Thursday 19 January 2012

Why England's richest club doesn't have any money...

I wrote this article for the latest edition of the famous fanzine United We Stand and it is reproduced here with the very kind permission of the editor, Andy Mitten.

If you don't buy it at the match I'd heartily recommend United fans subscribe to UWS here (ten editions for only £28).

Whenever things go wrong on the pitch or when injury ravages the team, I get asked whether United “have got any money” to buy new players. The last few weeks have definitely been one of those times and regardless of the footballing wisdom of January signings, the question is being asked with great urgency. Can United afford to strengthen?

I believe there are actually two answers and both are important. The first is purely factual, how much cash does United have in the bank, and the second is more subtle, what is the cash earmarked for and what are the real restrictions on transfer spending? 

When it comes to cash in the bank, United has been very, very rich since 2009 (when the club received the £80m for Ronaldo from Real Madrid and Aon paid £35.9m of their four year sponsorship up front). At the end of June 2009, the club had a cash balance of £150m, a year later it was up to £164m and at the end of June 2011 was still £151m. To put that number into context, it is more than twice the club’s £67m net transfer spend in the six seasons from 2005/6 to 2010/11. 

Since last summer the cash balance has fallen very sharply, by September 2011 the figure was down to £65m. A big chunk of this fall (£47m) is down to the signings of Jones, De Gea and Young (less the cash received from the sales to our Wearside retirement home). The club also spent £5m on corporate box upgrades and £8m on more land purchases around Old Trafford. 

The remaining £26m fall in club’s cash pile is where “Glazernomics” kicks in. The club generated around £22m in profits during those three months, but the interest bill was £21m (interest is paid twice a year in August and February). On top of the interest paid, the Glazers decided to spend £23m buying back bonds in the market. This is not the first time the club’s money has been used in this way; since the bonds were issued in 2010 £88m has been spent repurchasing them from investors (see graph below).

These bond purchases go to the heart of how the Glazers run Manchester United and how horribly different it is from other “normal” clubs. At almost every other football club, any profits are reinvested. Real Madrid made a handsome pre-tax profit of €50m in 2010/11 and spent every penny of it on transfers. That is not the way United is managed. Over the last two years the club chose to spend that £88m on buying back bonds rather than on strengthening the squad. Just to be clear, there was no obligation to buy these bonds, it was a judgement made by the Glazers and their management team. 

The financial return on these bond buybacks is pretty good, with cash in the bank earning 1.5% being used to buy bonds that cost the club 8.7% in interest. But good financial sense is not always good sporting sense if money is diverted from the football club. Which brings us to the subject of wages. 

When Sneijder turned down United’s offer last summer (and again when Nasri chose City over us), the sticking point was wages. Now no football club should be held hostage by greedy players, but there is something distinctly odd about a club like Manchester United being unable to “compete” for the best talent. So what is the reason we can’t compete? As with transfer spending (or the lack of it), it is a conscious choice by the owners. 

United is run not only to make a profit, that is just commonsense, but is run to maximise value for its owners. That means maximising profits and thus operating on a far lower budget than a club of United’s scale can actually afford. In 2010/11, United made so much money that the club could have paid three new players the same wages as Rooney (around £140k a week) and still make EBITDA (cash profits) of £89m. But making £89m instead of the £111m reported by club would inevitably reduce the price that could be achieved in a listing on the Singapore Stock Exchange, or the value of any future sale to a Sheikh or Oligarch. So the Glazers chose to restrict the wage bill to a level they were happy with and thus chose to make Sneijder unaffordable. 

Older reds will no doubt point out that this dance with financial devil began when Edwards floated the club back in 1991, and there is much truth in that. The difference however is in the scale of impact on Manchester United. Across all the plc years, the total dividends paid were only £59m. The total cost in interest, fees and debt repayment in the six and a half years of the Glazers is £480m. 

So it doesn’t really matter if we have about £60m in the bank (we do). It’s that unfortunately for us the club is run to make money for a distant family from Florida and they’ll do what they want....


