Manchester United Q1 2011/12 results: The big red money machine slowed down by debt

The first quarter of United's 2011/12 financial year saw a familiar story of a very profitable football club servicing some pretty expensive debt. Because the club is so profitable at the operating level (and full credit to the players, coaching staff and commercial team for making it so), the debt can be comfortably serviced. The threat of substantial dividends seems to have disappeared at the moment, but the sheer sums of money wasted by the Glazers' financial structure remains eye watering.

Revenue

Matchday

There were four home matches at Old Trafford during the quarter as there were in the prior year, with attendances virtually identical. Seasonal hospitality sold out for the first time in several years, adding £400,000 to income. The other c. £1.4m growth came from a bigger US tour (tour income is included in "matchday").

Media

The substantial growth here (up £3.2m) reflects a final payment from UEFA for last season's Champions League campaign which has been accounted for this financial year. United also receive a greater share of the Champions League English "market pool" this season. This is because we were Premier League champions last season rather than runners-up the year before.

Commercial

The £5.4m year-on-year growth in Commercial revenue comes from a variety of sources including the DHL training kit deal (worth around £2-2.5m per quarter), step-ups in existing deals (such as Aon) and the inclusion of partnerships signed post Q1 2010/11. On the bond holder conference call the club talked of "many" additional opportunities on the commercial side. United has by far the most successful commercial operation in English football, but still lags behind some major European clubs (especially Bayern Munich). The Stratton Street office in London now has over forty staff.

Costs

Staff costs

Despite the retirement of several senior players over the summer and the sale of Brown, O'Shea and Obertan, staff costs again increased sharply, by 12.2% vs. the previous year. The club said they "continue to face pressure" on wage costs. The club confirmed they had signed new deals with Valencia, Smalling, Park, Cleverley and Hernandez. Some of the cost pressure came from a further expansion of the London commercial team.

Despite the 12.2% rise in staff costs, the ratio of staff costs to income actually fell slightly vs. last year from 53.2% to 51.2%. By way of comparison, the figure at Arsenal in 2010/11 was 55.2% (football revenue only), at Barcelona was 58.3% and at Real Madrid was 45.0%.

Other operating costs

Other costs (ex-depreciation and amortisation) rose sharply up 13.3% year-on-year. Some of this is due to the expansion of the commercial operations and associated costs (the club revealed they pay for some elements of partner companies' advertising, such as the Turkish Airlines TV advert). The other main factor relates to the larger and more costly US pre-season tour.

EBITDA to EBIT

With revenues up 16.6% and costs up 12.6%, EBITDA (earnings before interest, tax, depreciation and amortisation) rose 29.6% to £19.3m for the quarter. This represents a 26.1% margin, which is good for Q1 (a seasonally weak quarter).

Depreciation grew slightly to £1.8m. The club achieved an accounting profit on selling Brown, O'Shea and Obertan of £5.6m. The amortisation charge (how transfer spending is recognised in the profit and loss account) was virtually unchanged at £10m. This all meant that EBIT rose substantially from £4.9m to £13.0m.

There was no goodwill amortisation charge now Red Football has moved  from UK GAAP to International Accounting Standards.

Below EBIT

The P&L interest charge was £10.0m, lower than the prior year reflecting the interest saved by the club buying back bonds over the previous twelve months.

In addition to this interest charge there were £9.3m of non-cash accounting charges. These relate to changes in the value of United's debt caused by the pound depreciating vs. the US dollar (£6.3m), the premium paid on repurchased bonds (£1.9m), the ongoing bond issue discount and issue cost amortisation (£803,000) and a small mark to market movement in interest rate swap (£321,000). In the previous year these items were a positive £11.4m and are of no real importance to the club's financial position.

Cash flow, interest and debt

EBITDA of £19.3m and a £3.2m inflow from working capital (largely prepayments on commercial deals) meant the club saw a £22.5m operating cash inflow during the quarter, virtually identical to the prior year despite the strong profit growth.

There was an August coupon payment on the bonds (the other payment is in February each year) of £21m and the club actually paid £3.2m in corporation tax, a rarity caused by group losses in 2010/11 being insufficient to offset the entire tax charge.

The club spent a substantial £13.8m on capital expenditure, including £8.2m on property near Old Trafford with the balance being spent on box refurbishment in the ground.

Unlike Q1 2010/11, there was substantial transfer spending in Q1 2011/12. The club spent a net £47.1m buying De Gea, Young and Jones (netting off receipts for the players sold).

