Sean B
1st February 2006, 06:02
MUST looks closely at David Gill’s public statements on the Glazer debt.
From various news sources, including the
Manchester Evening News 23 January 2006
Much of the press reporting of the recent MU results for the financial year 2004/5 has quoted the figure of £46m of profit for the club. This spin is misleading - the £46m quoted is actually the EBITDA number, the cash operating profit before taking into account interest, tax, depreciation and amortisation costs.
The net profit, after deducting those costs, was actually £12m, down £15m from £27m the year before. After tax and dividends, this number comes down to £4.4m of post-tax profit.
Gill has followed up the results announcement by making certain statements about the debt which in our view do not stack up. These are his statements, followed by our comment.
"There are two elements to the debt, the hedge funds and the senior debt," explained Gill. "The hedge funds have no security over the club and no influence over it either. Yes, they have to be repaid but that is something the Glazers will do from their own resources or refinancing plans in time.”
This is true up to a point but misleading in what is leaves out – the hedge funds do have rights over the club and its assets and operations, according to the finance documents that Glazer had to make public during the takeover:
§ If MU’s EBITDA (cash operating profits) for FY 2006 and 2007 do not hit £48.5m and £75.7m respectively, the funds have the right to appoint 25% of Red Football and MU’s boards of directors. And if the £275m hedge fund debt (PiK) is not completely repaid by May 2010, the funds have rights of veto over all commercial and financial aspects of the club including player transfers. Plus they can force the club to be put up for sale in those circumstances.
§ Of course it is inconceivable that Glazer would allow this to occur, especially since interest is rolling up on the PiK at an average rate of 18% per year (first year’s interest alone is £51m to May 2006). The PiK must be repaid or refinanced quickly, or Glazer risks losing his equity and possibly the club itself to the hedge funds. It is difficult to see where Glazer gets the cash to repay >£325m of PiK from his own resources this year – rumours still abound that his £272m ‘equity investment’ in MU was part (if not all) borrowed. So a debt refinancing is undoubtedly on the cards. This, we predict, will come in the form of either (i) a sale & leaseback of Old Trafford or (ii) using all available cash from United (and perhaps Glazer’s own funds from the sale of his US businesses which are currently on the market) to repay part of the JP Morgan senior debt, perhaps taking the outstandings down to around £200m or less. Then he would extend the borrowings against club assets to (say) £500m and use the sale & leaseback proceeds or new £300m loans to repay the hedge funds. By this time next year, we believe, the total senior debt secured on United’s assets will be between £450-£500m, which is the amount Glazer intended the club to borrow in his original business plan that was so roundly dismissed by the pre-takeover board (including David Gill himself) as ‘damaging’ to the club. [Why damaging? Because the annual debt service payments on this level of debt would be in the region of £80m!].
The ruinously expensive hedge fund debt was introduced by Glazer after this rejection in order to address the board’s legitimate concerns (to avoid a Leeds-type meltdown), by appearing to take some of the debt into his own company. This was always a temporary solution and we are now heading back to Glazer’s Plan A – load it all onto United. This requires saving money - for evidence of where the club’s cash is going, look at the cost-cutting which has been going on (staff made redundant, players sold or loaned out, axing one reserve team etc); look at the transfer budget (two defenders yes, but no cash for a midfielder in January, despite desperate need). The hedge fund debt is undoubtedly occupying a huge amount of the Glazers time working out how to get rid of it and consequently the hedge funds’ “influence” over the club and its finances is enormous.
The question has to be asked – would the Glazers sanction spending £5m or so on a midfielder in January, over and above the £12m already spent, if this could result in United failing to hit the £48.5m EBITDA target this year? We think not - it could lead to the hedge funds exercising their right to appoint directors to the board. So no midfielder, unless perhaps on loan. A clear example of hedge funds “influence” over the club?
"Manchester United is supporting the senior debt, which is around £265million-£275million.”
