Paul Brooks
16th June 2005, 13:31
Following today's Press Conference at Portcullis House, Westminster here are links to SU's full financial analysis of the Glazer debt mountain used to buy United. (available in .pdf and Word.doc versions) This document is long and involves complex financial analysis, however a summary can be found below.
This Analysis of Glazer’s financing of the takeover and operation of Manchester United plc (MU) is the work of Shareholders United (SU), with input from private individuals who are members of SU and work in the financial sector, together with information provided by our legal and financial advisers. Errors and omissions are solely the responsibility of SU. SU has taken great care to verify and check all facts in this analysis, and all forecasts and projections are honestly based on valid and industry-standard assumptions.
Financial Analysis
http://www.shareholdersunited.org/downloads/GlazerFinanceAnalysis.doc
(223kb)
http://www.shareholdersunited.org/downloads/GlazerFinanceAnalysis.pdf
(672kb)
Press Release
http://suforum.org/newforum/showthread.php?t=17990
http://www.shareholdersunited.org/downloads/PressRelease160605.doc
(48kb)
http://www.shareholdersunited.org/downloads/PressRelease160605.pdf
(200kb)
SUMMARY
Details of Glazer’s business plan have been leaked to the Times. Based on those leaks, SU has reconstructed Glazer’s business plan, attached as Annex 1. Key points have already been highlighted:
· Ticket price rises totalling 54% within 5 years
· Commercial revenues increased by 76% over the next 5 years
· Player net transfer budget capped at max. £27.3million
It is clear that even if this plan represented the whole picture, there are major doubts about his being able to achieve his targets – his revenue growth assumptions are over-optimistic in many eyes, and there are too many variables outside his control which could scupper the plan in any one year. And achieving his targets relies on compliant fans paying higher and higher prices for everything at Old Trafford – something which many have pledged to resist.
SU has no reason to believe that the plans are not genuine – they chime with many of the assumptions and projections we had already been making about life under Glazer.
But the leaks are just as interesting for what they do not reveal as for what they do. There will have been several variations on the model which have not been included in the leak e.g. a securitisation or sale & leaseback scenario, which any banker worth his salt will have prepared for his client. This makes us suspicious that the plans have been leaked from the Glazer side, to show the rosiest possible picture of a club thriving and able to meet all its obligations and demands for on-the-pitch success.
The plans show that the only debt to be secured on the assets and income of Manchester United is the £373.9 million JP Morgan Senior Secured Loan facilities. This debt has been structured so that payments of interest and principal are ‘light’ in the first 7 years, allowing Glazer maximum time and cashflow in the early years to make his plan work. The transfer budget depends on free cash being available for this purpose rather than for debt service.
This is where the suspicion lies – how is Glazer going to service and/or refinance all of his debts (including the PIK), which are punitive in terms of their interest burden, while keeping enough cash in the company to rebuild the team with world-class players? There is not enough cashflow generated to do both.
The leaked plans show the £275 million PIK debt (preferred securities issued to the 3 hedge funds in Red Football Ltd) as remaining in place throughout their life of 15 years. But these PIK accrue compounded annual interest at a frightening rate (see Annex 2 and Table 2 below) – they are a ticking timebomb. It is not credible that Glazer has no strategy to redeem and get rid of these punitive securities as soon as possible, otherwise he risks destroying any equity gains he hopes to make at the end of the day. Plus he loses control of key segments of the MU business if he has not completely redeemed the PIK in 5 years time.
And significantly, there is no mention in the leaked plans of the potential sale & leaseback of Old Trafford, which would provide him with significant cash lump sum enabling him to refinance a chunk of the Senior Debt and/or the PIK..
So some big questions remain:
· How is Glazer going to service and/or refinance all of his punitive debt and pay for the rebuilding of the team?
· Will he quickly go for sale & leaseback of Old Trafford, allowing him to pay down much of the Senior Debt and refinance the PIK by loans taken out by the club?
· How will he cope with variables outside his control – such as failure to qualify for the Champions League in one year, or the withholding of custom by a significant element of the United fanbase?
· How far can he aggressively drive revenues to meet his over-optimistic growth assumptions? Will we see stadium naming rights, an explosion of sponsorships and ‘match presenting’ rights etc?
SU’s belief that the Glazer business plan is unworkable has been reinforced by the leak of these incomplete plans. If this is the best he can do, then supporters have a very realistic opportunity to buy their club back if and when Glazer is forced to disgorge it, either by his banks or by financial pressure.
