Why Manchester IOU will not qualify for Europe: the detail « Untold Arsenal: Arsenal News, supporting the club, the players and the manager

by Tony Attwood

In a recent piece (“In football we are running out of benefactors”) I gave a quick resume of the financial problem that seems to be hitting the game.  In this article I want to try and get a bit further into how it can be that Man U’s chief exec constantly tells us that everything is ok and the financial fair play rules are not a problem, while to some commentators that seems to be miles from the truth.

Unfortunately any debate about Man IOU can get complex, so in a typical Untoldian manner I am going to start at the end with my conclusions – just so you know where I’m off to.  Then if you don’t want to read the rest you can pop on to the Arsenal History site and read about 1886.

Man IOU can’t qualify for Europe under the fair play regulations because…

1: They make a huge loss each year and that is enough to stop them qualifying.

2: Their last lost would have been even worse if they had not sold Ronaldo and then held onto the profits.  True, last year also had some unusual extra costs in it, but the two issues roughly balance, and there is worse on the horizon for the club.

3: The Glazers have no way out of their current position of raping the club financially since all their other businesses are in difficulty.  They need the money from Man IOU each year, and can’t repay any debts.

4: Man IOUs squad contains several older players who must give up soon.  Man IOU won’t get any money in sales for them, but they will save a little on salaries.  However they will probably have to buy replacements, and that will throw their profits out even more.

5: Marketing and ticket revenues at Man IOU are starting to slip.  They have been excellent at marketing in the past, but their brand image is tarnished, and there really isn’t much room left for expansion.  The pride of wearing Man U shirts has been replaced in some minds with a dislike of being seen as a pawn of the Glazers.

6: The bond issue put restraints on what Man IOU can do, such as the need to keep vast sums in the bank.  And when you are trying to fight your way out of a tough situation restraint on options is the last thing you need.

7: Selling is becoming less of an option, because most of the clubs who would look to buy Man IOU players, are themselves either under pressure from the banks (like Barca) or are desperately trying to reduce their losses so that they can qualify under the financial fair play rules.

So that’s the in and out of it all.  But the problem is the last thing in the world Man IOU ever want to do is admit a problem, simply because that would make their relationship with the banks, their supporters and the anti-Glazer gang even worse than it is, and it would devalue the bonds.

Hence Man IOU’s spinners spin faster and faster in changing the story.  They play games by talking about operating profits being over £100 million (operating profits are just a line half way down the balance sheet and you get them simply by not taking into account the payment of interest on your debts) and £164 million cash in the bank – all while failing to address the fact that this last accounting period they made a record loss of £84 million.  The losses all come because of the interest they pay to the banks and the hedge funds.  In fact by and large you could say that Man IOU and Liverpool Insolvency (now Liverpool America) has been instrumental in rescuing the banking sector in this country by giving them so much work and borrowing so much money.

Man U is currently paying about £40 million on player amortisation (ie decline in value of players in the accounts) as well as a further £9m  depreciation on other assets like computers, desks, table lamps and other odds and ends.  Then there is a further loss because the owners paid what is known in the trade as “goodwill” – that is they paid more for the club than the assets were worth.  To be fair, that is not unusual in business – most businesses that look like they are doing well sell for more than their value, in order to account for future profits that accrue simply because they are there.   This “loss” is paid off year by year as well.

So in short, Man IOU generates lots of money (the cash from the season ticket holders and TV firms) but then spends it all on players wages, interest payments, directors fees, loans to directors and stuff like that.   Worse, the accounting processes will continue to work against them, unless they can sell some players for more than their value on the books.

Ideally they need an Adebayor.  He cost (about) £3m, which by the time he was sold his value was reduced to zero on the books.  But we sold him for £25m.  So that is a straight £25m profit on the books.  Man IOU need to do that quite a few times – for as we have seen the one off sale of Ronaldo was not enough to remove one year’s debts.

In fact it costs Man IOU around £40m a year just to pay the interest on their loans – and if they are to go into profit they need extra revenue to pay cover that loss.

There’s another point – or rather I would say a guess – that I would make.  Man IOU have refinanced twice in the last four years, and I wouldn’t be surprised to see them do it again in due course.  Each refinancing comes because they need to shuffle money around because of the decline in Glazer revenue elsewhere – and each costs the club a small fortune (certainly over £40m).

Of course they won’t refinance next year, so they will save a lot of money then.  But then they won’t sell Ronaldo next year, so that’s a loss.  The two might balance out.