Gill does not mention the separate £109m loan facilities from JP Morgan taken out by the club and highlighted in Glazer’s offer document, in addition to the £265m senior debt – total JPM facilities of £374m. £18.9m of this was a bridge loan for buying out small shareholders. There was also a £50m revolving loan facility (speculation being that this was to pay Glazer’s advisers fees for the takeover at around £40m or more) and a £40m capex facility to pay for the stadium expansion – the previous board had set aside cash from the club’s own resources for this. Glazer’s PR spinners claim that the bridge loan (£18.9m) has already been repaid and the other facilities (£90m) have not been drawn down. No evidence of this has been produced and we are entitled to assume that at least the revolver and capex debts were drawn down and are still outstanding.
"People need to recognise the cost of servicing the interest on that debt is not in excess of what we were previously paying in dividends and corporation tax as a publicly quoted company”.
This is completely untrue and inaccurate. These are the figures for dividend and tax costs for the last two financial years, taken from United’s own published accounts:
2004 - Corporation Tax = 8.6m, Dividends = 7.0m Total = £15.6m
2005 - Corporation Tax = 4.2m, Dividends = 3.4m Total = £7.6m
Interest payments on the JP Morgan £265m senior debt and £90m revolver/capex facilities for the first full year (2005/6) are £30.3m, four times the dividend/tax cost for last year:
£55m term loan 1 over 7 years @ LIBOR + 2.75% pa (7.35%) First year interest = £4.0m
£62.5m term loan 2 over 7.5/8 years @LIBOR + 3.25% pa (7.85%) £5.0m
£62.5m term loan 3 over 8.5/9 years @ LIBOR + 3.75% pa (8.35%) £5.3m
£85m term loan 4 over 10 years @ LIBOR + 6.5% pa (11.10%) £9.5m
£50m revolving credit over 7 years @ LIBOR + 2.75% pa (7.35%) £3.6m
£40m capex facility over 7 years @ LIBOR + 2.75% pa (7.35%) £2.9m
£355m total debt Total Interest £30.3m
LIBOR currently stands at 4.60%.
Gill will also say they no longer have to bear the cost of being a listed company – regulatory and
admin. fees would have added a further approx. £2m per year, not material to Gill’s argument.
"The debt itself is serviceable because our cash generation will improve through the expansion of the stadium and other things."
Current levels of debt, maybe. But what if the refinancing increases the club’s debt load to £500m? Requiring annual servicing to the tune of £80m? Where will this extra revenue come from?
§ New shirt sponsor – speculation is rife that united will announce a deal with UAE-based Ettihad Airways worth around £12-15m per year, an increase from Vodafone’s £9m p.a. Ettihad is a company and a name that no-one has heard of, but this will not worry the Glazers who desperately need the cash and a deal which exceeds or matches the market best. The previous board rightly wanted to associate the Manchester United brand with a reputable global brand name, but it looks like the rumoured big name sponsors are not willing to pay what the Glazers are demanding. So cash needs must where the devil of £600m debt drives.
§ Increased TV and media revenues? Unlikely – these are expected to remain static, and could even reduce given United’s early exit from the Champions’ League this year and if they fail to finish higher in the Premier League (PL) than last year.
§ Cup runs do not produce a large amount of cash for United – gates and TV money are shared (home and away) and home gates have not been good (see below).
§ Expansion of the stadium will not come fully into play until next the financial year 2006/7. An additional 7,500 seats in theory gives a large revenue boost. But there are disturbing signs that the stadium expansion has come at a time when gate attendances, ticket demand and fans’ ability or willingness to pay any price to watch their team have peaked at United (and throughout the PL). Attendances at United’s PL games this season have been sold out as usual, but gates for cup games have drastically declined - no full houses and gates ranging from a 17-year low of 43,000 to see Barnet in the Carling Cup and culminating in a 61,000 gate for the Carling Cup semi-final against Blackburn. Even non-league Exeter in the FA Cup got a full house last season. Glazer’s planned ticket price rises (trailed in the leaked business plan in the Times last June) will surely have to be reviewed, given that for all cup and some PL games, the club has had to resort to selling on the gate (unheard of for 20 years), offering half-price executive packages and emailing local schools with offers of cheap tickets for schoolkids. The mythical ‘40-year waiting list’ for season tickets has evaporated – the club is currently offering new season tickets for the new quadrants to non-One United members – having only just managed to sell all of the 2,500 extra season tickets before this season. Fans willingness to pay higher prices and go to all games cannot be taken for granted any more.
