Glazer SEC filing exposes cloak and dagger strategy
One thing can be said for the Glazer family: they’re happy to go a long way to keep a secret. More than four and a half thousand miles from Manchester United’s base at Old Trafford, to the corporate tax haven on Grand Cayman in the Caribbean Sea, to be precise. But while the Americans seek to minimise future tax burdens and public scrutiny, in a corporate reorganisation prompted by a US-based stock market float this summer, the Glazers have also revealed more of their dubious business model, including, for the first time an admission that the club’s “indebtedness” is a burden.
United’s official announcement, Tuesday, that the club is seeking to float on the New York Stock Exchange (NYSE) came as the company filed statutory Initial Public Offering (IPO) papers in the US. These papers, which form a legally binding contact with potential investors, offer some insight both into the club’s financial model, and the extent to which United’s £443 million debt has finally triggered the Glazer family into action after six years in which the club has haemorrhaged more than £500 million on interest, debt repayments and other costs.
While the number of shares to be offered and the “price range for the proposed offering” have not yet been determined, the family is potentially seeking hundreds of millions of dollars for a minority stake in the club. Indeed, while the club had been seeking up to $1 billion in the now abandoned Singapore float, a $100 million figure widely quoted in the media is little more than a placeholder for a much larger NYSE offering that must take place within the next 90 days.
Bookrunners for the proposed IPO include medium-sized investment bank Jefferies, who will lead an offering far larger than any it has previously underwritten. Credit Suisse Securities, JP Morgan, Bank of America Merrill Lynch, and Deutsche Bank Securities are also in on the float. And it is these banks that will lead marketing for the float over the next three months, drumming up support for an IPO that will reorganise the Glazers’ myriad of holding companies, and split United’s ownership structure for the first time since 2005.
The family will move United’s ultimate base to the super-secretive tax haven Cayman Islands, while as has been previously mooted, the Glazers intend to offer only class A shares to the market, with Malcolm Glazer and “his six lineal descendants” retaining a majority stake of class B shares that hold 10 times the voting power.
The filing with the US Securities and Exchange Commission (SEC) makes clear that investors in United’s IPO with neither get significant voting rights nor any future dividends from the offering. Investors can hope only to gain through future capital gains if United’s operating profit grows in the coming years.
Underpinning the listing is the family’s belief that United’s global appeal will reap financial rewards. The IPO prospectus makes much of the recent ‘study’ that United is “followed” by 659 million people globally, with, says the filing, a popular Facebook page that boasts more than 26 million connections.
Future growth is likely to be based on a triumvirate of financial streams: broadcasting revenues, commercial income and matchday sales.
United’s revenues have grown under the Glazer family’s ownership, with the club listing sponsorship income as rising from £37.2 million in 2009 to almost £55 million in the year ending 30 June 2011. Meanwhile, the club’s very long-term deal with Nike, which is set to be renegotiated by 2015, has grown incrementally from £23.3 million in 2009 to more than £31 million last year.
Similarly new media and mobile revenue has increased, while commercial revenue from sponsors such as Nike, Aon, DHL, Epson, Turkish Airlines and Singha has increased from £66 million three years ago to more than £100 million in 2011.
Together with increasing revenues from domestic and overseas broadcast rights, which the family has little direct control over, United intends to expand its “global retail footprint”, says the club’s SEC document, investing in a “portfolio of product licenses” that will bring United’s brand to an ever great audience.
Whatever the grand plans for financial growth the club also faces challenges in the coming years, underlined in more than 20 pages of sobering – and legally required – risk assessment. Not least the club’s debt, which the Glazer family, chief executive David Gill and Sir Alex Ferguson have routinely claimed has no effect on the business.
No longer, with the SEC document concluding that debt could “adversely affect” the company’s “financial health and competitive position.”
“As of March 31, 2012, we had total indebtedness of £423.3 million,” continues the SEC filing. “Our indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. It could also have effects on our business.”
