Why Manchester IOU will not qualify for Europe: the detail

by Tony Attwood

In a recent piece (“In football we are running out of benefactors”) I gave a quick resume of the financial problem that seems to be hitting the game.  In this article I want to try and get a bit further into how it can be that Man U’s chief exec constantly tells us that everything is ok and the financial fair play rules are not a problem, while to some commentators that seems to be miles from the truth.

Unfortunately any debate about Man IOU can get complex, so in a typical Untoldian manner I am going to start at the end with my conclusions – just so you know where I’m off to.  Then if you don’t want to read the rest you can pop on to the Arsenal History site and read about 1886.

Man IOU can’t qualify for Europe under the fair play regulations because…

1: They make a huge loss each year and that is enough to stop them qualifying.

2: Their last lost would have been even worse if they had not sold Ronaldo and then held onto the profits.  True, last year also had some unusual extra costs in it, but the two issues roughly balance, and there is worse on the horizon for the club.

3: The Glazers have no way out of their current position of raping the club financially since all their other businesses are in difficulty.  They need the money from Man IOU each year, and can’t repay any debts.

4: Man IOUs squad contains several older players who must give up soon.  Man IOU won’t get any money in sales for them, but they will save a little on salaries.  However they will probably have to buy replacements, and that will throw their profits out even more.

5: Marketing and ticket revenues at Man IOU are starting to slip.  They have been excellent at marketing in the past, but their brand image is tarnished, and there really isn’t much room left for expansion.  The pride of wearing Man U shirts has been replaced in some minds with a dislike of being seen as a pawn of the Glazers.

6: The bond issue put restraints on what Man IOU can do, such as the need to keep vast sums in the bank.  And when you are trying to fight your way out of a tough situation restraint on options is the last thing you need.

7: Selling is becoming less of an option, because most of the clubs who would look to buy Man IOU players, are themselves either under pressure from the banks (like Barca) or are desperately trying to reduce their losses so that they can qualify under the financial fair play rules.

So that’s the in and out of it all.  But the problem is the last thing in the world Man IOU ever want to do is admit a problem, simply because that would make their relationship with the banks, their supporters and the anti-Glazer gang even worse than it is, and it would devalue the bonds.

Hence Man IOU’s spinners spin faster and faster in changing the story.  They play games by talking about operating profits being over £100 million (operating profits are just a line half way down the balance sheet and you get them simply by not taking into account the payment of interest on your debts) and £164 million cash in the bank – all while failing to address the fact that this last accounting period they made a record loss of £84 million.  The losses all come because of the interest they pay to the banks and the hedge funds.  In fact by and large you could say that Man IOU and Liverpool Insolvency (now Liverpool America) has been instrumental in rescuing the banking sector in this country by giving them so much work and borrowing so much money.

Man U is currently paying about £40 million on player amortisation (ie decline in value of players in the accounts) as well as a further £9m  depreciation on other assets like computers, desks, table lamps and other odds and ends.  Then there is a further loss because the owners paid what is known in the trade as “goodwill” – that is they paid more for the club than the assets were worth.  To be fair, that is not unusual in business – most businesses that look like they are doing well sell for more than their value, in order to account for future profits that accrue simply because they are there.   This “loss” is paid off year by year as well.

So in short, Man IOU generates lots of money (the cash from the season ticket holders and TV firms) but then spends it all on players wages, interest payments, directors fees, loans to directors and stuff like that.   Worse, the accounting processes will continue to work against them, unless they can sell some players for more than their value on the books.

Ideally they need an Adebayor.  He cost (about) £3m, which by the time he was sold his value was reduced to zero on the books.  But we sold him for £25m.  So that is a straight £25m profit on the books.  Man IOU need to do that quite a few times – for as we have seen the one off sale of Ronaldo was not enough to remove one year’s debts.

In fact it costs Man IOU around £40m a year just to pay the interest on their loans – and if they are to go into profit they need extra revenue to pay cover that loss.

