The article uses last available financial disclosures of the club as at 30th June, 2007 (download document (PDF) here). The words “current/currently” reflect opinion/fact with the same timeline in backdrop. All figures are in million pounds.

The author is a financial analyst.

It has been some time that people have been talking about a financial crisis in-the-making at Old Trafford. There are also those who insist we are already seeing one. The team, however, is doing extremely well on the pitch. That suggests, at least from a financial point of view (perhaps not conclusively though), that players are happy with their wages. After all, the club spent 74m on wages and salaries in 2006-07 (majority of which must have gone to players).

Even football clubs like Manchester United can hardly rely on money from T-shirts, posters or footballs — they really have to sell football — in the ground and on the TV. For Manchester United that makes up ¾ of their revenue which is showing excellent growth (30% year-on-year). Compared to previous year, the administration has done a great job in keeping a lid on operating expenses (despite the widespread belief that Manchester United uses a Russian cheque book too). The club has grown from a position of gross loss (persistent gross loss is an outright indicator of a failed business model) to a modest gross profit.

This is all good. But here comes a mighty financial challenge (note: I do not want to carelessly use the word “crisis”). The club incurred financial costs of 81m. That is more than what the club has paid the people who make this club — the ground staff, administration and of course players. This is, at least in an academic sense, a highly inefficient and unsustainable cost structure. But there are worse and more practical issues here.

Despite closing the acquisition transaction in the preceding year, the club incurred more debt and re-profiled existing loans this year. Pricing that Manchester United has received from financiers is not going to make things any easier. And given the deteriorating financial health of the club, overall credit tightening and the very nature of the risk financial institutions have taken on red devil’s football, finance costs will only increase.

If you doubt that then there is one simple explanation I can give.

The collateral offered to financial institutions is 425m of “first fixed and floating charge over fixed assets”. A charge is a piece of paper that gives legal claim to bankers over collateral in an event of default. But Manchester United only has 252m of tangible assets, the rest are largely intangible. In other words, this acquisition exposes banks more than Glazers themselves. The Glazers simply bought the club on bankers’ wallet, and if push comes to shove, they will handover the “soccer club” to banks, endure manageable loss, swim back home and watch “football clubs” play in America. Now wouldn’t a bank squeeze every penny out of Manchester United after taking such a risk on it?

Let us say, my view so far has been very subjective. Then let us look at some crisp objective facts. Financial institutions do not like to keep their credit lines evergreen for corporate customers unless the business model is one of low risk (e.g. a heavily regulated power utility). One day all banks will ask Manchester United to repay the principal amount which currently stands at 666m.

A very dirty (read: conservative) multiple of debt-to-free cash flow (using current figures for both debt and free cash flow) stands easily above 25x! This is too high, even with all the grace period in debt maturity schedule. Going forward, this multiple must come down or the club will be at mercy of financial institutions (whether or not they agree to rollover). What are the possible ways of doing it?

• Stop piling more debt – not possible until the club makes enough operating income to at least repay its finance costs i.e. interest cover above 1x. Currently, this ratio stands at 0.23x.
• Continue to post solid revenue growth e.g. at least at least 15-odd % each year. Keep up the branding. Media money is all about that. There is a reason why TV in Malaysia will not pay 2 cents for covering a Derby match.
• Win competitions. Duh!
• Become more efficient i.e. increase its operating margin. The current 9-odd % is not going to work.
• Buy like Wenger, not like Abramovich. The club does not have financial liberty as many would think.

A 194m accumulated loss on the balance sheet has reduced Glazer’s equity to only 80m (year-on-year 42% decline). This is alarming. Imagine, if loss in financial year 2008 is going to be anything above 80m (2006 loss: 135m; and let us say, Glazers don’t bring in more money from America), the club will have negative equity. In English that means bankruptcy for Manchester United where banks are involved. For clubs where no banks are involved, and Russians are involved, negative equity does not matter because the owner pays for his hobby, not the banks.

Even in the beginning of the article I clearly said, this is a challenge and not a crisis. One has to understand the buyout of Manchester United. These leveraged acquisitions, a couple of years back when things were not as bad, were in fashion. Financial institutions make good money in these. Where time is merciful enough to pan things out more or less the same way as those Excel sheets suggested in investment banks when the deals are struck, the equity investors (like Glazers) in these deals make money for their generations to come.

But huge risks are involved. There are too many assumptions, from the club itself to the economy at large. If you ask me in a nutshell if Manchester United is heading for a serious financial crisis — I will say it is not so certain at the moment. Glazers should really kneel down and thank the outstanding team and some great fans who continue to buy season tickets despite $120+ crude oil and a terribly confused Brown-Darling-King tripod.

The greatest positive surrounding all of this is the debt profile — the club does not really repay any principal in the next 5 years. That is a good breathing space. But even then, for this Glazer deal to let Manchester United live, this club needs to grow really badly. Did not we all think Manchester United is an enormous club? Size is relative. You are only as big as your debt makes you look.

Also see:

Football Debt, Spiralling Wages and the future of European Football
Chelsea FC’s financial accounts and understanding Roman Abramovich

From Soccerlens.com - Football News

On December 10^th 2006, three teams played football at Stamford Bridge. It was a magnificent match.

