Tuesday, 18 December 2012

MCFC's financial results - waiting for BT to ride to the rescue

City's 2011/12 annual report and accounts contains the usual mix of giddy blueness (apparently more people choose to be City than United when playing EA Sports FIFA 2012 - wow), photos of blue Santas and lashings and lashings of red ink.

For a club like Manchester City of course, losses don't really matter whilst the owners are prepared to carry on writing cheques. In the last four financial years, the club has made pre-tax losses of £510.9m, all of which have been funded (through equity) by Abu Dhabi United Group Investment & Development Limited.

What is interesting in the City figures is how the club is getting on with meeting the new UEFA Financial Fair Play ("FFP") regulations and how this will change the way the club is run. The first FFP hurdle is the 2013-14 "monitoring period" which looks at profits/losses (on UEFA's definition) in the prior two seasons (2011/12 and 2012/13). Over these years, losses should not exceed €45m (c. £36.5m at today's exchange rate).

So how are City doing?

A quick glance at the profit and loss account suggests a long way to go, with a pre-tax loss of £97.9m. This is however a massive improvement on the £197.5m loss in 2010/11 (albeit this included £35m of "exceptional" costs).

Revenue - massive

The huge reduction in losses is driven by a 59% increase in income at the club. In the table below I have changed the way the club present Commercial income to bring it into line with most other clubs by including hospitality income in "Matchday".


The increase in Matchday was driven by higher average attendances (league gates averaged 47,031 vs 45,885 in 2010/11), one extra cup game and higher cup attendances from being in the Champions League.

The growth in TV income reflects the impact of the club's short lived Champions League campaign which added £18m in extra UEFA TV money.

The eye-catching growth comes of course from Commercial revenue and in particular "partnerships". Commercial income rose 102% to £109.4m in 2011/12 with 89% of this coming from the club's commercial partners. To put these numbers into context, United's total Commercial income in 2011/12 was only £8m higher than City's and (whilst definitions vary slightly) it looks to me that City's non-kit partner revenue was higher than United's.

I will leave it to readers to decide for themselves whether City would have managed to get to almost £100m of partnership revenues if they hadn't been owned by a member of the Abu Dhabi royal family. Perhaps Etihad, TCA Abu Dhabi, aabar and Etisalat would have all signed up as City's sponsors if Thaksin Shinawatra or even Franny Lee was the owner..... Such debates are pretty superfluous, other clubs have established the benchmark for commercial income at £100m or more per annum and a legally well advised MCFC will no doubt meet that benchmark as long as the club is owned by ADUG.

Costs - some signs of control

Whilst City's income rose 60% last season, cost control was actually quite good. Total staff expenses rose 16% to an English record £202m (by comparison Arsenal spent £143m and United £162m) but there were obviously significant bonus payments for winning the league meaning underlying growth in the wage bill was probably no more than 5-7%.


The key profit measure of EBITDA (essentially cash profits/losses before investment) was greatly improved with the loss before player sales down to £14.5m (a negative margin of 5.9%). This profit performance is  still a long way off that of the major clubs with sustainable models (see chart below), but for the first time since the ADUG takeover, City are only making a small operating loss before investment spending.


Below the EBITDA line comes the cost of transfer spending - the amortisation charge. Whilst net cash transfer spending in the season fell to £95.2m from £143.4m, the amortisation charge only fell 1% to £83.0m. Amortisation lags transfer spending and only reflects purchases not sales. To make a major dent in the amortisation charge (which is included in the FFP calculation), the club will have to rely far more on home grown talent than currently is the case. It is a key characteristic of the FFP rules that spending on youth development is not included in the profit/loss calculation whilst transfer spending is. Across in M16, United's amortisation charge has never exceed £41m in any season as the club has had a constant stream of players coming through the youth system.

The FFP "breakeven" calculation

Although UEFA are not going to publish individual clubs' FFP figures it is quite easy to calculate a decent estimate. The items included in the calculation are set out in Annex 10 of the regulations. There are two main items which are not readily identifiable from most clubs' accounts; the total spending on dis-allowable items such as youth development and community programmes, and wages and salaries relating to contracts signed before the regulations were published in June 2010. 

Although not in City's accounts, the club have briefed journalists that there are £15m of dis-allowable expenses relating to youth development so I have used this figure.

I have shown calculations both including and excluding the sale of intellectual property rights to ADUG for £12.8m. There is no detail on this transaction, but it looks like a one-off.


The bottom line is that City reported an FFP loss of £79-92m last season. At first glance this looks like a pretty poor result vs. the target of £36.5m over two seasons, but some journalists are reporting that around £80m relates to player contracts signed before June 2010. This looks very high to me given the number of contract renewals that have taken place (the major players still on pre-June 2010 contracts are Tevez, Kolo Toure, Lescott and Barry), and I wonder whether journos have misunderstood and that the £80m is a projection over both last season and this one. In any event there will be a substantial amount that UEFA will ignore in making their calculations.

The key point however is that breaches of FFP in the first monitoring period are very, very unlikely to result in severe punishment, especially if losses are reducing (they are) and the club can show strong evidence that it is moving towards compliance, and here they have BT to thank.....

BT - the football club owner's best friend

The recent domestic PL rights auction transforms the outlook for clubs like City who are struggling to comply with FFP. The entry of BT into the market caused the value of domestic rights in the next three year cycle to rise by 70% (compared to a 3% rise in the previous three years period). BT's Ian Livingston is taking a huge gamble that he can break BSkyB's vice like grip on the UK sports pay TV market. He is betting £246m per annum that BT will succeed where Setenta, ITV Digital and (arguably) ESPN have failed.

Livingstone: Visionary or sucker?
The exact impact on clubs' finances from the new three year cycle will depend on the eventual uplift achieved from international rights. Assuming a 50% uplift, the amount going to the league champions will rise from c. £60m to c. £100m (see Sporting Intelligence's excellent article for a full analysis). The uplift for a relegated club will be around £25m.

Closing City's FFP gap

Manchester City are very lucky that Ian Livingstone decided to barge into the market when he did. The £40-50m extra will alone more than halve the club's FFP deficit when the new cycle starts in 2013-14.

Even before this new bonanza, however, the FFP gap will close somewhat. The club's share of the CL "market pool" will rise significantly this season because they are English Champions, adding c. £7-8m. City will also benefit modestly from the general 20% uplift in the amount clubs receive from the Champions League. The Nike kit deal signed in May 2012 will add another £9-10m per annum vs. the current Umbro deal. There will no doubt be further second tier sponsors announced in the coming months as well.

As described above, the amortisation charge lags behind transfer spending, but with net cash transfer spending year to date down to £39m, the total charge should begin to fall from this year onwards (down by about £10m on my estimates).

Taking these items together and assuming a top two finish, this season will see £30m+ improvement and  by next season the gap will have closed by £70m+. Further trimming of the squad, especially high wage/non-playing players looks very likely. The club no doubt expects to begin to reap rewards from its youth development spending, whether through reduced transfer spending or increased player sales income. Also further out, there is potential for the developments around the stadium and the new Etihad campus to yield profits too.

