Manchester United’s annual accounts to 31 June 2010 shows the club made a huge loss of £83.6 million despite rapidly increasing operating profits. The huge losses, associated with refinancing, debt interest payments and a decline in the squad’s value, will further fuel the anti-Glazer protest movement at Old Trafford.
One-off costs associated with the £502.5 million bond issued in January, together with an annual interest bill in 2009/10 topping £43 million have swallowed the club’s £100.8 million operating profits, despite the club announcing record turnover of £286.4 million.
The huge losses include a £40.6 million financing charge associated with the bond issue and a £19 million loss on fluctuating exchange rates.
There is now £521.6 million book-value debt owed by the club – excluding so-called Payment in Kind (PIK) debt – most of which matures in 2017. Under the current business plan the club will not pay down the debt before 2017 and is likely to refinance when the bond matures.
The Americans are allowed to take the £70 million dividend under the terms of the bond and many analysts believe that the cash – when finally taken – will be used to buy PIK debt that is running at more than £220 million.
However, the accounts record only the financial position to 30 June 2010 and, as expected, do not show that the Glazer family drew on a £70 million dividend to that date. Indeed, noises coming from the Americans’ camp in the summer signaled as much, with fans likely to find out more when the Q1 2011 figures are published in November.
Neither was a note attached to the accounts reporting a material change in United’s financial position post reporting date, which would have signaled that the dividend had been taken. Accordingly, United’s cash position increased slightly to £163.8 million.
The family bought 20 per cent of the PIK debt in 2008 at a heavy discount, almost certainly with £10 million borrowed from the club in loans. However, the remaining PIK debt now accrues interest at 16.25 per cent annually, which explains why the January bond was specifically designed to enable the Glazers will pay off the debt through club funds. Indeed, there is no business logic behind not paying down the PIK debt immediately.
The family can also take up to 50 per cent of United’s annual post interest profits as dividends on an ongoing basis, together with £6 million in management fees. All for the pleasure of having the Glazers as owners.
The losses provide a stark contrast with the club’s activity in the transfer market over the last season, where United spent about £11 million net this summer in bringing Javier Hernández, Bébé and Chris Smalling to the club. Zoran Tošić and Ben Foster moved on to CSKA Moscow and Birmingham City respectively.
The club can point to strong growth in media and commercial income, which puts United in a comfortable position to pay off debt interest. Indeed, United’s position is nothing like as perilous as Liverpool’s, with the Anfield club unable to cover interest through profits.
United has embarked on a programme of striking territorial deals with new sponsors such as Singha Beer, Concha y Toro wines and PCCW over the past year. It has led to criticism in some quarters that the club is now over-commercialised, with little room for growth in a very competitive sports-sponsorship market.
Supporters though will remain angry that the club continues to post huge losses on the back of the Glazer regime while under-investing in the transfer market. With Edwin van der Sar, Gary Neville, Paul Scholes and Ryan Giggs all retiring within the next 18 months, fans are yet to see any evidence that Sir Alex Ferguson is allowed to invest in established talent despite the departure of Cristiano Ronaldo in June 2009.
Ongoing price rises and controversy over the debt has led, for the first time in a generation, to the club failing to sell all season tickets. 2,200 remained on the shelves as the season began, and this week the club embarked on yet another email and text message marketing campaign, designed to sell the remaining season tickets.
Despite an eroding supporter base Old Trafford has sold out for each of the matches held this season. However, it remains to be seen whether tickets for less attractive upcoming matches against West Bromwich Albion, Wolverhampton Wanderers and Bursaspor go on general sale or even sell out.
Whether the financial results offer any new impetus to a bid for the club remains to be seen. Liverpool’s distressed sale at £300 million may help set a more realistic price for the club, but the Glazer family is under no immediate pressure to sell. United’s income covers debt interest payments and allows for the family to remove any remaining PIK debt exposure.
Whether there’s enough cash left in the kity to strengthen the squad is another matter altogether. United is a well run club, with an awful balance sheet. Yet for the Glazers’ business plan to work United need only qualify for the Champions League.
Fans must ask themselves if it’s an acceptable scenario or not.