Manchester United’s owners: The complete saga

Manchester United – Money trail

Before the Glazers took over Manchester United, Vodafone, the main shirt sponsor paid the club £9 million annually. Nine seasons later, Chevrolet, the new shirt sponsor, will pay the club £50 million annually.

The ordinary football fan doesn’t care much for Economics, but an enormous amount of patience and determination to understand is a half-decent substitute. That, and maybe a graduate degree in accounting, is precisely what is required to comprehend and appreciate the deep and dark abyss that is Manchester United’s ownership, debt and their cumulative effects. I’m not joking when I say enormous patience. You could also scroll down to the Executive Summary for a compressed version.

At the outset, let me say I have derived a great deal of inspiration from Andrew Green, the author of Andersred, one of the best Manchester United blogs. However, I have no intention of plagiarizing, patronizing or endorsing his or anyone else’s opinions and I apologize if that is how it appears.

A lot has been said about the Glazer family’s ownership of Manchester United, mostly negative. Despite that, Sir Alex Ferguson, who never called anyone ‘Boss’ in his life, has batted for them and that alone lends them a lot of credibility. I aim to explain why their ownership is sometimes unjustly criticized and try to uncover what Ferguson saw that made him side with the fans’ enemy.

What scares United’s fans more than any of the numbers is the uncertainty in which their future is currently entangled. This is the fault of the owners for a lack of transparency and the fault of the fans for a lack of knowledge. We can’t do much about the transparency, but we can about the knowledge. For that we need to start at the very beginning.

What is an LBO?

An ordinary person with some disposable income buys shares in a company and hopes its price increases. He trusts the prevalent management. A ‘player’, on the other hand, trusts nobody. When he wants to dabble, he does not buy a few shares, but a majority of the shares so that he calls the shots in the company. He takes matters into his own hands. Something along the lines of, ‘If I’m playing the hand, I want to deal the cards.’ When this ‘player’ borrows money in order to put it where his mouth is, the stakes are much higher. This is a Leveraged Buyout.

United were acquired through such an LBO, previously called a “Bootstrap Acquisition”, one of Wall Street’s many babies. An LBO is a method of taking over ownership of an existing business using borrowed money. The process involves three principal participants:

1. The Sponsors: As the name suggests, they’re the money. They realize the proceeds of their initial investment either when the company is eventually sold to the public, and occasionally through dividends.
2. The Investors: On the other hand, The Investors are the ones who perform the takeover. Their negotiations with prevalent management determine whether a takeover is hostile or cordial. Once in charge, they manage the risk, not through day-to-day activities, but through policy framework.
3. The Business: The target of an LBO will always be a business that is perceived to be grossly undervalued. This could be anything from a retail store network to a cow on a farm, just as long as it has strong cash flows.

Three New York based hedge funds: Citadel, Och-Ziff Capital Management and Perry Capital (The Sponsors) lent the Glazer family (The Investors) money to purchase Manchester United’s shares (The Business) from the stock market. Hedge funds typically make investments to earn a higher rate or return for their customers than ordinary investments in stocks and bonds. Directly related to this higher rate of return is a higher risk. That’s what attracted them to our football club.

A typical LBO usually goes through the following phases:

1. Privatizing a publicly traded company by accumulating all/majority of the stock.
2. Transferring debt to the company.
3. Creating an environment of cost efficiency and reduction of non-core business activities.
4. Gradually repaying principal and interest from the company’s cash flows.
5. Possibly declaring dividends to gradually recover the Sponsor’s initial investment.
6. Eventually selling the company through an IPO (Initial Public Offering) and FPO (Follow on Public Offer).

It now becomes clear why most educated people regard LBOs with the sort of contempt the West displays for communism. The transfer of debt is the bone of contention and is exactly as nefarious as it sounds. It leads to an environment of enforced prudence which prevalent management inevitably finds constricting. The solution: replace the management.

Offshore subsidiaries and shell companies are often set up, preferably in the Cayman Islands and there is a lot of beating around the bush just to get to one thing: cash flows. Enter the accountants, lawyers and investment bankers. Their extravagant fees are the one charge most Investors find difficult to justify and rightly so. United bore upwards of £6.5 million during the takeover as payments for their expertise.

Sponsors provide the majority of the money and Investors traditionally much less.

The Glazer family spent a total of about £800 million or $1.5 billion at the exchange rate prevalent in 2005 to buy 100% of United’s shares. This sum comprised of:

• About £140 million of the Glazer family’s own money.
• About £660 million of money borrowed from the three Hedge funds.

We’ll get to the borrowed money later. For now, it is important to note that while LBOs attract a lot of negative publicity, the principle of borrowing money to buy a business, either by outside investors or by existing management, has succeeded at companies outside of football like Harley-Davidson. Never before has a football club been bought through an LBO. United has being setting precedents in the game for all eternity and we as fans, can only hope it continues to be the bellwether in all matters football.

What is the Exact Structure of United’s Ownership?