Finally, if City can start to work out the Champions League, there is a further £25m+ to be earned from getting into the late knock-out stages.

A calmer future?

City will no doubt miss the first break-even result test, despite the exclusion of pre-2010 contracts. Crucially however, there is decent visibility on a very substantial improvement in the club's FFP position over this season and even more next season as the PL TV bonanza rolls in.

The club has been very, very lucky that TV income is continuing to rise so fast. There is no possibility that City would have been able to reconcile £200m of staff costs with the FFP rules without the enormous rise in TV money coming in the next 18 months. 

City still have much to do however. The "buy success" model needs to be replaced with a proper youth set-up that delivers high quality players. In the current first team squad, Micah Richards is the only player to have come through the ranks. Net transfer spending will have to fall and stay lower to keep the amortisation charge at a reasonable level. An £80m charge and a £200m wage bill are not compatible with a club generating £33m in matchday income (although the ticket price policy is to be applauded). Manchester City need to "bank" every penny of extra revenue they receive in the next two to three years.

For competing clubs, it doesn't look as if FFP is going to lead to major cutbacks at City, BT have seen to that. For those clubs who don't have sugar daddies, the outlook is still good. City can live with FFP, but they are going to be have to calm down to do so, and that has to be good for everyone else.....

LUHG








Tuesday, 21 August 2012

Manchester United's shares in issue: a quick guide

The news that George and Robert Soros own 3,114,588 shares in Manchester United has led to some confusion about the number of shares the club has and hence the relative size of this stake. This is a quick guide.

Pre-IPO
Before the IPO on 9th August, the club's share structure was reorganised to create two classes of shares, "A" Shares and "B" Shares. 

Red Football LLC, the Glazers' Delaware company owned 100% of each class of share.


The IPO - two elements
The IPO was an offer of a total of 16,666,667 "A" Shares at $14 per share. No "B" Shares were offered. 

This total offer had two separate elements, the issue of 8,333,334 new "A" Shares by the company and the sale of 8,333,333 existing "A" Shares by the Glazers. The first element had the effect of increasing the total number of "A" Shares from the 31,352,366 before the offer to 39,685,700 afterwards. The number of "B" Shares remained unchanged.


The Glazers therefore ended up owning 58% of the "A" Shares and 100% of the "B" Shares, so 90% of all the shares in issue. Third party investors own 42% of the "A" Shares and none of the "B" Shares, so 10% of all the shares in issue.

Votes or lack of them
Each "B" Share has 10 votes, and each "A" Share has 1 vote. Because of this structure the 10% of total shares owned by third parties only command 1.3% of the company's votes. In aggregate all the "A" Shares representing 24% of the company, only command 3.1% of the votes.


The Soros position
The Soros family bought 3,114,588 "A" Shares in the IPO. That is a pretty significant 18.7% of the shares sold in the IPO, but only 7.85% of the total number of "A" Shares and 1.9% of the whole company. Being "A" Shares this stake only has 0.24% of the votes.


At a price of $14 per share, the Soros family paid $43.6m for this stake. At yesterday's closing price of $13.06, the stake is now worth c. $40.7m.

LUHG



Friday, 10 August 2012

The MUFC IPO - why the club won't benefit for over two years...

So the Manchester United IPO has finally happened. Having failed in Hong Kong and Singapore, the Glazers and their increasingly desperate bankers ditched their own ludicrous $16-20 per share price range and the shares have limped on to the NYSE at a still very, very aggressive price of $14 per share.

The whole saga has been a grubby and unedifying spectacle in our club's history that does very, very little indeed to improve the club's finances. The whole exercise has only been undertaken to help the Glazer family with their cash flow problems.

From the latest SEC filing we have confirmation that at the lower issue price, the club will receive net proceeds (after underwriters' discounts and commissions) of c. $110.3m (around £70.7m).

The club will use all this $110.3m to repay $101.7m face value (£63.6m) of the 2017 US$ notes at a price of 108.375% of nominal value.

These US$ notes pay 8.375% interest so the annual saving before tax will be:

£63.6m x 8.375% = £5.3m per year

Because interest is tax deductible, this reduction in interest paid will increase taxable profits. As a consequence of the IPO, United will pay US Federal Income Taxes at a rate of 35%. The net interest saving  after tax will therefore be:

£5.3m x (1 - 0.35) = £3.46m per year

This net saving is the equivalent of the matchday income from one game at Old Trafford. It is just over 1% of the club's annual revenue and around 3-4% of EBITDA.

Before any United fans begin celebrating this tiny saving, there is a further sting in the tail.

The prospectus informs us that the club, and not the family, will bear the expenses of the IPO. From page 151 we can see that these expenses total $12.3m (c. £7.9m).

With so little debt repaid and United bearing the £7.9m of expenses, it will take until the end of 2014 for the club to even break-even from the IPO, let alone benefit financially.

And the Glazer family? They receive their $110m straight away.

That's "Glazernomics" folks.....!

LUHG


Friday, 3 August 2012

An apology to Sir Alex and a restatement of the fundamental issues


Sir Alex Ferguson

Readers will no doubt have seen Sir Alex Ferguson's statement that he will not benefit financially from the IPO. As one of the people suggesting he was likely to participate in the $288m "2012 Equity Incentive Reward Plan" the club are putting in place, I'd like to apologise to Sir Alex for the suggestion that personal gain was a motivation in his support for the owners. I think it was a valid question to ask in the light of his comments about "real fans" last week, but I was wrong about my assertions. I have frequently stressed on this blog the miracles Sir Alex has achieved at United and was proud to promote the SAF25 fans' book last year. I'm extremely glad he is not caught up in the murky finances of our club.

The real issue

The key issue with the IPO is not however the share options that will be granted, but the continuing financial costs to the club of the Glazers' ownership. I thought it might be helpful to set out the costs and savings that stem from the financial structure that has been in place since 2005. There have been a few comments on this blog questioning the financial costs of ownership so I wanted to set them out again in full with full sources.

The costs divide into several categories. Firstly "cash costs" of £402m, money paid out of the club's coffers. The most important element of this is interest (£295m). Second are the limited repayments of debt since 2005, these comprise £37m of the original bank debt and £93m of repurchased bonds. Please note I have not included the repayment of the PIKs as the club did not pay for this. Adding these together we get costs of £531m, around two thirds of United's total wage bill over the last seven years to put the figure in context.

For information I have also set out various costs paid by the taking on of additional debt rather than paid out of cash flow. I have not added this £79m to the £531m as there would be an element of double counting (I include repayments in the cash costs so can't include debt additions too).

There are two key savings from the financial structure totalling £180m, firstly the dividends which the plc used to pay and secondly corporation tax saved because interest payments are tax deductible.