There’s another little detail which crops up in the serious analyses of Man IOU – the infamous PIK loans.  These are the ones that the club always say are not Man U debts but Glazer debts.  Except that the Glazer’s secured the PIK loans against Man U itself, so if they ever failed to pay the holders of the PIK loans could start claiming against Man U.  The PIKS knock up getting on for £30m a year in interest, and the only place the Glazer’s can raise money (given that all their other businesses are making a loss) is by raiding the piggy bank at Old Trafford.  That to me makes them sound like Man IOU debts, but the Glazer’s think otherwise.

So, to put it in a nutshell, Man IOU earn £40m a year more than Arsenal, but have to spend so much on interest and money for the owners, that each year they lose loads of money, while Arsenal make it.  What’s more I have a suspicion that Man U’s marketing has peaked, while Arsenal’s is really starting to ramp up.   I must admit that the Glazer’s were right when they said that the revenue at Man U could be increased greatly, when they first took over.  But whether that will continue, given the harm they have done to the brand remains to be seen.  They will get extra TV money this year, as this season is the start of a new improved TV deal, but whether it is enough to balance a decline in marketing income, ticket sales, decline in season tickets and so forth, only time will tell.  But even stagnation would be a problem for the club.

Again on the positive side there will be extra money from overseas TV, and from a new range of sponsors who don’t seem to care too much about their image being associated with the Glazer’s, but then the wage bill is going up all the time – even when taking into account the retirement of the old brigade.

By now we have moved firmly into the zone of guesswork, but I would throw in one final point here.   Man U have never before been restrained about buying players at top prices – just like Barcelona and Real Madrid.   But suddenly the buying has stopped.  To me the story from Sir F Word that there are no good deals to be had just does not ring true.  That seems to me a fair bit of evidence that the economy of Man U is at breaking point, and the Glazers are simply not going to release money for players – especially as long as the club stay in the top four.   When they drop out, it will be too late.

Of course one way out of all this could be the end of the Glazers. But the Glazers have a lot of shopping malls that are not only not earning them cash, but actually being repossessed by banks and the like.   The Glazers need Man U because the Glazers have no other source of cash to pay for their defunct shopping malls with shops they can’t let.  So no, they don’t want to sell, even if a credible company came along to offer them a way out.  And as long as they don’t default on any debt, no one can force them out.  The Liverpool situation does not apply, at the moment the banks love the Glazers.  The Glazers pay the bankers bonuses.

So what will Man U do?   They reckon that the current situation is a one-off with lots of losses due to special events.  They will also argue that some losses (like depreciation of fixed assets) won’t count when the final tally is done.  They think they will qualify for the financial fair play rules.

No one knows if that is right, but supposing it is – there is still the fact that just as the costs relating to the bond issue etc were a “one off” one might also think that the sale of Ronaldo (for which Man U was paid in one go) and the failure to sign anyone at a high price over the past year, was also a one off.

If Sir F Word starts buying again, but has no one he can offload other than those in the 35+ years bracket, then I think the decline in costs because of one-off events will be overcome by the need to pay higher salaries and buy new players.

And there is always the problem of Man U going through a transition.  Arsenal’s five year transition to a point where we can go the Newcastle, put out a team with nine changes from the last league game, and it still looks like a phenomenally strong side made up of first teamers) has been done without slipping out of the Champs League.   But no other club has done such a rebuilding progress and maintained such a status.

If Man U were to go out of the Champs league they lose say £50m a year.  Which is what has just happened to Liverpool, and happened two or three years back to AC Milan (just as Flamini arrived, if you recall), has happened to Barca and virtually all the other top clubs.    The Anti-Arsenal mafia decry the achievement of Arsenal staying in the Champs, but it is extremely rare for this to happen.   Man U slipping out would be the norm during a rebuilding process.

Now we are in the realm of total speculation, and so it is time to stop.  But I would say this.  Arsenal’s model has lots of lee-way.  We could still pay the mortgage on the Ems without selling out for each game, and without being in the Champs league ever year.  And we have lots of cash around, because we make a profit each year.

Man U are on a knife edge, gambling that the special one-off payments last year were larger than the one-off rebuilding payments needed next year.  Maybe so, maybe not.   But one thing is sure.  One slip, and it all falls apart.

Final thought: For the best in depth analysis of football finance do keep an eye on the excellent Swiss Ramble