"This is a new era," said Gill. "We didn't have any debt before and now we do but I am quite comfortable about that situation.”
Quite right David, it is a new era – the game has changed and fans across the country are refusing to be taken for mugs anymore. And we rightly don’t like debt in the huge amounts our club is now saddled with. But having received £2m from Glazer for his shares and share options, and on remuneration of £1m a year, perhaps Gill has new priorities and does not feel the need to take fans legitimate views and concerns into account.
And he has done a complete about-turn himself on the matter of debt.
Gill was a member of the previous board of directors which labelled Glazer’s business plans ‘aggressive’ and ‘potentially damaging’ for the club. Gill was vociferous in his belief before the takeover that it would not be right for United to take on any debt at all – he made that very clear to SU/MUST members in an open meeting in August 2004. To go from that position to one where he is “comfortable” with over £600m of debt hanging over the club, beggars belief. He was either very wrong before, or playing footsie with the truth now.
United fans tend to agree with his previous position – we don’t want to be another Leeds, but at least that club took on debt to buy players. United’s debt is actually Glazer’s debt to buy our club. It serves absolutely no useful purpose in building the team, quite the opposite in fact. It imposes an obstacle to that critical objective. Sir Alex Ferguson has already admitted that we can now have a squad of no more than 19 or 20 well-paid players and can’t afford to compete with Chelsea financially. The debt is seriously affecting our club on the pitch as well as off it.
We strongly believe that this would never be the case under a supporter-owned club – 100% of all net profits would go to the team and the facilities, like Barcelona and Real Madrid, rather than in repaying acquisition debt. For sure, a supporter-owned United would make sure the manager could buy a player when he really needed it.
MUST Board
31 January 2006
From various news sources, including the
Manchester Evening News 23 January 2006
Much of the press reporting of the recent MU results for the financial year 2004/5 has quoted the figure of £46m of profit for the club. This spin is misleading - the £46m quoted is actually the EBITDA number, the cash operating profit before taking into account interest, tax, depreciation and amortisation costs.
The net profit, after deducting those costs, was actually £12m, down £15m from £27m the year before. After tax and dividends, this number comes down to £4.4m of post-tax profit.
Gill has followed up the results announcement by making certain statements about the debt which in our view do not stack up. These are his statements, followed by our comment.
"There are two elements to the debt, the hedge funds and the senior debt," explained Gill. "The hedge funds have no security over the club and no influence over it either. Yes, they have to be repaid but that is something the Glazers will do from their own resources or refinancing plans in time.”
This is true up to a point but misleading in what is leaves out – the hedge funds do have rights over the club and its assets and operations, according to the finance documents that Glazer had to make public during the takeover:
§ If MU’s EBITDA (cash operating profits) for FY 2006 and 2007 do not hit £48.5m and £75.7m respectively, the funds have the right to appoint 25% of Red Football and MU’s boards of directors. And if the £275m hedge fund debt (PiK) is not completely repaid by May 2010, the funds have rights of veto over all commercial and financial aspects of the club including player transfers. Plus they can force the club to be put up for sale in those circumstances.