The combination of heavy capex and transfer spending meant there was £62.6m outflow before financing. The club bought back a further £23.1m of bonds, meaning the total cash outflow for the quarter of £85.7m.

The club's cash balance fell sharply from £150.6m at the end of June to £65m at the end of September. Gross debt (excluding bonds held in treasury) is down to £433.2m, meaning net debt is £368m, up slightly on the same date last year.

Thoughts

Another £21m of interest and £23m of bond buybacks takes the total cost of the Glazers' financial model to an eye watering £578m. There have been some savings along the way (corporation tax savings of around £100m), but the net cost is clear.

There are very few football clubs that could support a burden like that, after all Hicks and Gillett's Kop Holdings Limited collapsed after a couple of years with a lower interest bill than United's. Thankfully, Manchester United can cope with its current level of interest. The club's resilience is down to good management, good luck and good fortune. It is largely of course a product of Sir Alex Ferguson's extraordinary record.

Despite the fact that the club's £100m+ of annual EBITDA can support the £40m+ of interest paid each year and still leave funds for investment, the mooted IPO in Singapore (currently on hold of course) tells its own story.

United's debt is expensive at an effective rate of c. 8.5% at a time of very low interest rates. The club's wage structure cannot apparently be stretched to afford a Wesley Sneijder type purchase, and net cash transfer spending since the Glazers took over is only £114.6m or £21.8m per year.

The House of Commons Select Committee report on Football Governance was highly critical of leveraged buyouts in football and the Department of Culture, Media and Sport response acknowledged this. The crushing cost of the Glazers' LBO are clear every time Red Football reports results. Just because United can "afford" to waste millions, it doesn't mean it's right or sensible.

If the club does do an IPO to reduce debt it appears that message has even made it to Florida.....

LUHG

The real problem with Liverpool's media income

There are few things as unedifying in any aspect of life as hearing the rich demand more at the expense of the less well off, and football is no different.

Ian Ayre, Liverpool FC's Managing Director has suggested that the current (equitable) distribution of the Premier League's overseas rights income should be looked at. Ayre believes that "big" clubs (which apparently includes clubs that finish 7th and 6th respectively in the last two seasons) should get a bigger share.

Ayre is particularly worried about "competing" with Barcelona and Real Madrid and told the Guardian:

"If Real Madrid or Barcelona or other big European clubs have the opportunity to truly realise their international media value potential, where does that leave Liverpool and Manchester United? We'll just share ours because we'll all be nice to each other? The whole phenomenon of the Premier League could be threatened. If they just get bigger and bigger and they generate more and more, then all the players will start drifting that way and will the Premier League bubble burst because we are sticking to this equal-sharing model? It's a real debate that has to happen."

So how bad is the competitive gap between Liverpool and the Spanish giants?

Well at face value, the gap is big and growing. The chart below shows Liverpool and Barcelona's media income for the last five seasons (numbers for 2010/11 are derived from the PL, UEFA, FCB's account and an estimate of LFC's domestic cup income). I have converted Barcelona's income from Euros into Sterling at the average exchange rate for each season.

Having been £20m in 2006/07, the gap has expanded enormously to £75m last season. So what's going on?

Much is made of La Liga's highly inequitable TV rights deal which allows Barcelona and Real Madrid to negotiate to sell their rights individually, creaming off the majority of the total paid between the two clubs. This has indeed been a factor as the chart below showing income from the domestic league rights demonstrates:

The chart appears to show Barcelona's league income running far ahead of Liverpool's in recent years, but it masks the key impact not of the way rights are sold, but of currency. In 2006/07, one € was worth on average 67.6p, by 2010/11 the pound had devalued substantially and one € was worth 85.7p. Once this currency impact is accounted for, a different picture emerges:

The chart above, rebases domestic league media income to 100 in 2006/7 and shows Barcelona's figures in both £ and €. From this chart it is clear that in local currency, the value Liverpool receive for domestic competitions (PL, FA Cup and Carling Cup) has actually grown faster than the equivalent in Spain.

So currency plays one factor in explaining the divergence between the clubs, but there is another huge factor at play; performance on the pitch.

To get a sense of how the relative fortunes of the two clubs have diverged and how crucial this is to media income, consider the following chart showing UEFA TV distributions (all in €).

In 2006/07, Liverpool earned €9.5m (£6.4m) more from the Champions League than Barca. By 2010/11, the positions were radically reversed with Barcelona earning €44.9m (£39m) more from their winning CL campaign than Liverpool did from the Europa league. This season, Liverpool will earn precisely zero from Europe.