There’s another point – or rather I would say a guess – that I would make.  Man IOU have refinanced twice in the last four years, and I wouldn’t be surprised to see them do it again in due course.  Each refinancing comes because they need to shuffle money around because of the decline in Glazer revenue elsewhere – and each costs the club a small fortune (certainly over £40m).

Of course they won’t refinance next year, so they will save a lot of money then.  But then they won’t sell Ronaldo next year, so that’s a loss.  The two might balance out.

There’s another little detail which crops up in the serious analyses of Man IOU – the infamous PIK loans.  These are the ones that the club always say are not Man U debts but Glazer debts.  Except that the Glazer’s secured the PIK loans against Man U itself, so if they ever failed to pay the holders of the PIK loans could start claiming against Man U.  The PIKS knock up getting on for £30m a year in interest, and the only place the Glazer’s can raise money (given that all their other businesses are making a loss) is by raiding the piggy bank at Old Trafford.  That to me makes them sound like Man IOU debts, but the Glazer’s think otherwise.

So, to put it in a nutshell, Man IOU earn £40m a year more than Arsenal, but have to spend so much on interest and money for the owners, that each year they lose loads of money, while Arsenal make it.  What’s more I have a suspicion that Man U’s marketing has peaked, while Arsenal’s is really starting to ramp up.   I must admit that the Glazer’s were right when they said that the revenue at Man U could be increased greatly, when they first took over.  But whether that will continue, given the harm they have done to the brand remains to be seen.  They will get extra TV money this year, as this season is the start of a new improved TV deal, but whether it is enough to balance a decline in marketing income, ticket sales, decline in season tickets and so forth, only time will tell.  But even stagnation would be a problem for the club.

Again on the positive side there will be extra money from overseas TV, and from a new range of sponsors who don’t seem to care too much about their image being associated with the Glazer’s, but then the wage bill is going up all the time – even when taking into account the retirement of the old brigade.

By now we have moved firmly into the zone of guesswork, but I would throw in one final point here.   Man U have never before been restrained about buying players at top prices – just like Barcelona and Real Madrid.   But suddenly the buying has stopped.  To me the story from Sir F Word that there are no good deals to be had just does not ring true.  That seems to me a fair bit of evidence that the economy of Man U is at breaking point, and the Glazers are simply not going to release money for players – especially as long as the club stay in the top four.   When they drop out, it will be too late.

Of course one way out of all this could be the end of the Glazers. But the Glazers have a lot of shopping malls that are not only not earning them cash, but actually being repossessed by banks and the like.   The Glazers need Man U because the Glazers have no other source of cash to pay for their defunct shopping malls with shops they can’t let.  So no, they don’t want to sell, even if a credible company came along to offer them a way out.  And as long as they don’t default on any debt, no one can force them out.  The Liverpool situation does not apply, at the moment the banks love the Glazers.  The Glazers pay the bankers bonuses.

So what will Man U do?   They reckon that the current situation is a one-off with lots of losses due to special events.  They will also argue that some losses (like depreciation of fixed assets) won’t count when the final tally is done.  They think they will qualify for the financial fair play rules.

No one knows if that is right, but supposing it is – there is still the fact that just as the costs relating to the bond issue etc were a “one off” one might also think that the sale of Ronaldo (for which Man U was paid in one go) and the failure to sign anyone at a high price over the past year, was also a one off.

If Sir F Word starts buying again, but has no one he can offload other than those in the 35+ years bracket, then I think the decline in costs because of one-off events will be overcome by the need to pay higher salaries and buy new players.

And there is always the problem of Man U going through a transition.  Arsenal’s five year transition to a point where we can go the Newcastle, put out a team with nine changes from the last league game, and it still looks like a phenomenally strong side made up of first teamers) has been done without slipping out of the Champs League.   But no other club has done such a rebuilding progress and maintained such a status.

