There is plenty of talk about our debt issues at the moment, where just like in 2005, the less than satisfying performances have come at a time of more doom and gloom about the Glazers.
I received an e-mail this morning from a poster on the blog asking me to share some of his analysis with the readers. He works in a financial planning department, is a qualified Chartered Accountant, and has Masters in Economics and a Masters in Finance. In summary, a pretty smart cookie.
I’ve edited his analysis and hopefully this should give us all some more understanding of what is going on at our club at the moment. This is not sugar coating the issue, rather weighing up the negatives, as well as the positives, thanks to a situation we’ve been forced in to because of the Glazer takeover.
First, let’s try to clear up some common misrepresentations:-
– There is a difference between Profit and Cash Flow. Profit made on player sales represents the difference between the sale value of the player minus the written down value of the player in the books of the company. So to say that the entire amount of £80.7m mentioned in the accounts as profit made on Cristiano Ronaldo is wrong as Cristiano was bought for around £12.8m and after accounting for accumulated depreciation/amortisation (which would be a small amount in his case as he was a very young player when bought and his remaining ‘estimated economic life’ would be long) I would say the figure related to Ronaldo is closer to £70m. The remaining £10m is down to sales of other players and youth team/ reserve team players that we have moved on, which is likely to continue in the future as well because United have recently sold on the youth players we think are not good enough to make it at Old Trafford.
– Similarly I read some comments on the lines of “If we had purchased Carlos Tevez for £25m, our profits would have been lower by £25m.” Again not correct. Players are the operating assets of a football club and any purchase made will reflect in the cash-flow statement and not in the Profit and loss statement. So if had in fact purchased Tevez for 25 million, our profits would have been almost unaffected except for the annual depreciation on him, which would have worked out to £2m pounds assuming an estimated working life of 10 years (he is 25 now, so him playing until 35 is a justified assumption)
– Financially, the GLAZERS and THE CLUB are now virtually one and the same, whether we like it or not. Underneath all the corporate veil and the mesh of companies (holding companies, subsidiaries, etc) the sad truth of de-listing is that the company and the Glazers are now one, whether we like it or not. The Glazers debt is virtually our debt, so we can safely say that the secured debt mentioned in the accounts is bollocks and the real debt is closer to £710m pounds after including the PIK loans of around £200m on the Glazers personal Balance sheet. There is nothing the club can do to stop siphoning off of funds from the club to the Glazers and that is sadly a fact for all of us.
The published accounts are as follows:
Match day Revenue is more or less maxed out and shouldn’t exceed £110-112m next year as almost all Old Trafford games were already at full capacity this year, and so no substantial further rise can be foreseen. Unless you consider we are due another yearly rise in ticket prices. There is also the future potential of increasing capacity in the South Stand.
Media Revenue can be expected to rise further to an estimated £105-110m as the payments from the Premier League on media engagements continue to rise. Media revenue is also dependent on United reaching the last stages of the UEFA Champions league and cup games.
Commercial Revenue is again expected to rise next year to around £80-82m as the new shirt sponsorship deal and deals with Airtel and other commercial partners kick-in in full next year. This year figures reflect only a small part of those as they were struck in the middle of the year. The full benefit of those will be realised in 2010 with commercial revenues likely to be significantly higher next year.
Based on the above estimates, the picture for next year should be as follows:
The EBITDA is the key figure that we must focus on, because it represents the cash available for us to repay the debt and interest as well as finance the player purchases.
The depreciation and amortisation figures are just book entries and do not involve cash outlays, which is the key thing for any leveraged acquisition. (Believe me I know what I’m talking about as I work in the Financial Planning department for a company called Tata Steel which itself was involved in $12 bn leveraged buy-out of Corus Steel in the UK, which many of you might know about as it has been in the news lately with Gordon Brown involved in some discussions with the company). As you know, we cannot depend on profit on player sales as they are a one-time ‘extra-ordinary’ income and such huge windfall profits cannot be expected every year.
Also, we must keep in mind that losses on player sales might occur in the future, such as the loss on Louis Saha, Juan Sebastian Veron happened in the past, we may see the same for players such as Nani, Owen Hargreaves, etc. if they are moved on for less than their written down value.
The original Glazer line of giving Sir Alex £25m a year seems to be partly covered, as out of the approx EBITDA of £90-95m every year, £25m could go to player purchases (plus any profit from player sales could be safely re-invested after paying off the tax on capital profits – yes, profit on sale of players do attract taxes!) leaving around £60-65m cash for payment of interest and repayment of debt.
