Manchester United (Red Football Limited) have recently filed their latest annual accounts and yesterday announced their first quarter results (1st July 2010 to 30th September 2010). The club has always been quick to concentrate on the positive aspects of their financial results namely, in respect of their annual accounts, a record turnover of £286 million and an operating profit of £100.8 million. Manchester United’s Chief Executive David Gill praised the annual results as being “very good results for the club with records here, there and everywhere”. The first quarter results have been no different with the club announcing revenue growth of 9.7%, media revenue growth of 3.7% and significant commercial revenue growth of 24.7%.
However, those who study the results with more scrutiny will notice a different picture to the one the club attempts to portray. To put it simply, in respect of United’s annual results, United turned their £286 million turnover and £100.8 million operating profit into a £83.6 million loss.
The reasons for this huge turnaround are threefold. Firstly, United posted non-cash flow expenses totalling £84 million. This included £40.1 million for player amortisation (decrease in player value), £35.4 million for goodwill amortisation (decrease in clubs market value) and £8.5 million for depreciation of the clubs fixed assets.
Secondly, United sustained exceptional losses totalling £66.9 million for the year ending 30 June 2010. This included a £40.7 million loss on an interest rate swap (a derivative product which speculated interest rate movements), £19.3 million foreign exchange loss (US dollar strengthening against sterling), a £4.7 million loss for amortisation of debt issue costs and £2.2 million loss arising out of a lease.
The final element that contributed to United’s eventual loss is the controversial net interest payment of £42.3 million to service the debt of circa £500 million.
Doubts have therefore been cast over United’s capability to comply with UEFA’s Financial Fair Play Regulations that are due to be implemented at the beginning of the 2013/2014 season.
The Financial Fair Play Regulations are supposedly designed to herald the end of football’s reckless spending era and to ensure fairness amongst European clubs. UEFA are clearly concerned in the current financial climate with the increased examples of clubs incurring significant losses whilst continuing to competitively compete within European football. UEFA believe clubs should be barred from spending more than their income and that rich owners such as Sheikh Mansour and Roman Abramovich should not contribute to their clubs reckless spending.
The Financial Fair Play Regulations primary objectives are to:
a) To improve the economic and financial capability of the clubs, increasing their transparency and credibility;
b) To place the necessary importance on the protection of creditors by ensuring that clubs settle their liabilities with players, social/tax authorities and other clubs punctually;
c) To introduce more discipline and rationality in club football finances;
d) To encourage clubs to operate on the basis of their own revenues;
e) To encourage responsible spending for the long-term benefit of football;
f) To protect the long-term viability and sustainability of European club football.” (Article 2(2) UEFA Club Licensing and Financial Fair Play Regulations)
The Financial Fair Play Regulations come into force at the beginning of the 2013/2014 season whereby UEFA Club Licenses should only be issued if clubs have complied with the regulations. The Financial Fair Play Regulations only apply to clubs who are intending to enter UEFA competitions such as the Champions League and Europa League although, it must be noted that there are apparently ongoing discussions for the Premier League to implement similar regulations. The regulations must be adhered to prior to the 2013/2014 season as accounts for the previous two years are taken into account for the 2013/2014 licence application.
The main requirement under the Financial Fair Play Regulations is for clubs to not spend over what they earn (Break Even Requirement),
"The philosophy is that you cannot spend more money than you generate” (UEFA President Michel Platini).
The effect of this requirement is to prohibit clubs from spending excessive sums on transfer fees and salaries whilst also posting considerable losses as a result. For instance, Chelsea posted a loss of £140 million in 2004/2005 and Manchester City have more recently posted a loss of £121million in 2009-2010 as a result of their respective spending sprees.
However, UEFA have decided to phase in this break even requirement by including an acceptable deviation provision which enables clubs to post acceptable losses within the first few years. This provision provides for clubs to post initial losses of up to 45 million Euros (30 million Euros from 2015) throughout the monitoring period providing this loss is offset by an equity investment from a shareholder or other related person. If an equity investment is not forthcoming, the acceptable loss is only 5 million Euros throughout the monitoring period (2-3 years).
