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Man U: highly profitable, well run within its means, but…



By Phil Gregory

Manchester United:  highly profitable business, well run within its means.   But…

This is the third in a series of articles covering the economics of the premier league, based entirely around information found in their official accounts.  There’s a link to all the articles in this series at the end.

Manchester United’s finances are never far from the back pages any more, and with the club losing the Premier League title to Chelsea after three successive victories, the furore over the Glazers’ handling of the club is only going to increase.

That their performance fell after the sale of Ronaldo is undeniable: from 90 points the season before to 85 this season despite a stellar season from Rooney. Some Mancunians would point to defensive injuries, but they have been blighted to less an extent than ourselves, [see our summary of last season’s injuries across the top teams here] and suffered few injuries amongst attacking personnel making no mention of the bizarre contribution from own goals. But enough of that: we’re here for the finances.

The turnover

United’s accounts are much more open than Chelsea’s and the breakdown of turnover allowed me to see that matchday revenue rose  by around 10% from 07-08 to 08-09.

With attendances accounting for 99.6% of capacity in 2007-2008 and falling (but only slightly) to 99.1% in 2008-2009, there isn’t scope for selling more tickets. The price rises under the Glazers are common knowledge, but with recent reports of substantially lower than expected  season ticket renewals, it certainly seems the scope for further price rises has vanished entirely. Short of selling a pint on the concourse for a tenner, my conclusion is that matchday revenues for United are likely to plateau soon, and if the Green & Gold movement keeps gathering pace, they could well fall.

TV money grew by 10% from 07-08 to 08-09, though if it wasn’t for the new TV deal starting in 2010, they couldn’t expect to improve on the 08-09 TV money figures either thanks to an appearance in the final of the Champions League and first place in the Premiership.

Commercial revenues grew steadily to £70million, far and away the highest in the league. Such growth in revenues resulted in an increase in turnover  from £256million to nearly £280million between 07-08 and 08-09.

Given how Manchester United are never out of the news for financial issues, it is ironic that they are a shining example when it comes to having a sensible overall wage bill. United have one of the lowest wage to turnover ratios and indeed it fell in 2009 compared to 2008 (from 47.1% to 44.2%). This percentage is marginally lower than Arsenal’s despite their wage bill being around 20% higher, courtesy of their monster turnover. This is a result of commendably low wage growth figures of 2-3% and good turnover growth.

Amortisation – accounting for transfer fees over time

Amortisation spending has risen slightly, pointing to an increasing transfer expenditure over the last few years.

While I’m venturing into the subjective, I think from a sporting point of view this needs to increase but may not due to financial burden so kindly applied by the Glazers. Scholes, Neville and Giggs cannot be expected to keep chipping in and Rafael’s inconsistency as well as issues surrounding Anderson at the start of 2010 mean that signings in those positions could be beneficial to United.

I however don’t think we can expect too much from them this summer. Recent signings such as Diouf, Hernandez and Smalling didn’t come cheaply (easily over £20million for the three judging from various reports), while a cynic would argue money must be tight if they don’t want Joe Cole on a free. This makes me think United will struggle to build on their 09-10 points tally and won’t be adding to their league title tally any time soon thanks to the Glazers. Couldn’t happen to a nicer bunch, either.

The interest payments

The big issue with United’s financial health is of course the Glazers and the various management and interest fees going out of the club. A cursory glance at the Manchester United club accounts reveals no interest payments, but lo and behold, by the end of 2008 over £70million had left the club as “loans to parent company” along with over £50million in 2009. Vast, vast figures, which more than account for the £42.8mill (2008) and £47million (2009) operating profit.

The interest bill is hidden away in the parent company accounts, as the debt is with the parent company. An interest bill of over £100million for the last two accounting periods accounts for the operating profit and then some, meanwhile tax, amortisation and depreciation all still wait to be taken into consideration.

It’s plain to see why the debt is growing and transfer policy has shifted to those likely to have significant resale value. Naturally, a significant one-off income such as selling a star player for £80million would help with this for a while, but demanding the fee in a single lump sum as United did clearly points to their desperation for the money.

Operating profit

The operating profit figures are very healthy, with an increase from 07-08’s £42.8million to £47million.  While United are on the whole in a hell of a mess, at least their core business is profitable. I’ll underline however, that operating profit doesn’t take into account interest payments amongst other things, which clearly is a significant cost for a highly leveraged business like United.  If the interest bill wasn’t there, they’d be competing for the biggest names every summer: what a shame they aren’t.