However the real spanner in the works has been thrown in on account of the financial markets going into free-fall. This meant that the Glazers could not refinance the extremely high interest bearing PIK loans (14.25%) and this led to extremely high total interest payments over the last few years (£41.9m and £45.5m is just the interest on Secured bank loans part – add the PIK part as well and the total is closer to £68-70m every year). Also, the cash saved by the club over the last few years from not using up the £25m a year transfer fund (the club has a net spend of £32m over the last few years I think as pointed out by Scott when comparing Sir Alex Ferguson’s spending with Rafa Benitez) has all been lost on fruitless expenses such as derivative fees, fees to financial institutions, hedge losses, etc.
Also, these PIK loans are lowest in the hierarchy of repayments; any repayment would first have to go towards the bank secured “Senior” loans of around £510m remaining on the balance sheet.
You could easily ask why not pay-off these extremely high interest loans first to get rid of them – the answer is that it would not be allowed by the “Senior” bank lenders as these PIK loans are ‘Junior’ loans which can be repaid only after senior debt is repaid.
Also other restrictive covenants based on profits/losses, EBITDA multiples, etc. would be imposed leading to restricting our movements in the transfer markets.
This is where this BOND issue of almost £500m comes in. If it is successful, then the senior loans of the bank could be paid off. This means that the hierarchy of loans is gone. The bonds are planned to be secured on the clubs assets and if you read one of the articles where it says the Glazers can then use the remaining cash at the moment to pay dividend to themselves whereby they can use £70m or so to pay off the PIK loans or use it as they deem fit.
This is where I think, this bond issue is going to help us. It removes the restrictive covenants that the bank loans have put on the club, enabling us to pay off the crippling PIK loans quickly, as well as have greater freedom in financial matters such as further raising of funds.
The Revolving credit of £75m that the club seems to have signed is basically a short term measure or a working capital loan – it should NOT be used to buy players because in principle, short-term funds should only be used for short term assets (and long term owned funds for long term assets) as otherwise there will be ‘asset-liability mismatch’ in financial jargon leading to other issues and expenses such as the hedging loss suffered by the club to match the interest rates, exchange rates etc.
Conclusion: Despite all of Sir Alex’s protestations to the contrary, he does not have all of the £80m from Cristiano Ronaldo’s sale. In theory, yes he does still have that amount of money in the bank account/cash flow, but if the above bond issue does go through as planned, and the Glazers do indeed take away around £70m of the remaining cash, then Sir Alex might just have to restrict his spending. Coming from a working class Scottish background and will put financial prudence and long term financial safety of the club first over immediate success.
Positives: All is not lost, if the PIK loans are taken care of, then in the long term the rest of the bonds and loans can be re-financed, plenty of takers should be available considering that the business model remains essentially healthy and sound. Young players coming through this club are exciting and very large reinforcements are not needed anyway, just a few decent players here or there should help us tide through. EBITDA levels are expected to remain competitive.
Negatives: The club must continue to build on its success. A drop outside the top four could be financially disastrous. We simply cannot afford to finish outside the top four as it would involve a straight loss of almost £40m a year (£25m from UEFA plus all the matchday revenue and commercial revenue brought by it.) Our days of break the bank signings seem to be over. Even if we do make any marquee signings, it will be out of borrowed funds (the revolving credit facilities) and would put us under great pressure to succeed to balance the books in the long run, making the situation even more precarious. Sir Alex knows this and hence the constant assertions of there being “no value in the market.”
The Glazers have taken the club for a ride and needless expenses on financial institutions could been avoided. However, we must also keep in mind that all this was in some ways necessary to move away from being a PLC which was also holding us back as was highlighted by Sir Alex himself at the time of the takeover. Some of these expenses were a necessary evil, but the financial downturn came at the wrong time which has made the situation even worse then it had to be. This answers the question as to why David Gill later approved the takeover in the first place (at the second time of asking the offer from the Glazers was improved upon over the first offer).
We cannot just wish away the Glazers, so the sad truth is we must stick with them and hope people such as David Gill are able to steer it away from all the complications and that the players under Sir Alex are able to continue their success.
The analysis has been restricted to the amount of publicly available information as the club is now no longer a PLC and hence information is not freely available about the goings on inside the club.
A big thanks to Abhay (Red Devil) for sharing this perspective.
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