Rather than bleating on about how unfair the allocation to Bolton Wanderers is, Ayre needs to look at the performance of his own club. The gap in media income with Bolton over the last five years is already £159m, how much more does he want?

If Liverpool football club had made better use of the £340m in media income they have received since 2007, perhaps they would have been closer to Manchester United on the pitch. The gap last year between United and Barcelona? Not £75m but £20m.....

LUHG

A look at Real Madrid's headline financial figures

Real Madrid is one of several major clubs (hello Chelsea) who publish a gushing press release summarising their financial results several weeks ahead of the full figures. This year's summary came out on 16th September, ahead of RM's AGM on 25th September. This post takes a look at what the figures say and makes a comparison with Manchester United (the only other major club to report 2010/11 figures so far).

Revenues - performance on the pitch drives growth

Despite finishing second in La Liga to Barcelona for the third successive season, 2010/11 was a better season for RM than 2009/10. The club won silverware in the Copa del Rey and perhaps more importantly  made it beyond the first knock-out round of the Champions League for the first time since 2003/04 (even if it was FCB that knocked them out in the semi-final).

The better on-pitch performance was the major factor behind the 8.6% (€37.9m) increase in revenue to €480.2m (£411m). The new three year Champions League TV deal and the club's progress to the semis increased RM's CL income from €26.8m in 2009/10 to €39.3m in 2010/11. The two cup runs meant Real Madrid played 29 home games in total, compared to 24 the previous season and this will largely account for the rest of the revenue increase. No split between Matchday, Media and Commercial revenues is given in the press statement.

Costs - wages up, other costs sharply lower

The 2010/11 season saw the start of the Mourinho era at the Bernebeu and with him came significant transfer spending and a large hike in the wage bill. 

Despite the increase in income, the ratio of wages to turnover increased to 45% from 43.5%, although this is still a very healthy performance compared to other clubs (FCB reported a ratio of 67% in 2009/10, Chelsea 84% and City 107%).

We can use the reported ratio to separately identify staff and non staff costs. Despite the departure of club legend Raul as well as Guti, Diarra, van der Vaart and others, the arrival of Carvalho, Di Maria, Ozil, Khedira etc  as well as Mourinho himself meant the wage bill rose a very punchy 12.4% year on year. It is reasonable to assume there was an increase in bonuses during the season to match the better playing performance.

With staff costs rising sharply, the club did very well to maintain virtually flat operating expenses (before depreciation and amortisation). With total costs only rising 0.5%, non-staff expenses must have fallen 15.9% year on year. This cost line has proved volatile in past years (non-staff expenses fell 12.7% in 2007/08 and then rebounded 24% in 2008/09) but this is still a very commendable performance. It appears Real Madrid have found significant economies at the club which has allowed them to spend more on the playing side.

EBITDA - up sharply but very low profit on player sales

With revenue up 8.6% and total operating expenses only up 0.5%, EBITDA (ex-player sales) rose very sharply in 2010/11, up almost a third to €147.7m. The EBITDA margin was a healthy 30.8%, a huge improvement on 2009/10's 25.2% and almost double the 16.9% the club made in 2004/05.

With only van der Vaart commanding any sort of proper sale fee, the club's "profit on player" sales (transfer proceeds compared to a player's book value) was sharply lower at €3.4m vs. €34.0m, leaving total EBITDA up 3.8% at €151.1m. Profit on player sales is a volatile figure for any club and I would not include it in any measures of fundamental profitability.

After EBITDA - small rise in amortisation

Between the €151.1m of EBITDA including player sales and Real Madrid's reported operating profit of €46.5m are charges for depreciation and player contract amortisation. Unhelpfully the club did not split out the two categories but depreciation is likely to be a very small element (Barcelona's depreciation charge in 2009/10 was only €8.1m for example). Player contract amortisation is how transfer spending is reflected in football club accounts. The value a club pays for the contract of a player is "amortised" or charged over the length of the contract.

The implied depreciation and amortisation charge for 2010/11 is €104.6m, up slightly from €101.7m in the previous year. This movement reflects around €50m of transfer spending (which assuming the new players were on five year contracts would add c. €10m to amortisation) less the sales of Diarra (whose original €26m cost was amortising at c. €5.2m pa) and van der Vaart (his €13m cost was amortising at c. €2.6m pa).

Real Madrid's amortisation charge is the highest in world football, reflecting years of big name signings at record breaking prices.

