Reds slip down Glazers’ favourite league

It’s a slow news day when the headlines are less about Louis van Gaal’s failure as Manchester United manager, than Ed Woodward’s success as a financial architect. Yet, as United slipped from second to third in the Deloitte Football Money League 2016, the annual financial ranking of Europe’s leading clubs, there will be little concern in the Old Trafford Boardroom. After all – there is huge revenue yet to come, even if Van Gaal’s tepid side is just fifth in the Premier League.

Based on 2014/15 accounts, the Money League ranking leaves the Reds behind Real Madrid and Barcelona in top line revenue generation – the change reflecting, in part, United’s absence from Champions League football last season. The Reds generated €519.5 million (£397.5 million) during the campaign to Real’s €577 million (£439 million) and Barça’s €560.8 million (£426.6 million).

Yet, with the Premier League’s new TV contract coming online next season, and the first year of Adidas kit sponsorship yet to be fully reflected in the accounts, United is likely to hit top place in the league in two years. In fact the Deloitte report forecasts that the club will be a “strong challenger” for top place next year even before the Premier League’s new deal begins. It will bring joy to the legion financiers amongst Old Trafford’s commercially oriented executive management. On the pitch Louis van Gaal’s team is suffering; off it, the club remains a money-making machine like few others.

Source: Deloitte

Historically, the Spanish giants’ leadership of the Deloitte rankings – Real has led for the past 11 seasons – has been underpinned by the clubs’ ability to sell individual television rights, in comparison to the Premier League’s collective approach. Real and Barca made £152.1 and £152 million, respectively, from broadcasting in 2014/15 compared to United’s £107.7 million.

Last season’s Champions League absence means that United earned around £38 million less than the previous campaign in real terms, although the relatively strong UK economy means that losses were all but eliminated in Euro-terms by changes in forex markets.

Gains

The real gains for United’s moneymen are to come, however, with Adidas’ £750 million 10-year kit supply deal kicking in this summer – to be reflected in next year’s Deloitte ranking. United will also enjoy a small, but material, boost in broadcast and ticket revenue from returning to the Champions League, albeit only for six matches.

The Premier League’s £5.14 billion television rights deal, which begins in 2016/17, means that Manchester City, Chelsea and Liverpool could all surpass the Spaniards’ income. Little wonder Bayern Munich CEO Karl-Heinz Rummenigge believes that the new deal will allow English clubs to “dominate the market even more than today.”

The boom in the worldwide commercial market has generated gains for many of the continent’s top clubs, although United, under Ed Woodward, has led development of a regional sponsorship approach that has largely created a new market. United’s commercial revenue has grown from £48.7m in the season that concluded with the Glazer acquisition in 2005, to more than £200 million in the latest accounts. Others have grown too though: Bayern and Paris Saint Germain generate of £211 and £226 million in commercial revenues – although the explanation lies in the the German’s inclusion of some types of matchday revenue, and PSG’s suspiciously Qatari-themed sponsors. The Spanish giants, United’s true benchmark for global reach, make around 10 per cent less than United from commercial sources annually.

Such is growth in commercial and television income that United now generates just 26 per cent of its revenue from matchday tickets. The Glazers increased ticket prices by more than 50 per cent in the five years after takeover, part of the “aggressive business plan” that David Gill once fought, only to drive home on behalf of the American owners. In recent seasons there has been a more general moratorium on ticket price increases as matchgoing fans become relatively less important as an income source.

While revenue has increased sharply, United’s profitability has been less of a success story. In the early years of the Glazer regime interest, debt repayments and the infamous Glazer-family “management fees” sucked more than £800 million out of the club, only partially offset by the lack of taxes and dividends paid.

Source: Andy Green

Debt

Debt remains a burden on the club’s books to the tune of more than £400 million, despite three rounds of refinancing, including the 2010 Bond that prompted the short-lived ‘Green and Gold’ movement, and the 2012 IPO on the New York Stock Exchange. The latest financial engineering actually increased United’s total debt, if substantially reducing the annual interest burden.

Famously, the Glazers’ parsimony in the transfer market led to a net spend between 2005 and 2013 of just £114 million, supported by Sir Alex Ferguson’s near-obsessive quest for “value.” Since Ferguson’s retirement United’s catastrophic slide has prompted a significant increase in spending.

Indeed, much of United’s more liberal approach can be explained both by the requirement to stay in the Champions League and the increasing likelihood of significant free-cash flow in the coming years. As a normal part of the contract, Adidas will reportedly receive a discount its £75 million annual payment if United slips out of the Champions League – a very real possibility, with Van Gaal’s team current fifth in the Premier League and in a three-way fight with Tottenham Hotspur and West Ham United for a spot in Europe’s premier competition next season.

The financial impact of poor performance on the pitch might also be reflected in United’s stagnant share price, which has gained 9.7 per cent since IPO against an 23 per cent increase in the club’s top-line revenue. The forward price-to-earnings ratio in the low 20s suggest a market that view the club as a commodity and little more.

Control

The future remains uncertain on the pitch, of course, although United’s deals with Adidas, Chevrolet and the Premier League’s TV rights contract provides a strong degree of certainty off it. It is a very different picture to United’s pre-IPO position, with the club’s huge debt mountain leaving the Glazer family running to stand still against a tide of interest and debt repayments. The IPO locked in the Glazers’ control of the club, enabling the family to extract capital from the public markets at will, while retaining more than 90 per cent of rights-holding Class ‘A’ shares. The family, should it wish to do so, is under no pressure to exit despite the leveraged buyout model that typically prompts an asset sale at the point of maximum perceived value.

Back nearer the pitch it is set to be a pivotal summer – Van Gaal’s future resting on Champions League qualification and the readiness, or otherwise, of assistant Ryan Giggs to take over. After all, the club has seemingly passed on Pep Guardiola, despite the Spaniard’s apparent interest in the role, and José Mourinho, who would love to take over but for a highly reticent United Board.

In the market the club may spend again, although the Glazers’ decade long ownership describes a history in which there are no guarantees. Except, of course, the club’s ability to generate hard cash.