The Glazer family, like any wealthy American family and Bruce Wayne, has some trusts to look after its family members’ monies. The following table attempts to depict the structure of ultimate ownership of Manchester United Football Club, in descending order. (To be read as Entity 1 owns Entity 2, Entity 2 owns Entity 3 and so on.)

Entity Number	Entity Name	Place of Incorporation
1	Several Glazer Family Trusts	Nevada, United States
2	Red Football Limited Partnership(Partner of Red Football General Partner Inc.)	Nevada, United States
3	Red Football Limited Liability Company	Delaware, United States
4	Red Football Finance Limited	Cayman Islands
5	Manchester United PLC	Cayman Islands
6	Red Football Holdings Limited	England & Wales
7	Red Football Shareholder Limited	England & Wales
8	Red Football Joint Venture Limited	England & Wales
9	Red Football Limited*	England & Wales
10	Red Football Junior Limited*	England & Wales
11	Manchester United Limited	England & Wales
12	Manchester United Football Club Limited	England & Wales

*Red Football Limited and Red Football Junior Limited (Entity Numbers 9 and 10) also own a number of ‘operational subsidiaries’.

Delaware and the Cayman Islands are the two so-called red flags. Delaware has one of the least stringent disclosure requirements of any place in the world. The Cayman Islands appear almost exclusively in 007 movies.

Yes, United’s ownership structure is complicated to say the least, but it is the second most highly valued football club in the world and has the third most revenue. It can hardly be as simple as our textbook problems now, can it?

What is The Effect of All The Borrowed Money?

United’s total turnover in the year before the Glazers came to town was £166 million. Compare that to our total wage bill for 2012-13; a staggering £181 million. This is without even considering any of the other expenses. Had our revenues not increased to accommodate such an incredible rise in our wage bill, we could have bid farewell to all forms of competitiveness.

United’s finances have been adversely and favourably affected in the following categories:

1. Profits which are affected by interest cost.
2. Value which is affected by debt.

Cumulative Cash Flows have been affected as a function of the above two aspects.

I shall now attempt to dissect the effect of the takeover on each aspect separately.

Profits and Interest Cost

Yes, United’s interest costs have risen exponentially from 2005 to 2013. But what we tend to overlook is the upward surge in revenues as well. The new management has been amply proficient in securing major sponsorships and endorsements for the club. The comparison I make is between two years:

• Year 1 is the one in which John McManus and John Mangier-controlled Cubic Expressions was our majority shareholder (Cubic was out majority shareholder till the end of 2004-05, during which revenue was £166 million, which was in fact less than the previous year. To give them the benefit of the doubt, we will consider the amounts for 2003-04 in which the revenue was £169 million.)
• Year 2 is the most recent year when the Glazer family-controlled Red Football was our majority shareholder (Financial Year 2012-13).

No.	Description	Year 1 (2003-04)	Year 2 (2012-13)	Change
1	Total Turnover	£169 million	£363 million	£194 million
2	Interest cost	£0.1 million	£72 million	£71.9 million
3	Dividends	£7 million	-	£7 million
4	Profit After Tax	£19 million	£146 million	£127 million

Manchester United – Is it getting bigger?

We have stressed enormously on Number 2 and it is time Number 4 gets its due.

In effect, we have incurred additional interest costs of around £72 million, but generated additional revenue of £127 million in 2012-13.

Value and Debt

Debt takes a toll on United’s value. Our club went from having near-zero debt n 2005 to having £389 million of debt by June 30^th, 2013. However, this was not enough to displace United from its spot in the top two most valuable football clubs in the world. We ceded top spot on this list to Real Madrid in the 2013 list, but when their value jumps from $1,900 million to $3,300 million in a single year, surely no reasonable man would call that bad management on United’s part.

Plus there is the small matter of trophies that this value has translated into. From 2008 onwards, Real has won 5 trophies compared to United’s 12.

When someone speaks of value, they intend to quantify the amount of money can be realized from disposing off all assets and liabilities on a particular day. There are two basic and easy ways to quantify this value, both being imperfect:

• Book Value.
• Market Value.

Book Value or Shareholders’ funds represents the difference between the assets and liabilities as per the company’s own, often conservative estimates. The greater the book value, the more stable a company is perceived to be.

United’s Book Value in 2004: £173 million

United’s Book Value in 2013: £448 million

Book Value is not an adequate measure of a football club’s prosperity for a number of reasons such as the inability to confine the value of a home-grown player to a particular number.

Market Value reflects the amount investors or potential investors are willing to pay to acquire the club. The greater the market value, the more the club is desirable to ordinary profit-oriented investors.

United’s Market Value in 2005 (when the Glazers bought the club): £800 million

United’s market value on November 11^th, 2013: £1,662 million

The true value of the club lies somewhere between £448 million and £1,662 million. The 2013 values are arrived at after considering the burden of debt that the club is shouldering.

It is important to note the function of an Initial Public Offering like our club’s IPO on the New York Stock Exchange in 2012. The Glazer family sold 10% of their shares in the ordinary stock market. Roughly £69 million was raised out of which about £67 million was used to repay our loans. This transaction reflected absolutely no charge on United’s cash balances. It was simply money raised from investors and paid to creditors. Effectively, the Glazers repaid this part of the loan with their own money.

