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Manchester United And Liverpool – An Alternative Financial “Plan”

Sat, 16 January 2010

The American owners of Manchester United and Liverpool respectively purchased the clubs as follows:

  • Manchester United – “On 16 May 2005, [Malcolm] Glazer took his shareholding in United to 75%, allowing him to end the club’s PLC status and delist it from the London Stock Exchange, which he did on 22 June. On 14 June 2005, Glazer successfully increased his share in the club to 97.3%, sufficient for full control. On 28 June he increased his share to 98%, enough for a compulsory buyout of all remaining shareholders. The final valuation of the club was almost £800 million ….”
  • Liverpool – “On 6 February 2007, George Gillett, …, and Tom Hicks, …, assumed control of Liverpool FC in a deal worth a reported £470 million. The Liverpool board of directors were unanimous and advised shareholders … to accept the offer of £175 million. The deal also included £45 million of club debt and £215 million for the new stadium proposed for Stanley Park, with building expected to begin within 60 days.”

Both purchases appear to be financed primarily by borrowings, and both sets of owners have transferred all or a substantial part of the cost of purchasing the clubs to the clubs themselves or specially created holding companies:

  • Manchester United:
  • “The important numbers are these, as of 30 June 2008, the date of the last published accounts for Man Utd’s holding company, Red Football Joint Venture Ltd.

    Red Football JV had £519m of secured bank loans, on which it paid £45.4m [interest].

    And it had £175.5m of so-called payment-in-kind notes, where the interest is rolled up into the principal rather than paid in cash. The interest rate on these is 14.25%.”

    Also, “[i]n July 2006 the club announced a refinancing package. The debt taken on by the Glazers to finance the club was split between the club and the family, approximately £256 million is secured against Manchester United’s assets.”

  • Liverpool:
  • “Prior to the takeover by Hicks and Gillett, Liverpool operated with a much smaller level of debt.

    But in borrowing money to finance their purchase the American duo considerably increased the sums owed – roughly £250m themselves and £100m attached to the club – at a time which coincided with a seismic downturn in global financial conditions.”

It is unclear how much of the liabilities for their purchase of the clubs fall on the respective owners of Manchester United and Liverpool personally.

Much, if not all of the debts, appear to be in the names of holding or related companies created for the purpose of  holding the shares in companies which are the football “clubs” or to be principally liable for the debts, and secured by the shares in the “clubs” or the “clubs’” assets.  For example:

“The Glazers have been keen to emphasise that the PIK loans, advanced by hedge funds at a high rate of interest when the family last restructured the debt in 2006, are not secured on the club but on their shareholding in it. If they were to default, the hedge funds would not have any say over the operational side of the business.

Liverpool’s debt burden was in the news in June 2009.  Manchester United’s finances have been in the news this week:

The ownership of Manchester United’s Carrington training complex could be transferred to a holding company controlled by the Glazer family and leased back to the club, according to the prospectus ­circulated to potential investors in a £500m refinancing scheme this week.

The £500m bond and a new £75m credit facility, which will add to an overall debt pile of more than £700m, will be secured on the majority of property owned by Manchester United, including Old Trafford.

….

The 322-page prospectus, the basis for a bond offer that most experts expect to be priced at around 9%, sets out in great detail the “high degree of risk” involved, together with the Glazers’ strategy for continuing to maximise revenues.”

The overriding problem for both sets of owners at present is that despite increasing revenue, they are barely able to cover interest payments (without even taking into account the need to pay down the outstanding principal):

  • Manchester United -  Although “[r]esults released this week showed that income from matchday operations, TV contracts and commercial activities continued to rise, contributing to an increase in turnover to £276.8m”, the interest situation has been summarized as follows:
  • So the total annual interest bill was just under £70m (including rolled-up interest).

    That compares with a net cash inflow from operating activities (largely profit before interest and taxation) of £88m.

    So in that year, if Man Utd did not want to increase its overall level of debt, it had less than £20m to spend on players and other investments.

    In fact, it spent £43m – so its indebtedness increased, by just under £33m to £699m gross in total.

    ….

    But that’s to ignore the problem that the burden of the PIK is growing exponentially, because the 14.25% interest rate applies to the original principal plus the rolled up interest.

    In other words, Red Football JV is this year probably paying 14.25% on PIKs with a value of £200m – or more than £28m in interest. Which would imply that next year it will be paying 14.25% on almost £230m, and so on, to financial ruin.”

    Also, “[t]he £500m bond issue, if fully subscribed, is unlikely to reduce the club’s interest burden in the short term.”