Debt and interest

The Real Madrid press release trumpets a 30.6% fall in debt to €169.7m from €244.6m the previous year. The club's own definition of debt is very wide, including football creditors and stadium debt. There is no breakdown of bank debt, transfer fees due and other creditors in the release.

The €75m fall in debt looks entirely consistent with EBITDA (ex-profit on player sales) of €148m, net (cash) transfers of c. €40m, interest of around €10m (my estimate based on lower average debt and the interest paid in 2009/10), tax and capex.

The Real Madrid balance sheet is pretty strong and at only 1.1x EBITDA debt is not a major concern for the club.

A quick comparison with MUFC

Manchester United is the only other major European club to have published 2010/11 results so far. I have converted the Real Madrid figures to £ (at the average rate between 1st July 2010 and 30th June 2011 of €1 = 85.65p).

Real Madrid's turnover continues to exceed United's, but the gap closed in the last twelve months as United reached the CL final and saw very strong growth on the commercial side. Both clubs have seen an enormous increase in income over the last five years, but the very significant price increases at United mean it has grown revenue faster (+13.9% CAGR 2006-2011 vs. 10.4% CAGR at Real).

There remain several structural reasons for the gap in turnover between the clubs including;

a) The membership fees Real's Socios pay (c. 60,000 people paying a total of c. £7m pa)

b) A higher proportion of executive facilities at the Bernabeu compared to Old Trafford and

c) The hugely unbalanced La Liga TV deal which brings FCB and Real Madrid around £110m each per annum (vs. the £60m United earned from the Premier League).

In addition to these factors, Real Madrid has for many years been one of the most effective drivers of commercial income in football earning over £116m from this source in 2009/10.

The two clubs have virtually identical wages/income ratios (45% for RM and 46.1% for MUFC). With Real's higher income base this means the Spanish club spend £33m more than United on wages. It should be noted however that the Real figure include around £20m for the club's basketball team and that the United number includes bonuses for winning the league and reaching the Champions League final (which RM did not of course have to pay) of £9.7m. Taking these into account, we can see that Real spend around 15% more than United on "normal" football wages.

United's other operating expenses are significantly lower than Real's, but the two numbers are converging rapidly. United has long had higher margins than Real due to lower wage costs, but the gap is now as close as it has been in recent years at only 2.7%.

It is after the EBITDA line that the major differences between the two club's business models is evident. 

United's depreciation and amortisation charges are almost half Real Madrid's reflecting the far lower reliance on expensive transfers at United in the last five years. 

Of the eighteen players who appeared more than 20 times for Real Madrid in 2010/11, only one (Casillas) came through the club's youth system, one was a loanee (Adebayor) and sixteen were players bought in at an average cost of £19m per player.

By contrast at United, there were also 18 players who made more than 20 appearances last season but four were youth products and those who were not cost an average of only £12m each.

The money saved by United on transfers goes on interest. Real Madrid reported an interest charge of £11m in 2009/10 and I estimate it will have fallen (as the debt has fallen) to around £8m in 2010/11. At United of course, interest on the bonds soaks up around £44m per annum, purely for the honour of being owned by the Glazer family. In previous years the Glazer's financial structure has involved other major costs for United. In 2009/10, swap losses, FX losses and other charges cost an additional £40m. In 2010/11 there was a small net gain of £5m on such items.

Putting the two clubs side by side, we can see two very profitable football clubs putting their resources to very different uses. Neither will struggle under the new Financial Fair Play regulations.

Real Madrid would benefit from having United's youth set-up of course, but United would benefit from having Real's balance sheet. Both need to find a way to beat Barcelona....

LUHG

Manchester United’s Q4 and full year results: 19 titles and a Champions League final

United's Q4 and full year 2010/11 results published today reflect a great season on the pitch that was almost as good as it gets.

The financial impact of the 19th title and reaching the Champions League final were significant on both the revenue and the cost lines. The EBITDA performance was exactly in line with my forecast in my post of 17th August, United remains a predictable money machine.

The interest bill remains very high (£51.7m in cash in 2010/11), and the year can be characterised as one where operating profits were largely used to reduce debt rather than invest in the club. Bond buybacks accounted for c. £64m, whilst net transfers only cost £11.4m. The cost of De Gea, Young and Jones will fall into the current financial year.

Revenue

Matchday

United played 29 home games in 2010/11 vs.28 the previous year and also benefited from a share of gate receipts for the two trips to Wembley. The extra games and gate sharing added c. 5.7% to matchday income with a strong US tour and better corporate hospitality sales adding c 2.7% to leave total matchday income up 8.4%. This is a really as good as it gets for matchday income with virtually the maximum number of games played at 99% of capacity crowds. There was no price increase put through in 2010/11 (excluding the VAT rise).

