Monday, 16 May 2011

Manchester United’s Q3 results: not nearly as interesting as the football

Published last week, Red Football's results for the three months to 31st March 2011 have been absolutely rightly overshadowed by events on the pitch since. Becoming the most successful English league side ever (to go with our long record as the team with the most FA Cup victories) is a stunning achievement and I was privileged to be in the Darwen End at Blackburn on Saturday to see the job done.

By contrast to the drama of a season's finale, the Q3 and nine month results contain absolutely no surprises. From a financial point of view a great season is only recognised in the final quarter of the year when TV income from winning the league and reaching the Champions League final is recorded in the accounts. The third quarter is therefore a time when nothing unexpected really happens and with United staying out of the January transfer window there was nothing to report there either!

To maintain a decent service for interested readers, here's a brief run through of the main points.

Matchday income was actually quite weak in Q3 compared to last year (down 9.1%). This is a little odd given the number of games (9) was identical to last season and the average attendance (74,628) were only 148 lower. There was one additional cup game and one less league game, but prices are identical for both and shared gate receipts are treated as an expense. For the nine months, matchday income was down 3.7% due to one fewer game than last season. The fourth quarter will be better than last year as there will be two more games including a Champions League semi-final for which ticket prices are higher. Adding in the US tour, matchday income should be up around 4% for the season compared to 2009/10. The twenty nine games played by United at Old Trafford this season is about as good as it gets in terms of number of matches (unless there are several FA Cup replays in a season).

Media income is recognised as games are played. The 9% fall for the quarter and 1.6% fall for the nine months mainly reflect the one fewer Champions League away game vs. last season, something that will clearly reverse this quarter. With United progressing to the Champions League final, the media results for the full year will depend on whether we win or lose. Winning is worth €9m and losing €5.2m. In total, United will receive either c. €52m (£44m) or c. €56m (£48m) from UEFA for 2010/11. This compares to c. £39m last season. Next season, winning the Premier League will increase United's share of the English "market pool" from 30% to 40%, automatically adding €4.2m (c. £3.6m) to media revenue.

In the Premier League, the new international rights deal is mainly being allocated to parachute and other solidarity payments. Each Premier League club will receive an additional £5m each. United's total Premier League media revenue will be around £58m.

The impact of the automatic Nike step-up, the extra Aon income and the raft of secondary sponsors continues to drive this area of the business. Continued growth into next year relies on further deals, something the ever optimistic Edward Woodward spoke confidently about on the conference call.

Q3 is a quiet quarter on the wages side, especially with no major transfer business in January. The club announced new deals for Carrick and Fletcher during the quarter. Looking at the year to date figures, wages are still rising faster than turnover and were up 8.1% during the nine months vs. last season. Other costs were also up 8.1% but were flat in Q3 on the prior year.

Wage growth remains THE financial problem in football. Woodward expressed some confidence that the Financial Fair Play rules would dampen wage inflation in the future, but that this effect would not be seen for a while. The transitional mechanisms in FFP mean that clubs have another couple of years to get their houses in order before the rules bite, and that probably means a couple more years of rising costs.

Operating profits
EBITDA (ex-player sales) was down 2.8% for the quarter and up 1.5% for the nine months. As mentioned above, the timing of games and extra revenue from progressing all the way to the Champions League Final will appear in the next quarters' figures. The successful season on the pitch should lead to moderate profit growth for the year. Woodward warned that winning at Wembley on 28th May would cost the club a large (unspecified) amount in bonus payments to players and coaching staff. In modern football winning is expensive...

Interest, cash and debt

The club recognised an interest charge of £34.9m for the nine months (£11.2m in the 3rd quarter). Because bond interest is paid in February and August, the cash interest cost year to date is actually £47.0m. This brings the total cash interest paid by the club since the 2005 takeover to £239m and total costs including fees etc to £369m.

The third quarter is working capital negative for all football clubs (cash received from ticket sales and sponsors at the start of the year is being run down as wages are paid). Operating cash flow for the nine months was £40.6m after this working capital outflow. In addition to the £47m spent on interest, the club invested £5.7m in capital expenditure (box refurbs at Old Trafford). Net cash transfer spending (stage payments on Hernandez, Bebe, Smalling and Lindegaard) was only £12m during the nine months. This left cash before financing down £24m. There will be a huge seasonal rebound in cash flow in Q4, last season this amounted to over £60m.

In the third quarter United repurchased £5.5m of bonds to take the total buyback for the year to £29.5m (face value). Not all this cash spend fell into the period. At 31st March the club had a cash balance of £113m. With the dollar weakening vs. sterling (and therefore reducing the sterling value the dollar denominated element of the bonds), gross debt fell to £478m. The fate of the repaid PIKs remains a mystery.

Other bits and pieces
The club's amortisation charge was down slightly due to limited transfer spending in the last few years. The goodwill amortisation charge should be ignored, it is an irrelevant non-cash accounting rule.

The machine hums on at United. These results were dull but next quarter's will be good due to an excellent season on the pitch. The run to the Champions League final will boost both media and matchday this season, but of course such years can't be relied on and underlying, the only real growth is from the commercial arm. So far the commercial arm has done enough to offset cost inflation, and this remains the long term challenge.

With the PIKs "disappeared" and Fergie proving he didn't need to spend much last summer, United remain awash with cash. The £113m will rise sharply from now to the end of June. Will SAF spend it? Will it be kept for the next manager? Will the Glazers swoop in and grab it in dividends, something they haven't done so far of course. Only time will tell.