  • LiverpoolAlthough, “[a]ccounts for the year showed the club itself made a profit of £10.2m with a record turnover of £160m”:
  • “The parent company of Liverpool FC, owned by Tom Hicks and George Gillett, lost £42.6m in the year to August 2008.

    The loss was mainly due to the £36m of interest payments that Kop Football Holdings had to make to service the debt taken on to buy the club.”

Both sets of owners paid over the odds to purchase the clubs in the expectation that revenue would increase substantially, based on the following assumptions:

  • The clubs will continue to be successful.
  • With their past successes and rich histories, they will develop large overseas markets, such as in China, India, USA and the Middle East.

Perhaps they also hope that sometime in the future, distant future even, English clubs will be able to negotiate TV deals individually, the way Real Madrid and Barcelona do in Spain.

Further, with demand for seats at Old Trafford exceeding supply, there is scope to increase ticket prices substantially over time.

In respect of Manchester United, it has also been reported that:

“… the bond issue will not significantly reduce the amount the club pay out in interest.

However, it gives the Glazers more financial flexibility to pay themselves a decent dividend from the club’s cashflow.”

Not just dividends:

“Manchester United’s owners, …, have taken £10m out of the club in “management and administration fees” and have personally borrowed a further £10m in the past year, it has emerged.

The club’s financial results, released yesterday, revealed that six members of the Glazer family on the Red Football board had borrowed a total of £10m, which does not have to be repaid for five years.

….

The offer document reveals that on 30 June last year the club entered into a £2.9m-per-year agreement with SLP Partners, a company related to the Glazers. Since 1 July 2006 a further total of £10m has been paid in “management and administration fees”.

“During the period from 1 July 2006 to the date of this offering memorandum, management and administration fees of approximately £0.6m, £1.8m, £1.4m, £3.1m and £3.1m were paid to our affiliates,” it said.

Under the terms of the bond issue it promises to terminate the agreement with SLP Partners but reserves the right to pay up to £6m per year to “one or more entities related to our ultimate shareholders for administration and management services”.”

The rub of it appears to be:

  • The Glazers purchased Manchester United by borrowing heavily, with little or no personal exposure (either out of their own pockets, or, by using corporate structures, in terms of personal liability for the debts incurred).
  • The Glazers have paid or will pay themselves substantial amounts in connection with their shareholding, directorships or other links with the club.
  • If revenues increase substantially such that substantial profits are earned and they are able to pay off the principal debt (even if over say 10 to 20 years), the Glazers will benefit substantially from fees and dividends, or by selling the club at a profit to new owners.
  • If the club is unable to pay its debt, the financial institutions take the shares (effectively the club itself) or assets of the club.  They will then either try to sell the club as  a going concern, or sell off the assets of the club, whichever brings in more.  Even if  they do not recover the full amounts outstanding, they would already have earned substantial amounts in interest.   Only the club suffers – the risk of administration and/or a decline in its fortune.  Liquidation remains unthinkable for now.
  • The bottom line appears to be that even if things go badly wrong, the Glazers walk away relatively unscathed.   If the club does well, they benefit substantially; if it doesn’t, there’s no significant loss to them.  It may help explain why they were prepared to pay over the odds to purchase the club.  Their primarily goal at the present time may well be simply to maintain the status quo (apart from substituting one form of debt for another) long enough to take out substantial benefit for themselves, regardless of the ultimate consequences to the club itself.

That is the way of modern capitalism and finance.

Even if on a lesser scale, is the situation at Liverpool all that different?  Okay, Tom Hicks Jr has resigned as a director of the holding company, but the owners are surely looking to take more out than they put in.  For that reason alone, they are unlikely to sack Rafael Benitez anytime soon.  They would have to pay him £20 million in compensation, and that would have to come from somewhere. Easier (and cheaper) to allow the club to stagnate (or even decline) further.

If there are any doubts about their priorities, in their accounts for the year up to August 2008, Liverpool’s owners stated that “the opening of the new stadium will be delayed until 2012″.

Neither set of owners  is likely to be able to find new buyers at the present time.  In answer to “Will a white knight save United?”, United Rant point out:

This is highly unlikely. …. With a market value reaching more than £1.3 billion, any investor in the club will need seriously deeps pockets. In comparison Roman Abramovic has invested a total of around £400 million in Chelsea, including buying the club, paying off debt and bringing in new players. Meanwhile, Sheik Mansour’s investment in Manchester City totals just £304 million.

Liverpool too are probably too expensive for any investor at the present time.

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12 comments

  1. The Telegraph reports that:

    Analysis of the £500m bond prospectus distributed to investors reveals that in addition to annual interest payments of more than £300m the Glazers can take a guaranteed £160 million in dividends, one-off payments and fees out of the club.

