Tuesday, 16 November 2010

Q1 results – running very hard to pay the going rate

Red Football Limited's Q1 results (3 months to 30th September 2010) were published today. They are available on www.mufplc.com.

No information was given on the reported PIK redemption other than confirmation that no dividend has been paid out of the club. A Glazer family spokesman has told the BBC that no equity stake has been sold in the club. We are thus left with a total mystery as to where the money to redeem the PIKs has come from. A refinancing would seem the most likely route, but neither the club nor the Glazers seem minded to tell us anything.

These were not exciting figures and mainly confirm the trends we saw in the full year results.


Matchday income was up very marginally (0.6%). This reflects one fewer home game this quarter (drawn away in the Carling Cup), offset by higher tour income. Tour income is not split out separately from home games but a back of the envelope calculation suggests it is around £6m. The club is still generally selling out home games (Wolves in the Carling Cup being the exception), but it is clearly a struggle with local newspaper adverts for home games now a common feature.

In media income, United benefitted from the new three year PL deal which began this season. Whilst domestic rights growth was low, the overseas rights bonanza added around £1.5m. This offset the £1.6m fall in CL media income (the "market pool" element) due to United coming second in the PL last season.
Commercial revenue was again the star rising 25%. This is the first quarter to included the Aon deal (worth around £1.5m more per quarter, although this extra cash was pre-paid in 2009). The growth on last year also reflects all the smaller deals done during last season (Concha Y Toro, Smirnoff, Turkish Airlines etc).

In total, revenue rose 9.8%. The profit on player sales was only £2m vs. £6m last year as Possebon, Cathcart and Tosic left.

On the cost side, I have to say the rise in salaries at 14.8% is totally staggering. Last year wages rose 7% so this doubling reflects a huge acceleration in wage increases. Note, these figures do not include Rooney's pay rise! Salary inflation shows no sign of slowing down in the run up to UEFA's Financial Fair Play rules coming in. Other costs rose 5% year on year. In total, costs rose 12%, ahead of the rate of growth in revenue.

Interest, debt and cash

The interest charge was £12.2m. This is one quarter of the bond interest paid annually. Actual cash interest paid was £22.7m (the bond payments are in February and August) and probably includes c. £1.6m in swap losses. The £26m of swop losses not paid last year are being paid over the next four years but we do not have the exact payment dates.

Gross debt (including MUTV and the Alderley mortgage) is reported at £509.4m (down from £522m at the year end). This fall is due to the strengthening of £ vs. the US$ during the quarter. The gross debt figure does not include the unamortised issue discount and financing fees of c. £22m. Total debt repayable is therefore c. £531m.

The cash balance fell £12.1m since 30th June to £151.7m. This seasonal fall is normal for the club. There was an explained inflow from working capital of £6.6m which limited the fall in cash.


These figures show United running very hard to keep up with quite extraordinary wage pressures. So far the commercial growth is delivering, which is essential as there is little growth in Matchday or Media to compensate.

These figures cast no light on the refinancing or redemption of the PIKs. The silence from the Glazer family and the club on this issue is a disgrace. If all is good, tell us the details please.


The full details on the terms of the PIKs

Following the news that the Glazers are redeeming the PIKs, this is now only of academic interest, but I thought it might be useful for readers to see the full terms and conditions of the PIKs. I was supplied these documents a few weeks ago in confidence by a bond market participant who is now happy for them to be published.

There are two documents:

This confirms the interest rate (14.25% rising to 16.25% if debt to EBITDA exceeds 5x), the redemption terms and other details of the loans. It shows that the PIKs can be repaid at any point with at least five business days notice. It also shows that there are no penalties for early repayment after the first two years. In other words, there is no structural reason why the PIKs could not be repaid without penalty since 16th August 2008. The issue has always been availability of funds.

This confirms that the PIKs are secured on 100% of the equity of Red Football Limited.

As I wrote yesterday, we are left with many questions about the future financial structure of the Red Football group. I think it is time the Glazers and their employees answered some questions on all this.


Monday, 15 November 2010

Known unknowns and unknown unknowns

This evening Bloomberg's Tariq Panja has broken a story that Red Football Joint Venture Ltd (the parent company that issued the famous Payment In Kind loans) is to redeem all £220m of the PIKs on 22nd November. Perhaps more importantly, Bloomberg report that none of the funds to redeem the PIKs will come from Manchester United.

As has been well documented, under the terms of the bond issue, the Glazers can take £95m from the club whenever they wish. The fact that they are NOT using this dividend entitlement to repay the PIKs raises the obvious question; where is this money coming from?

There seem to me to be three main possibilities (and probably a few dozen less likely ones):

1. Refinancing
The PIKs are being refinanced with a new form of debt, secured (as the PIKs are) on RFJV's shares in Red Football Ltd. If this was the case, it would be reasonable to suppose that the interest rate on this new debt was lower than the 16.25% currently being paid on the PIKs. The question would remain as to how this debt would be repaid in the long-term and whether the burden of this repayment would fall on the football club.

2. Sale of an equity stake
The Glazers have sold a stake in Red Football Limited to a third party outside investor and are using all or some of the proceeds to repay the PIKs. The consequences of this would obviously be hugely uncertain. Who could this investor be? What stake would they own? How would their ownership impact the running of the club?

3. Sale of other assets
The Glazers have secured significant sums from another source, perhaps by selling assets. I find this incredibly unlikely as the only asset valuable enough is the Tampa Bay Buccaneers. The fact that redemption notices for the PIKs have already been issued suggests the funding is already in place which does not tally with a sale of the NFL franchise.

