How risky is Manchester United's financal game ?

At the end of January, the UK Premier League club released its financial results for the year ended June 30 2005. While club executives expressed confidence, the figures themselves, which included a 20 percent fall in profits from the previous year, are not universally encouraging.

The pressure on cash flow has given further credence to those who opposed the GBP 790 million takeover in May 2005 by American entrepreneur Malcolm Glazer. Of most concern to Glazer's detractors is the scale of leverage that was used to finance the transaction. The deal has left the club with a substantial debt burden and the consequences of failing to meet financial targets could have significant consequences for the club and its ownership.

The club posted operating profits, before depreciation, amortisation and exceptional items, of GBP 46 million for the 11 months to June 2005, GBP 12.3 million less than the preceding 12 months. Revenue fell to GBP 157.2 million from GBP169.1 million, and pre-tax profits were GBP 10.7 million, down from GBP 27.9 million. The club adjusted its financial year-end to June from July for previous years. The change, implemented to correspond with player contract cycles, had a negligible effect. The financials also revealed a GBP 6.6 million charge for fees related to the club's defence against the Glazer acquisition.

The club largely attributed the drop in performance to a GBP 14.1 million fall in television revenues to GBP 48.4 million. This followed the re-negotiation of broadcasting rights in the UK and a reduced share of media earnings from the European Champions League, following the club's elimination at the final 16 stage. This season, the club will fare even worse having failed to advance beyond its qualifying group. To add to its financial pressures, Vodafone announced last November that it was terminating its GBP 9 million a year sponsorship deal at the end of this season, two years early.

Reduced revenues and uncertainty over future cash flow have placed further scrutiny on the club's ability to service its loans. In the years preceding its stock-market de-listing, the club was debt-free, a situation that was radically altered by Glazer's takeover. Glazer, who also owns the American NFL Tampa Bay Buccaneers, largely financed the acquisition with borrowings of GBP 540 million. JP Morgan, the American investment bank, provided a GBP 265 million loan, which is secured against club assets including the Old Trafford stadium and players. A further GBP 275 million was provided by three New York hedge funds in the form of "pay-in-kind" or "Pik" notes, which accrue a high 12 percent interest rate and are secured against Glazer's assets, including Manchester United. These Pik notes give the issuer the option, during an initial period, to pay interest in the form of additional bonds instead of cash.

The club’s chief executive officer David Gill appears unfazed by the decline in the financial results or its level of indebtedness. Gill maintains his confidence in the club's prospects, stating "The forecast for 2006 is very good but I am not going to predict profits will be over GBP 50 million." He cited that the current stadium expansion will provide nearly 8,000 extra seats from the beginning of next season and that "the end of 2007 is looking very positive".

Addressing the topic of debt for the first time, Gill was adamant that the company's business plan targets, and those assumed by its creditors, were not so aggressive as to endanger the club's future. Gill commented that "We didn't have any debt before and now we do, but I am quite comfortable with that situation",

and that, "the debt itself is serviceable because our cash generation will improve through the expansion of the stadium and other things".

Other sources contend that the Glazer plan is certainly aggressive and includes a 50 percent uplift in revenues over five years and a tripling in operating profit.

On-pitch performance, especially at European level, will be critical, but Gill stated that the two January signings, for a combined GBP 12.5 million, completed any squad strengthening until summer.

The club also reported that it paid GBP 2.2 million pounds in agents' fees, including GBP 1.5 million to Wayne Rooney's agent as part of the England striker's GBP 27 million transfer from Premier League club Everton. While not required to make this disclosure, Gill defended the payments and encouraged other Premier League clubs to be more open saying "the whole regulatory system would benefit from universal publication".

Publicly, Malcolm Glazer, who has appointed three sons to the Club’s Board, has not shown any misgivings about his prominent foray into English football. A Glazer family spokesman states that the family is committed for the long term and that "They remain extremely comfortable with the level of indebtedness at the club". Concurrently, however, Glazer has appointed a chief of staff to liaise with the creditors and has also reportedly moved to monetize the family's non-sporting interests, which could yield an estimated US$ 80 million. Liquidation of assets is a frequent consequence of highly leveraged transactions, coupled with the need to increase revenue and reduce costs to boost cash flow.

Despite debate over its ownership and capital structure, Manchester United can still claim to be the most profitable football club in the world. This is in stark contrast to rivals Chelsea, who have practically secured a second consecutive Premiership title, but announced a pre-tax loss of GBP 140 million for the year ended June 30 2005. The loss, which sets a record for a Premiership club, will be comfortably absorbed by the club's billionaire owner, Roman Abramovich, who has invested GBP 440 million in Chelsea since his 2003 acquisition.

David Gill echoed the thoughts of all supporters when he said "We want to win trophies, that is the challenge. But in sport, no-one can guarantee that". But without the guarantee of trophies, can Manchester United support its current leveraged position and guarantee its financial future as a business?