Glazer reign continues to drain Manchester United

July 31, 2012 in Premier League

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Back in 2004, when the Glazer family began to position themselves to take charge of Manchester United, Chief Exec David Gill uttered the famous words “debt is the road to ruin” - yesterday, for the umpteenth time, he was proved right once again. Though Gill claims to have since seen the light and now whole heartedly backs the Glazer ownership, it is now more than ever undeniable that the Glazers are a cancer to Manchester United, hold the fans in contempt and will always put their self interest ahead of the club. When on the 30th of April, Vincent Kompany headed Manchester City to victory at the Etihad Stadium to send them back to the top of the Barclays Premier League and on their way to the title, the Glazers were busy registering Manchester United in the Cayman Islands - a sad day for all Manchester United fans and the starting point for yesterday’s revelations.

The financial terminology and numbers can seem daunting and difficult to grasp, so using the questions below, I will seek to explain what is in truth a fairly straightforward situation.

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What exactly happened yesterday? 

Late last night, Manchester United’s flotation on the New York Stock Exchange officially began - an Initial Public Offering (IPO). The club will sell 10.2% of itself, with 16 million shares on offer, priced between $16-$20 - this values the club at an astounding $3bn (£1.92bn). This means the club hopes to raise $300m (£192m) in exchange for 10% of the club. The shares sold will receive no yearly payments in the form of dividends and hold absolutely minimum voting rights.

A further 10% of the club will be gifted to senior management at Manchester United, through 16million shares, under the guise of the “2012 Equity Incentive Award Plan”. It is unclear who this involves, but it would be reasonable to expect it includes directors, board members and even the manager Sir Alex Ferguson - basically anybody in a position of power at the club.

So yesterday 20% of Manchester United was given away, 10% on sale and 10% in gifts.

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So what is that money going to be used for? 

A revised prospectus for potential investors was released; in the original prospectus released a few weeks ago, the Glazers promised that 100% of the proceeds from the IPO would go towards paying down Manchester United’s increasingly troublesome debt burden. However, the revised prospectus was a total u-turn. Instead, less than 50% of the proceeds would be used to pay down debt (£75m), and the rest of the proceeds would go directly to the Glazer family, in the form of $25m each to six Glazers, a total of $150m (£95m).

This means that 20% of value has been taken away from the club but the club benefits with just £75m. The club is valued at just under £2bn, therefore £400m worth of value has been taken from the club for just £75m - a bad deal all things considered.

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Right, but how is this going to impact the debt?

Well, debt is down. Debt currently stands at £425m, so the £75m repayment sees debt fall to £350m. It’s positive, but it must be looked at relatively, the idea was debt would fall to £233m.

What is also crucial is how this impacts the interest payments related to the debt. These interest payments currently total to £45m a year. That is money which the club pays from its profits and it has no impact on the total debt, it just serves to ensure banks don’t begin to repossess the club - it’s wastage. Those interest payments will now fall, but only to £38.5m. That gives the club an extra £6.5m a year, or £4.2m a year after tax - an ineffectual amount. Had all the IPO proceeds been used to pay down debt as was previously promised, interest repayments would have fallen to £28m a year, giving the club an extra £17m a year - a far more significant amount which could be used to sign new players or give current players competitive contracts.

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This sounds pretty bad, so why would people invest in this IPO?

A mystery to us all. As mentioned beforehand, the Glazers have placed an incredulous valuation on the club at a little under £2bn. A true value would be closer to £1.5bn. Furthermore, this IPO is being served up in a torrid financial climate, meaning investors are hesitant to touch even reasonable investment opportunities, never mind inflated ones. As if that wasn’t discouraging enough, the shares earn no dividends, so there is no short or medium term benefit in buying these shares. To compound that, the shares bought hold minute voting rights, the Glazers will retain over 97% of voting rights, meaning shareholders have little to no say in the direction the club takes and future decisions.

The only possible basis on which investors may be tempted is if they see the club raising its value in the future allowing them to sell their shares at a later date at a profit. It is likely the club’s value will rise as money continues to flood into football, but with the club already £500m over-valued, it would take a near miracle for the clubs value to rise to a point where share holders could sell at a profit.

