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Thursday, February 02, 2006

David Conn writing in today's Guardian

'In the week or so since Manchester United published the final accounts of their plc era, the Old Trafford PR people have made manful efforts to persuade fans into some greater acceptance of last June's takeover, which saw United into the ownership of the Florida-registered Malcolm Glazer Revocable Trust and loaded with debt.
The Glazers are unlikely to speak publicly again, with Joel, one of Malcolm's three sons, having subjected himself shortly after the takeover to the white heat of an interview with the club's in-house television channel, MUTV. Having bought what the Glazers describe approvingly as one of the world's most high-profile sporting names, they are, it is said, private people. They do, though, employ City of London PR representatives, who do not want to be identified for fear of a backlash from fans but are trying to tackle the ingrained Old Trafford hostility to the takeover and United's new, multimillion-pound, debts where previously there was cash in the bank.

Most directly United and the Glazers are mounting the argument that in the grown-up commercial world the debt is nothing to worry about. Only last April David Gill, United's chief executive, was saying the opposite, the then board stating that the Glazers' financing plans proposed "more leverage [debt] than the board would consider prudent" and were liable to put "significant financial strain on the business".
Last week Gill, now an employee of the Glazers - no doubt earning a similar package to the £1.009m he was paid in the 11 months to June 2005 covered by the accounts - said publicly he is, after all, satisfied that the Glazers' financing plan is "sensible" and "serviceable". That rationale, however, tends to crumble when you push the PRs for a bit of detail. Gill began by explaining that the three US hedge funds, who lent £275m of the £810m total price paid for United, at punishing interest rates of 14 and 20%, do not threaten the club's financial ballast. The Glazers, he said, not the club, would be repaying the hedge funds "from their own resources or refinancing plans".

United, Gill continued, are paying off only the other chunk of debt, the £265m the Glazers borrowed from the merchant bank, JP Morgan. Then Gill said something intriguing: "The cost of servicing the interest on that debt is not in excess of what we were previously paying in dividends and corporation tax as a publicly quoted company."

So, after all these years as a plc chief executive, during which all supporter opposition to stock market status was waved away, Gill is now saying, after all, that it was an expensive structure which leaked money out in dividends.

But aside from this irony, his suggestion that it was as costly as paying Glazer-scale interest, even on just the £265m, does not seem to add up. According to the Glazer bid documents lodged with the lawyers, Allen & Overy, last June, the interest on that JP Morgan debt varies between 7.35% and 11.10% annually, adding up, in this first year of the takeover, to £23.8m in interest alone. That is way above United's payments last year in corporation tax, £4.2m, and dividends, £3.4m, £7.6m in total.

As for the hedge funds not burdening United, Gill's reassurances may not be as straightforward as they appear. Currently, true enough, the interest on the hedge funds' £275m is not being paid out of United's income. In fact, it does not have to be paid at all until the whole hedge-fund debt is repaid. Meanwhile the interest is accumulating frighteningly quickly, up to £38m already. As Gill said, the full repayment will indeed be done "from the Glazers' own resources or refinancing plans", but that hides a devil of detail.

When the Glazers refinance, which will be relatively soon, they will seek to replace the hedge funds' borrowings and eye-watering interest rates with money from elsewhere. The Glazers spokesperson said they cannot yet tell supporters how the refinancing might be structured. The family may find more cash, adding to the £270m they have paid already, they may sell and lease back Old Trafford or find some other device to lever in a different kind of finance. However they do it, though, it is difficult to believe they will take care of repaying all the hedge funds' £275m, plus interest, with straight cash. Some, at least, is almost certain to be replaced with new debt, which will be added to what United owe directly already. What Gill said applies only to the very short term; the hedge funds are not being repaid just yet, so do not burden United. After the refinancing, however, United are very likely to be servicing a much higher debt than just the £265m.

But the Glazer PR was clear about one thing: United is "a stand-alone business", the interest on its debts, however large they grow, will not be subsidised from the family's other wealth. In other words, United's income must pay all the interest burden produced by the takeover. When you worry at the scale of debt, the City PR people sigh. "This is normal," the spokesman told me, "for any leveraged [debt incurring] buy-out".

That, again, is true, agrees Nick Towle, the chair of the Manchester United Supporters' Trust, himself a corporate lawyer, who maintains his total opposition to the takeover. "Leveraged deals do happen in industry. Buyers have the debts to service and they cut costs, lay off staff. In United, in a football club, the main costs are players' wages but you can't get rid of your best players or the club's performance irreparably suffers. And we don't believe they will make the extra money they need to service the interest. We're genuinely worried about what this level of debt will do to our club."

Glazer spokespeople are at pains to soothe: "The family is comfortable with its acquisition of Manchester United. They take a long-term view. They turned round the fortunes of [the NFL franchise] the Tampa Bay Buccaneers, so have a pedigree for running sports businesses. If you look at Premier League football's popularity, at how the world is developing and how much leisure spend is increasing, the family believes that long term they will make a success of Manchester United and get something out of it."

They promise that the Glazers' United will achieve a better sponsorship deal than the current one recently terminated by Vodafone and secure more profit in a range of activities. They can make the future seem bright. But one of the stubborn Premier League ironies has been that, although the clubs have indeed become huge global names, for all the Far East tie-ups and US tours clubs have found it difficult to turn this worldwide interest in football into cash. Of United's £157m total income last year, just £383,000, 0.24%, was made commercially overseas.

Around a third of United's income, £48.4m, came from media rights and £42.4m from commercial activities. The largest earner by far, £66.3m, was made in one nondescript corner of the globe, Stretford, from an old-fashioned activity colloquially known as "going to the match". For all the talk of world markets, as the stadium expands to 75,000 capacity the Glazers' plans rely hugely on demand holding up at Old Trafford.

There, as at other clubs, fans' loyalty appears to be finally weakening after years of price increases, shuffled kick-off times and commercial overkill. There were 7,000 empty seats for the Carling Cup semi-final against Blackburn and, for the first time in years, there is an underlying rumble among fans about not renewing their season tickets and instead taking their chance game by game from next season.

For all the efforts of Gill and the City PRs there is still a sullen sense at Old Trafford that one of football's great clubs has, for no reason other than financial speculation, been plunged into an uncertain future.'


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