If Man U were to go out of the Champs league they lose say £50m a year.  Which is what has just happened to Liverpool, and happened two or three years back to AC Milan (just as Flamini arrived, if you recall), has happened to Barca and virtually all the other top clubs.    The Anti-Arsenal mafia decry the achievement of Arsenal staying in the Champs, but it is extremely rare for this to happen.   Man U slipping out would be the norm during a rebuilding process.

Now we are in the realm of total speculation, and so it is time to stop.  But I would say this.  Arsenal’s model has lots of lee-way.  We could still pay the mortgage on the Ems without selling out for each game, and without being in the Champs league ever year.  And we have lots of cash around, because we make a profit each year.

Man U are on a knife edge, gambling that the special one-off payments last year were larger than the one-off rebuilding payments needed next year.  Maybe so, maybe not.   But one thing is sure.  One slip, and it all falls apart.

Final thought: For the best in depth analysis of football finance do keep an eye on the excellent Swiss Ramble

20 Replies to “Why Manchester IOU will not qualify for Europe: the detail”

  1. Written by a true Arsenal fan.

    The fact is ManIOU is perfectly fine if the PIK situation were sorted. They can manage the bonds OK. Not a good situation but it can be sorted. Just like Arsenal’s mortgage to be honest. Twice the size, but easily payable from operating profits.

    The PIK is the ticking time bomb.

    If the Glazers were interested in ManIOU, they would raise equity to pay it off from the fans. 25.1% at current prices raised, pay off the PIKs and use the rest as working capital.

    They aren’t, so they won’t.

    And do we really care???

  2. Let them burn I say.

    All those titles bought through massive financial advantage will soon be a thing of the past.
    Arsenal are the future.

  3. Tony – I would add two further points of caution.
    Firstly there may be evidence appearing that Manure may well have unearthed some new young talent this season and that may preclude them having to spend big in the next few years. Their new players may not turn out to be as consistently good as some of the ones they will be losing (and they may not necessarily be in the right positions) but only time will tell.
    More importantly there is still some uncertainty as to whether UEFA will have the stomach to impose the threatened sanctions when the offender is a big name on whom the sponsors rely for big TV audiences. Even senior people at Arsenal are not sure (I know because I have spoken to them) although they do believe that UEFA may well have ‘painted themselves into a corner’ and cannot now back down.
    We can only hope that if and when the crunch comes Platini is as firm in his views as he obviously was when asked the other day about goal line technology. That was a firm ‘no’ and we can only hope (for Arsenals sake) that on financially related sanctions it’s a firm ‘yes’.
    We’ll know pretty soon!

  4. Another problem is the Rooney situation. I still think Rooney will leave at the end of this or next season to raise money for United. He wanted out and wanted more money.

    So they asked him to sign a contract that makes him the best payed player in the world. But this also has the advantage that next summer when Real Madrid is coming in Rooney is still very much under contract and so United can ask what they want and Real Madrid will pay what they ask in order to sell more shirts. And I do think that they have promised Rooney that they would not keep him if Real Madrid (or others) would pay the price they want or need.

    And on the other hand the money offered to Rooney is so much that I don’t think United can afford those wages for a long time. As it could have as a result that other players want also a raise in wages.

  5. Great article.
    I just don’t trust UEFA and FIFA. I think they might bend the rules for ManIOU and those catalonians. I just hope they won’t.

  6. Another great article! Could anyone expand or answer as regards increasing the capacity at the emirates? Surely we should be looking to get to 70/75,000 in the near future. I’m sure we’d sell out all of the prem games and with sensible ticket pricing we would more than likely sell out for C Cup and FA Cup.

    Is there still issues with transport?


  7. Sir Alex is now starting to invest in youth… Going wenger style. Though they are 5 years behind us now

  8. Of course Man U always bring through the occasional home grown talent, and the occasional guy brought in at 16 or 18. But there is a difference between that sort of thing that happens everywhere, and finding Jack Wilshere, Theo Walcott, Cesc, and Bendtner

    Last time I heard Sir F Word speak he was rambling about 14 year olds, which is not so good.