I have assumed dividends would have increased 8% per year from 2006-2012. This compares to 7.6% per year growth in the seven years up to the takeover and is faster than the 7% growth in EBITDA seen since the last full year of the plc (2003/4).

Corporation tax is as set out in the Manchester United Limited accounts (but not paid because of deductible interest higher up the corporate structure).

The net cost: £531m - £180m = £351m is a vast number. It is the gross transfer spend of the club in the ten years from 2001/2 to 2010/11. It could alternatively have funded a 60% ticket price cut in every year since the takeover. It could have been used to build out Old Trafford to be a 100,000 seat stadium. It was used for none of these things. It is the cost in cold hard cash of the Glazers' ownership.

Crucially, this figure ignores the fact that even after all this waste of money, the club still has £437m of debt on the balance sheet and that this will still be around £360m after the IPO.





The IPO

The IPO is a huge wasted opportunity to stop this enormous outflow of money from Manchester United. The SEC F-1 prospectus confirms that the IPO will only reduce the club's debt by around £78m, saving (after tax) only around £5m per year. Longer term, the IPO will cost the club more each year in higher US taxes (the corporate tax rate is 35% vs. 24% in the UK).

The real beneficiaries of the IPO will be the Glazer family who will receive around $150m from their sale of 8,333,333 shares and the unnamed senior executives (but not Sir Alex) who will be entitled to 16,000,000 shares under the "2012 Equity Incentive Reward Plan". All these people will make money and the club will be left with the vast bulk of its debts.

The IPO gives no opportunity for supporters to take a meaningful stake in their club. The shares on offer represent 10% of the club but with under 2% of the votes.

It has been mentioned by some people that the club is constrained by the bond terms as to the amount of debt it can repay. It is true that until 2013, the club can only repay 35% of the bonds. That figure is £182m compared to the £78m the IPO will repay. It is in any event only five months until this restriction falls away. If this IPO was about paying down debt, the vast majority of the $300m (£193m) proceeds could be applied to debt repayment today, with the balance being applied in January.

Agendas

People have queried my "agenda". My agenda remains the same. I want Manchester United run for the glory of Manchester United, not to make money for owners who do not care about it. I want the money United makes to be ploughed back into the club, invested in players, stadium and cheaper tickets, not wasted on financing costs. I want debts taken on only to expand the facilities of the club. This is not a pipe dream. It is how almost every European football club is managed, for the glory of the club. It is how the other financial titans; Barca, Real and Bayern are run.

As part of the IPO roadshow, the senior management team at United (Woodward, Arnold and Bolingbroke)  have done a video presentation. For the next few days you can view it here: 


In the video presentation they confirm that the club's transfer budget in the future will usually be a net £20-25m, the average spend over the last fifteen years. That is a choice being made by the Glazers, more concerned with maximising profits. A debt free United run like a normal football club could afford to compete with biggest clubs in Europe, we aren't even trying.

LUHG


Monday, 30 July 2012

The Red Issue Forum letter to Sir Alex Ferguson

This letter was written by long standing United fans who post on the Red Issue Main Forum, I didn't have any part in writing it but would be happy to sign it.

I post it here in the hope that it receives a wider audience, especially today of all days when the Glazers again show their true colours with an IPO that enriches themselves and leaves the club in debt.
Dear Sir Alex,  
As lifelong Manchester United fans, we are disappointed and concerned by quotes attributed to you in a recent interview. Many of us are the same fans who protested to denounce Cubic Expression back in 2005. These are the same fans who had previously offered you their unwavering support during your private dispute over Rock of Gibraltar's breeding rights, despite Cubic Expression raising some very pertinent questions. In the spirit of fairness, we would like to invite you to clarify these comments by responding to a brief summary of our concerns:
1. You suggested that ‘the majority of real fans will look at it [Glazer ownership] and see that it’s not affecting the team’. Can you clarify what constitutes a real fan? 
2. With thousands of fans leaving the club in protest over the Glazer regime, do you consider these time-served reds to be less than real fans? 
3. Have you personally met with any of the dissenters to determine how deep their commitment and affection for United may be?
4. What are your thoughts on an atmosphere which gets markedly worse each season as more and more local, traditional fans are marginalised and alienated from the club? 
5. You are also quoted in the interview as claiming ‘I’m absolutely comfortable with the Glazers situation. They’ve been great’. You are clearly aware of the opposition from the United fan base - does that not make you uncomfortable in any way?
6. What, in your view, would constitute poor owners?
7. You have repeatedly claimed to have been backed financially whenever you have requested transfer funds. Is this your only consideration when determining what represents great ownership?
8. You continued the interview by saying that, ‘the salaries, agent fees – is just getting ridiculous now’. Whilst we agree in tone, it does represent a sea change in attitude from pre Glazer transfers. Agent fees in both the Ferdinand and Rooney transfers were criticised at the time for being excessive, so why does the club now refuse to meet market conditions for the top players? 
9. Do you believe Jorge Mendes’s £2.6m cut of the Bébé transfer, a full 35% of the total fee paid, represented good value?
10. With more than £250k leaving the club each day to service the Glazer debt, totalling over £500m since the takeover, is it so reprehensible for us to question your constant references to ‘value’?
Given your personal background and previous support for fan involvement we hope you take the trouble to respond to our deep concerns about both the club’s situation and the wording of the interview quoted. 
Signed
Concerned Manchester United Fans

Thursday, 12 July 2012

Why have the Glazers changed their strategy on the debt? A theory....

The big news in United's "preliminary prospectus" (the Form F-1 SEC filing) was 1) that the proceeds from the IPO will be used to repay some of the club's enormous debt and 2) that no dividends will be paid "in the foreseeable future".

The big question that stems from this, is "why?". Why after seven years of running a highly leveraged balance sheet and only two and a half years after the bond issue have the Glazers executed a huge u-turn? Why suddenly decide to reduce the club's debt?

I believe it is highly unlikely that the change is due to a sudden realisation that cash wasted on interest should be available for investment, although that may be a positive knock-on effect, but because of the financial pressures the family is under.

What follows is only my theory (and apologies if you don't like speculative articles like this), but one that I think is near the truth....

The amazing disappearing PIKs
Followers of the United financial story will know that out of the blue in November 2010, the Glazer family found £249.1m (around $400m) which they injected into the club as equity and used to repay the infamous "payment in kind securities" (PIKs). These short-term debt instruments had festered on the balance sheet of Red Football Joint Venture Limited for more than four years and had accrued £111m of rolled up interest on top of the original £138m loan.

In August 2010, the PIKs had become even more expensive as the Red Football companies breached a key debt covenant (section 8.2 of this document). The covenant stipulated that total debt in the group (from Red Football Shareholder Limited downwards) should not be more than 5x EBITDA (essentially cash profits before transfers). If debt exceeded this limit (set when the PIKs were issued in 2006), the PIK interest rate would rise from 14.25% pa to 16.25% pa. With debts in August 2010 totalling £773m and EBITDA of £102m the rate duely rose, making the PIKs even more toxic and in need of repayment.