For the purposes of assessing whether a club has broken even, income is defined as:
“Revenue from gate receipts, broadcasting rights, sponsorship and advertising, commercial activities and other operating income, plus either profit on disposal of player registrations or income from disposal of player registrations, excess proceeds on disposal of tangible fixed assets and finance income.” (Article 58(1) UEFA Club Licensing and Financial Fair Play Regulations)
And expenses are defined as:
“Cost of sales, employee benefits expenses and other operating expenses, plus either amortisation or costs of acquiring player registrations, finance costs and dividends.” (Article 58(2) UEFA Club Licensing and Financial Fair Play Regulations)
Relevant expenses do not include “expenditure on youth development activities” or “expenditure on community development activities” (Article 58(2) UEFA Club Licensing and Financial Fair Play Regulations) which ensures that clubs are encouraged to continue to invest in academies, training facilities and local community schemes.
UEFA have established a Club Financial Control Panel to ensure that the Financial Fair Play Regulations and licensing requirements in general are adhered to.
“The main task of the panel will be to conduct financial audits on clubs in order to ensure licences were correctly awarded and it may further conduct spot checks, and/or investigations, to ensure that the integrity rules are observed by the clubs” (UEFA).
UEFA General Secretary David Taylor has explained the panel’s duties further “the panel will look specifically at the finances of clubs and how they are structured … this panel will be doing continuous monitoring." The ultimate penalty for a club failing to comply with the Financial Fair Play Regulations is a ban from all UEFA competitions although other more lenient sanctions such as warnings or fines are also possible.
Many believe that that UEFA will initially take a soft approach due to the fact that they have worked closely with the clubs in implementing the Financial Fair Play Regulations as Michel Platini has confirmed “we have worked on the financial fair play concept hand-in-hand with the clubs, as our intention is not to punish them but to protect them. We have an agreement with the clubs”. However, the fact that the clubs have agreed to the proposals should mean that there are no excuses should any breaches occur. UEFA will clearly need to show that the regulations are there for a reason and they could decide to make an example of a club in order to prove this point. It will certainly be interesting to see how UEFA will act if Manchester City post another loss in the region of £121 million pounds whilst the Financial Fair Play Regulations are in force.
Manchester United and the Financial Fair Play Regulations
So where does this leave United with the impending Financial Fair Play Regulations?
Crucially, in addition to expenditure on youth and community development expenses “depreciation/impairment of tangible fixed assets, amortisation/impairment of intangible fixed assets (other than player registrations)” and “any other non-monetary items” (Article 58(2) UEFA Club Licensing and Financial Fair Play Regulations) are not included for the purpose of calculating whether a club has complied with the break even requirement. Further, United’s “exceptional one-off hits” (David Gill) of £66.9 million should hopefully not be included in any future accounts. Using the latest accounts as an example, United would break even with relative ease and would in fact post a profit. This is subject to all revenue being taken into consideration by UEFA. David Gill clearly agrees with this assessment:
“In terms of the accounts, charges related to goodwill and depreciation of fixed assets are ignored by Uefa. As a result, we can comfortably meet the qualifying criteria of the financial fair-play rules”.
However, despite the constant reassurances from the club, United’s financial position undoubtedly remains uncertain.
United’s confidence in complying with the Financial Fair Play Regulations is subject to the club maintaining their huge turnover. However, turnover is very much reliant on success on the pitch and, should this tumble, so will United’s match day, media and commercial revenue with the inevitable consequence of lower attendances, media payments and a decrease in commercial sponsorship. United are still coping with the loss of Ronaldo and it is felt that the squad is in need of some serious investment in order to maintain a challenge in all competitions. Further, the impending retirements of Giggs, Scholes, Van Der Sar and Neville together with the manger Sir Alex Ferguson has only highlighted this point further. Signings have been made such as the recent additions of Hernandez, Smalling and Bebe although, according to some, these are not of the required quality. It seems apparent that investment in the playing squad is necessary however, people question whether there are sufficient funds available in order to fund the quality signings that United are believed to need despite cash in the bank of £151.7 million.
If United are to invest heavily in the playing squad, they should consider doing so in the very near future to ensure that the expenditure is not used by UEFA for calculating the break even requirement. Any such spending by United will require a careful balancing act between investment to maintain success and the impact any investment will have on United’s revenue. It therefore remains to be seen what expenditure is made in this regard.