Media

Media income rose £15m or 13.9% on the previous year. Premier League income rose £7.4m, largely from the overseas rights deal (shared equally by all PL clubs). Champions League income rose c. £5.5m due to the club reaching the Champions League final rather than quarter final (offset by a smaller "market pool" payment). The balance came from better domestic cup runs and MUTV. As with matchday, on current deals this is close to the maximum United can expect to earn from media. The extra earned from winning the Champions League would be c. £3.2m and the extra "market pool" payment for coming first in the PL is worth c. £3.6m.

Commercial

This is of course the key growth area for the club. The 2010/11 results saw Commercial income rise 27% or £22m on the previous year. This was driven by the Aon deal (adding c. £6m pa), the contracted step-up in Nike income (adding c. £2.1m pa) and the raft of secondary sponsors (Conchay Y Toro, EPSON, Singha, DHL etc). Nike and Aon now account for 47.4% of Commercial income, with the majority now coming from the secondary partners. These figures pre-date the £10m pa DHL training kit deal and Mister Potato(!).

The club remain as bullish as ever on the scale of the Commercial opportunity, with significant costs being added in the new (Stratton Street) London office. The expectation being pushed to the media by the club is a doubling of the Nike and Aon deals when they are renewed in the next two to three years. Add DHL and further secondary partner growth and a 2015 Commercial income number of c. £190m looks achievable.

Costs

The price of success on the pitch can be seen in the sharp rise in costs during 2010/11. Staff costs rose £21.2m  or 16.1% to £153m. The club splits this increase between additional bonus payments of £9.7m and "normal" increases of £11.5m. So the "normal" inflation in wages was around 8.7%.

Other operating costs increased at an even faster rate than the wage bill, rising 26.4% year on year or £14m. Around £2.3m of this increase relates to higher pre-season tour costs and the costs of taking the club and its sponsors to Wembley for the Champions League final. The rest is largely related to continued spending on the club's commercial operations, on MUTV and on charitable donations to the Foundation (we will have to wait for the report and accounts for that number).

EBITDA and below

With revenue up 15.7% and costs up 19.1%, EBITDA rose 9.6% to £110.9m, a margin of 33.5%. Although the margin was down 1.8% on 2009/10, it remains well within the normal range seen since 1991.

The club has moved from UK GAAP to IFRS, eliminating the goodwill amortisation charge. The player amortisation charge was down 2% (reflecting a quiet year for transfers). Depreciation fell sharply (no explanation given). There was a £4.7m exceptional charge largely related to a bad lease in Ireland.

Cash flow, interest and debt

With EBITDA of over £110m and a positive working capital movement of £14.3m (pre-payments), operating cash flow was again very strong at £125.1m (up from £103.5m).

The major cash outflow was of course interest of £51.7m which must include some residual swap loss payments as flagged in the bond prospectus (although they are not identified separately).

Cash flow after interest and tax was c. £74m and the club chose to use the majority of this to reduce debt, buying back c. £64m (face value) of bonds and making its small regular payment on the Alderley property loan.

Investment in the squad (£11.4m) was low compared to recent years and infrastructure spending (£7.2m) was in-line with recent years. As stated above, the summer spending on De Gea, Young and Jones falls into the current year's accounts.

Taking all these items into account, the club's year end cash balance fell slightly to £150.6m, very much in line with the average year end balance (£155m) since the sale of Ronaldo. Around £45m will have been spent since the year end on new players, and a bond coupon payment of c. £20m was made on 1st August. The club therefore has a current balance of around £85-90m.

The bond buyback left gross debt at £458.9m and net debt at £308.3m. This is debt secured on United and excludes any family debt that may or may not be hidden in the US. The graph below shows how the club's debt position (net of any cash) has changed since the takeover. The key event is of course the vanishing of the PIKs in November 2010....

Thoughts

These are very strong operating results, but then they "should" be given the success of Fergie and his players on the pitch. Seasons don't get much better than 2009/10 and therefore the Matchday and Media income streams are very close to being as good as they can be. The performance of the commercial operations remains excellent, although the thing that really shows how strong they are is the DHL training kit deal which doesn't even appear in these figures.

The club thus remains a prodigious cash machine attached to a lot of debt. The £51.7m spent on interest takes the total spent on interest and fees since 2005 to £373m. Another £105m has been spent repaying debts taken on by the Glazers. The total of £478m is equivalent to 67% of the money spent on wages since the takeover or more than 7.5x the net transfer spend of the club.