§ Of course it is inconceivable that Glazer would allow this to occur, especially since interest is rolling up on the PiK at an average rate of 18% per year (first year’s interest alone is £51m to May 2006). The PiK must be repaid or refinanced quickly, or Glazer risks losing his equity and possibly the club itself to the hedge funds. It is difficult to see where Glazer gets the cash to repay >£325m of PiK from his own resources this year – rumours still abound that his £272m ‘equity investment’ in MU was part (if not all) borrowed. So a debt refinancing is undoubtedly on the cards. This, we predict, will come in the form of either (i) a sale & leaseback of Old Trafford or (ii) using all available cash from United (and perhaps Glazer’s own funds from the sale of his US businesses which are currently on the market) to repay part of the JP Morgan senior debt, perhaps taking the outstandings down to around £200m or less. Then he would extend the borrowings against club assets to (say) £500m and use the sale & leaseback proceeds or new £300m loans to repay the hedge funds. By this time next year, we believe, the total senior debt secured on United’s assets will be between £450-£500m, which is the amount Glazer intended the club to borrow in his original business plan that was so roundly dismissed by the pre-takeover board (including David Gill himself) as ‘damaging’ to the club. [Why damaging? Because the annual debt service payments on this level of debt would be in the region of £80m!].
The ruinously expensive hedge fund debt was introduced by Glazer after this rejection in order to address the board’s legitimate concerns (to avoid a Leeds-type meltdown), by appearing to take some of the debt into his own company. This was always a temporary solution and we are now heading back to Glazer’s Plan A – load it all onto United. This requires saving money - for evidence of where the club’s cash is going, look at the cost-cutting which has been going on (staff made redundant, players sold or loaned out, axing one reserve team etc); look at the transfer budget (two defenders yes, but no cash for a midfielder in January, despite desperate need). The hedge fund debt is undoubtedly occupying a huge amount of the Glazers time working out how to get rid of it and consequently the hedge funds’ “influence” over the club and its finances is enormous.
The question has to be asked – would the Glazers sanction spending £5m or so on a midfielder in January, over and above the £12m already spent, if this could result in United failing to hit the £48.5m EBITDA target this year? We think not - it could lead to the hedge funds exercising their right to appoint directors to the board. So no midfielder, unless perhaps on loan. A clear example of hedge funds “influence” over the club?
"Manchester United is supporting the senior debt, which is around £265million-£275million.”
Gill does not mention the separate £109m loan facilities from JP Morgan taken out by the club and highlighted in Glazer’s offer document, in addition to the £265m senior debt – total JPM facilities of £374m. £18.9m of this was a bridge loan for buying out small shareholders. There was also a £50m revolving loan facility (speculation being that this was to pay Glazer’s advisers fees for the takeover at around £40m or more) and a £40m capex facility to pay for the stadium expansion – the previous board had set aside cash from the club’s own resources for this. Glazer’s PR spinners claim that the bridge loan (£18.9m) has already been repaid and the other facilities (£90m) have not been drawn down. No evidence of this has been produced and we are entitled to assume that at least the revolver and capex debts were drawn down and are still outstanding.
"People need to recognise the cost of servicing the interest on that debt is not in excess of what we were previously paying in dividends and corporation tax as a publicly quoted company”.
This is completely untrue and inaccurate. These are the figures for dividend and tax costs for the last two financial years, taken from United’s own published accounts:
2004 - Corporation Tax = 8.6m, Dividends = 7.0m Total = £15.6m
2005 - Corporation Tax = 4.2m, Dividends = 3.4m Total = £7.6m
Interest payments on the JP Morgan £265m senior debt and £90m revolver/capex facilities for the first full year (2005/6) are £30.3m, four times the dividend/tax cost for last year:
£55m term loan 1 over 7 years @ LIBOR + 2.75% pa (7.35%) First year interest = £4.0m
£62.5m term loan 2 over 7.5/8 years @LIBOR + 3.25% pa (7.85%) £5.0m
£62.5m term loan 3 over 8.5/9 years @ LIBOR + 3.75% pa (8.35%) £5.3m
£85m term loan 4 over 10 years @ LIBOR + 6.5% pa (11.10%) £9.5m
£50m revolving credit over 7 years @ LIBOR + 2.75% pa (7.35%) £3.6m
£40m capex facility over 7 years @ LIBOR + 2.75% pa (7.35%) £2.9m
£355m total debt Total Interest £30.3m
LIBOR currently stands at 4.60%.
Gill will also say they no longer have to bear the cost of being a listed company – regulatory and
admin. fees would have added a further approx. £2m per year, not material to Gill’s argument.
