I hate myself for starting a United thread, but this is an interesting look on the finances of the rags. Tick. Tock.
I've lifted this from another forum
I've lifted this from another forum
First, let me just say that I thought this take-over would not be a good idea from the beginning, so to the extent you don't like what I'm going to write, bear that in mind. I don't think LBOs are good way to run football clubs. Now, then, onto the analysis.
I. What the prospectus doesn't say.
The Prospectus is a relatively revealing look at Utd's finances. But one thing that it doesn't show, critically, is the terms on which the Glazers own the equity of the club. (The Prospectus covers the debt and mostly ignores the equity.) The Glazers did take a PIK loan out, but I don't know on what terms. (PIK means payment in kind; its like your credit card. If you can't pay your balance, it gets added to the principal of the loan, and you have to pay interest on that too.)
II. Can the club/the Glazers pay the debt faster/earlier?
Technically? Perhaps. Realistically - only if they replace the bonds with another form of financing. To be more specific: There are two types of debt - amortizing and balloon. Amortizing debts are like most mortgages - you pay off interest and principal at the same time. So if you've borrowed $200K to buy a house, you'll have paid off some of the principal in 10 years. These sorts of loans also often let you put in extra money to pay the principal down. However, that's not the sort of bond this is - these are balloon payment bonds. That means that at the end of the bond's maturity, the bond will come due in full, and all the club pays on it until that maturity date is interest.
Now, some people have suggested that the Glazers will repay the debt faster. One problem - they can't. The bonds do not provide a mechanism to put in, say, an additional 30M a year one year to pay down principal. They're not meant to work that way. Now, the bonds can be redeemed optionally, but with caveats. If done before 2013, the Glazers would have to pay a premium. If done after 2013, the club could do it, but again, it'd basically have to buy the bonds at about par. That would be expensive, and can't be done for a while.* So you're stuck with this debt for a while unless the Glazers are willing to pay a premium after finding another source of funding.
III. What does the Prospectus say?
The Prospectus has quite a few interesting things in it. Some of them are:
a) Change of Control: This is an interesting provision. Basically, if the Glazers don't control United's equity, they have to offer to repurchase all the bonds at a premium. This is a bit of a "poison pill" that makes the Glazers harder to remove - whoever buys the club will have to pay out a ton of money for the debt.
b) Conflict of interests: Here's an interesting snippet from the prospectus - "The interests of our ultimate shareholders could onflct with your interests, particularly if we encounter financial difficulties or are unable to pay our debts when due." This isn't an unusual provision, but this makes clear that what's best for the Glazers isn't what's best for the club.
c) The club owns the Manchester International Flight Terminal. I have no idea why, but it took out 7.7M of debt in 2008 to buy it.
d) The contract with Nike has "performance criteria" - i.e., the better you do, the more it pays, and the converse is true.
e) 39% of revenue comes from matchday tickets, 35% comes from media and 25% comes from commercial sources (sponsors, suppliers, liicenses, etc.)
f) without the sale of players, the consolidated financial numbers would have shown a 55M loss. In 2008 the loss was 26.25M, in 2007 the loss was 25.8M
g) 88.7% of media revenues come from EPL and CL matches. I'd have loved to find the breakdown for that number, but couldn't. The EPL TV rights will be renegotiated in 2013, the CL ones in 2012.
h) 16% of luxury boxes were unsold at the beginning of last season (from 12% the year before) - this likely has to do with the economy doing worse; these are usually corporate perks. (I'm still pissed I couldn't go to the Chelsea game for which my friend at RBS had a spare luxury box seat )
i) You're allowed to sell Old Trafford and Carrington, though whoever buys it will have to lease it to you.
j) Player Salaries: You paid 92.3M in 06/07, 121.1 in 07/08 and 123M in 08/09. I don't know the figure for 2010, obviously, but it looks like the Glazers are trying to stabilize this.
h) Net spending on transfers in 06/07 was 10.6M, the next season 26.4M and this past season - a gain of 44M.
i) There's a 75M revolving facility with RBS. This isn't unusual for a big club, but is a potential 75M more of debt. Usually these are used to even out "seasonal" variations in income. (I.e., football clubs get lots of money at one time but then don't for a while - revenues aren't average over the year).
j) Interest - the interest on your debt is a little cheaper these days, since LIBOR is going down.
k) You pay the Glazers for consulting, you pay your affiliates for "management" (combined up to 10M or so a year, not more). These are limited.
l) You gave the Glazers a loan of 10M - presumably for paying the interest on PIK loans, at 5.5%.