From the first quarter results that were announced yesterday, staff costs have increased 14.6% from the equivalent quarter last year. The club have stated that this increase is as a result of “growth in player compensation” i.e. player’s wages despite United’s policy that wages should not exceed 50% of the clubs turnover. This is a significant increase that will eat in to United’s turnover and this shows no signs of diminishing. The impact of Sheik Mansour’s millions has meant that United are facing a battle to compete in the wages market, as we have already seen with the Rooney affair. It is worth noting that Rooney’s pay rise will probably mean that this figure will increase further in the next quarter results. David Gill obviously strongly feels that United can still compete despite City’s millions:
“we are more than capable of retaining and attracting top players."
A further occurrence that could potentially impact on United’s turnover is the ongoing protests against the Glazer ownership. Despite the popular green and gold campaign, as well as other initiatives, many fans believe that a total boycott of all home games is what it takes in order to remove the owners from the club. It is clear from both the annual and first quarter results that United rely heavily on match day revenue so any fall in attendances will impact severely on the clubs turnover. Season ticket sales are down on last years but United continue to sell out Old Trafford as is apparent from the first quarter results which show a minor increase in match day revenue of 0.5%.
Finally, and perhaps more importantly, United’s mountain of debt remains a concern in respect of its ability to comply with the FFPR as well as its financial position in general. Michel Platini has confirmed that UEFA have no issues with a structure such as United’s
“If clubs pay their debts I have no problem… I am not against debts, I am against losses.”
United currently appear comfortable in servicing the circa £500 million of debt. This has been further reinforced by the news that the extortionate Payment in Kind (PIK) notes will be paid in full on 22 November. This debt was held by the clubs holding company namely Red Football Joint Venture Limited and was the personal responsibility of the Glazers although the debt was secured over the clubs assets. It was widely believed that the Glazers would utilise the £95 million available dividend from the club to help pay off the debt of circa £220 million however the club confirmed in their first quarter results that “there has been no dividend of club cash”. The question that therefore remains is how the PIK notes will be paid?
With the Glazers apparently ruling out a minority equity sale, a refinance with a lower rate of interest seems most probable. As with the PIK notes, any such refinance would almost certainly continue to be secured over the clubs assets and so it is debatable whether replacing debt with debt is beneficial to the club. The pricey PIK notes were certainly a concern to the Glazers so the elimination of this burden is welcoming. However, interest rate payments burn a huge hole in United’s revenue and will ultimately impact on its ability to comply with the break even requirement. The circa £500 million bond debt that replaced the previous bank debt in January will cost United circa £45 million to service this year and the full sum is due for repayment in 2017. It remains to be seen how the Glazers intend paying this debt off in 2017 and whether more refinancing is on the cards. Any further debt will therefore increase this liability.
If the Glazers have refinanced, the new debt is likely to require interest payments like the current bond debt. This is unlike the PIK notes, which accrued interest at the rate of 16.25% but was not due to be paid until the whole sum was due. Time will tell how the Glazers will finance any potential new indebtedness and it is certainly possible that the £95 million dividend will be used for this purpose. If the Glazers use this dividend to fund any new debt, this would have an effect on United’s ability to comply with the break even requirement as dividends are defined as an expense (Article 58(2) UEFA Club Licensing and Financial Fair Play Regulations). Further, as well as the £95 million dividend being treated as an expense, the full interest payment that Red Football Joint Venture Limited would potentially have to pay would also be considered by UEFA when assessing whether United have broken even. Annex VII (b) (4) UEFA Club Licensing and Financial Fair Play Regulations states that if a parent company controls the licensed applicant i.e. the club (Red Football Limited) then:
“consolidated financial statements must be prepared and submitted to the licensor as if the entities included in the reporting perimeter were a single company.”
Unfortunately, at this stage, we are only speculating as to how the Glazers have paid off the PIK notes and the resulting impact of doing so. It is therefore very much a case of wait and see.
The fact that the items which have significantly contributed to United’s losses are disregarded by UEFA as expenses as well as the likelihood that United should incur far fewer exceptional losses, clearly help explain United’s confidence in their ability to comply with the Financial Fair Play Regulations and its financial position in general.
United’s vulnerable and potentially precarious financial structure however should not be ignored and/or taken lightly. Currently, United’s success on the pitch is ensuring that revenue streams are minimising the burden of United’s debt as well as its probable compliance with the Financial Fair Play Regulations. These streams though appear maxed out and any demise in the clubs success on the pitch could potentially have severe ramifications. United fans can therefore either continue to protest or leave matters in David Gill’s “capable” hands:
"We as Manchester United have always been run professionally and will continue to be run professionally."