"The debt itself is serviceable because our cash generation will improve through the expansion of the stadium and other things."
Current levels of debt, maybe. But what if the refinancing increases the club’s debt load to £500m? Requiring annual servicing to the tune of £80m? Where will this extra revenue come from?
§ New shirt sponsor – speculation is rife that united will announce a deal with UAE-based Ettihad Airways worth around £12-15m per year, an increase from Vodafone’s £9m p.a. Ettihad is a company and a name that no-one has heard of, but this will not worry the Glazers who desperately need the cash and a deal which exceeds or matches the market best. The previous board rightly wanted to associate the Manchester United brand with a reputable global brand name, but it looks like the rumoured big name sponsors are not willing to pay what the Glazers are demanding. So cash needs must where the devil of £600m debt drives.
§ Increased TV and media revenues? Unlikely – these are expected to remain static, and could even reduce given United’s early exit from the Champions’ League this year and if they fail to finish higher in the Premier League (PL) than last year.
§ Cup runs do not produce a large amount of cash for United – gates and TV money are shared (home and away) and home gates have not been good (see below).
§ Expansion of the stadium will not come fully into play until next the financial year 2006/7. An additional 7,500 seats in theory gives a large revenue boost. But there are disturbing signs that the stadium expansion has come at a time when gate attendances, ticket demand and fans’ ability or willingness to pay any price to watch their team have peaked at United (and throughout the PL). Attendances at United’s PL games this season have been sold out as usual, but gates for cup games have drastically declined - no full houses and gates ranging from a 17-year low of 43,000 to see Barnet in the Carling Cup and culminating in a 61,000 gate for the Carling Cup semi-final against Blackburn. Even non-league Exeter in the FA Cup got a full house last season. Glazer’s planned ticket price rises (trailed in the leaked business plan in the Times last June) will surely have to be reviewed, given that for all cup and some PL games, the club has had to resort to selling on the gate (unheard of for 20 years), offering half-price executive packages and emailing local schools with offers of cheap tickets for schoolkids. The mythical ‘40-year waiting list’ for season tickets has evaporated – the club is currently offering new season tickets for the new quadrants to non-One United members – having only just managed to sell all of the 2,500 extra season tickets before this season. Fans willingness to pay higher prices and go to all games cannot be taken for granted any more.
"This is a new era," said Gill. "We didn't have any debt before and now we do but I am quite comfortable about that situation.”
Quite right David, it is a new era – the game has changed and fans across the country are refusing to be taken for mugs anymore. And we rightly don’t like debt in the huge amounts our club is now saddled with. But having received £2m from Glazer for his shares and share options, and on remuneration of £1m a year, perhaps Gill has new priorities and does not feel the need to take fans legitimate views and concerns into account.
And he has done a complete about-turn himself on the matter of debt.
Gill was a member of the previous board of directors which labelled Glazer’s business plans ‘aggressive’ and ‘potentially damaging’ for the club. Gill was vociferous in his belief before the takeover that it would not be right for United to take on any debt at all – he made that very clear to SU/MUST members in an open meeting in August 2004. To go from that position to one where he is “comfortable” with over £600m of debt hanging over the club, beggars belief. He was either very wrong before, or playing footsie with the truth now.
United fans tend to agree with his previous position – we don’t want to be another Leeds, but at least that club took on debt to buy players. United’s debt is actually Glazer’s debt to buy our club. It serves absolutely no useful purpose in building the team, quite the opposite in fact. It imposes an obstacle to that critical objective. Sir Alex Ferguson has already admitted that we can now have a squad of no more than 19 or 20 well-paid players and can’t afford to compete with Chelsea financially. The debt is seriously affecting our club on the pitch as well as off it.
We strongly believe that this would never be the case under a supporter-owned club – 100% of all net profits would go to the team and the facilities, like Barcelona and Real Madrid, rather than in repaying acquisition debt. For sure, a supporter-owned United would make sure the manager could buy a player when he really needed it.
MUST Board
31 January 2006