Summary

In a nutshell: they are a highly profitable business which is run well within its means. Their problems have come as a result of a leveraged buyout and the subsequent reshuffling of the debt to bonds which has allowed the Glazers to use club money to pay down all aspects of the debt. As such, Glazer debt is Man United debt, and once interest payments are considered, United make a loss.

Clearly an end to this type of buyout is needed for the Premier League to be healthy overall, but the question of how to do this remains.

The Glazers

This article is about Manchester United, not their owners.  However we will be published a separate piece on the Glazer’s own finances and how it is affecting the Manchester United situation, in the near future.

————————–

There’s a new Financial Index showing all the financial reviews published to date, at www.blog.emiratesstadium.info

22 comments to Man U: highly profitable, well run within its means, but…

  • One point about Man U is that they have gone so far with their marketing that it is hard to see how much further they can go. They often speak about the new technologies, but when these come along they will be launching at the same time as the other big clubs and so won’t have that much of an advantage.

    For Man U, growing the marketing revenue is hard, because they have done so much. For Arsenal, growing the marketing revenue is so much easier, because we have hardly started yet.

    Also if the anti-Glazer movement continues, marketing revenue could even slump, and be diverted into anti-G marketing. At the moment if you look at pictures of the crowd at Old Trafford, you will see men in Man U official shirts, waving anti-Glazer scarves. If the fans can wake up to the anomaly of this, then the club income could be hit.

    I believe I am right in saying that Man U’s matchday revenue is below Arsenal’s – is that right, or am I way off Phil? If the two are even similar, then marketing is everything in the economic battle to come.

  • Phil

    On matchday revenues, Man U shade us by £8million, which puts them less than 10% higher than us. If the Green and Gold hurts renewals as it seems it might, they could well fall below us on matchday revenues. But broadly speaking, £8million isn’t much in the grand scheme of things.

    Our commercial of £48million compared to theirs of £70million is where much of the discrepancy comes from. As you say Tony, the fans could well hurt them here.

  • Hartwick89

    It is definitely sad to see the hard work and passion Manchester has created in United to be taken away piece by piece by the American bastages.

    The question is if ManIOU want to become healthy again what is the first step? And, as long as the Glazers are in charge it seems likely that this brand is going to continue to fall.

    While it is satisfying to watch what not to do if you want to be a successful business and satisfying that Arsenal are doing the right things I hate the fact that MAnIOU’s mismanagement is is hurting football.

    I wish the Glazers would sell ManIOU make a profit and never set foot in England again!

  • Phil

    I think it’s karma for the insufferable glory supporters that they have, Hartwick 😛

  • John

    Utd imo are the best football run football club in the world are were until the Galzier family got its claws in.

    The key to there success was they took full advantage of there onfield sucess to maximise the brand and commerical revenue which in turn generated more profits to fund more player invested. They are as it pains me to say it… the model to follow in this regard something Arsenal failed miserably at.

    As a Arsenal fan I’m kinda glad the Glaziers have laddled the club with so much debt…. jesus us or Chelsea would not have a chance if Ferguson was able to invested all the profits made were this interest not payable.

  • Phil

    Agree with you John. The amount of profit they make could fund £30million odd of player acquisitions a season, as well as the wages.

  • Dark Prince

    Phil – i wanted to ask u- What happens if Glazers sell united to someone else? Does the interest factor still remain after the sale?

  • gooner80

    Am I wrong but manu’s debt is like 716 million so if the glazers sell for say 1.5 billion they make a nice little profit and then Manu are back in the black with enough revenue to be self sufficient?

    I think the next 5 years is going to be interesting in football. I think arsenal are going to be the template of how to run a football club once success is achieved on the field. You develop the academy and buy a few select players. I dont understand why Man u switched from bringing a number of academy players to buying 30 million flops like veron,berbatov and others

    I can honestly see players wages coming down due to demand and supply with more and more clubs not being prepared to pay 100,000 plus wages. I would like to see the onus moving toward more performance related pay

    I hope the prem league put in adequate due diligence rules to stop someone taking over Arsenal in a highly leveraged manner, otherwise all the hard work is done for nothing

    ps does anyone know where spurs get their money from because i dont understand it?