The bond issue of February 2010 had created a "carve out" which allowed the Glazers to take £95m of the club's cash out and it was widely assumed (and mentioned in the bond prospectus as a possibility) that this money would be used to pay off a chunk of the PIKs. But the Glazers didn't use the carve out to repay them in November 2010. The exact source of funds is unknown.

What I do know, from impeccable sources, is that the money was borrowed by the Glazer family. They didn't have £249m in cash, few people do (and the other bits of the family empire are leveraged up already). The money was borrowed by one of their US companies from a single US financial firm.

Throughout the summer of 2010, the family and their advisers were hawking the deal around the market. Amusingly an old college friend working for a private "intelligence company" was retained by an American debt investor (I won't embarrass him by naming the investor) to look at the deal and initially asked me for help. The invitation to meet the potential investor was quickly dropped after they did some due diligence on who I was.

So that's what we know. Since November 2010, the club has been carrying the bond debt, and the Glazers have been stuck with what you might call "PIK2", expensive personal debt secured on their equity in United, presumably costing less than the eye watering 16.25% of the PIKs, but more than the senior bond debt's c. 8.7%.

Could there be another total debt covenant attached to "PIK2"?
Stories about a potential IPO (in Asia) first started to circulate in mid 2011 as the first anniversary of the PIK repayment approached. As we now know, nothing came of the attempts to list in either Hong Kong or Singapore, but the Glazers kept going. Despite terrible market conditions, a moribund IPO market, weak results due to the Champions League etc, they have persisted.

The explanation for this burning desire to IPO the club must be to do with their personal circumstaces, and yet they are not seeking to cash out but to repay debt. I believe that it is highly likely that the PIK2 debt has "total debt to EBITDA" covenants attached to it of a similar sort to those in the original PIKs. Such covenants would be very common for quasi-equity financing of this sort. Breaching these covenants could be very costly for the Glazer family and the existence of such would go a long way in explaining their apparent change of heart on the debt. Under such a scenario there would be a very strong incentive to try to reduce the debt across the Red Football group of companies, and the easiest method is an IPO.

The change of strategy actually dates back to Q4 2010 and PIK repayment
It is worth noting that although the prospectus sets the new strategy down in black and white for the first time, the Glazers have been pursuing deleveraging for a while, using bond buy backs, and that this new approach began as soon as the PIKs were repaid.

The club first bought back bonds in the final quarter of 2010 (when £24m were repurchased) and has now spent a total of £92.3m. No less than two-thirds of the cash the club had at the time of the bond issue (all that Ronaldo and Aon windfall) has been used on bond buy backs. The peculiarity of holding almost £150m of cash when issuing £520m of bonds and then, just a few months later, using that cash to buy back those bonds is striking.

Something has definitely changed...
So since the repayment of the PIKs and their replacement with "PIK2" we have seen a completely new financial strategy. The best part of £100m has been whipped to buy bonds and now we have an IPO being launched into terrible markets to reduce the debt further. None of this proves they are under pressure from debt covenants in PIK2, but it all fits with the theory.

Even fellow "lineal descendants" can fall out
The other chat coming out of the US about the Glazers is that Darcie, Edward and Kevin don't like having wealth tied up in this pesky soccer club that Joel, Avram and Bryan are so fixated with. If the six of them are personally on the hook for $400m of "PIK2" and covenants are in danger of being breached, you can sort of see their point.

Theories and facts
Apologies again for such a speculative post. My theory may ring true to you or may sound like laughable rubbish. It would be lovely to think the Glazers have had a damascene conversion to prudent financial management and eschewed the crippling debts of the last seven years, but you'll forgive me for seeking a baser motive.

Perhaps there are multiple reasons for the change in tack, including fears that becoming uncompetitive on the pitch will hurt the club's value, as well as the sort of direct pressure on the family I have described above, and perhaps the reasons are less important than the fact the burden on the club is being reduced. That won't stop this blog trying to identify the "whys" not just the "whats" of the whole sorry saga.

LUHG

Thursday, 5 July 2012

The Manchester United IPO some initial observations


There’s been a lot written about Manchester United’s proposed listing on the New York Stock Exchange (“NYSE”) since it was announced on Tuesday night by the filing of an SEC Form F-1 (the document is available here), this post is designed as a brief summary of my thoughts on the subject.

This is a massive change in strategy by the Glazers and a positive one financially
Since the takeover, the club have insisted that the debt loaded onto United is not in any way a problem. As recently as last March, David Gill was reiterating this to the House of Commons Culture Media and Sport Select Committee.

Suddenly, the attitude to debt has changed. The SEC filing clearly states:
We intend to use all of our net proceeds from this offering to reduce our indebtedness
The Glazers do not need to take this approach, they could float United and retain the proceeds themselves. The fact they have chosen not to do so is very telling and has the potential to transform the financial position of the club. As I have mentioned again and again on this blog, over £500m has been spent on interest, debt repayments, fees and derivative costs since 2005. In the first nine months of the 2011/12 financial year alone the club spent £71m on interest and bond buybacks. The elimination or significant reduction of these costs is huge news.


The other key aspect of this debt reduction is that the prospectus makes it clear that there is no intention to pay dividends in the forseeable future. Interest payments will not simply be replaced with dividend payments.


The 2010 bond issue was supposed to lock in long-term (seven year) funding, and yet only two years later, that entire costly structure is being ripped up.  A major change of heart has taken place.

The family can still cash in some shares under the "over allotment" mechanism
Although the prospectus says all the net proceeds will be used to reduce debt, the family can still sell some of their shares (as opposed to the new shares in the main offer) under the "over allotment" option. This is a feature of many IPOs, whereby the owners make additional shares available for sale if demand is higher than expected. Over allotment is not normally for more than 10-15% of the shares being offered.

At this early stage we are missing some very key details
The SEC filing is a “preliminary prospectus”. It contains no details on the number of shares being issued or the price of these shares. It is subject to revision.

The success or failure of the offer will have a lot to do with the valuation the offer puts on United. In the past, the Glazers have appeared to have placed a higher value on the club than most analysts or potential buyers. The FT recently reported that Morgan Stanley had left the IPO syndicate (of underwriters) because of disagreement over the valuation.

It is not too late for this offer to collapse spectacularly if the Glazers attempt to sell shares on too high a valuation or if financial markets weaken further. This is not a “done deal”.

The share offer will be significantly greater than $100m
The much quoted “$100m” issue is a red herring. There is a requirement in a preliminary prospectus to estimate the cost of registration fees and as these are dependent on the size of the share offer, a “placeholding” assumption has to be made. That is where the $100m figure comes from. It is not a guide to the size of the eventual offer. There is little or no point raising $100m (£64m). The exact amount raised will depend on the valuation placed on the company and the state of the markets in the next few weeks but I would expect at least $300m.