Result: Manchester United won, Arsenal managed a tie and Chelsea lost.

If you’re a Chelsea fan, do not already plan my crucifixion, for I am just as blue as you are.

Enough has already been written about the match. Whether it was Chelsea’s bad luck or Manchester United’s good luck is a matter of which side you’re on. But yesterday’s match was one of those where things just don’t happen for one team.

Earlier this season I thought hitting on the woodwork was a Gunner specialty, probably one of Wenger’s accuracy lessons. But turns out, even Mourinho has started these lessons. Besides the role of luck in yesterday’s match, I do not want to get into the debate of penalty or no-penalty, foul or no-foul, Hilario or Cech. No use.

The bottom line is Wenger and the Gunners should celebrate after drawing a match full of defensive bloopers. It is not usual for teams to grab a point at Stamford Bridge, three seemingly impossible. Henry was out, and so was Gallas. Every prediction was against Arsenal. Chelsea lost 2 points that should have been bagged with ease. But now the only right thing to do is to look forward and brush aside yesterday’s match.

Assuming Chelsea will beat Newcastle, the gap between #1 and #2 will be 5 points. To clear the picture, let’s say Arsenal is only contending for the third spot. Based on this situation, I’d like to throw a few thoughts and numbers for readers to comment on.

The Curse of Accommodating Shevchenko and Ballack

Players are brought in to support the team, not the other way round. Chelsea is consistently exhibiting two different qualities of play within 90 minutes. The first half seems to be an experiment, an attempt to make the most out of big investments. The second half seems to be the lethal Chelsea rescue operation. When gamblers lose money, they play another game for the motive of winning back the money already lost.

Is Sheva starting every game in an attempt to “recover” the big money put into his transfer? How long can Chelsea wait to see him regain his lost confidence? Robben electrifies the game on the left while Essien does the same on the right, why doesn’t Chelsea play the whole 90 minutes like that? Why do you wait until you’re against the wall? Wait a minute, am I forgetting the mighty Joe Cole? Where are the wingers when the one strength your star striker has is aerial?

Manchester United and the Statistical Challenge

Manchester United is on a high. They are looking extremely good. But a flashback of numbers presents a thought-provoking picture. In the FA Premier League ManU has played 561 matches, won 353 (63%) and drawn 128 (23%). Using this rate of performance, ManUs expected number of wins in a season should be 24 with 9 ties — that leaves the club with an impressive 81 points. The highest ManU has ever scored in EPL is 92 way back in 1993-94 season (in 42 matches, not 38) and then 91 after a 6-year gap in 1999-00. The untouchable Arsenal team scored 90 points when it last won the EPL in 2003-04. The resurgent Chelsea scored a record-breaking 95 and 91 back-to-back in the last two seasons.

Based on current table the extrapolated points for ManU are 98 by the end of the season, while Chelsea looks to be scoring 86. And this is where I raise the question; can ManU really become the statistical anomaly? The last 2 times ManU crossed the 90-points mark, it was Cantona, Giggs, Keane and Hughes playing for them in 1993-94, and in 1999-00 they enjoyed the magical partnership of Andy Cole (19 goals) and Dwight Yorke (20 goals) leaving Arsenal trailing by 18 points at the end of season. Based on ManUs current team and increased competitiveness of EPL, I doubt ManU will break its own record of 92 points and I strongly believe ManU will see a mini-slump.

And a slump doesn’t mean 3 defeats on a trot — for clubs like ManU, Arsenal and Chelsea, a slump is simply not winning one match after another. After all, didn’t Chelsea unexpectedly lose quite a few points end of last season — who thought they would lose points to the struggling Fulham? Don’t get me wrong here and start getting all touchy. There are no undertones. All I’m doing is presenting some facts, and questioning the wisdom of expecting ManU to perform like this till May!

The Title Race

The average EPL winning score is 85, lowest 75 and highest 95. The extrapolated score for Chelsea is 86, while ManU seems to be flying up to 98. For Chelsea I can say, they might lose even more points ending up 80ish or they could push it upward with their commitment to bring it closer to 90 – and I don’t think many of you would disagree on 80-90 range being achievable for Chelsea.

But, how many of you would really want to bet on ManU going past their 42-match highest of 92? Truth is, ManU is having a party right now! It is extremely commendable and must be applauded no matter which club you have pledged your loyalty to. But can this last? And I must admit that IF ManU really goes on to setting that record, I will have no complains watching Neville raise the silverware instead of Terry. I will be ready to concede defeat to a brilliant team. I will respect ManU for the very reason I love Chelsea – the undying spirit and consistency.

After last night, the premiership race has turned the heat on Chelsea. Chelsea has to stay strong now, and I have complete faith in Mourinho and his squad. I expect this season to end on a very close call, perhaps as close as 1997-98 and 1998-99 seasons. I couldn’t believe my eyes when the invincible Schumacher was defeated by Alonso in San Marino by one-fifth of a second. But I did love every bit of that race. Despite whoever wins the EPL this year, Chelsea and ManU will entertain everyone with their title race.

From Soccerlens.com - Football News