SUMMARY of the SUMMARY
· The high interest rates he is paying for both Senior Debt and the PIK classify this deal as high risk, ‘junk-bond’ status
· The debt mountain which Glazer has taken on to acquire MU is growing a such a rate that the longer it stays in, the harder it is to repay
· This deal can only be done by keeping the £275m of PIK debt off the MU balance sheet – but Glazer has to refinance the PIK sooner rather than later – if he does not do this by 12.08.2010, the hedge funds can take control rights over the major part of the MU business (ticket prices, player transfers & contracts, sponsorships & merchandising) and put the club up for sale
· Our analysis is that Glazer will find it very difficult to refinance the PIK with his own equity, unless he sells the Tampa Bay Bucs, for example
· Glazer therefore has to try and use the club’s assets to refinance, with potentially disastrous effects on the company and the club – “potentially damaging” and “putting a direct and indirect strain on the business” to quote the MU board in February
· No prudent board of directors would allow their company to take on such punitive debt – and if they did, they would surely try to pay off that debt before splashing out on player transfers
· Glazer is planning to gamble, to ignore the growing debt mountain and make available some £25 million per year for players instead of reducing the debt risk – endangering the club in the style of the recent Leeds meltdown
· SU does not think this strategy is sustainable, especially in view of Glazer’s “aggressive” projections of EBITDA and commercial revenue growth for MU
· Nor do these projections take into account the impact of a widespread campaign of customer power and exercise of consumer choice by fans - the withholding by supporters of custom from a Glazer-owned MU and its sponsors, which is already beginning to bite (e.g. Vodafone and Nike recent public reaction) – this campaign is expected to grow over the next two years as Glazer is forced into (or chooses) unpopular, profit-based decisions on ticket prices and other commercial matters which cause more fans to give up watching and paying for their team
· It seems to us that the risks of failure of Glazer’s model and his business plan far outweigh the prospects of success – the margin for error is too narrow and the potential debt downsides too great for a company and a team struggling to regain and retain the supremacy it recently enjoyed over its rivals on and off the pitch
· We confidently forecast failure of the Glazer financing model and business plan within 3 years followed by one of the following:
a flotation of all or part of MU
an attempted sale of the club and/or its assets by Glazer
a forced sale of the club and its assets by the banks
· That is why we call on all fans, from all over the world, to be prepared for that day, when supporters stand ready with a warchest to reclaim our club – or significant ownership stake in it.
Contact:
Nick Towle 07770 226681
Oliver Houston: 07855 097753
Sean Bones 07743 001164
This Analysis of Glazer’s financing of the takeover and operation of Manchester United plc (MU) is the work of Shareholders United (SU), with input from private individuals who are members of SU and work in the financial sector, together with information provided by our legal and financial advisers. Errors and omissions are solely the responsibility of SU. SU has taken great care to verify and check all facts in this analysis, and all forecasts and projections are honestly based on valid and industry-standard assumptions.
Financial Analysis
http://www.shareholdersunited.org/downloads/GlazerFinanceAnalysis.doc
(223kb)
http://www.shareholdersunited.org/downloads/GlazerFinanceAnalysis.pdf
(672kb)
Press Release
http://suforum.org/newforum/showthread.php?t=17990
http://www.shareholdersunited.org/downloads/PressRelease160605.doc
(48kb)
http://www.shareholdersunited.org/downloads/PressRelease160605.pdf
(200kb)
SUMMARY
Details of Glazer’s business plan have been leaked to the Times. Based on those leaks, SU has reconstructed Glazer’s business plan, attached as Annex 1. Key points have already been highlighted:
· Ticket price rises totalling 54% within 5 years
· Commercial revenues increased by 76% over the next 5 years
· Player net transfer budget capped at max. £27.3million
It is clear that even if this plan represented the whole picture, there are major doubts about his being able to achieve his targets – his revenue growth assumptions are over-optimistic in many eyes, and there are too many variables outside his control which could scupper the plan in any one year. And achieving his targets relies on compliant fans paying higher and higher prices for everything at Old Trafford – something which many have pledged to resist.
SU has no reason to believe that the plans are not genuine – they chime with many of the assumptions and projections we had already been making about life under Glazer.
But the leaks are just as interesting for what they do not reveal as for what they do. There will have been several variations on the model which have not been included in the leak e.g. a securitisation or sale & leaseback scenario, which any banker worth his salt will have prepared for his client. This makes us suspicious that the plans have been leaked from the Glazer side, to show the rosiest possible picture of a club thriving and able to meet all its obligations and demands for on-the-pitch success.