This is not a change of ownership
Sadly for those of us who want supporters to have a meaningful stake in Manchester United, this IPO is of virtually no use at all. The “A shares” on offer will only have very limited voting rights. Even if the Glazers sold 90% of the club in the IPO (which they won’t), the “B shares” the family will hold would still have a majority of the votes as each B share has 10x the votes of an A share.

Non-Glazer shareholders will therefore have virtually no influence over the club.

This remains a very short-sighted and depressing approach to governance. The experience from Spain and Germany shows that supporter participation in ownership is a huge plus for football clubs. United’s unwillingness to engage with supporters as anything other than potential customers remains an enormous problem that can probably only be solved by intervention by government.

They’ve chosen New York rather than London because they want to maintain control
The principal advantage to the Glazers from listing in New York rather than London is that the A/B dual share structure is acceptable in the US and not in the UK. Well known companies such as Google, Ford, Facebook and (infamously) News Corporation all have dual voting structures. It would be very hard to float a company with such diminished voting rights for outside shareholders in London.

The downside of US listing is the higher tax that the club will have to pay. United has been UK tax registered for all of its existence but will now be subject to US Federal Income tax on profits at the high rate of 35% (the UK rate is 28%). The fact that the Glazers are happy for the club to pay a higher tax rate tells us a lot about the importance of the A/B share structure to them.

Is this all about a post Fergie world?
Why is this all happening now? We can only speculate, but it seems to me that the Glazers are preparing for a Manchester United without Sir Alex Ferguson. As we know, the club has achieved great success on the pitch on a pretty low transfer spending since 2005. Would another “big name” manager come on board with this limited budget, especially as City, Chelsea, Real Madrid and Barcelona continue to flex their financial muscles?

What happens next?
The underwriting banks and the company will now undertake a road show for potential investors. United have ninety days from the date of the preliminary prospectus to file their “final prospectus”, which includes the price and number of shares being offered. The IPO can still be cancelled at any time prior to this….

Watch this space.

LUHG

Friday, 18 May 2012

Manchester United Q3 2012 results: getting hard to square the circle

Since United had its bond issue in early 2010, the club has reported increased year-on-year revenues every single quarter. This revenue growth has more than offset rampant wage inflation. Meanwhile of course the club has clocked up Champions League finals and Championships. This season the performance on and off the pitch has stalled somewhat. The numbers for the next quarter (which runs from April to June) will be worse again.

For the Glazers, the clever trick of football success on a limited budget with high and seemingly ever increasing profits may well coming to an end. Will they spend at the expense of those profits? If they don't, will the success and hence the profits still be achievable?

It's getting harder to square the circle.

Revenue and EBITDA - both down a little
The poor performances in Europe and the domestic cups can be seen in these quarterly figures. Matchday income fell 13% compared to last year as the club played seven home games compared to last season's nine. Of the seven played, two were in the Europa League in front of smaller gates paying lower prices.

Media income fell 19% compared to 2010/11 despite the higher share of the UEFA CL "market pool" this year. The explanation is simply the exit from the Champions League. The impact will be far more severe in the current quarter of course when there will be no CL media income at all compared to the previous year's run to the final.

Commercial income was again the star, with the new contracts signed since last year; DHL, Epson etc and a step up in Nike income and income recognition boosting revenue by 15% compared to 2010/11.

In total, revenue fell 5.8% year-on-year in the quarter and revenue growth for the nine month period was 6.1% (down from 11.9% in the first half of the year). United may be a commercial powerhouse, but old fashioned football success and failure can still have a major impact.


Staff costs only rose 1% compared to last year, reflecting lower bonuses (presumably linked to qualification for the CL knock-out stages). The wage bill for the year to date is still 10% higher than last season, although the fourth quarter will not see any of last season's bonuses.

The major fall in operating expenses (down 16.3%) is largely due to the lack of domestic home cup games. The club accounts for the gate sharing for such games as an expense and this season there were no such games.

With revenue down 5.8% and costs only down 4.7%, EBITDA fell 8.4% and for the first nine months of the year was only up 3.3%. There will be a larger fall in Q4.

These falls shouldn't be overplayed, with United still making cash profits before transfers of £85m in the first nine months of the season. That is more than any other English club has made over any twelve month period. The worry for the Glazers, is that the profits are stagnating this year at a time when investment is needed to keep up with City and others, and none of that is good if you hope to float your club on a stock exchange.

Below EBITDA - not much of note
The club made a small £2m profit on player sales during the quarter (Gibson and Ravel Morrison). The amortisation charge (how transfers are "charged" in accounts) was basically unchanged at £9.7m for the three months. To put this in context, the c. £40m annual amortisation charge compares to a figure of £83.8m at free spending City in the last reported season (2010/11).

There was a £4.3m "exceptional" charge during the quarter which the club says related to "professional advisory fees" and the need to top up the Football League pension fund. I suspect the "fees" element accounts for the great majority of this £4.3m and relates to advice on the mooted IPO.

The interest charge is spread evenly over each quarter even though bond interest is paid twice a year in February and August. The club recorded a "gain" of £6.5m as the pound rose against the US dollar, reducing the sterling value of the club's dollar denominated bonds.

Taking all these charges and credits into account, pre-tax profit for the quarter was £2.8m, down from £7.4m last year.

Cash - a lot less money than there used to be
As I always say in these pieces, I do not consider the profit and loss account described above to be particularly informative when looking at football clubs below the EBITDA figure. The cash flow statement is often more informative. Cash flow includes real spending on transfers which are after all cash transactions (the amortisation charge is a significant simplification by contrast). For United, lumpy bond interest payments and bond buybacks are also a fact of life that constrain what the club can spend.

Despite their advantages, cash figures come with a warning however. Football is a seasonal business with season ticket revenue collected in the summer, boosting cash balances. The end of the season also see large TV payments from the Premier League and UEFA. Furthermore, prepayments on sponsorship contracts can lead to large positive and negative swings in cash and at United there are large interest payments in the first and third quarters of each financial year. It should be remembered that United are the only football club to publish quarterly figures (a requirement of the bond issue), all other club accounts are struck at the seasonal high point for cash in the summer.

You can see the volatility in United's quarterly cash flow in the chart below which shows how cash builds up in the fourth quarter and runs down through the rest of the year:


Manchester United is not like other football clubs of course, because it has £420m of outstanding bonds. Since the bonds were issued in February 2010, the club has periodically gone into the market and repurchased them (usually paying more than the issue price). These buybacks make financial sense (the bonds cost c. 8.5% whilst cash at the bank barely yields 1.5%) but risk depriving the club of cash needed for investment. It is a choice made by the Glazers and their management team. 

There were no buybacks in the third quarter of the 2011/12 financial year, but since 2010, the club has spent over £92m on them. You can see their impact on the "gross" debt which has fallen by the amount bought back (plus currency fluctuations) and on the cash balance below:


Since June 2011, the club has spent £71m on buybacks and interest payments which together with the other seasonal cash outflows described above has pushed the club's cash reserves down to a low of £25.6m at the 31st March.