It is hard to pronounce on the future until we know more about the proposed IPO. At the moment, surplus cash is being used to repay debt, a prudent waste of our club's money....  With net debt (at 30th June) down close to £300m, a debt free club is not unimaginable. That would be a huge improvement on the position in early 2010, but would have come at the cost of almost half a billion pounds of unasked for expense over the last five years.

You can read the results and see the club's presentation to investors here.

LUHG

Some more thoughts on United's Singapore IPO

Now that the Glazers' plans for a partial flotation of Manchester United on the Singapore stock exchange have been confirmed, here are a few more observations.

Some of the proceeds will be used to pay down the club's debts - good news but we need details

The club and its bankers are briefing journalists that some of the proceeds from the IPO will be used to repay some of the club's debt. The Telegraph even suggests that the family have realised that the debt burden is hampering the club's ability to compete in the transfer market.

This is an extraordinary turn around in my view, with the club and its owners apparently finally falling in line with the view of supporters! It also stands in stark contrast to the evidence David Gill gave to the House of Common Select Committee on 8th March 2011 (my emphasis):

David Cairns MP: "There can’t be any ambivalence about this. Obviously it would be much better if Man United was not carrying those levels of debt and servicing them, surely?"

David Gill: "In isolation, yes, but there is no issue in terms of asking whether Manchester United has been hampered in terms of what we have had to do as a club in respect of investing, as you quite rightly say, in facilities, players or player contracts. I personally believe that there has been no impact in that respect."

The devil will of course be in the detail,with the following areas particularly important:

How much will the IPO raise?

The BBC suggest between £400m and £600m.

How much of this will actually be used to pay down the club's debt?

Will we have to wait for the prospectus, expected to be published in six to eight weeks time. To make a real difference to the cash flow, a substantial amount would need to be paid down, £200m+. Debt repayment reduces the interest bill but increases the corporation tax bill so this will have an impact too.

What will the club's policy on dividends be?

This is crucial as paying down debt and reducing the £45m interest bill doesn't improve the club's financial position if interest payments are just replaced by dividend payments. The club does not have to pay dividends post flotation, but twenty eight of the the thirty companies in Singapores's Straits Times Index (the "STI", the equivalent of the FTSE) do. The STI yields over 3%. If United had a market capitalisation of (say) £1.2bn, and yielded 3%, that's an annual dividend bill of around £36m.

Looking at valuation

When considering the success of the IPO, its impact on the club and whether fans can or should invest once the shares are listed, valuation is key. I apologise if what follows gets a little technical.

When I wrote about valuation in my post on Wednesday I compared a suggested EV/EBITDA multiple for United of over 21x (on the basis of no debt repayment) to the 14.6x paid for Stan Kroenke for Arsenal. Whilst United may or may not deserve a premium valuation to Arsenal (and you have to ask which club has the most upside in improving its commercial operations in the future), it is worth noting the Kroenke was paying for control of AFC in a contested situation. In such circumstances one would expect to pay a premium price. The United IPO will be an offering of minority position, a very different situation.

I thought it might be useful to look at possible valuations in various scenarios. 

Using some IPO proceeds to repay at least some of the club's debt impacts on valuation itself when looking at measures using "enterprise value" (i.e. debt plus equity). What is in effect happening is that debt is being swapped for equity. The briefing to the press has suggested the Glazers are looking to raise £400-600m, a huge range. I have assumed 2010/11 EBITDA of £110m (we will know the exact figure in October). It is worth noting that 2010/11 was a very good year on the pitch and the media income earned from winning the league and reaching the Champions League final cannot be assumed to recur in the future!

The charts below show the EV/EBITDA valuation in two scenarios, a flotation of 1/3 of the club for £400m and for £600m and how various levels of debt repayment impact the valuation. I have deliberately kept the scales constant.

In Scenario A above, 1/3 of the club is sold for £400m, implying a market capitalisation of £1.2bn. If all the proceeds are used to repay the £400m of net debt, the club is debt free, has an enterprise value of £1.2bn or around 11x 2010/11 EBITDA. By contrast if only 25% (£100m) of the net debt is repaid, the enterprise value is £1.5bn or 13.6x EBITDA.

Scenario B above shows the same process but at a far higher IPO price with 1/3 of the club sold for £600m, giving a market capitalisation of £1.8bn. In this scenario, even if all the debt is redeemed, the EV/EBITDA multiple is still 16.4x and if only £100m is repaid, it's a very punchy 19.1x.