As someone who has repeatedly and vehemently stated that the club's money would be used to repay the PIKs, I can only eat humble pie at this point. Another source has clearly been found and that means I was wrong. I do believe however that until we have concrete answers about the source of this £220m it is best to reserve judgement about what this means for United.

Tomorrow (Tuesday 16th November) Red Football Limited announces its results for the three months to September 30th. These results may cast more light on what is going on, but there is a good chance that no further information will be forthcoming as the PIKs are held by the parent company that is not reporting its figures. I will be blogging about the figures tomorrow.


Thursday, 11 November 2010

Spurs results 2009/10: desperately in need of a new stadium

Tottenham Hotspur plc published its summary figures for the year to June 2010 this morning. We'll have to wait a few days until the full report and accounts are published to get all the details (like an accurate number for the wage bill) but the press release covers most of the key points.

Excluding transfers, Spurs is reasonably profitable at the operating level. The club focuses on "operating profit" (which includes depreciation), but I prefer the more commonly used EBITDA which rose 20% to £25.4m from £21.2m the previous year.

The profit improvement was driven by turnover up 6% whilst operating costs were only up 3%. Almost all the increase in turnover came from higher PL TV receipts. Although the total paid to all 20 clubs only increased 5%, Spurs' share increased 16.4% due to their fourth place finish and higher number of broadcast games. This increase in PL TV income offset falls in gate receipts and corporate hospitality due to the club not qualifying for Europe the year before and therefore only playing 24 home games (vs. 28 in 2008/9). Merchandising and "other" income both rose sharply.

In these figures we do not have details of how the £94.4m of operating costs split between wage and non-wage expenses. In total however, operating costs only rose 2.8%. Assuming non-wage costs were flat (as they were the previous year) we can estimate that wages only rose 4.3%, which is commendable and better than the 7% growth seen at Arsenal and United.

The profit on player sales was down sharply from £56.5m to £15.3m. This reflects the very profitable sales of Berbatov and Keane in 2008/09, compared to those of Darren Bent, Zokora and Boateng in 2009/10. The amortisation charge continues to rise albeit slowly (this is the cost of transfer spending spread over the length of players contracts and is an important component of the new Financial Fair Play regulations). The amortisation charge was £39.5m up 3.6%. Actual net cash spending on transfers was £27.5m, more than the club's EBITDA.

Net interest paid rose to £5.0m on gross debt of around £90m (up from £80m). The club issued £15m of new shares during the year.

So the £25m of EBITDA was insufficient to cover the £5m of interest and the £27.5m of net transfer spending. The gap was small, but existed despite Spurs having the lowest wage bill of any of the clubs with a realistic ambition to achieve a top 4 finish.

Challenges and opportunities

Spurs' wage bill of c. £63m makes it a minnow compared to the "big 4" and City (see table below). Having broken into the Champions League, Spurs' financial and footballing challenge is to maintain a good enough squad to stay there (or at least have a good chance of achieving a top 4 finish each season).

* 2008/09 **Esimated
This season, Spurs will benefit from at least three Champions League home games (and almost certainly at least one knock-out stage game) as well as the TV income from the competition. The club do not publish a total "matchday" number and include corporate hospitality in their "Commercial" turnover but assuming gate receipts account for 75% of total matchday revenue, each home game is worth around £1.5m in additional income. Assuming elimination in the first knockout round of the competition, the club will earn around £6m in matchday income and around €30m (c. £25m) from UEFA TV money. The dual Autonomy/Investec shirt deal is reported to be worth £25m over two years, representing an increase of c. £4m pa on the previous sponsorship by Mansion. Like all Premier League clubs, Tottenham will receive an additional c. £5m from the new overseas PL deals. Assuming a roughly consistent domestic performance, Tottenham should earn c. £40m more than last season.

This Champions League bonanza could clearly help finance a squad with more strength in depth, one able to compete both domestically and in Europe. History shows that relying on continual Champions League football is highly dangerous (see Liverpool or Leeds) and Daniel Levy is too smart to fall into this trap. Whilst this season's CL run is very helpful (even if the wage bill rises this year with the arrival of van der Vaart and Gallas), Tottenham need to close the earnings gap with United, Arsenal and Chelsea who have turnover £84-167m higher. Beyond playing performance related revenue, this means building a bigger stadium.

Last season, White Hart Lane was full to 98% of its theoretical capacity for the club's 24 home games. The waiting list (a proper one which fans have to pay to be on) is 33,000 or 90% of the Lane's current size. The comparison with Arsenal is instructive, with the Emirates bringing in £3.5m per home game vs. Spurs' £1.5m and with Arsenal's blended revenue per seat around £58 vs. Spurs' c. £42 (reflecting fewer and lower quality corporate facilities at WHL). A new stadium could allow Spurs to increase their matchday income by around £40-50m per annum, easily giving them the means to pay the £100m+ wage bill their competitors can afford (or in City's case can't).

The stadium question links to how well prepared the club are for UEFA's Financial Fair Play rules. On my estimates (see table below), Spurs would have squeaked in last season by £2m, but were reliant on their profit on player sales to do so. This season the CL income will easily cover any shortfalls, but the margins are tight in years when they aren't in the European Cup.

So the big question for a prudently run club like Tottenham is can they finance and build their new home? Liverpool fans know how hard it is to do and there is no Highbury-like property bonanza to be had in N17. Debt is already at £90m, albeit much of this has funded property investment around the ground.  Without the additional income that a new ground would bring, it is hard to see Spurs competing consistently with the big boys. The alternative is relying on Redknapp's wheeling and dealing and accepting the role of a feeder club (G. Bale anyone?).