These effects, concludes the document, may include an impact on the playing team’s competitiveness, especially with some clubs – particularly Chelsea and Manchester City – spending “substantial sums” on transfer fees and salaries. This increased competition, says United, could result in team finishing lower in Premier League than in the past, jeopardising qualification for the Champions League, which would “result in a material reduction in revenue.”
Indeed, United admits that the “ability to attract and retain talented players and coaching staff,” could negatively affect brand and reputation and that “our business is dependent upon our ability to attract and retain key personnel, including players.”
This may go some way to explain United’s acquisition of Japanese international Shinji Kagawa for £17 million this summer, with Ferguson’s side desperately requiring creativity from midfield after a season in which the club finished trophyless, and the Glazers’ business model hinged on global reach. Indeed, United’s “popularity in certain countries or regions may depend, at least in part, on fielding certain players from those countries/regions,” admits the SEC document.
But while many of the risk factors drawn up by the IPO prospectus are unlikely – terrorism, natural disaster, or a downturn in football’s popularity, for example – it is the financials that will concern United fans most. Indeed, the IPO filing demonstrates, not for the first time, just how frequently the club leaks cash due to the Glazer family’s business model, including “£4.8 million in professional advisor fees in connection with the proposed public offering of shares.”
Moreover, the filing also gives some insight into the mysterious repayment of the family’s Payment-in-Kind hedge fund loans, concluding that “£111.1 million of interest payments were made in 2011 in connection with the repayment of our payment in kind loan.”
By contrast the £7.2 million United paid in ‘consultancy fees’, in the fiscal year to 30 June 2011, to Red Football LLC – the Glazers’ holding company – is a drop in the debt ocean. The Glazers also took consultancy fees of £2.9 million in 2009, and £3.1 million in 2010.
The Glazers also drew loans from the club of £10 million between December 2008 and November 2010 at a nominal 5.5 per cent interest, although that is somewhat moot given that the club also paid the family a £10 million dividend in 2012.
Despite the relative transparency of United’s IPO filing, these small morsels of financial information may remain rare, although the club will be required to make quarterly filings with the SEC post-offering. After all “following the offering, we will be a “controlled company” within the meaning of the New York Stock Exchange rules,” states the filing, “and we intend to take advantage of exemptions from certain corporate governance requirements.”
But many eyes will remain on United in the coming weeks as the family gears up for a listing in a tetchy post-Facebook IPO market. And it is the market that will eventually determine whether the Glazer family has struck the right chord with an IPO that offers investors a very limited, and admittedly risky deal.
Should the market buy into the pitch, then United should enter a new far less indebted world in the coming months. After all, the Glazers filing promises to “use all of our net proceeds from this offering to reduce our indebtedness” by exercising options to redeem in aggregate principal senior secured bond notes that are due to mature in 2017.
Whether that leaves United better able to compete remains an open question. After all, while the club may become – if the IPO is successful – far less indebted, it will still be owned and completely controlled by the Glazer family. A family that has taken seven years to conclude that its debt-fuelled takeover was damaging to the club.
- United will offer an as yet undetermined number of shares at an unspecified price on the New York Stock Exchange within the next 90 days
- The total value is likely to far exceed the $100 million ‘placeholder’ noted in the club’s SEC filing
- The club “intends” to use all proceeds to pay down debt, which currently stands at £423 million
- The club will offer only Class A shares that have much reduced voting rights; no dividend will be offered to investors
- United’s ultimate holding company will be based in the tax haven of Grand Cayman, Cayman Islands
- United, through a myriad of holding companies, paid more than £111 million in payment-in-kind loan interest in recent years
- It is estimated by various analysts that the club has spent more than £500 million on debt, interests and other costs associated with the Glazer family’s business model over the past seven years
- United has finally admitted that “indebtedness” is a risk to the club’s business model and competitiveness, on and off the pitch
- Despite this, Glazer family took a £10 million loan from the club in 2008-2010, and paid itself a £10 million dividend in 2012.