    On the issue of expanding the Ems, I have no inside knowledge, but I would imagine that if an expansion were possible it would have been built into the issue of the walk ways, podium area etc etc.

    The issue for the club is, how fast does it pay for itself? The issue for the fans is, what’s the view like. I personally find the view at the back of the upper tier along the halfway line to be really at the limit of what I find ok. But maybe that is just my eyesight going

  9. the above conclusions are made by the assumption that United will not be taken over…
    But what if they are takenover by some billionaire?? Did u see those vast operational profits they make, after a takeover, those profits can be used for buying players??
    Liverpool are now doing good, and United, as i had said a long time ago, will go around this problem eventually.

  10. I was trying to take in all that you wrote, i must admit you certainly researched well i think,went over my head a bit but i know it is the important part of all football clubs,the finance, because its a buisness.
    i have watched Wenger since he came, heard him say he does not get involved with this side of the buisness, i dont beleive this for a moment,but i dont know, but i do know one thing and that is we have a damn good youngsters program and it will deliver for years, maybe this is the way to get all these massive transfers down, or make Arsenal even richer.

  11. @Dark prince,

    Those big operational profits are baloney, they don’t include amortisation, depreciation or interest. Their real operating profit is only £15m.

  12. Rather than Liverpool America, how about The Liverpool Red Sox? Or The Liverpool New England Sports Ventures?

    One point about the Glazer’s shopping malls. Some of them have been taken into administration by the banks, but this is actually good for the Glazer’s. With tenancies falling across America, it was actually costing more to keep the malls running than to allow them to be repossessed by the banks. So in a funny way, having the malls repossessed has actually SAVED the Glazer’s money rather than the other way around.

    I agree with Rhys though. It is the PIK loans that are the ticking bomb. That and the potential of missing out on the Champions League.

  13. @Wrenny – Just think, if United get takenover by someone, then all that debt, including interest on debt will vanish instantly, as it was in the case of Liverpool. Also the goodwill of £35 mil which is deducted every year in united’s account too will vanish. And their £105 mil operating profits r not a ‘baloney’, those are the real revenues they are having, while the amortisation, interest part can be brought to a minimum by smart buying and a normal takeover.

  14. Tony,
    I think Bayern Munich managed to build the Allianz Arena and maintain success at the top of the Bundesliga. They didn’t have the same competition for the league and top 3 but it is analogous in some respects.

    There is a lot of speculation in your article and I think you emphasize every worst case possibility for effect. It would have been much more reasonable to say that ManU has issues because of the Glazer takeover and an older squad and that there are questions about whether they will meet the requirements of the fair play rules. But that probably isn’t as satisfying a conclusion for us Arsenal fans who love to congratulate our club for being the best run club and soundest financially. Too bad there aren’t any trophies for that.

    What I would rather talk about as an Arsenal fan, financially, is why our commercial revenues are low and it has taken so long to start trying to address that? Also, if we are so well run, why is it that we have 55 million pounds in other operating costs? What is this and why is it never itemized in any financial reporting or information about the club? That is a huge amount of money, which suggest mismanagement–I have no idea whether it is due to waste or if there is a very sensible explanation as to the necessity of spending that amount of money for whatever it is, but it is much more than other clubs, apparently. No one seems to know what that category of spending is actually for and why it is so much.

  15. @Dark Prince

    But that’s a huge ‘IF’. The Glazers have absolutely no interest in selling, the club is their cash cow. And there’s no pressure on them from the banks to do so as they are still (just about) controlling the debt, although it continues to rise. As has already been pointed out the danger for Man Utd would be to miss out on the CL, they are clearly relying on that income.

