Did United have to sell Ronaldo to balance the books?

Posted: January 11, 2010 by mcdonaldtaf in Business, Finance
Tags: , , , ,

Interesting figures were posted on the Manchester United website today showing that while the club made a profit of £48.2m they had to sell Cristiano Ronaldo to do so. Had this record-breaking transfer not happened United would have, in all likelihood, incurred a £31.8m loss. No doubt compounding the problems of the previous year when the club incurred a £21.4m loss.

So is this what its come to in the premiership, the most successful club both from a footballing (in the premiership era only) and commercial perspective is having to sell its star players to balance the books? This is despite United continuing to grow, with all turnover categories up and overall revenue generation (excluding player transfers) up by over 8%.

Are the alarm bells ringing yet? They should be and for several reasons:

1. United’s overall business model is the nearest to our own. Both businesses have significant debts and have been impacted upon by the credit crunch and reluctance of lenders to continue lending (Arsenal are a PLC and both Chelsea and City are in the ‘sugar daddy’ club of ownership). As I have written before the lending boom allowed clubs to accelerate their growth plans by borrowing to fund on the pitch success and commercial expansion, both of which would allow for longer term returns without the need for major personal investment. This allowed entrepreneurs to spread themselves across more businesses hopefully fuelling greater returns in the future. The retraction of lending during the investment period in the business plan cycles has caused a significant amount of ‘cloth cutting’. I have commented several times that it was no coincidence that United didn’t make any big signings in the summer.

2. The interest on United’s debts was £41.9m. So without this interest the club would be profitable even without the £80m acquired for Ronaldo. This is not unlike our own situation where our last accounts for Kop Holdings would have also shown a profit without the interest payments.

3. We are both owned by Americans who have other sporting ventures, which are no doubt leveraged and suffering from the same problems. So the owner’s personal capital reserves or lending abilities (if required) are spread across more than one business. This was all well and good when they could borrow to support their plans. But now they have banks calling in loans across several businesses, in our case no doubt exceeding our owners’ available cash. Hence the sale of significant assets across the pond from both.

Since the credit crunch really hit, the original business plans employed by both clubs is simply not sustainable. Despite low-interest rates lenders are simply too cautious. No doubt recognising, as suggested by Robert Peston recently, the fine line between success and failure off the pitch is inextricably linked to winning on it. Simply put several clubs all can’t win the premiership every season, never mind the number of teams vying for the champions league.

It is surely a sign of the actual liquid assets these owners have that when the lending stops so does the investment (and thus growth). This is why United are now looking at new ways to borrow money without diluting the Glazer family shareholding. These two businesses, the two most successful english clubs, so alike but so opposed are not sustainable in the long-term without investment, borrowing or cloth cutting – we at Anfield seem to be trying to create a mixture of the three, and we need to!

So we’re under way with a major change in plan, as are United. In the meantime, as in any other business, you cut back on your staff costs (transfer activity) and other growth opportunities while you adjust. Christian Purslow is confident that investment will be forthcoming and Ian Ayres is just as confident in selling the naming rights to the new Anfield; both of which together could raise anything up to £400m. There is no reason not to believe either of them as Liverpool Football Club remains a strong brand with untapped potential, more untapped potential than United I would suggest. However, I am in no doubt that should we fail in creating additional commercial revenues or investment then it is only a matter of time until someone will need to balance our books.

  1. robbohuyton says:

    So Alex Ferguson is a liar and Tom Hicks and George Gillett aren’t? 😉

    Fergie reckons there is plenty of money to spend at OT and says the only reason he isn’t dipping into the transfer market (as yet) is because he sees no value in it.

    Ferguson said: ‘Their (the supporters) concerns are down to the fact that I haven’t moved in the transfer market, but that’s nothing to do with the Glazers or with (chief executive) David Gill. It’s simply because I am not going to pay £50m for a striker who is not worth it. That is the kind of money they are talking about for the best strikers who are around.

    ‘I don’t have any concerns about the financial situation. There is absolutely no issue at all with the club’s finances. I have no issue at all. I am really confident about that.

    ‘I could easily have spent the money from the Ronaldo transfer but I didn’t want to do it because I couldn’t see any value in he market. I can spend the money – it is there. There has been talk about a bond issue and I think that’s a good thing for the club. I think anything that helps with the repayment of the debt is a good thing.

    ‘There is debt there but it has never interrupted my plans for the team – at any stage. No. Believe me there is no impact.’

    Read more: http://www.dailymail.co.uk/sport/football/article-1241762/Sir-Alex-Ferguson-There-cold-war-Glazers-Manchester-United.html#ixzz0cJyyAPOo

    Bit different from the kind of thing you hear Benitez saying isn’t it?

  2. mcdonaldtaf says:

    I think the difference is that the Glazers are probably saying “Alex we could do without spending this money, unless you really need to.” Wheras H&G are saying “Have you seen our pot Rafa, we’re bursting?”

    In fairness I would imagine the profit was available to Ferguson, or certainly a large % of it so his response would be truthful. But like I just said to Richard longer term, after selling the golden goose, who goes next to make up for the deficit brought about by interest payments, Rooney or 2/3 other players?

    The current model is unsustainable now the credit bubble has burst. Interestingly Peston reckoned the bond issue would be more expensive. This could possibly indicate that the banks want their money back and the Glazers don’t have it. Exactly the same situation as ours.

    • robbohuyton says:

      Have you read about how David Dein raised money at Arsenal to rebuild the Northbank? That was a bond issue connected to some crap offer of reduced season ticket prices. Rightly, a lot of Arsenal fans kicked off. Yet others blindly bought the bonds and the stand was built – happy days.

      If the Glazers can dream up a solution involving a bond available to fans there will be enough gullible people worldwide who will go for it.

      It looks like it’s definitely happening as well: http://online.wsj.com/article/SB10001424052748703652104574651821203718010.html

      • mcdonaldtaf says:

        If they can pull it off I can (now) see how it may be beneficial, if managed correctly. It could benefit their profit a bit (nothing major) but the main benefit is in the cash flows.

        While they would have to account for the interest accrued in their P&L each year the cash would not have to be paid out, like it is now. So in theory they could bank or invest the £40m (they would have paid in interest) each year and make a return on it. In fact thinking about it they could possibly make a handsome return on it. It’s actually quite clever, although raising £500m could be a tall order.

  3. robbohuyton says:

    What I find amazing about the whole thing – and I read Paul Tomkins expressing similar disbelief – is that someone can basically rock up, buy a club, then throw the debt back on the club. Unbelievable.

    Another article for you btw – this, I thought, was excellent:


    • mcdonaldtaf says:

      That’s where we land back at my dissertation (which I’m still not getting any help from the club with, surely they could do with some good PR now?). It’s not about buying a club anymore, or its traditions or community roots. It is (or has been) about buying a ‘business’ and the leverage model is considered by some an efficient and normal business practice.

      Consider the tax implications (or savings), no tax to pay because you didn’t make money (due to interest) but all the while you’re increasing the value for ‘cash in day’!

      Then ask why someone from abroad is going to tie up their own personal cash in a venture in another country.

      Everything that’s happening is just standard business practice. I’m not saying it’s right and it certainly rubs fans (customers) up the wrong way but what are they going to do? We’re not going to start supporting Everton are we? It will be a choppy ride for the owners, but I’d take a choppy ride for a few hundred million in a few years!

      We as fans are struggling with this change, and not just at LFC. There has been unrest at Chelsea and MUFC as well. It’s taking the fun out of it all isn’t it?

  4. robbohuyton says:

    Last sentence – nail on head.

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