United ready to show off the money debt equity players

May 21, 2014 Tags: Opinion 10 comments
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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.

MANU market-cap

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.


Denton Davey - May 22, 2014 Reply

” 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.”

Maybe; maybe not. AshleyBloodyYoung would be a dead-loss (how else could another club deal with his ludicrous contract ?) and the same goes for Anderson; Cleverley might fetch a few million but he might be just as valuable as squad-depth in the event of an avalanche of injuries and, I suppose, the same could be said about Fellaini.

What might be more significant is that at least three of these guys – Nani and Bebe and Kagawa – could be very valuable in sealing deals as “makeweights”.

In a fantasy world:

Vidal = Nani plus $

Carvalho = Bebe plus $

Hummels = Kagawa plus $

I have no clue as to how much these three would end up “discounting” cash outlays but all three have value/interest to the other clubs whose players have been repeatedly linked with UTD.

And, before anyone falls off their seat, check out Bebe’s goal record for one of the worst teams in the Portuguese league.

To be sure, there is likely to be a lot of “monopoly money” tossed around this summer – the owners cannot afford to see their asset depreciate by becoming also-rans. One season out of the top four is a problem but two/three would be a tragedy for their business-plan. How they find the money to fund an extensive re-building will become apparent as the summer progresses but it’s going to happen because the remnants of the EPL/CL champions of 2008 are now history while the guys who were purchased to replace Giggs and Scholes and Vidic and Rio and Evra and Ronaldo and Tevez have almost all proven to be well short of adequate-to-the-task. AND, Michael Carrick is also on the downside of his career so that all adds up to eight proper replacements.

Jag - May 22, 2014 Reply

mate well done fo artcle but i honestly believe we got enough money to buy any player in d world dont worry keep calm carry on

mongoletsi - May 22, 2014 Reply

And what do you base you assertion on? Certainly not on the information available.

Subterranean Steve - May 23, 2014 Reply

As expected the transfer situation is a total conundrum, or if you like, a media beat-up. I’m a bit sceptical about a 150-200 million war chest.

One aspect that should not be underestimated is the need to offload current players at the same time as bringing new ones in. Players wages, and the need to reduce the payroll, is as big a financial consideration as are transfer fees. For instance, Vidic and Ferdinand were on six million and five million a year respectively, so their departure is good, financially speaking. However Ashley Young is hanging about on six million a year and that’s hardly value for money, not to mention Rooney on fifteen million a year until 2018. Nani is on almost five million a year until 2018. There will have to be a fair bit of loaning out, if players are not sold, in order to reduce the wages bill.

New players will expect improved contracts and that means increased wages eg. Mata coming in on seven million a year. Luke Shaw for thirty million transfer is a reasonable deal if they are offering him a ‘ mere’ two and a half a million quid a year as a starting salary.

Lots of numbers to be crunched in the summer. It’s not going to be easy. Let’s hope Woodward gets on top of the situation.

Wink - May 23, 2014 Reply

à la carte. You keep using that word. I do not think it means what you think it means…..


Ed - May 23, 2014 Reply

You mean I used it once. It means from the menu (typically the more expensive items rather than the Prix Fixe). aurevoir!

Jay Pritchard - May 23, 2014 Reply

Until the club’s overall debt has gone, it would be foolish to start spending the type of money required to compete with our oil funded rivals. Everyone wants to see good players at OT but not at the expense of long term financial stability.

We’ve always done best by unearthing young talent either from within or at other clubs, giving them a chance and bringing them through. Our mega money buys have been hit and miss. For every Rooney there’s a Veron, for every Rio there’s a Berba.

I want to see us succeed but I don’t want to see us go bust like L**ds. Some prudence is needed.

Denton Davey - May 23, 2014 Reply

“Until the club’s overall debt has gone, it would be foolish to start spending the type of money required to compete with our oil funded rivals.”

Precisely the opposite.

Life it or not, “the debt” is being managed – and accountants can always turn debt payments into tax breaks.

What can’t be “managed” is a fall-from-grace into a kind of EPL Liverpool lack of trophies/competition. If that happens then the chance of getting HUGE sponsorship deals will evaporate.

It’s almost a necessity for UTD to get back into the trophy hunt. Can LVG do that with a couple of new additions – and a lot of deletions – from last year’s disappointing squad ?

I don’t see why not – the big issue is fixing the team’s core as Vidic/Rio/Evra/Carrick are either leaving or declining. That group of core-players was the key to the sustained success from 2006 onwards; their decline – and the failure of their replacements to grasp-the-nettle of the challenge facing them as well as the insipid “leadership” of AgentMoyes – was why last year’s team played so slowly, so turgidly, and so uninspired in the attacking zone: it was squeaky-bum-time at the back !

Jay Pritchard - May 23, 2014 Reply

Davey, the point was that spending big is no guarantee of success and to do so in the club’s current financial situation is likely to be counter productive.

It’s perfectly possible to sign top players without spending £30million plus on them. See Vidic, Nemanja or Ronaldo, Cristiano.

Those who spout the “we need to spend £200 million” crap miss the point. Yes, new players are needed and departing players must be replaced. But should that be done by buying well known, ready made replacements for over inflated fees? Or perhaps a bit of good old fashioned scouting would secure lesser known but equal quality replacements for a third of the price. And not bankrupt the club in the process.

Denton Davey - May 23, 2014 Reply

“perhaps a bit of good old fashioned scouting would secure lesser known but equal quality replacements for a third of the price.”

In the best of all possible worlds this budget-strategy might make sense but in the world UTD are currently inhabiting it’s just too risky.

For instance, let’s suppose that Mats Hummels costs 30 million and Ryan Shawcross costs 10 million, do you suppose that a team vying for trophies would get sufficient quality from Shawcross ? Is Shawcross any better than, say, Jonny Evans or Chris Smalling or Phil Jones ?

The one true thing that AgentMoyes said during his tenure was that the current UTD squad lacked real quality – he said that a CL-contending team needed five/six world class players but that UTD only had two (Rooney/RVP). He wasn’t wrong.

The quality of the squad needs upgrading – radical upgrading. In addition to Juan Mata, there’s a need for another two defenders and, perhaps, two proper central midfielders – i.e., the core of the team. Right now, the owners have no alternative to spending on quality replacements for Rio, Vidic, Evra, Giggs, Scholes, Carrick, and Carrick since those guys (the heart of the 2006-2013 team) have either retired or gone past their best-by date.

Even spending 200 million quid won’t “bankrupt the club” although it might put a dent in the Glazers’ profits. You are correct, however, even spending that much money doesn’t quarantee success.

The whole issue of “the debt” is something different from normal housekeeping expenditures. The club is worth something like 2,000,000,000 GBP – if the debt rises from 350 million to even 600,000,000 then that’s not an impossible problem for the owners to manage since the club’s revenues have been rising very fast over the past few years.

Furthermore, the problem of “the debt” is an issue for the owners and their accountants – it only has an impact on fans-like-us insofar as “the debt” limits the owners’ ability or willingness to spend to compete. Now, the Glazers have no feasible alternative strategy other than throwing other people’s money at the dearth of quality in the current squad. IF the owners want to maintain the value of their asset – and let’s face it, MUFC is an “asset” not a “club” for them – then they have to spend to have any hope of getting out of the predicament they have found themselves in with an aging squad and years of inadequate recruitment.

Your suggestion of shopping in the bargain-basement would most likely confirm second-tier status for the “asset” and the “club”. It’s just not in the Glazers’ interest to watch their “asset” decline in that way.

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