Tuesday 17 January 2012

Explaining the confusing world of Everton's cash transfer spend

This is slightly dweeby analysis of Everton's transfer spending that attempts to explain why the figures quoted by EFC Chief Executive Robert Elstone and published in the club accounts do tie in with reality. Hopefully it casts some light on the complex cash flows involved in many transfers, but it may be a bit dull!

The problem
After Everton announced the purchase of Darron Gibson last week I tweeted:
"Little known fact. Everton have been net spenders on transfers every year since Rooney left (cash figs from accounts)."
Along with this graph:

This was met by some understandable scepticism from Evertonians pointing out that in 2010/11 "we didn't sign anyone". Then by happy coincidence, Everton Chief Executive Robert Elstone published an extraordinary blog on the club's official website entitled "Where The Money Goes", which said exactly the same thing I had said.

The dichotomy between the honest opinion of Everton fans that the club has been more about selling than buying and the numbers in the club's cash flow statements in the accounts showing net spend over each of the last six years needs explaining.

The problem arises with the phasing of payments for players and receipts from their sale and from the fact that the only information we have are headline figures for deals, what you might call "the Sky Sports News number", and two numbers in a club's cash flow statement, one for purchases and one for sales.

The details Elstone gave on transfers
This is what Robert Elstone has to say about Everton's transfer activity since 2006/07 (emphasis as in original):
"[2006/07] We spent £4m net on new players (money we paid out on signing including Kroldrup, Davies, Johnson and Lescott less money banked on the likes of Rooney, Bent, Kilbane and Davies).

[2007/08] net spend of £15m (further money we paid out for Kroldrup, Johnson and Lescott and new spending on the likes of Howard, Jagielka, Yakubu, Baines and Pienaar, less the money banked for Davies, Kroldrup, Beattie, McFadden and Naysmith).

[2008/09] We spent £6m net on players(payments for Yakubu, Baines, Howard, Kroldrup, Lescott and Fellaini, less monies in for McFadden, Kroldrup, Beattie and Johnson).

[2009/10] We spent £3m net on players (payments out on Yakubu, Fellaini, Bilyaletdinov, Distin and Heitinga, less monies in for Johnson, Rooney and Lescott).

[2010/11] We spent a further £7m net on players (money spent on Fellaini, Heitinga and Gueye, less cash in for Lescott and Pienaar)."

Modelling Everton's cash transfer spend
We can look at Elstone's long list of purchases and sales in more detail in the table below, along with the actual cash flows from the Everton report and accounts.

We can then apply some estimates of transfer prices, I have used figures from except for Tim Howard for whom no figure was available on the site and I have estimated £3m, the sale of Simon Davies (est £2m) and for Rooney where the relevant stage payments for 2007 and 2010 are estimated from note 11 of MUFC's 2005 accounts.

Except in the case of the Rooney stage payments and the payments for Lescott, I have assumed that where cash is received or paid over multiple seasons all payments are equal (a modelling simplification I concede), so we can get to an estimated payment/receipt per season:

We can then apply the payment/receipt per annum estimated to the sequence of payments given by Elstone and compare the calculated figures to the actual cash flows in the report and accounts:

As can be seen from the table above, this model matches the actual numbers from the accounts pretty well, with an error of only £1-2m per annum.

I am not claiming the above model is perfect, but hopefully it shows why Everton's published numbers are correct. The issue of phased payments creates significant confusion when people examine football club accounts, something we will no doubt see with Chelsea and Liverpool's next few results in which the £50m paid for Torres will be spread over 5 years....

It's worth noting that for two years in 2003/4 and 2004/5, Manchester United, under pressure from the club's major Irish shareholders Magnier and McManus published detailed player by player analysis of all transfers. The example below from 2004/05 (apologies for the low quality) shows the complexity of the cash flows and conditional payments:

Only £1.4m of the £23m cash United received that year was from player sales in that season and only 58% of cash spent related to deals signed in that year.