    The terms of the bond also allow the family to take additional annual eight-figure dividends based on a complex formula relating to the ratio of income to interest. Applied to last year’s figures, which saw net income of £41.6m, the Glazers could have claimed a dividend of almost £21m.

    The device allows the Glazers to take a dividend equal to 50 per cent of net cash profits, as long as gross profits are more than double the interest paid figure. If, as the Glazers forecast in the prospectus, income continues to grow at Old Trafford, over the seven-year life of the bond the total dividend could reach more than £140m.

    This comes on top of about £260m in interest payments already paid since the Glazers bought the club in 2005, and a further £23m already taken in fees and personal loans to the six children of Malcolm Glazer who sit on the club board.

    The Glazers are expected to use the dividends to pay off payment-in-kind loans that stand at £200m but, accruing rolled-up interest at 14.25 per cent annually, are set to grow by £30m this year.


  2. “Manchester United debt hits £716m” – http://news.bbc.co.uk/2/hi/business/8470595.stm


  3. The follow up:

    Manchester United have successfully raised £504m through a bond issue, which will cover most of what the club owe to international banks.

    The deal means the Premier League club will be able to pay off nearly all their outstanding debts of £509m.

    They will face an annual interest bill of £45m a year on the bonds.

    The sale comes after figures showed debts at the club’s parent firm, Red Football Joint Venture, rose to £716.5m ($1.17bn) in the year to June 2009.

    The bond was sold in two tranches, one of £250m with a coupon rate – or interest rate – to bond holders of 8.75%, and another tranche of $425m with a coupon rate of 8.375%.

    However, unlike the debt at present secured against the club, the seven-year bonds will not mature until 1 February 2017.

    The annual interest bill on the bonds is close to the £41.2m in interest paid in the last financial year.

    But by converting the money owed to banks into a bond, it means the club will be free of the potentially strict financial conditions imposed by lenders.


  4. It has been reported that:

    Tom Hicks Jr, the Liverpool co-owner, is close to completing the sale of the Texas Rangers baseball team for a fee in excess of $500 million (about £310 million), but none of the proceeds are expected to be ploughed into the Barclays Premier League club.

    ….

    Late last year Gillett was also involved in a substantial sale when he relinquished ownership of the Montreal Canadiens ice hockey team for a reported C$550 million (about £323 million), but has not invested that money in Liverpool.

    In light of their failure to plough in money — the most recent round of contract extensions for some of the club’s biggest stars, including Steven Gerrard and Fernando Torres, was funded from the club’s earnings, not contributions from the owners — the duo’s popularity levels are at an all-time low with supporters’ groups.


  5. I question whether American owners understand “football”.

    Major American sports, such as the NFL, Major League Baseball and the NBA, tend to be organized as “closed shops” – the organizing body grants franchises to the owners of teams to participate in the league.

    In granting franchises, American leagues try to ensure major metropolitan areas across the country are represented. The number of teams that can play in the league is limited. There is no promotion and relegation. Not only does this reduce risk and commercial uncertainty, it also limits sporting competition.

    It is against this background that salary caps and player drafts apply in American sport – limiting market forces to benefit owners of “franchises”.


  6. [...] the club planning to return to Newton Heath, it’s as close as the Red Knights will get to owning Manchester United.  Don’t forget how it all started 108 years [...]


  7. Glazers’ finances in a worse state than previously disclosed:

    When they bought Manchester United in 2005, the Glazer family borrowed £500m and paid the remaining £272 million in cash.

    Mr Green found that the Glazers had remortgaged 25 of their shopping centres in the six months before the takeover.

    He believes the family borrowed against their US properties to pay for United: “At the time when they had to present a huge amount of cash over here in the UK they borrowed a huge amount of extra money in the US and publicly they didn’t buy anything else that year.”

    A spokesman for the family did not respond to questions about the mortgages taken out by First Allied.

    But with properties now worth about £380m ($550m) but mortgages valued at £395m ($570m), the shopping mall company now appears to be worth next to nothing.


  8. [...] } A lot has been said about Manchester United’s debt arising from the takeover of the club by the Malcolm Glazer in 2005, but as far as I am concerned, [...]


  9. [...] I have no sympathy for Hicks and Gillett, but increasingly, notwithstanding the conceptual difficulties (of having less than no sympathy), I have even less sympathy for the Royal Bank of Scotland. [...]


  10. [...] with a manager named MANUel.  Manuel Pellegrini?  It may not be the best choice, but given the increasing financial constraint on the club’s owners, they may have no choice.  Certainly preferable to Manuel Jiménez Jiménez, who replaced Juande [...]



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