The plans show that the only debt to be secured on the assets and income of Manchester United is the £373.9 million JP Morgan Senior Secured Loan facilities. This debt has been structured so that payments of interest and principal are ‘light’ in the first 7 years, allowing Glazer maximum time and cashflow in the early years to make his plan work. The transfer budget depends on free cash being available for this purpose rather than for debt service.
This is where the suspicion lies – how is Glazer going to service and/or refinance all of his debts (including the PIK), which are punitive in terms of their interest burden, while keeping enough cash in the company to rebuild the team with world-class players? There is not enough cashflow generated to do both.
The leaked plans show the £275 million PIK debt (preferred securities issued to the 3 hedge funds in Red Football Ltd) as remaining in place throughout their life of 15 years. But these PIK accrue compounded annual interest at a frightening rate (see Annex 2 and Table 2 below) – they are a ticking timebomb. It is not credible that Glazer has no strategy to redeem and get rid of these punitive securities as soon as possible, otherwise he risks destroying any equity gains he hopes to make at the end of the day. Plus he loses control of key segments of the MU business if he has not completely redeemed the PIK in 5 years time.
And significantly, there is no mention in the leaked plans of the potential sale & leaseback of Old Trafford, which would provide him with significant cash lump sum enabling him to refinance a chunk of the Senior Debt and/or the PIK..
So some big questions remain:
· How is Glazer going to service and/or refinance all of his punitive debt and pay for the rebuilding of the team?
· Will he quickly go for sale & leaseback of Old Trafford, allowing him to pay down much of the Senior Debt and refinance the PIK by loans taken out by the club?
· How will he cope with variables outside his control – such as failure to qualify for the Champions League in one year, or the withholding of custom by a significant element of the United fanbase?
· How far can he aggressively drive revenues to meet his over-optimistic growth assumptions? Will we see stadium naming rights, an explosion of sponsorships and ‘match presenting’ rights etc?
SU’s belief that the Glazer business plan is unworkable has been reinforced by the leak of these incomplete plans. If this is the best he can do, then supporters have a very realistic opportunity to buy their club back if and when Glazer is forced to disgorge it, either by his banks or by financial pressure.
SUMMARY of the SUMMARY
· The high interest rates he is paying for both Senior Debt and the PIK classify this deal as high risk, ‘junk-bond’ status
· The debt mountain which Glazer has taken on to acquire MU is growing a such a rate that the longer it stays in, the harder it is to repay
· This deal can only be done by keeping the £275m of PIK debt off the MU balance sheet – but Glazer has to refinance the PIK sooner rather than later – if he does not do this by 12.08.2010, the hedge funds can take control rights over the major part of the MU business (ticket prices, player transfers & contracts, sponsorships & merchandising) and put the club up for sale
· Our analysis is that Glazer will find it very difficult to refinance the PIK with his own equity, unless he sells the Tampa Bay Bucs, for example
· Glazer therefore has to try and use the club’s assets to refinance, with potentially disastrous effects on the company and the club – “potentially damaging” and “putting a direct and indirect strain on the business” to quote the MU board in February
· No prudent board of directors would allow their company to take on such punitive debt – and if they did, they would surely try to pay off that debt before splashing out on player transfers
· Glazer is planning to gamble, to ignore the growing debt mountain and make available some £25 million per year for players instead of reducing the debt risk – endangering the club in the style of the recent Leeds meltdown
· SU does not think this strategy is sustainable, especially in view of Glazer’s “aggressive” projections of EBITDA and commercial revenue growth for MU
· Nor do these projections take into account the impact of a widespread campaign of customer power and exercise of consumer choice by fans - the withholding by supporters of custom from a Glazer-owned MU and its sponsors, which is already beginning to bite (e.g. Vodafone and Nike recent public reaction) – this campaign is expected to grow over the next two years as Glazer is forced into (or chooses) unpopular, profit-based decisions on ticket prices and other commercial matters which cause more fans to give up watching and paying for their team
· It seems to us that the risks of failure of Glazer’s model and his business plan far outweigh the prospects of success – the margin for error is too narrow and the potential debt downsides too great for a company and a team struggling to regain and retain the supremacy it recently enjoyed over its rivals on and off the pitch
· We confidently forecast failure of the Glazer financing model and business plan within 3 years followed by one of the following:
a flotation of all or part of MU
an attempted sale of the club and/or its assets by Glazer
a forced sale of the club and its assets by the banks
· That is why we call on all fans, from all over the world, to be prepared for that day, when supporters stand ready with a warchest to reclaim our club – or significant ownership stake in it.
Contact:
Nick Towle 07770 226681
Oliver Houston: 07855 097753
Sean Bones 07743 001164