other 50 professional clubs that have gone into administration or CVA in the last twenty five years) ever getting into severe trouble in the first place.

Preventing clubs running up debts at the expense of the taxpayer or other football clubs is a very welcome step, but it doesn’t go nearly far enough.  So next time Richard “over £900k a year but I’m not bailing out the St John Ambulance” Scudamore or Premier League spokesman Dan Johnson wax lyrical about the new “early warning system” and “a set of regulations designed to protect the viability and sustainability of the clubs” remember that these rules wouldn’t have saved Portsmouth and will do little or nothing to save the next football club which falls victim to greed, stupidity and mismanagement.


Wednesday 21 April 2010

Manchester United: Looking after YOUR data?

Those who don't hang out on United forums when they should be working might have missed the posting on the web today of what purports to be a list of companies with hospitality facilities at Old Trafford.  It's accompanied by a statement encouraging the companies to not renew their facilities until the Glazers enter into negotiations with the Red Knights(!).

The link is here.

The people who published it claim to have more names (of individuals) which they aren't releasing.

I've heard lots of stories about the bulk of United's staff being totally sick of the Glazers, and it seems in the case of at least one ticket office employee that it's true.

Not great data security by the club of course.....


Monday 19 April 2010

Should we worry if the Red Knights took over and kept the bonds in place?

In the last week, the press has been full of speculation about the timing and structure of any offer from the “Red Knights”.  One often repeated idea is that the RKs might keep the recently issued bonds in place, at least for the time being.  Reading various United forums, it seems this possibility is worrying a lot of supporters.  Obviously the ideal thing for United would be to turn the financial clock back to May 2005, when we had no debt at all. But if the only way to get the Glazers out involves keeping the bonds for a few years at least, then I still believe this would produce a transformation of the club’s financial position.

The first key thing to bear in mind, is that if the Glazers sell United, they will repay the PIKs from the proceeds, removing this terrifying millstone from around our necks.  The PIKs are central to everything, because the Glazer family do not have the money to repay them and are therefore using the clubs money.  So any successful takeover would immediately reduce the debt that our football club is supporting from over £750m to the £534m of bonds.

In the event of the Glazer family selling United, the bondholders can demand that they are repaid at 101% of the bond’s face value.  The cost of this would be around £540m.  This would be money that any buyer would have to find on top of the amount they had to pay the Glazers and would therefore hugely increase the amount of equity (cash) that had to be found.  Theoretically, a buyer could raise new debt to repay the bonds, but this is a complex, difficult process in what remain tough credit markets.  The third option would therefore be to make an offer to the Glazers that was conditional on the bondholders waiving their right to be repaid.  Why would bondholders accept this?  There are two main reasons, firstly the price of the bonds has risen very sharply since speculation about a takeover began in March.  Prior to the RK announcement on 2nd March, they traded at £92.5.  Today they trade at around £97. If the bondholders did not waive their rights, there would be no bid and the price would almost certainly fall back towards its February levels.  Secondly, new owners who (unlike the Glazers) were not seeking to take significant dividends out of the club would be far more attractive for bondholders.  The more of the club’s profits that are retained inside United, the safer bondholders are.

But wouldn’t keeping the bonds just leave the club in the same position as we are now?

The answer to this is a definite no.

In these successful times (which may not last, just ask a scouser about dominating the league), United is making cash profits (EBITDA) of around £90-100m a year.  From this has to be paid the cost of the bonds, around £45m pa, and then a whole host of payments to which the Glazers are entitled.  These include £6m a year in “management fees”, £3m a year in “parent company corporate expenses” and around £20-25m of permitted dividends.  That’s £30-35m of extra profit that can be saved by removing the Glazers, over £200m during the remaining life of the bonds. 

So an ownership structure that removed all the Glazers’s non-interest costs would be a huge improvement on the current situation.  Under the Glazers, in a season when United make around £95m of EBITDA, only around £26m is left after interest, fees and dividends are paid (and this actually overstates the cash flow).  Under the sort of structure the press say the Red Knights are looking at, this would rise to £60m a year. This extra money could go towards investing in the playing squad, reducing ticket prices and, over time, starting to pay down the bonds.

If the bonds were retained post any takeover, the rules relating to repaying them would still apply.  The bonds cannot start to be repaid until 2013 and early repayment in that year costs an additional 8.75%, falling to 4.375% in 2014, 2.1888% in 2015 and zero in 2016.   So any new owners would have around five years before it became economical to repay the bonds.  In addition to the cash that the club should have generated over this period, it is very likely that by this time lending markets will also be more benign than they are now.  If banks are more willing to lend, the club could repay a large chunk of the bonds and refinance the rest of the debt at far less punitive rates than it is currently paying.  Just to give an illustration, the bank debt the Glazers put in place in 2006 cost 3.5% above LIBOR (roughly similar to base rates), so around 4.5% at today’s LIBOR.  This compares to the 8.5%+ being paid on the bonds.  Similar terms to the 2006 deal would not be achievable today in the post credit crunch world, but in the next few years I would expect credit conditions to improve, allowing a refinancing of the bonds and significantly lower interest costs.

In an ideal world, a new owner would take over our club and sweep away all of the debt so pointlessly loaded onto it by the Glazers.  In the real world, the most we can hope for from a financial point of view is to staunch the flow of cash into the Glazers’ pockets and then gradually rebuild the club’s balance sheet.  It is natural for supporters, all too used to years of financially motivated owners, to be sceptical about the motivation of the Red Knights and people should of course wait and see what they propose. But if supporters can gain a substantial stake in Manchester United in a  structure that provides an extra £200m between now and 2017 to pay down debt, cut ticket prices for kids or to buy world class replacements for Giggs, Scholes and Neville then it sounds pretty good to me.