Discounted cash flow ("DCF") valuation

As I have said before, EBITDA is not a particularly good measure of a football club's profitability. Below EBITDA comes transfer spending which can be very significant. In 2010/11, net transfer spending equalled 30% of EBITDA. A more rigorous valuation method is to look at free cash-flow after transfers and capex. Assuming annual net spend on players and infrastructure of £35m, unlevered free cash-flow is around £65m (assuming only £3m of cash tax is paid, a low rate than cannot be relied on indefinitely). 

DCFs are notoriously bad predictors of value, but a simple two stage model growing free cash at 10% per annum to 2015, then 5% to 2021 with 3% perpetuity growth and a 9% discount rate gives an EV of £1.5bn (so a market cap around £1.2-1.3bn assuming some debt is left in place). If that sort of growth rate only justifies a valuation at the lower end of the range, the higher prices mooted rely on some very heroic assumptions.

There will no doubt be further twists and turns in this story in the weeks to come. I will endeavour to keep readers up to date.

LUHG

The key issues surrounding a United flotation in Singapore

Readers will no doubt have seen the story, initially reported by Reuters’ International Financing Review news service yesterday, that the Glazers are planning to float a minority stake in Manchester United on the Singapore stock exchange (the "SGX") later this year. This story follows rumours in recent months of a listing in Hong Kong.

What could it mean for the club?

The first thing to say is that we have few details to go on. IFR mentions a “$1bn” listing, around £600m. How much of the club that would represent depends on the valuation on flotation the Glazers could achieve. Suggestions in the media that £600m could be raised with the Glazers only selling around 30-35% would indicate a very high valuation in excess of 21x EBITDA[1]. By comparison, Stan Kroenke’s acquisition of Arsenal earlier this year was at a valuation of around 14.6x EBITDA and Fenway paid 11.4x EBITDA for Liverpool in 2010. The suggested United numbers may of course be bankers’ puff, but they are certainly aggressive.

The second obvious statement to make is that actions the Glazers take are generally for the good of the Glazers and nobody else. It is notable that neither the club nor the family have made any attempt to consider supporter involvement in any flotation. Information is, as usual, very scarce.

In my view there are three main issues for supporters stemming from this news:

1. What will the Glazers would do with the proceeds of an IPO?

One obvious answer is to pay down some of the club’s £400m (net) debt, the bonds issued in 2010. That would, without question, be good for the club, reducing the interest bill (currently around £45m per annum) and freeing up more cash to invest in the club.

The other answer, and in my view far more plausible, is that the cash will go to Florida to bolster the Glazers’ personal finances. As has been well documented, the Glazers obtained £249.1m (c. $400m) from an unknown source in November 2010 to repay the infamous PIKs. I have it on good authority that this money was borrowed. The family’s highly leveraged US strip malls business, First Allied, continues to struggle. In 2013, NFL teams will have to meet a wage “floor” which will (on current figures) reduce the profitability of the notoriously low spending Tampa Bay Buccaneers.  All in all, the family could do with a significant injection of cash.

It seems logical that the flotation plan is really just the “Plan B” adopted by the family after they decided (in the face of the green and gold protests) not to use United’s cash to deal with the PIKs (for evidence of this fear of supporters see this Bloomberg article from October 2010). With the club's cash pile not available, a minority IPO is the logical next choice to get the Glazers out of their financial hole.

If I am right and the Glazers are intending just to take some personal profits, there will be little short-term impact on United’s finances, although the club's dividend policy may change. The club would not be obliged to pay dividends after flotation, but there is a risk that further cash would have to leave the club under the new structure. On the flip-side, if an IPO relieves the financial pressure on the family, the risk of them taking dividends out (which they are already able to do) is reduced. Once again we need more information.

2. Should supporters try/want to buy shares?

Looking back, many fans realise that we missed our chance between 1991 and 2005 to build a meaningful supporters’ stake in Manchester United when it was listed on the London Stock Exchange. Leaving ownership to City institutions led to the Sky bid, the manipulation of the club by Magnier and McManus and eventually the Glazer takeover.

A flotation of United, even in Singapore, gives an opportunity to own shares in our football club again and that cannot be dismissed out of hand. The problem is of course that any supporter stake would be as a minority in a Glazer controlled business. With the suggested valuation so high the sums needed for a meaningful stake look very difficult to achieve.

