Tuesday 21 January 2014

Manchester United – the potential financial cost of failure

It’s crystal clear that a Champions League place, that sad modern non-trophy victory we’ve watched Arsenal "win" in recent years, is the most Manchester United will achieve in the league this season.

But what if even a top four finish or, whisper it, the Europa League, prove out of reach? How much would United’s profitability be harmed?

This post looks at how much the club earned last year from the Champions League, how much a Europa League spot would provide instead and the implications of no European football at Old Trafford for the first time since the Berlin Wall came down.

The lessons from LFC

In the long-term, repeated failure to qualify for the Champions League would damage the club’s ability to negotiate the sort of commercial contracts that have been so important to United’s finances in recent years. In the short-term I do not see significant risk to commercial revenue from one (or even two) seasons on the sidelines. If this seems blasé, the evidence from Liverpool is that such damage takes a very, very long time to have an impact.

In 2011/12, the last season for which we have figures, Liverpool FC had the 6th highest commercial revenue in European club football (of course City, with the fifth highest, have the benefit of a suspicious number of Abu Dhabi companies queuing to give them money). Liverpool, who haven’t played in the Champions League since 2009/10, had higher commercial income than Arsenal that season. Furthermore the club’s decline hasn’t prevented more deals being signed since 2012, with companies like Chevrolet and Garuda.

Where United may be vulnerable if the current slump persists, is the very fact that the club has pushed the boundaries when it comes to sponsorship. Manchester United have identified numerous industry “verticals” where football clubs have never attempted to find commercial sponsors, hence the official “office equipment supplier”, “medical systems partner”, “savoury snack partner”, “motorcycle partner in Thailand”. These deals are unproven for the “partners” and may be more vulnerable if the football club isn’t on the top stage for several seasons.

TV cash

The most obvious impact of not finishing in the top 4 (or implausibly winning the Champions League to ensure qualification, hello Chelsea), is the loss of TV income.

In 2012/13, United earned £31.3m in CL broadcasting revenue, which accounted for 8.6% of the club’s income (the third most important source after PL TV money and the Nike contract).

The bloated Europa League is the financial poor relation of the Champions League. A club getting from the group stage all the way to the semi-finals in 2012/13 would have earned €4.7m (around £3.8m) before payments from the competition's market pool. For a club from a large nation like Italy, Germany or England, the market pool payment could add €3-4m more. The most United could earn from actually winning the Europa League (hardly a certainty obviously) would be around €14m (about £11m), a loss of £20m compared to 2012/13. A more plausible run to the quarter finals would bring in around £7m, a loss of £24m.

Europa League (to the quarter-finals): £24m lost income
No European football: £31m lost income


At United, Champions League matches command premium prices for season ticket holders and members. Cup games, including European matches are however included in seasonal hospitality packages. What would happen to hospitality prices if there was no European football for a season is one of the great uncertainties in analysing the financial impact on United. I find it hard to believe the club could hold the prices of executive seats and boxes whilst the number of home games falls from a “normal” 29-30 per season to as potentially few as 19 or 20 (the exact number in a season with no European football obviously depends on the draws for the domestic cups).

The Europa League clearly lacks the appeal of the Champions League, and another factor to consider in the event that United ended up in the second tier competition, would be whether the EL would be included in the daft “Automatic Cup Scheme” that compels season ticket holders to buy their ticket for cup games even if they don’t want to/can’t attend. When the club ended up playing in the competition in 2011/12, the games were excluded from the ACS, to much relief from many fans. Would the management be so generous if the Europa League was the only European football on offer?

There is also a possible impact on summer tour revenue if United had to play in July Europa League qualifiers (although there would be home gate receipts to compensate). All these uncertainties make it very hard to predict accurately the impact on Matchday revenue of either time in the Europa League or no European football at all.

One useful way to consider the sums involved is to look at how Matchday revenue has changed in recent years in response to the changes in the number of home games. A home game generates around £3.8-3.9m of revenue.

Assuming a season with no European football at all and two home cup games, to make a total of 21 home games, the impact would be around £20-25m of lost income. In my view a season in the Europa League might be expected to cost around half that figure from lower attendances.

Europa League (to the quarter-finals): c. £10m lost income
No European football: c. £20-25m lost income

Cost savings

The current terrible season means of course no substantial bonuses for the playing squad, which could save the club around £7m compared to the title winning year of 2012/13.

Fewer cup games saves the club money on match day staff, policing and other related costs. In total, a season with no European football could see cost savings of £2-3m from a locked up Old Trafford.

No European football: c. £2-3m cost savings

The Glazers, the share price and investment

Manchester United’s owners and the club’s board are not stupid and the possibility of one or more years out of the Champions League has no doubt crossed their minds.

The SEC filings the club has had to publish since the IPO show that the scenario is part of the club’s planning. The club can actually be released, twice (in non-consecutive years), from the covenants built into its “Revolving Credit Facility” (think of these as the financial rules governing United's emergency overdraft) if it fails to qualify for the Champions League.

One season, or even two, of failure to qualify for the Champions League doesn’t destroy the Glazers’ business model which envisages ever more commercial relationships and ever greater TV deals. What it definitely does do is make the already expensive shares look very expensive.

A fifth place league finish this season means the club will make EBITDA (cash profits) of around £120m (depending on what happens in the Champions League knock-out stages). At the current share price that values the club at 15x EV/EBITDA ("EV" is "enterprise value" which is market capitalisation plus net debt). No Champions League football, even allowing for more commercial growth (such as the Chevrolet contract and a new kit deal) pushes that multiple up to around 19x. For a company where profitability is failing and which needs to invest more cash to remain competitive that is very expensive.

Europa League (to the quarter-finals): EBITDA down c. £30m in 2014/15
No European football: EBITDA down c. £45m in 2014/15

The big question the owners and Ed Woodward face if things continue poorly on the pitch, is whether they will properly back David Moyes and invest in the squad. The club proudly stated in the IPO prospectus that average annual net transfer spend over the last 15 years (from 1997/98) had been £14.3m (or £20.1m excluding Ronaldo, which one shouldn’t). That level of spending is far too low for any major club, let alone one that has let its engine room decline over years, a decline masked by the genius of the manager.

There is no shortage of cash to strengthen the playing side. At 30th September the club had over £80m in the bank. This season the club will generate at least the same amount again. Debt is down to a manageable level. There really are no excuses.