Wednesday 7 April 2010

Business as usual?

Big game tonight, dare I say “massive”.  Just like the big game on Saturday.  And yet what’s this popping into my inbox yesterday?

Yes that’s right, twenty four hours before a tense quarter final tickets are knocking around on United’s official touting site ticket exchange.  A week before the Chelsea game, the club was taking out discreet adverts in the Guardian offering hospitality packages which it had failed to sell.

Roll back to February and thousands of normal season ticket holders applying for the Carling Cup final in February were pretty dismayed to be told they had not been successful in the ballot, this was despite an allocation of 31,000 and the fact that only around 40,000 season ticket holders were eligible to apply (those in the Automatic Cup Scheme who hadn’t opted out of the Carling Cup).  With odds like those, the huge number of “chubbings” (that’s a United supporters’ term for rejection in a ticket ballot) was very odd.  The mystery was solved when this missive from the ticket office was sent to executive ticket holders (I’ve removed the sender’s details as it isn’t his fault and underlined the key paragraph):
From: ****************
Sent: 17 February 2010 10:21
To: ****************
Subject: Chance to get Wembley Tickets
Hi there,
I hope you are well and business is going strong. After last night's great result against AC Milan, Manchester United have a very strong chance of progressing at least to the Quarter Final stages of the Champions League.

We have therefore hospitality options to guarantee a place not only for the AC Milan game, but also the Champions League Quarter Final game, Liverpool, Chelsea (potentially the Premiership title decider), Spurs, West Ham, Fulham and Stoke with one seasonal ticket. Prices only start from £673 + VAT subject to availability which equates to just £75 + VAT per game.
If and when Manchester United progress to the quarter finals and then the semi finals of the Champions League, your place will also be guaranteed for these at no extra charge.
This is a great option to not only trial the Hospitality facilities at Manchester United, but also gives you the chance, in a very cost effective way, to strengthen your relationships with new and existing clients, reward your staff, network with other Executive Members and if relevant, use them for your own personal use. 
As a further incentive, if you decide to get seats by close of play on Friday 19th February, you will have access to buy the same amount of Wembley Carling Cup final tickets which is on Sunday 28th February.
I have attached a link to our microsite which highlights all the facilities here at Manchester United for your perusal. 
If you are interested or would like to find out more information, please contact me on 0161-8688530.
Many thanks,
***** ******
Senior Business Development
Seasonal Hospitality
T +44 (0) 161 868 8530
F +44 (0) 161 868 8456
E ************
When the club failed to shift many (any?) of these hospitality packages, there was a “second ballot” of Carling Cup Final tickets for normal season ticket holders.  My little group of eight, all of whom had been “unlucky” in the first ballot experienced an amazing reverse of fortune in the second ballot and we got eight tickets.

My sources inside the ticket office say that the club’s top brass are desperate for United to get to the CL final so tickets for the game can be offered to executive ticket holders in exchange for renewals for next season.  These are just stories at the moment, but if we do make it to Madrid it will be interesting to see if the club tries to leg over supporters in the same way it did with the Carling Cup.

There is a whiff of panic about all this.  A quick look at United’s website shows the Europa Suite and Museum still available for hospitality for both the Spurs and Stoke home matches.  United’s most recent results presentation described match attendances as “robust” (hmmm) and hospitality as “challenging”.  The JP Morgan report reminds investors that executive hospitality is “highly discretionary” and sees only a very slow recovery from a forecast 2009/10 capacity utilisation rate of 85%.

Adding to United’s fears of course is the looming threat of season ticket holders and executives not renewing for next season.  As JP Morgan say, “We note that the coming two quarters will be important to gauge demand for 2010/11 season tickets and Executive Hospitality seating in light of the negative MUST PR campaign.”  The club is very keen to stress the season ticket waiting list, the existence of which was rather undermined by the experience of one supporter who spoke at BBC Radio 5Live’s United “Fan’s Forum” on 27 March 2010.  Having received an email from the club asking if she wanted to join the list, she duly did so as an experiment (despite already having a season ticket) and was amazed to receive another email from the club the very next day saying she had been very lucky and was now at the top of the list!

For all the talk of 333m supporters around the world, United are well aware that around 40% of revenue comes from “matchday”.  Furthermore, the timing of ticket revenue receipts is very beneficial to cash flow, which is already under pressure from the pre-payment of the Aon sponsorship monies (which has the effect of reducing free cash flow by £9m per annum compared to EBITDA).  This all puts huge power in the hands of match going fans whether they are executives, local companies who use hospitality facilities (two thirds of the club’s hospitality clients are based in the north-west according to my ticket office source) or normal season ticket holders.

The green and gold protests are clearly already causing concern inside the club.  The increasingly heavy handed actions of the club’s security contractor CES – searches at the turnstiles to look for banners, stewards deliberately blocking gangways in the Stretford End to prevent banners being unfurled (surely breaking health and safety rules) and the ejection of fans allegedly involved in blocking gangways at previous matches (a little ironic?) all point to increasing worries about the supporters’ campaign (details and photos here).  A leading contributor to a United forum reports staff on the official programme and magazine “desperately scouring pictures to source those with minimal exposure to gold and green”.

If a bid is forthcoming in the next few weeks or months, the Glazers will have to decide whether to cash in now, or risk holding on in the hope of more in the future.  Right now the risk level is high and rising.