United ready to show off the
money debt equity players
One certainty when dining at the top table is that the fare on offer can be mighty pricey. It seems that Manchester United’s appointment of Louis van Gaal to the manager’s post signals the club’s intention to eat à la carte once again. While the Dutchman boasts a fine record of working with youth, over more than two decades as a front line manager, there is little that will distract from the major rebuilding task ahead.
After all, three significant player departures, and perhaps another half-dozen regarded by the club as deadwood, points to a squad ripe for overhaul. But it is an observation that provokes an obvious question: just how will United fund the much rumoured £100 – £200 million summer transfer market splurge?
The answer is more nuanced than the question predisposes. After all, more than nine years into the Glazer family’s ownership, United has never spent more than £50 million net of player sales in a single summer. Cash rich the club may be, with commercial and broadcast income on the rise, but United has rarely been less than relatively parsimonious during the Americans’ reign.
Yet, executive vice chairman Ed Woodward has left no doubt – both off and on the record – that United’s board intends to support the new manager in the market this summer. Taken at face value Woodward’s spin signifies a new era in which United’s owners are prepared to release club funds for player investment that may supersede, for the first time in years, the club’s rivals at home and abroad.
The motivation for this new-found financial profligacy is far from altruistic of course; nor will a penny be invested by the owners directly. Indeed, the club’s performance on the New York Stock Exchange (NYSE) since Sir Alex Ferguson’s retirement little more than a year ago is instructive. Valued at $3.02 billion on the day Ferguson retired last May, United’s market capitalisation lies at just under $2.75 billion today – or, on paper at least, some $300 million wiped off the asset’s value in a year. The most bearish sentiment came in February when the club was valued by investors at some $600 million less than on the day Ferguson walked out on the job.
While ‘MANU’ stock fluctuates significantly, including the oddly frequent end-of-day ‘dead cat bounce’, as little paper is actually available for trading, the message was clear: Wall Street does not foresee a positive outlook on United’s financial future if the team’s results slide. The Glazers’ concern is to avoid a perma-bear market assessment where the commercial upside that comes with success – prize money, sponsorship, television revenue, and healthy margins – is believed to have run dry. Permanently.
Little wonder the family is keen to protect the asset’s value by ensuring, at a safe minimum, perpetual top four finishes and ongoing Champions League football. Releasing cash for investment, and not further debt repayment is a sound strategy in the context.
Yet, the source of cash for investment is far from clear. The club’s third quarter results showed a significant uplift in revenues and earnings before interest, tax, deductions and amortisation (EBITDA). Yet, gross debt remained above £350 million, while cash-in-the-bank held steady at just over £34 million. The latter figure will rise during the summer months when income from season ticket and executive facility renewals comes in, but it hardly amounts to a war-chest of biblical proportions.
Moreover, the short-term revenue outlook has some bumps ahead, with broadcast, matchday and sponsorship revenue set to take a downturn with United out of the Champions League next season. Woodward put the revenue impact at “mid-30s millions” in a recent analyst call, but the impact on margins – and United’s share price – might be more significant still.
“Assume revenue in 2015 falls 7 per cent, to £400m,” said the FT’s Lex column this week. “In the past Manchester United has reported a margin on earnings before interest, tax, depreciation and amortisation of about 30 per cent. This could contract towards the mid-20s if player costs keep rising. Add the revenue drop and the lower margin together, and ebitda could easily be £33m lighter this coming year – 25 per cent.”
It is not a message ever taken positively on Wall Street. Yet, if the club is to avoid burning through its cash this summer then investment will need to be spread, as is increasingly common in player acquisitions, over a number of years. It makes for an interesting negotiation tactic at least. And there is also a warning – the cost of transfer fees and attendant wages is still felt over three to four years, even if it is not across a single summer.
On the upside there is a coming cash influx from freshly minted principle sponsor Chevrolet, although the deal has already been part-paid reducing the annual revenue to the club. Meanwhile, any new kit deal will not come into effect until July 2015 leaving United with something of a short-term investment dilemma.
The observation also leaves open two possibilities: that the Glazers will expand, or at least not pay down, some part of United’s debt in the coming year; or that further equity will be released to the market. The latter option, although cheaper than debt, had seemingly been shelved over the past 12 months, with the Glazer brothers not keen to cut tomorrow’s capital gains by eroding their shareholdings today. The former will gain supporters’ ire and shareholders concern – only one of which concerns the American family.
Then there is the fine line that United faces with UEFA’s Financial Fair Play construct. While the club, with EBITDA over £40 million for the quarter, is a healthy beast where the European governing body is concerned, a huge transfer splurge in the £150-200 million range, with the attending amortised player values and wage uplift, will take United closer to the ‘fail’ line than many will be comfortable with.
Or as the FT put it Woodward must “get the players in immediately while preventing transfer fees and the higher salaries from stressing the balance sheet.” And Michel Platini.
At a minimum, heavy spending today is more than likely to reduce the budget available in future windows, not withstanding quite how difficult it will be for United’s to recruit the players on van Gaal’s ‘A’ list of targets this summer. That Woodward has signalled United’s intent is sure to load rivals’ hand when it comes to spending the kitty, with a premium on transfer fees more than likely. Meanwhile, Wayne Rooney’s contract has set the benchmark for top line wages at the club. Incoming players take note.
Nor will United find it easy to move on some of the squad’s highly paid deadwood. Reduced incoming transfer fees, or compensation due to players, may not offset the summer spending as United’s bean counters may hope. It is unlikely that the club will command premium fees for Nani, Anderson or Bébé, although Ashley Young, Shinji Kagawa, and Tom Cleverley could leave for in excess of eight figures each.
It leaves a delicate balancing act for Woodward and his Florida paymasters. One that last summer proved is a task for which United’s executive is far from infallible. Unlike when it comes to securing those lucrative sponsorship contracts it would seem.