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So it sounds like this is going to fail, what happens then?

It does sound like a farcical investment opportunity, but that said, similarly bad deals have managed to lure investors. However, those opportunities came along a wave of hype, whereas the MUFC IPO has been taking a battering in financial journals across the world.

Because of the way these things work, a group of banks have “underwritten” the IPO - this means that even if investors run a million miles, the Glazers and the club will still get their money. However, usually the underwriters agree to buy the shares at a discounted price. Just what that price is remains to be seen, but what this means is that if the £192m worth of shares is instead bought by the underwriters for, say, £150m, it is likely that the Glazer family first take their alloted £95m and leave the club with just £50m to pay down debt, instead of the already massively reduced £75m.

If the IPO does fail and underwriters do step in, it would be a massive embarrassment for the club and the Glazers, and show once again clearer than ever that the club is in a real bad way and the Glazer ownership is harmful.

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Why are the Glazers doing this? 

The Glazer family have no interest in benefiting Manchester United other than the bare minimum. This is an opportunity for them to make a lot of money from the club. As has been outlined, it’s a very rash and certainly not an ideal way to go about it. Whilst it’s difficult to give solid reasoning and evidence for their actions, it has been widely reported that the Glazer family business back in the United States is at its knees and that the family has many debts to pay back in the near future. This is a sign of desperation by the Glazers. It is worth remembering that little over a year ago, the family had planned to float in Singapore for $1bn in exchange for 33% of the club. This is already a massively reduced offering and the Glazers must know there is little demand for these shares. To push ahead with this type of offer in current markets is nothing short of bad business.

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What does this mean for the club going forwards?

It’s tough to say. For the moment things will largely continue as there are. Debt repayments will hardly budge and life will go on as it has been, prices rising, limited transfer spending, general stagnation. This is troubling for Manchester United because standing still sends you backwards in football. Manchester City are a genuine and real threat now; more than that, they are champions and comfortably the Premier League’s best side. Chelsea have spent massively this summer and beat Manchester United to the signing of Eden Hazard, and you wonder if that would have happened if Manchester United had more money available to them. The Manchester United squad is weaker than it has been before, and there are still clear problems in the side, yet they are not being addressed. Last season was United’s worst in a long time, you would have expected the club to go out and spend money to rectify that, but as of yet the spend has been small.

Back on the financial side, we will have to see what direction this IPO takes and how it impacts on other facets of the club. One thing is for sure however, fans are irate and that is never a good thing.

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Depressing. Give me some good news.

I wish I could. Sadly, there isn’t much good news to be given. The revised prospectus claims that this summer Manchester United will spend £50m net on transfers…that is promising. The problem is, it’s probably a lie. The Glazers have lied time and time again, so there is no reason to think this is any different. When they took over the club, they promised a net spend of £25m every summer, but in seven years, the net spend has been just £50m. I would be amazed if the Glazers sanctioned as much spending as they have in seven years, in just one summer. That said, because of the outrage amongst fans because of the IPO…it is possible they will seek to sign a star player to appease them, but I wouldn’t get my hopes up. The Glazers aren’t interested in what makes Manchester United fans happy.

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Ferguson’s going to be pissed, right?

Ha. At this point, I think Sir Alex Ferguson stands right alongside the Glazers. He has repeatedly backed their ownership and praised it to the heavens, claiming they are brilliant owners and that he doesn’t have a complaint to make. He has recently said that “real” United fans would know the Glazer ownership is a good thing, and in the past has said that if we don’t like it, we should “f**k off and support Chelsea”. Some will argue that Ferguson has to back them or at least not speak out to benefit the club, and they may even be right, but examples such as those above show Ferguson is more than happy to openly condemn the support which has been so loyal to him. The revelation that he is more than likely in line for a cut of the club makes me doubt his intentions.

Whatever happens now, Ferguson has harmed his legacy in backing these owners as they now begin to plunder the club for its riches. He may well be a great football manager, but can you really say he is a great man?

 

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