I can see no logical reason why UEFA, FIFA or national associations shouldn't insist on this level of disclosure, prices paid are hardly commercially confidential, and then everyone could see how much their club does or does not spend and on whom.


Saturday 14 January 2012

An open reply to steve_mcfc's questions to me on 13th January 2012

This is an open reply to steve_mcfc, the Manchester City supporting Twitter sensation. I blocked Steve on Twitter months ago but in a rush of blood to the head I unblocked him yesterday.... Steve proceeded to tweet me around 30 times starting at 7.48pm yesterday. The Tweets were a combination of insults and questions and are reproduced in full below (in bold). You can check they are exactly as Steve tweeted on his timeline. I was out at the time.

Given that it is hard to reply to 30 tweets I thought I would give more detailed answer to each of Steve’s points on this blog. I apologise for not replying on Twitter but as Steve doesn't restrict his questions to 140 characters, I don't see why I should restrict my answers...

Before you blocked me, you said you were opposed to a cap on squad spending where the cap is the same for all clubs. How can you claim to be impartial when you refuse to support a cap that's fair and you will only support a cap that provides United with a huge long-term advantage? You're not impartial at all, are you?

I’m not impartial about which team (United) I want to win things and which teams (others, especially Liverpool, City) I don’t. That’s called “being a supporter”. I am impartial about wanting football organised in a fair and sensible way maintaining decent competition, preventing the exploitation of supporters and the endangering of clubs through excess debt and financial mismanagement.

I support FFP because I think excessive owner subsidy unbalances competition and injects unsustainable inflation into the system. The labour market in football has an almost vertical supply curve, that is to say the supply of footballers is almost completely price inelastic. Additional cash above a certain level just increases the price (wages) of footballers. The vast majority of clubs lose money because of the wages they are forced to pay. Controlling owner support through FFP should calm this systemic inflationary problem, helping the whole pyramid.

Why did you refuse to support a cap on spending where the cap is the same for all clubs, & you would only support either FFP as it currently stands, or a cap on spending where the cap is set to be a percentage of revenue?

Because a fixed cap would eliminate any incentive to grow and develop a club, surely a daft and unwelcome consequence? What is wrong with the “normal” equation of “play good, attractive football, attract higher gates and more sponsors, reinvest this money back in squad and create virtuous circle....”?

FFP doesn’t preclude massive investment in stadia, youth development, training facilities etc in any way. It just limits inflationary bursts of wage and transfer spending.

I would have preferred FFP to have specific debt restrictions in addition to its spending limits, debt is a cancer on the game. I would like to see any English licensing rules to include debt restrictions. See my submission to the CMS Select Committee, available here:

Do you still think that FFP will land City "back in the ditch", as you once charmingly said?

I hope City go back to the regular relegation/promotion comedy cycle of failure they have been on for most of my life yes! In other shocking news I hope Liverpool implode with King Kenny going mad, that Leeds never come back up and I have to tell you Steve, THE POPE IS CATHOLIC.

Before you blocked me, you said you were opposed to a cap on squad spending where the cap is the same for all clubs. How can you claim to be "impartial" when the reason you oppose that is because you want FFP to provide United with an unfair advantage?

I don’t support FFP because it helps United (under the current ownership all it would actually do is help the Glazers boost EBITDA and get a bigger price for any future IPO in any case).

I actually think there needs to be a financial rebalancing between the richest clubs like United and the less well off. I would advocate the reintroduction of league gate sharing and a redistribution of Champions League income across the PL to help this. I think the FFP exclusions on stadium development are great for aiding a rebalancing but bottom line, clubs like United should be “taxed” through gate sharing etc. If you don’t believe me, ask Dave Boyle, David Conn and Ian King (of TwoHundredPercent) with whom I’ve been discussing this for a while now.