As described above, there will be the usual rebound in the club's cash position in the current quarter, although the precise amount is very hard to estimate. Judging from previous years and taking into account the lower profits caused by the CL exit, I estimate the cash position will improve to c. £75m by the end of June.

Will they spend?
The big question supporters want answering is not about buybacks or EBITDA, it's about spending to keep the club competitive after a season when the squad was found wanting at home, but especially in Europe. I can't give an answer to whether the club will spend, only the Glazers can, but the very issue raises big questions over their strategy for running the club.

Since the takeover, Fergie's genius has allowed United to consistently win trophies (with a couple of rebuilding dips on the way) whilst keeping the club's wage spending to turnover ratio very low (45.7% so far in 2011/12 for example) and whilst spending very little on transfers (average net spend of  £16m per season). This combination of controlled wages and low transfer spending is vital for two reasons. Firstly it theoretically boosts the value of the club (if you look at valuation based on EBITDA). Secondly, it frees up profits to service the enormous debts taken on to buy the club. Since the takeover, 18% of revenue has gone on interest. This has been "affordable" because the club hasn't ever really had to "pay up" in either wages or transfers.

Since 2005 the challenge of achieving this financial balancing act has been aided by a number of factors. In the years immediately after the takeover, the 40%+ ticket price rises were crucial. The Ronaldo windfall in 2009 and, to be fair, the rapid growth in Commercial income in the last two years have also been significant pluses. Now however, the trick is becoming more difficult to pull off.

Bond buybacks and interest have eroded the club's previously huge cash balance. There has been spending (£47m last summer) but not on crucial areas of the pitch (United haven't bought a central midfielder since Ronaldo departed). Major transfers cost money twice over, both driving up wages and demanding immediate cash. Wage inflation and transfer inflation across football remain endemic and the advent of FFP appears not to be having any impact on this.

If United are to strengthen, money will be needed and that means no more bond buybacks. It probably means lower profitability, in at least the short-term, with negative implications for the valuation achievable at any IPO. The alternative may well be under investment and the club going further backwards relative to its main competitors.

The Glazers know their structure hampers the club. There was heavy briefing of journalists in the run up to the aborted IPO process last year, suggesting debt would be paid down from the IPO proceeds to make United more "competitive". If the IPO can't be delivered however, the club is stuck with its debt and the owners will have to accept lower profits or further relative decline. Can they square this circle?

LUHG

Friday, 4 May 2012

The scale of Fenway's challenge at Liverpool becomes clear

Normal health warning: if you don't think a United supporter can impartially analyse Liverpool Football Club's finances don't read on.

Liverpool are a club in transition on and off the pitch. The financial results published overnight show just how great is the challenge facing Fenway Sports Group ("FSG"). We can now see that the American owners spent £261m acquiring and refinancing Liverpool. Of this figure only £30m has actually flowed into the club, the rest was spent on the purchase itself.

I think Liverpool will turn the corner financially, the commercial opportunity is still there and there is clearly the scope to occupy a far larger/more profitable ground. The challenge is getting far more sporting success out of a very expensive squad of players, and that isn't really down to money at all....

FSG's ownership structure
The primary operating company of Liverpool Football Club is "The Liverpool Football Club and Athletic Grounds Limited" which the the main entity I will focus on. Since 15th October 2010, 100% of this operating company has been owned by a new vehicle "UKSV Holdings Company Limited". UKSV is in turn owned by NESV I LLC, a US company also (and commonly) known as "Fenway Sports Group". The accounts of UKSV only run from 1st October when it was established to 31st July 2011. The accounts of the operating business, which I'll refer to as "Liverpool" or "the club" for ease, run for the year to 31st July 2011 (i.e. last season).

Ian Ayre's spin
Before the club's accounts were available at Companies House, Managing Director Ian Ayre gave a lengthy interview to the club's website and to the Liverpool Echo. Without making the accounts available, Ayre threw around various numbers and in particular blamed the £50m pre-tax loss on a write-off of work on the abandoned stadium plans. Whilst the write-off had a big impact, he was being pretty disingenuous by not mentioning a pretty exceptional profit (£43.3m) on the sales of Fernando Torres and Javier Mascherano. This profit largely offset the stadium write-off (£49.2m) and that meant that the underlying results were very poor.

Ayre is not alone in spinning his club's financial figures before they come out (hello Chelsea) or not being straight with his supporters (hello United and many, many others), but it is still pretty poor. The club is in transition and there is surely no need for such spin.

Revenues and costs
Football clubs are simple businesses. There are three revenue streams (matchday receipts, media income and commercial deals) and two main operating costs (wages and the costs of operating the club day to day). The difference between these numbers is "EBITDA" (earnings before interest, tax, depreciation and amortisation), effectively cash profits before any investment or the servicing of debts. After EBITDA come depreciation of the stadium, training ground etc, "amortisation" which is how transfers are accounted for, then interest and (rarely in football) corporation tax.


Liverpool's results for 2010/11 show what happens when costs run ahead of revenues; profits collapse. This is of course the curse of football finance. Success brings income so clubs invest in player wages in the pursuit of this success. Fail to do well on the pitch and the costs are still there but not the income.

Liverpool's revenue was effectively flat last season (down 0.5%). Matchday income fell 4.6% despite the same number of home games, reflecting a small fall in average attendances (40,224 vs. 41,940) more than offsetting ticket prices rises and must imply a fall of in corporate hospitality too. Media income was down 18% as the club failed to qualify for the Champions League (losing £25m of income). This was partly offset by £5m of Europa League income and the £7m increase in PL TV money from overseas rights. Commercial revenue was the star area with the Standard Chartered deal driving it up £15m or 25%. The Warrior kit deal will not impact the accounts until 2012/13.

Although revenues were down a fraction, there was significant cost growth as the club spent heavily in an attempt to break back into the top 4. Pre-exceptional staff costs rose a very punchy 12.7% year-on-year. This wage growth is more down to contract increases than transfers in my opinion. Although the club signed Cole, Poulsen, Konchesky, Meireles etc, Mascherano, Riera and Benayoun all departed and the January flurry of transfers will not have impacted the full year numbers significantly.

Total operating costs (pre-exceptionals) rose 9.3%, driving EBITDA before players sales down by 63% to only £9.8m, a margin of 5.3%. The graph below shows how the club's EBITDA has fallen very sharply since 2009 revenue despite growing slightly. Liverpool are overspending.


The issue of rampant wage inflation is not of course unique to Liverpool. The graph below shows that Arsenal, Everton, United and City all saw wages rise faster than turnover last season. The problem for Liverpool is however more acute than at other clubs, fundamentally because Liverpool are operating a squad with a Champions League cost base without Champions League income.


Liverpool's wage bill is quite competitive in Premier League terms, fourth behind City, Chelsea and United but the dreaded wages/turnover ratio is rising sharply (up to 70% from 62%). That puts Liverpool much closer to Chelsea (76%) than Arsenal or Everton (55% and 56% respectively).