  • gooner80

    Does anyone know how the VAT hike will affect profits come Jan?

    or will these costs be passed on to supporters and if so will growth be affected?

    On a £1500 season ticket that would be £30 approx I know it kicks in Jan so wont affect this year but surely all merchandise is going to be affected I know its small amounts but the small things add up, may be a supporter wont by those chips, or wont buy the programme etc they all add up

  • Phil

    Gooner80: Some of United’s debt is in bonds, which a takeover is unlikely to redeem. They’ll just keep that debt in place. The big issue is the PIK debt which I’m sure just rose to 16.25%, and they don’t even pay the interest, hence why the debt is rolling up and up.

    Nobody understands Spurs, though I will have a look in their accounts and see what it says there.

  • Dark Prince

    So basically if Glazers sell United, then all of united’s debt and interest payments are wiped off. Then it will become the most profitable club. According to Forbes, United is valued and £1.2 billion. So maybe an offer of above £1.2 billion will be enough for d Glazers to sell United. Looking at all the Green and Gold protests, this sale will be like a revolution in United’s history.

  • There is a problem with this approach Dark Prince.

    As was pointed out at the end, this was an article about Man U and not the Glazers, and in an earlier article on them the point was made, that their other businesses are teetering on the edge. They need Man U to generate the cash for their lifestyles and for their other faltering businesses.

    So they can’t sell just for enough to get their money back – they must sell for much, much more than that, and that is where the bids all fall down, because to buy from the Glazers you have to pay about twice as much as Man U is worth, in terms of what cash it will generate for your investment.

  • @Dark Prince

    In theory, you are right. If the loans are repaid after a huge acquisition, then the interest burden would be removed and United would be profitable again (even without selling a player of Ronaldo’s valuation).

    However, there are not that many people/companies that could fund such an acquisition without debt. Even the Red Knights had to admit this.

    Also, be very careful of the Forbes soccer team valuations. The basis for their ranking looks seriously flawed to me. Their definition for Current Value is “Value of team based on past transactions and current stadium deals (unless new stadium is pending) without deduction for debt (other than stadium debt).” In other words, if an owner has bought a club for an absurdly high price, funded by mountains of debt, then this is the starting point for the Forbes valuation. Nor do I know how Forbes can accurately source their data for stadium deals. As for “without deduction for debt”, need I say more?

  • @Phil,

    Among the plethora of companies in the Man Utd structure, which one did you use for your analysis? Reason I ask is that the operating profit seems on the high side.

  • Dark Prince

    Tony- I agree on the point that Glazers are using United to generate the money required to run their personal business. But if we look at the worst case scenario, i.e if Glazers become bankrupt, then they’ll eventually have to sell United to the highest bidder. And the way they are running their business, it seems that they’re definately heading for bankruptcy in a couple of years. Then there will be no stopping for any billionaire to buy United. Perhaps a hope of redemption for United?

  • Dark Prince

    Swiss Rambler- Forbes has valued currently Arsenal at £770 million. They also say that it accounts for 40% debt. You said,’without deduction of debt other than stadium debt’. That means your saying that they dont include stadium debts in their current value, then what is this 40% debt, i.e £300 million debt, in arsenal?

  • @Dark Prince,

    The answer is in the Forbes definition quoted above:

    “Value of team based on past transactions and current stadium deals (unless new stadium is pending) without DEDUCTION for debt (other than stadium debt).”

  • Dark Prince

    Swiss Rambler- thats what i’m tryin to say….’Without deduction for debts (other than stadium debts). According to the defination, only debts other than stadium debts are included in the value. So arsenal’s stadium debt should not be included in their value of £700 million

  • @Dark Prince,

    No, the Forbes definition says that they do not make a deduction for debt – except for stadium debt.

    In other words, if a club’s debts have been incurred due to building a new stadium, these will be deducted from their spurious staring point of value (“past transactions”).

    However, if debts have been incurred for other reasons, e.g. an LBO, these will not be deducted.

  • Rhys Jaggar

    Well, if the Glazers told Sir Alex to tell Wayne Rooney to play brilliantly in the World Cup so he could be sold for £80m, then he made a fine pigs breakfast of it, didn’t he?

  • mahaveer

    man u will never get into debt

  • Marc

    You all seem to have missed something. Someone is going to buy ManU and wipe out all of the debts err what about the return they will expect on theit “investment”. Does anyone really think someone or a corparation is going to spend over £1 billion pounds and just write it off?