Despite these issues, I think as details emerge, we should as supporters look very carefully at this new opportunity. A minority sale is a major change in approach by the Glazers and looks likely to be the beginning of the process of them selling the club (although this may take some years). If that is the case, supporters need to be thinking now about how they can be part of a new ownership structure.

The sheer size of Manchester United may appear to preclude any major stake for fans, but in some ways the scale of our support provides the opportunity. MUST have 172,000 registered “e-members”, the club claims 330m “fans”. Looking at those two numbers, could 1 million supporters be brought together in the next twelve months and commit to invest £100 each? That would be a significant toe hold. A great first step on the way to greater supporter involvement in years to come.

3. What should we do now?

In the short-term, we all need more information on what the Glazers are planning. How much will they sell, to whom, when, what will the board structure be, what will the dividend policy be, how long will the family’s remaining stake be “locked up” etc, etc, etc. Without this information we can only talk in generalities.

As these facts come out, I passionately believe we need to achieve some new unity amongst our support. MUST will, as the mass membership official supporters trust, take the lead, but we need to try and build a consensus with all groups including IMUSA, the three fanzines, principal forums, FCUM (who remain part of the family), and possibly members of the “Red Knights” consortium and groups like Stretford End Flags and others who some feel haven’t been sufficiently “anti” in recent years.

It may be that none of the numbers stack up when we see them. It may be that unity is not possible, but we screwed up our last opportunity to get meaningful supporter ownership in our club and we would be wrong not to look at this opportunity closely. Together. United.

LUHG 

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1. 21x EBITDA calculated as follows: Estimated 2010/11 EBITDA £110m. £600m for 30% of equity implies equity valuation of £2bn. Current net debt (outstanding bonds less cash at bank) c. £400m. Enterprise value therefore £2bn + £400m = £2.4bn or 21.8x EBITDA.

Are United trying to cut the wage bill?

It pays not to believe anything Sir Alex Ferguson says about potential transfers. This is not a man who loves sharing secrets with the media. So we should all take his comments in the US yesterday with a pinch (or perhaps a bucket) of salt. Having said that, Fergie said some quite specific things about the financial implications of the club's summer sales and purchases which are worth a closer look at. This is what he said (my emphasis):

"At this moment, I can't see another addition. The type of player we might have been looking for is not available.

"We lost five players in their 30s this summer. That helped finance the three younger players I have brought to the club. I am happy with the players I have got at this moment in time." 

The "five players in their 30s" are presumably Wes Brown, John O'Shea, Owen Hargreaves, Gary Neville and Paul Scholes. In addition of course, one rather important player in his forties, Edwin van der Sar, has also left the club.

Of these six departures, only Wes and JOS were sold for a fee, so presumably when talking about exits helping to "finance" new arrivals, Fergie is talking about wages. The question therefore is how much has been saved in wages?

Needless to say, we are entering a world of guesswork when it comes to players' salaries. These are my best guesses, but if anyone can find sensible sources for more accurate figures, please let me know.

On these figures (and indeed on anything roughly near them), the club is currently sitting on some significant cost savings. The estimated £10.7m per annum in annual wage savings is 8% of the total club wage bill in 2009/10 and around 11% of the club's annual cash profits (EBITDA).

The estimated saving of c. £200k per week is also (coincidentally?) around the level that the press has speculated United would have to pay Wesley Sneijder to prise him from Internazionale.

So what is going on here? The cash for transfer spending is definitely available. As I wrote in June, when the club publishes it's full year results in October, they will show a cash balance of c. £180m at 30th June 2010. Only around £47m of this has been spent. There is over £130m still available.

The club is clearly crying out for more creativity in central midfield. Scholsey made sixteen league appearances last  season and has gone, Gibson is for sale, isn't good enough and hasn't travelled on the US tour, Fletcher is still ill, Giggsy is a stand-in midfielder entering the end of his career. Meanwhile, Barcelona passed through us and around us at Wembley in a way that makes the need to strengthen crystal clear.

I don't know why Fergie said what he said yesterday. I hope it is more smoke and mirrors to keep the rest of the world confused. I hope it isn't a sign that not only do new signings need "financing" by player exits, but that the edict has gone out to reduce the wage bill. Is the subject of dividends to the Glazer family back on the agenda? Is this an attempt to boost short-term profits for a Hong Kong float (at the cost of the long-term development of the club)?

Frankly, what's the point of being the most commercially successful club in England with a "global fan base" of 330 million and £130m+ still in the bank if we can't afford a decent new central midfielder?

Good old Glazernomics.

LUHG