It’s just over four years since the Glazer family took over Manchester United in the most heavily leveraged football buy-out in history. Despite fans’ anger, threats of violence, and a myriad of destroyed season tickets, Malcolm Glazer landed the club and handed it over to his sons Avram, Joel and Bryan to run. In doing so he placed hundreds of millions of debt straight on to the club’s books, at almost no risk to his own personal fortune. United moved from the world’s most profitable sports team, to the most indebted in one easy step. Four years, three Premier League titles and one European Cup later and the anger has subsided but the debt legacy is just as stark.
While common in the world of business, leveraged buy outs are almost non-existent in football. The process, whereby money is borrowed against the asset that is to be bought, means that the acquired company effectively pays for itself through its own profits. And that’s exactly what happened to United – with the vast bulk of the purchase price effectively mortgaged against Old Trafford, Carrington, the players and future season ticket revenue. The Glazers then took out a £152 million payment-in-kind (PIK) loan, on which the club is playing an eye-watering 14.25% interest rate, to cover the rest. In total the debt burden is now more than £667 million.
On the pitch few fans can complain. Investment has been made in new players since 2005 – Dimitar Berbatov, Nani, Anderson, Nemanja Vidic, Patrice Evra and others. United meanwhile has continued to rack up trophies – three Premier League titles, a European Cup, World Club and the Carling Cup, twice.
The big question is – when does the debt start to bite? Because it will bite. According to the most recently published accounts United serviced £69 million of debt interest last year. Almost exactly the same amount as the club’s profits before tax. Perhaps most pertinently, however, none of the total debt burden was paid off. United does have to pay off the debt, whether its by increasing revenues, selling assets or lowering costs.
For the fans the takeover has meant huge increases in match-day ticket prices. With TV income largely known – save for the millions available from a long Champions League run – ticket prices and commercial revenues are the two principal areas where the United board has looked to generate revenue. Tturnover has increased hugely under the Glazer regime, but critics can argue that the club is sprinting just to stand still.
But does trouble lie ahead? With Cristiano Ronaldo sold for £80 million, and the money earmarked for Carlos Tevez not spent, Sir Alex Ferguson was expected to have a transfer kitty of more than £100 million this summer. But the move to bring Michael Owen into the club on a free transfer and pay-as-you-play terms, could be seen as a sign that the chequbook has been put firmly back into the safe for the summer. More worrying still, the United board has being trying to strike a hard bargain in a sellers market – and failing. First with Carlos Tevez’ team over the fee to secure the player’s rights, and then with Olympique Lyonnis over the transfer of Karim Benzema. Each time the club has effectively given up the ghost and been outbid.
Time will tell whether the Glazer family allows the board to spend this summer. And whether they’ll ever pay off that debt. One thing is for sure, love them or hate them, they appear to be here to stay.
More worrying still, the United board has being trying to strike a hard bargain in a sellers market – and failing. First with Carlos Tevez’ team over the fee to secure the player’s rights, and then with Olympique Lyonnis over the transfer of Karim Benzema. Each time the club has effectively given up the ghost and been outbid.
Spot on ED,completely agree with you. we had a good chance of securing the service of Benzema but didnt cough up. simple as that.
Benzema didn’t want to come to us and never has. I think it is a crazy seller’s market right now and we should play it safe until August.
Apart from that I agree completely with the article and scarily the debt will need to be serviced one day.
Its only 3 days into the transfer window, so a bit early to be talking about panic signings.
Uts need signings that suit, so its not a case of going out and blowing £80 million on anyone.
The money doesnt need spending in one go or even this year, if the right players arent available, them hold on till they are.
Once Madrid bid for Benzema, there was no point in upping the offer, as the player had stated he wanted to go to Madrid.
Owen is a great signing as we have nothing to loose and he has everything to prove. Much better than spending £25 million on Tevez or £16 million on Fabiano.
Why does the debt need to be paid off? As you say its common in leveraged buyouts to take out debt, and moreover to maximise the amount of debt the company can get, use it and refinance.
Refinancing isn’t a magic bullet – just swapping one pile of debt for another. I guess the real difference between leveraging in business and football is that excess revenues in business is profits, in football its a transfer budget.
Just seems like such a bloody waste of money each year..
‘Turnover has increased hugely under the Glazer regime, but critics can argue that the club is sprinting just to stand still.’
Precisely.
If and when Fergie retires we could have a few years of readjustment which would have enormous ramifications if we fail to make the Champions League for a few seasons in a row. At that point we are not sprinting and therefore we might sink.
Make no mistake banks do not want to own football clubs but if they fail to make payments when due or have to refinance in this market 14.25%, eye watering as it is may seem small by comparison.
I delight in the clubs success but make no mistake – this was not the Glazers doing, we would have done this anyway. We do however continue to support the Glazer’s debt.
Oh dear. What a mess.
seriously doubt the glazers have any intention of paying the debt off.. theyll simply service it with profits and hope its value has increased when the get round to selling. agree its a total waste of money, but no more than the pre-glazer years when they were paying dividends to shareholders.
only way the club can avoid paying out is an abramovich-style takeover. but the thought of the club becoming some billionaires plaything/PR gimmic/money laundering front makes me for one, quite ill
This may be a little late but the one thing that people may be missing is perhaps the Glazers are paying off the debt themselves? If the club end up paying the interest (I am assuming it works very much like a mortgage in regards to extremely high % payments in the beginning) then it would leave the Glazers’ own money freed up to pay off the actual debt over the long term.
In essence, they MAY be using the club to pay any and all interest so that they could spread the actual cost of buying United over 20 years rather than all up front.
United are sliding towards that same precipice that saw Leeds go under. Once their chimps league days came to an end, all that was left for Leeds was toxic, unsustainable debt.