Amortisation and depreciation
Amortisation is the method by which transfer spending is recognised in the profit and loss account. It reflects the level of transfer spending a club does, spread out over the life of player contracts. Importantly it forms part of the UEFA's FFP calculation. At Liverpool the amortisation charge has been quite high, reflecting steady transfer spending under Benitez and Hodgson. The charge fell from £40m to £36m in 2010/11.

Depreciation (on Anfield and Melwood) was up slightly at £2.9m (vs. £2.1m).

Exceptionals, player sales and interest 
Exceptional costs totaled £58.99m in 2010/11. Of this, £49.2m was a write-off of capitalised costs relating to the abandoned stadium project. It is important to stress that this is not a cash cost in 2010/11, the money had already been spent in previous years. Most of the balance of the exceptional charges relate to getting rid of Roy Hodgson. The club spent £8.4m changing managers last season compared to £7.8m getting rid of Benitez the year before.

The interest charge fell very sharply from £17.6m to £2.9m as the burden of Hicks and Gillett's debts was lifted. It is worth noting that cash interest paid actually rose slightly.

Although not treated as an "exceptional", the club recorded a huge profit on player sales in 2010/11. Such profits are calculated as the difference between the price at which a player is sold and his "book value". Torres was acquired for around £20m and probably had a book value of around £10m when he was sold to Chelsea. That means the club recorded a profit on his sale of around £40m. Add in Mascherano and the "profit on player sales" was £43.3m.

Pre-tax loss
Bringing all these numbers together, Liverpool reported a pre-tax loss of £49.3m compared to £20m the previous year. The exceptional charges are unlikely to re-occur, but neither is the enormous profit on Torres. Estimating a "normal" profit on player sales is very difficult (the figure was £23m in 2010, £4m in 2009), but £10m looks a reasonable estimate for a club with Liverpool's strong youth set-up. Stripping out the exceptional costs and using £10m for a "normal" profit on player sales implies an "underlying" pre-tax loss of c. £23m. The collapse in EBITDA means Liverpool are structurally loss making at these level of income and wages. To change that of course, the club need cheaper players or more revenue.

Cash(flow) is king
Accounting items like non-cash exceptionals, amortisation and player sale profits can often make the profit and loss account of football clubs misleading. It is always important to focus on cash flow as shown in this table:


The collapse in EBITDA (here including cash exceptionals), led to a very sharp fall in operating cash flow at Liverpool. Unlike in the P&L, the transfer spending here reflects actual cash spent and received and with the Carroll spending paid up front but the Torres receipts staggered, there was punchy £40m of cash spending in 2010/11. Deduct interest and the club saw a £42.5m outflow before financing.

It goes without saying that Liverpool need to generate more EBITDA and hence cash flow to be able to compete in the transfer market in the future or will need subsidising by FSG.

Debt and financing
Of the £42.5m cash outflow shown above, £26m came from an injection from new parent company UKSV and the balance from running down the club's cash balance (which fell from £19m to £2.5m).

The £30m "debt" on the Liverpool balance sheet owed to UKSV/FSG is really equity by another name (it attracts no interest). At 31st July there was a real bank loan of £37.7m (the "stadium finance" part of a larger £92m facility with RBS and Wachovia/Wells Fargo) secured on the club's assets.

On 30th September 2011, the club entered into a new £120m facility with RBS, Bank of America and Barclays for £120m. The facility runs for three years. £45m is the stadium project facility and £75m for "general corporate purposes". Whilst with year end debt of only £37.7m there might appear to be plenty of spare capacity, football clubs' cash positions are highly seasonal and the club will definitely need this facility during the course of the season. We do not know the interest rate on this debt (the old facility was LIBOR +450bps).

Prospects and thoughts
Fenway have a very big challenge keeping Liverpool competitive in the next few years. The Warrior kit deal next season will add c. £13m (7%) to revenue, but there was no Champions League football in the current season and there won't be any next season. Wage inflation across football remains endemic despite the imminent arrival of FFP. The playing squad needs investment and a new ground is desperately needed.

If all that wasn't bad enough, the competition for CL places is far fiercer than it was in the good old days of "the big 4". A £100m+ wage bill used to guarantee qualification for the CL, now it barely guarantees qualification for the Europa.

The great unknown in all this is the willingness of FSG to invest their own money in Liverpool FC. So far £30m has flowed in on top of the cost of acquiring the club. The expansion of the banking facility very much suggests that the business will be debt not equity financed in the next year or two and that is a worry.

Despite all this gloom, I think Liverpool will negotiate these financial risks, for two reasons. Firstly as shown by the Standard Chartered and Warrior deals, the club is a big brand still on the global stage. It is commercial success that has allowed United to compete despite its debt burden and remains a key advantage for Liverpool too. Secondly, there is significant scope to expand matchday income if a new stadium can be developed. Liverpool L4 is not London N5, but Arsenal's move to the Emirates gives a flavour of what can be done. Liverpool's matchday income is only 37% of United's. FSG need to close some of that gap.

The other thing Liverpool need is for Financial Fair Play to be rigorously enforced. This is the great unknown of course, but FSG have clearly made a bet that it will stick. 

Taken together, the Liverpool "project" is a steep, steep challenge.

LUHG

Friday, 9 March 2012

The issues the football authorities won't address

So finally, we now get to see "football's response" to the government's call for the game to reform itself.

What a damp squib.

You can see the "response" here, page after page of moving blazers around committees and no action. It's a depressing document more concerned with preserving the status quo than looking at the real issues; debt and financial mismanagement, ownership, ticket prices etc.

Debt, the cancer that kills clubs and costs fans gets one mention. Actually it doesn't, the word "debt" appears as in "debt of thanks". Thanks for nothing.

Crucially, the authorities have chosen to ignore government suggestions on supporter involvement and leveraged buyouts.

Why is there no response to this (from the Government response to the select committee)?

30. The Government notes the evidence before the Committee on the use of leveraged buyouts to purchase football clubs and the strong view of the Committee on the appropriateness of this vehicle. The Government expects that the issue of financial sustainability should be addressed as part of the recommendations on the new licensing model. 
and why is there nothing at all in the document on supporter involvement in clubs as suggested by the government here (my emphasis)?

