The Glazers and Manchester United: Turning Water into Wine

The Glazers and Manchester United: Turning Water into Wine
 
When the Glazers took control of Manchester United (NYSE:MANU) back in 2005, the strategy was clear: leverage the Manchester United brand to increase revenue and profits, bank themselves a nice little dividend to cover living costs, then sit back as the value of the club soared, with a view to a lucrative sale further down the line.

Amazingly, despite all the trials and tribulations of the last 17 years – including poor on-field performances, regular fan protests and even a global pandemic – the Glazer family look like they are on track to realise that ambition. Whether they can take any credit for that, aside from their thick skin and conviction in the initial investment, is another matter.

Even before Covid hit, things were not going to plan. Since fabled manager, Sir Alex Ferguson, retired in 2013, the club’s on-field performances have been a tale of woe, save a couple of Premier League runners-up places and a Europa League win. Recent football history has threatened United’s claim to be the most successful club in England, with arch-rivals Liverpool now surpassing United in total trophies won.

The financial performance hasn’t been much better. While the club has been successful in growing revenues – with total revenue ballooning from £169m in 2004 to peak at £627m in 2019 – this hasn’t fed through to the bottom line. From 2017 to 2021, the club made a combined after-tax loss of close to £100m. Some of this is attributable to Covid, but profit margins were already slim, with the club averaging profit of just £12m in the five years to 2018.

The post-takeover management team succeeded in growing revenues, through well-executed sponsorship agreements with the likes of General Motors (NYSE:GM), Aon (NYSE:AON) and Adidas (ETR:ADSGN), as each new agreement financially surpassed its predecessor. At the same time, the club rode the wave of the ever-increasing global appeal of the Premier League, with broadcasting fees surging to dizzying heights. Debt that had been accumulated in the process of buying the club, was carefully managed, as United looked to extend loan maturities at lower rates of interest. While this increased the total amount of debt on the club’s balance sheet, it also dramatically reduced annual interest payments, making the club a far more financially viable business.

Despite fan mutiny and lagging its major rivals on the field of play, there was a sense that management was at least in control of the financial side of the business, with a balance sheet that had been carefully constructed and scrutinised to the nth degree. Then Covid hit, and suddenly the club lost over £100m in annual matchday takings. Broadcaster rebates followed, along with a loss of earnings from the lucrative annual pre-season tour, and closure of the club’s megastore to boot.

While 2021 revenue was 21% below 2019’s, total operating expenses reduced by only 11%. All of a sudden, the club was haemorrhaging cash and needed to take on yet more debt to meet its expense obligations. Since 2019, the club has borrowed a further £100m from its loan facility, meaning there is now close to £600m in debt sat on the club’s balance sheet. What’s more, a significant chunk (£118m) is due to be repaid over the next year. With the club showing no desire to reduce its expenditure, the result is clear: the club will need to take out even more debt, and the spiral continues.

The global economic backdrop of inflation, rising interest rates and economic contraction is not ideal for borrowing in. Higher interest rates mean that United’s net finance costs will increase, putting a dent in any profits. The £21m that the club paid in interest in the 2021 financial year, looks like it will only increase further. An inflationary environment is not kind to United (or other football clubs for that matter). At the same time as players are demanding increased wages and clubs are demanding increased transfer fees, clubs are seemingly unwilling to pass on price increases to the fans at the stadium, while broadcaster and advertising spend looks to have plateaued.

But when it comes to inflationary expenses, Manchester United is not exactly helping itself. The last few seasons have seen the club desperately spending huge amounts of money on player transfer costs and wages, with an average net transfer spend of £132m over the last five seasons. Until recently, United targeted an employee expense bill (player and staff wages) of no more than 50% of revenues. It’s a target that’s not been met since 2018, with 2021’s expense bill coming in at a whopping 65% of annual revenues. Increased transfer spend ultimately must be amortized over the length of player contracts, putting yet more pressure on the bottom line. The club is suffering from a very common business problem: costs are increasing by a greater degree than revenues.

Management is in effect doubling down. The Adidas sponsorship agreement is famously conditional on Champions League representation. United have already missed out on the Champions League this season. If the same thing happens next year, then the Adidas annual payments will reduce by 30% (about £23m). It’s fair to assume there are similar conditions for other sponsors. On top of this, the broadcasting rights from Europe’s premier competition are lucrative and their absence is felt acutely.

A poor on-field performance tarnishes the Manchester United brand, and reduces the club’s appeal to fans, sponsors, lenders and investors. This in turn affects the financial performance. What’s more, United’s loans contain covenants requiring the club to achieve a minimum level of profitability. If the club breaches its covenants, it could be a real problem. All in all, the stakes are very high and explain the desperation of the current transfer strategy. The club’s viability as a business is at stake.

As well as a worsening financial position and an abject footballing performance, the club’s stadium, Old Trafford, is a shadow of its former self. Once the best stadium in the Premier League, it’s suffered hugely from a lack of investment over the years, and now lags behind Tottenham’s, Arsenal’s, West Ham’s and even Manchester City’s. The stadium is now routinely mocked on social media for its leaking roof. The failing infrastructure does nothing to help market the club as a premier, global entertainment brand. The club requires major investment, and the current owners have shown that they are more interested in achieving immediate returns, than they are in the long-term health of the football club.

On top of this, there is the issue of dividends. The owners seem to have settled on an annual dividend of around £23m, although this was reduced during the Covid pandemic. From a financial viewpoint, it’s impact – while not negligible – isn’t a massive issue. The real problem is the message it sends to fans: that the owners are taking from the club.

For all these reasons, United’s fanbase are heavily opposed to the Glazer ownership. This has been the case since the initial takeover back in 2005, but anger is mounting. So far, the Glazers have largely ignored the fans acrimony, but it feels like we are coming to a crunch point, with rumours swirling that the family are prepared to sell. The owners have failed to appreciate fully that the performance of Manchester United as a business is completely dependent on the performance of Manchester United the football team. On-field success is about so much more than signing big names on big contracts. Instead, it’s a holistic process, a long-term strategy that needs to flow through the whole organisation.

In any other industry, the performance of Manchester United the business, would have resulted in a dire investment performance. United’s 2019 net profit of £18m – the last time the club made a profit – and net assets of below £211m, would give the club a valuation not that much different to the £300m (of their own money) that the Glazers originally used to fund the takeover. However, football and all major sports operate in a different universe to the rest of business. The clubs are in effect trophy assets for wealthy owners to flaunt, akin to a luxury yacht. In this sense, the club is worth whatever anyone is willing to pay for it. Chelsea Football Club was recently sold for around £2.5bn. Even after a dreadful few years, it’s hard to argue that the Manchester United brand, with all its history, isn’t worth more than Chelsea (even after factoring in the debt pile). For Manchester United, the sale price that’s being mooted, is closer to £4bn. If the Glazers manage to get anything around that mark, then they will have done well. That would equate to a return on initial investment of over 1,000% and a compound annual growth rate of over 16%, comfortably beating an investment in the S&P 500 over the same period. For all the rightful criticism that has flown the Glazers way, they are set to pull off a masterstroke. They bought the club as a business and will sell it as a trophy. It’s the modern equivalent of turning water into wine.