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Tuesday, January 24, 2006

MUST response to Gill on Radio 5

United Chief Executive David Gill was on BBC Radio 5 this morning (Sunday), giving us a sneak preview of the Manchester United 2004/5 financial results, in advance of official release tomorrow. Below are the highlights, with our view of the significance. However they are spun, the results are not good for the club or for the Glazers.

These figures are for the 11 month period to 30 June 2005, the Glazers having brought the financial year end forward by one month when they took over.

Operating profit (EBITDA) £46m (2004 - £58m) = down £12m
Pre-tax Profit (P-TP) £12m (2004 - £27m) = down £15m
Agents fees £2.2m
Takeover costs (legal, banking) £6.6m

Gill said on R5 the future is bright for United and the forecast for 2006/7 is “very good” but refused to confirm that the EBITDA numbers would be as good as 2004 (£58m).

He also confirmed that Fergie is in the job for “years to come” (as long as he wants?) and the Glazers are in agreement with that.

MUST comment:

1.EBITDA is down due to (i) FAPL revenue decline of £6m for finishing 3rd and (ii) Champions League earlier exit in 2005. Contrary to Glazer’s business plan expectations, EBITDA and P-TP are heading south and next year’s figures will not be helped by this year’s even earlier exit from the CL at group stage, declining attendances & ticket demand at OT* and (we hear) falling merchandise and other sales. Drastic price rises or new revenue-generators are desperately needed by the Glazers.

2.This year’s figures did not include any significant debt interest element, as most of the debt was put onto the club after the June 2005 year end. But next year, P-TP will be hit by a debt service bill of £63.6m (interest on the £374m JP Morgan loans plus £19m repayment of bridge loan). We forecast nil or near-nil Net Cash for transfers next year, meaning that to fund player purchases over the summer, Glazer will have to dip into his own funds. He has been selling his companies in the US, so perhaps we can now see why.

3.The hedge funds will be able to appoint 25% of the Boards of Red Football and United if EBITDA are not at least £48.5m in 2006 and £75.7m in 2007. It’s looking tough. The forecast EBITDA for 2008 is £107.7m – how on earth do Glazer and his banks think he can reach this number with everything pointing the other way?

4.P-TP for 2005 was also hit by the £6.6m fees Utd spent on fighting the takeover, but note that Glazer’s own fees to banks and lawyers were somewhere between £30-40m and these have been loaded onto United in the form of additional debt. The combined total of all fees spent on this takeover (more than £40m) would have paid for at least two world class midfielders.

* Total recorded attendances at OT this season (from the official MU site) for the first 14 home games (incl. cup games):

= 881,136

Capacity at OT for those 14 games @ 67,800 = 949,200

Total attendance as % of capacity: 92.82%

Lost revenue to date @ average £30 per ticket £2,041,920

We can assume that, based on previous years home attendances at close to 100%, this decline was not in the business plan. There is a significant drop in the cup games since even last year – e.g. there was a full gate in the 3rd round FA Cup tie against non-league Exeter in Jan. 2005.

Demand for tickets to United games has up to now always well outstripped supply – two years ago, we were told by the club, demand was average 12,000 over capacity for every home game. This season? Close to zero. How to tell - look at the MU website before every home game. Tickets are always available, sometimes on general sale at the gate on matchday. Cheap tickets are offered by email to local schools, even for some PL games – we have evidence of this. Executive packages are regularly offered at half price and it is no longer difficult to get tickets for a game (other than the big ones - Arsenal, Liverpool, Chelsea and Man City).

We are also hearing of United’s possible plan to offer frozen season ticket prices next year, but ST holders may be forced to buy an additional 6 domestic cup tickets as well – so a ST costing £540 now could cost £725 next year for 25 games (some other clubs do this). Subscription to the automatic cup ticket scheme has collapsed and there must be a real concern about this year’s and next year’s cup attendances. Although this proposal would be intended to ensure that cup attendance and matchday income remains high, it remains to be seen how fans will react to being asked to pay much more upfront than they have historically. Worse still - there seems to be no plan for refunds if United fail to play 6 or more cup games.

For anyone wanting to know what EBITDA means (from Nick)

Also, EBITDA can be called revenues less the direct costs of running the business (like salaries), but before additional costs (like Interest, Taxes, Depreciation, and Amortization ).

Banks also use EBITDA to measure whether a business can afford loans (interest and repayment) and the JPM loan agreements will have covenants in case United breach the EBTDA targets. United’s EBITDA looked healthy for a few years, but may have peaked. So JPM and the hedge funds will not be pleased with these results.

Expect some drastic action to find new areas of profit and increase existing revenues.


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