To put that into very crude context, if all of our club’s stock is floated tomorrow, we could theoretically generate £690 million from new investors, all of which can be used to pay off our debt. As of June 30^th 2013, our total outstanding debt is £389 million. The difference is moolah and pure joy for the Glazers. Now what they’re trying to do is widen the gap between the amount that needs to be repaid and the amount that can be raised. This is done to maximise their profit potential. What this means is, the greater the club’s value, the more will be the profit for the Glazers.

So, for the Glazers to do well, Manchester United needs to do well. This alignment of interests is exactly what any successful enterprise needs.

The effect on the cumulative Cash Flows can be measured by comparing total incremental revenue with total incremental interest and debt repayment costs for the Glazer era thus far.

• Incremental Revenue from 2005-2013: £889 million
• All takeover costs (interest + debt repayment) from 2005-2013: £495 million

There are other more indeterminate costs involved, but they cannot bridge that gap substantially.

It is safe to say the club’s revenue has stayed well ahead of the curve, and although the burden of debt might not be entirely fair, I personally, have few complaints as long as this is the case.

Transfers

Over the last 15 years, the first seven were non-Glazer ones and the next eight were very much Glazer years. (Net Transfer Spend = Player Purchases – Player Sales)

Net Transfer Spend from 1999-2005: £114 million

Net Transfer Spend from 2005-2013: £154 million

We spent £154 million net after deducting the £80 million from the Ronaldo sale. It also speaks volumes that they were willing to back a repurchase of the player in 2013.

At the end of all the talk about transfers, it is of paramount importance to note that they were all transfers that the Manager wanted.

So now we know what the numbers say. Let’s talk about what they don’t say. From a purely capitalist point of view, the Glazers are no benefactors; we all know they’re in it for the money. Why is that wrong? Lesser institutions have sometimes thrived in a completely profit-centric motive. We aren’t profit-centric as much as we’re success-centric. As long as the owners, without impairing our competitive integrity, are able to translate that motive into material gains for the club, and by extension themselves, we will continue to thrive as long as we continue to win. Loosely translated, failure is no longer an option. But United never needed a balance sheet to clarify that!

The problem with benefactors is that they tend to think they’re the only ones with the club’s best interest at heart. Continuous capital infusion is not sustainable and is not in any club’s best interest, as evidenced by the FFP regulations. Increasing revenue, on the other hand, is sustainable.

Without trying to put too fine a point on it, Oligarchs and other benefactors have displayed a tendency to dismiss managers with no more than casual disdain. That’s where those clubs’ autonomy lies. The benefactors forget that they haven’t gone through the proper stages of a football education. We can be grateful for the kind of owners that respect that fact, acknowledge their limitations; and have so far afforded our Manager undisputed autonomy. Yes that manager was no ordinary man and the true test will only now present itself.

I will support the Glazers so long as they leave the football to those who know best and focus themselves on the brand that is Manchester United.

Executive Summary

• United earned £9 million from the main shirt sponsors in 2005-06 and will earn £50 million from the main shirt sponsors from 2014-15 onwards.
• Comparing 2012-13 to the pre-Glazer year of 2003-04, we incurred additional interest of £72 million to earn additional income of £127 million.
• United have the third highest revenue of all football clubs in the world, largely due to the commercial exploitation of our brand, substantially engineered by the new owners.
• United’s 2004-05 turnover of £166 million would fall short of covering our 2012-13 wage bill of £181 million, without even considering other expenses.
• United’s Profit after all expenses and taxes increased from £19 million in 2004 to £146 million in 2013.
• United’s Market Value increased from £800 million in 2005 to £1,662 million in November 2013.
• Since the takeover, we have incurred interest and principal repayment costs of £495 million, but earned additional revenues of £889 million.
• Very crudely, if debt is reduced in the way we repaid £67 million by issuing 10% of our stock at £69 million, through an IPO (Initial Public Offering) in 2012, there is the ability to raise £690 million in order to repay obligations worth £389 million, leaving a sizeable surplus. This represents no charge on United’s cash balances.
• The Glazer’s profit motive makes it essential for them to manage the affairs of the club in a way that maximizes revenue. Besides winning trophies, that is exactly what the football business of the club aims for as well. Thus, interests are aligned and capitalism is running its course.
• The Glazers are not cutting back on transfer money. The Net Transfer Spend (Player Purchases – Player Sales) over the eight Glazer years totals to £154 million as opposed to £114 million in the preceding seven years.
• As long as United keeps winning, its brand remains desirable and new sponsors will throw more money its way. This will alleviate any monetary woes, but the challenge remains; what happens if we stop winning? That remains to be seen; or perhaps not seen.
• The Glazers have let Ferguson run the show in all football matters and that’s a credit to them. It remains to be seen if they will give Moyes the same free hand. All the signs are encouraging, but when United play, you can never be sure till the final whistle!

That’s the problem with money. It makes you do things you don’t want to do. – Gordon Gekko.