    That £105m ‘operating profit’ is nonsense, it’s been trumpeted by David Gill to make the finances look much healthier than they are but it excludes important expenses. You can talk about one-off expenses, but the fact is Man Utd have been posting losses for several seasons apart from one, which was only possible because of a stupendous world-record transfer fee.

  16. Limestone Gunner – if you dont know why our commercial revenues are so low then you havent been paying attention for the past 5 years. We signed below market rate sponsorship deals for kit, shirt and stadium in order to get cash up front to build our magnificent stadium. The shirt deal expires in 2012, kit in 2012 and stadium in 2014. At that time our commercial revenues should skyrocket as we sign contracts for the going market rate. We also do not tour pre-season which may change in the next few years.

    As for 55m operating costs, that is pretty par for the course. It costs a lot of money to run a huge football club these days. Our accounts are among the most open in the world for football clubs. If there was any mismanagement it would be pretty obvious and people like Stan Kroenke and his accountants would stamp it out in a flash.

    And yes, Tony is looking at the negative side of things. But people said there was no way Portsmouth would go into adminstration, and no way Liverpool would get themselves into such a mess. Yes, if everything goes perfectly then the Glazers could still come out of this smelling of roses. But things havent exactly been going smoothly recently have they?

  17. Talk about your own club muppet and stop being obsessed with Utd, you ve just paid your debt off and only now your rabbitting on about Utds debt, honestly, Arse aint won nothing for 5 years and that wont change this year so stop hating on Utd cos you can only wish Arse was as successful as them, you beat 10 man City last week and your all talking like your the next invicibles, how many times are you lot gonna get all excited about “This year we gonna win the league blah blah blah” only to come crashing straight back down to earth when you get put in your place by Chelsea & Utd

    Seriously get over it, its boring to say the least:0)

  18. Paul C., I know those figures, but I raise the question to suggest that there is room for improvement in how we run the club. As a massive London based club, those deals could have been better, plus there are other things that Gazidis and co. might be able to do to market the club better globally.

    The 55m is not par for the course according to astute observers like the AST and Swiss Ramble. It should be easy to detail more fully what these expenses are for and to look for savings.

    Who are these people who said Portsmouth would never go into admin? I recall it being a real possibility discussed all of last season and even before. In any case, there is no comparison between the size of club with Arsenal, so why raise this comparison when it isn’t a good one? Who said Liverpool wouldn’t get themselves into a financial mess? The take over debt and interest, transfer spending, and failure to finance a stadium to raise matchday revenues have been identified as a problem since the takeover. Who exactly are these “people”? And just because there are some foolish people around doesn’t mean that it is right to exaggerate one’s analysis in the other direction just to counter them.

    All I am saying is that there are serious issues for ManUnited, but claiming that they can’t qualify under the fair play rules (around which there are still some questions to be resolved) is a claim too far based on speculating and taking all the worst case scenarios–that only demonstrates that there is a real possibility they will have difficulty doing so. Everything doesn’t have to go perfectly for them to qualify, unlike as you suggest.

    You should read the Swiss Ramble’s analysis–it is more convincingly researched and analyzed and is more ambiguous about the final conclusions.

  19. Good article in the Sunday Times, short but directly quoting Uli Hoeness (Bayern Minich President) who is a major driving force behind the UEFA Financial Fair Play regulations.

    Hoeness Is very clear about the Glazers and the general problem of debt in English and UEFA football and is also very clear that both Bayern and Arsenal are the models for the future.

    Of course details still need to be made more clear and we do not know if UEFA will have the strength of will to ban (for example) Inter, Madrid, Barca and Manure is the same season, but I for one can see them refusing a license to Man City! For sure this is a serious uncompetitive and unfair problem, Financial Doping is a good description! Portsmouth’s example is awful! ‘Buying’ players on higher wages and then failing to pay for the players and failing to pay the players wages, failing to pay legitimate debts to small local businesses and charities is just not on in a competitive professional sport!

    This is coming, this is real and this is a huge opportunity for the Gunners!

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