38. The Government supports the Committee’s recommendation about effective consultation with fans. The Government believes that every club should have a dedicated and mandatory supporter liaison officer. Furthermore, that every club should officially recognise the relevant supporters groups or trusts and keep an open dialogue with them. They should hold official and regular annual general meetings at which these groups are invited to take part and at which appropriate financial and other information can be shared and consulted upon. 
39. The Government believes that these conditions should be an explicit condition of the football licensing model recommended by the Committee and so compliance should be a requirement of the club competing within the English game.
40. Furthermore, the Government urges the football authorities to consider ways to actively encourage and incentivise methods of including supporter representatives on the Boards of clubs. We see the value in the views of many supporters that such representatives should have a full role within the club Board. At the same time, we acknowledge that this may not be the right solution for all clubs or all supporters. Where there are ways of achieving this role in an advisory capacity that do not attract fiduciary responsibilities that could create conflicts of interest, then we urge the football authorities to also consider this route. Whatever the way that representation is achieved, we believe that there is every reason to think that clubs are stronger because they have supporters at the heart of the club, not weaker. 
41. One option that we have considered is to specify within the new club licensing system a trigger point that would require clubs to make a seat available to one or more supporters’ representatives on the Board. Such a trigger point could be the next time the club changes hands; the point at which the officially recognised supporters organisations reach a certain size; or by a majority vote of eligible supporters. There will be other options as well.
The whole document smacks of complacency and an unwillingness to change.

Hugh Robertson should scrawl "not good enough, try again" on it in big red letters and send it back to Wembley and Gloucester Place.

LUHG

Tuesday, 21 February 2012

Manchester United Q2 2011/12 results - the amazing, expanding wage bill

The second quarter of Red Football's financial year (September to December) is the least exciting. The transfer window is firmly shut, the season ticket selling season is over, it's the dull group stage of the Champions League. Nothing is won before Christmas and from a financial point of view, not much happens...

That is largely the case with these figures for the three months to 31st December 2011 (and therefore the first half of 2011/12 too). Having said that, there are some surprises.



Revenue
The trends seen in the first quarter figures were present again in Q2. Matchday income was up 3.8% compared to last year despite exactly the same number of home games. The club put through an average price increase of 2.5% this season and the additional revenue has come from better corporate hospitality sales, a real credit to the Old Trafford corporate sales team at what is obviously a very difficult time economically.

Media income rose an impressive 9.8%, but this increase is somewhat deceptive. United benefit this season from a higher share of the English "market pool" than in 2010/11 because of winning the league last season. Furthermore, the club recognises some of the Champions League media income evenly over the number of games played in the competition. With United being knocked out at the group stages, there is a paradoxically higher amount of revenue recognised in the first six months than last season (when income was spread over ten games across the whole season, not six in the first six months).

In the second half of the season, there will be no Champions League income of course and the meagre pickings from the Europa League (a maximum of about €5m if the final is reached) will depend of course on progress in that competition.

Commercial income continues to grow very fast (up 13.4% during the quarter vs last year and up 17.7% over the six months). Much of this growth comes from the c. £10m per annum DHL training kit deal. The club has also recently signed new deals with Bulgarian and Bangladeshi telecom operators. This strategy of finding a local telecom partner in a myriad of markets will eventually reach a natural end of course, but I must confess to having been too cautious on United's commercial growth. The "brand" has stretched far further than most observers (including this one) felt was possible.

In total, revenue growth of 12% in the first six months of the year is very impressive, even if the impact of the early Champions League exit is yet to be felt.

Costs - terrifying
It's a good thing that United's top-line is growing so well, because so is the cost base, and particularly the wage bill. After the 12.2% year-on-year growth in staff costs in Q1, they rose 17.2% in Q2. This increase is before any end of season bonuses obviously, so can only be put down to significantly more expensive deals for key players. When you consider that Garry Neville, VDS, O'Shea, Brown, Obertan and Scholes (his return is not included in these figures) all left the club in the summer with younger (and you would imagine cheaper) players coming in, the wage inflation is even more extraordinary.

Historically, there has been a very, very strong correlation (r squared of 0.98) between media income and wages at United. What has happened this season is effectively a breakdown in that relationship.There is no big new TV deal to drive player salaries up. Endemic wage inflation is THE financial problem in football, it is what Financial Fair Play is designed to deal with. These figures show it remains a huge issue in 2011/12.

Non-staff cash costs rose an equally punchy 14% in Q2 vs. last year. Some of this must be the club's swanky new corporate offices in Stratton Street in central London. Unlike at the old Pall Mall office, the club has the confidence in Stratton Street to have their name listed in reception.

EBITDA and below
With revenue up 8.7% and costs up 16.3% during Q2 vs 2010/11, EBITDA was virtually static (up 0.4%) and the margin was down from 48% to 44.4%. For the first half as a whole, EBITDA was up 7.7%. United remain very profitable, but the negative "jaws" between cost and revenue growth (costs are rising faster than income) is a worry in any business.

Below EBITDA, depreciation and player amortisation were virtually static. The club made its usual small profit on player sales and there was a totally unexplained £2m exceptional charge.

Interest and various marks to market
The interest charge in the profit and loss account was down 11% compared to Q2 last year. This reflects the increasing number of bonds the company has bought in during the last two years. It should be noted that actual bond cash interest payments are made twice a year in February and August.

Under International Accounting Standards, Red Football must recognise the initial discount on bonds over their life, any premium paid when buying bonds, any "mark to market" increase or fall in the sterling value of the US$ bonds and must also mark any swaps to market too. I don't consider any of these (largely non-cash) charges to be material to the health of the business.

Cash and debt



The second quarter is not a big one for seasonal cash flow (pre-payments of season tickets and sponsorships unwind over the quarter). Operating cash flow was slightly negative (-£2.7m) as these working capital positions unwound. As stated above the main bond interest payments fall outside this quarter and there was little transfer cash flow outside the window.The club bought another £5.2m of bonds during the quarter to take the total to £92.8m (almost 20% of the bonds issued in 2010).

The press have focused on the c. £100m fall in the club's cash balance, but £86m of this fall took place in Q1. In Q2 the cash outflow was only £14m.

The cash outflow and bond buybacks left gross debt at £439m and cash at £50.9m. Net debt has therefore risen slightly from £368m at the end of September to £388m at the end of December.

Thoughts
Credit has to go to the club for once again boosting revenues in a tough economic climate. United (along with Real, Barcelona and Bayern) is one of the commercial giants of modern football. Much though it pains me to say it, the Glazers have overseen extraordinary commercial growth (this year Commercial income will be more than 2.5x the level the plc achieved in their best year). The second half will see weaker media income as the CL exit bites, a timely reminder that on-pitch success is never guaranteed.

Despite United's excellent revenue growth, the dynamics of football finance remain awful (hello Rangers, hello Pompey). Any business which sees core cost growth of 16% year-on-year is going to struggle to meaningfully grow profits. Profit growth is not crucial for a football club, but it is for the owners who are no doubt still eyeing an IPO and want to tell a story of rising profits, not just revenue growth. I remain confident that FFP will eventually calm player wage inflation but such restraint is not visible in these figures.

Finally, for all the booming income and soaring wages, there can be no doubt whatsoever that the £116m Ronaldo/Aon windfall received on 30th June 2009 has gone to deal with the debts laden on the club. In the thirty months from that date 31st December 2011, the club spent the following on debt service and investment.



In almost all football clubs, surplus cash is reinvested. At Manchester United it is still far more likely to be spent dealing with debts that the club should never have had.

LUHG