Why did you assume that Etihad Airways would not grow at all over the 10-year period that the Etihad sponsorship deal of City covers? Etihad is a young airline that is looking to massively expand over the next decade, yet the figures you assumed for Etihad's growth over the next 10 years was 0%. Your assumption of 0% growth was dishonest wasn't it, Andy? Why would a young airline seeking to massively expand sign a £400m sponsorship contract and expect to grow by 0%?

If you are talking about my benchmarking of the Etihad deal to the company’s current financial in my blog post of 13th July you have got the wrong end of the stick. I pointed out that the company’s current turnover was £2bn and that even at a 10% EBIT margin the deal would represent an unusually substantial proportion of profits. When did I say the company would never grow?

I think the deal is extraordinarily large compared to the size of the company and can find no equivalently large deal vs. company size out there (Bayern’s sponsor Deutsche Telekom for example have EBITDA of €3.9bn and pays Bayern €25m pa). Let me know if you can find another mismatch between deal size and company size...

No response to anything I've just said then? Does that mean you accept everything I've just said?

No, hence these replies!

As for verbal diarrhoea, I would say you being interviewed by the BBC talking about City's finances is the best example of verbal diarrhoea I've seen. Why on earth a supposedly unbiased broadcaster has a highly biased Utd fan on to slag off our finances I'm not entirely sure.

Why don’t you ask the BBC Steve.

You don’t like me or my views, but lots of other people take me seriously unfortunately.

One other thing. Do you not consider it extremely hypocritical to campaign against the Glazers because they limit United's spending while you also act as cheerleader for FFP, cos it will limit City's spending? Is that impartial?

The Glazers exploit United and its fans (like Hicks and Gillett exploited Liverpool and their supporters)  through an LBO. My main gripe is not spending restrictions, it is enforced ticket price hikes to make the LBO numbers stack up. The House of Commons Select Committee for Culture Media and Sport was scathing of LBOs in football, it is not an unusual view that they add no value.

I am not a cheerleader for FFP, I support it but think that the financial structure of UEFA’s CL is a major problem and would like specific debt limits in the rules too. Again, see my DCMS submission for details (and note that the committee quoted my submission on several occasions).

No response to any of that then? Guilty as charged then.....

Sorry, it took me a while...

You actually blocked me because I accused you of being a liar, Andy. I see you're lying about that too now.

Did I Steve? I knew there had to be a good reason.

Sorry, my mistake, you blocked me because I accused you of being a biased liar. That's the one.

OK, if you say so Steve.

Come on Andy. I think I explained the issues I have with your claim of being impartial. You used to stick up for yourself, so why not now? For example, this is a yes/no answer: Do you still think FFP will land City "back in the ditch"? Yes/no - wouldn't take you very long to clear that up, would it?

I actually think City may get around FFP sufficiently to remain quite competitive. As a United fan I would of course like to see you back down in the ditch!

Stop pretending to be impartial. We all know you've only started covering clubs other than Utd so that you can help to convince people of the supposed need for FFP so that Utd get their massive unfair long-term advantage. Unless you can convince people why it's "fair" for United to spend around 65% more than their PL rivals year in year out when on-field success has been shown to be highly correlated with total spending on wages & transfer fees

Are you saying nobody who supports any club can comment on the finances of any other club or on football wide regulation? That would rather restrict debate!

As I said above, I think the big clubs like United need reining in financially through new rules. The fact that clubs without rich owners like Everton can’t possibly compete and that clubs with quite rich owners like Sunderland can spend £100m of their owner’s money and not get anywhere suggests fundamental flaws with the system. The answer to that is surely not a billionaire owner for every club?

I started covering other clubs because the whole subject interests me and I believe fans are exploited all too often (see my work on QPR’s ticket price hikes for example). The Football Supporters Federation were kind enough to nominate me in their blogger of the year award. I’ve helped out various supporters trusts behind the scenes too, not that you appear to care about ownership issues Steve.

In fact Steve, you are like a stuck record, fixated by FFP and its relative impact on City and United.

You've provided a great defence of your impartiality, Andy. Well done son.

Thanks Steve.