IV What's it all mean?
Are you in danger of imminent collapse? No. However, the real concern is a slow bleed. Unless the economy recovers quickly, you're going to have problems servicing the debt AND spending money on players. Some - of course. A lot - doubtful. Part of the problem is where to squeeze money from? I suspect the Glazers will increase ticket prices as the economy recovers, though by their numbers the tickets are not too expensive. (Not my claim.) Commercial is another potential source of revenue (thus the signing of Chicharito probably), but its a question of how much more money can be wrung out of this. For one, other clubs are becoming more savvy about it, for another, you need to keep winning to keep it up. And Real, for instance, are becoming very aggressive. Last is television revenue. You can bet United will try to get individual TV contracts the way that Real and Barca do. For the CL, this obviously won't fly. For the league......who knows? If supported by enough clubs, they could force a break in the way that the initial Premier League owners did in 92. That would make a huge difference.
The prospectus also makes clear that losing revenue from the CL would be very bad. So it seems then that the most economically efficient is to do what Arsenal do; shoot for 4th place in the league while hoping for better and getting past the group stages of the CL. Three years ago, this seemed like a cinch - no one seemed poised to challenge the Big Four. Now, with Citeh around? Well.........that's not so easy anymore. Granted, Pool have similar problems to yours and no other club is a clear alternative to fourth place. But still - its a slippery slope. As the prospectus says - you need to win in order to maintain high ticket prices and in order to attract top talent.
I think you have to hope that the economy recovers rapidly which would make ManUtd an attractive IPO candidate - hope that lots of people decide to buy shares at an inflated price. Clubs have certainly done that before. However, if the economy doesn't recover quickly, this will be hard to do. Which means that you'll continue to have fairly significant interest payments staring you in the face even as the Glazers need to squeeze the club to pay their PIK creditors.
Can it be definitively said that the Glazers are a bad thing for Utd? Well.....not yet. If Darron Gibson turns into the next Bobby Charlton, Nani into Ronaldo II and the rest of the forever touted youth players into split images of Milan 89 - no. Then things will be hunky dory and the Glazers might even begin to form an attachment to the club. But if not............there is the danger of a slow bleed to death. And while the Glazers haven't caused it yet, they have put the club into a more precarious situation. The Glazers maintain they have the experience of "turning around" other sports franchises - but the Bucs were a loser who became more valuable when they began winning. Utd. haven't exactly had that problem. The outlook may not be wholly bleak.......but there are very significant risks ahead if you actually want to win. Fourth place, however, shouldn't be a problem. But, I suspect that's not what you wanted to hear.
Sorry if that was brief/incomprehensible or if it was something you all knew already and I'm annoying you for posting it. But at the same time, if you have specific question, I can try to answer them.
*This is not unusual. What occurred with the Glazer buyout was an "LBO" - a leveraged buyout. Traditionally private equity businesses do these (and they got famous in the late 80s, especially with the purchase by KKR of RJ Reynolds/Nabsico as detailed in Barbarians at the Gate). The strategy is to buy out all the equity of the target company and to pay for the borrowing by issuing debt from the company once you've taken control of it. Why do it? Well, the argument is traditionally that the private equity shops (or the Glazers in this case) are better managers than the current owners. So what the new owners would do is to run the company in a much more efficient manner - firing unnecessary employees, reducing waste, selling off non-core parts, etc. Then, after a few years, they'd sell the company on the stock market (by doing an initial public offering) and get their money back. What about the debt in the meantime? Well, the argument goes that it enforces good fiscal discipline for two reasons. First, the lenders ensure that the company can't do certain things (like borrow additional amounts, etc.) and second, with the debt needing to be serviced, the company has to focus on doing well and doing well efficiently. This is basically what has happened to ManUtd. Historically there's no standard guideline for how well LBOs do - some do well, some don't.