Manchester United And Liverpool – An Alternative Financial “Plan”

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.”

• Liverpool –  Although, “[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.