Friday, October 8, 2010

Manchester United results 2009/10: first thoughts


Results review




Revenue up 2.9% year on year, compares to 10.2% pa achieved 2000-2009. Lower growth down to "poor" season vs. 2008/09 impacting matchday and TV income. Media is boosted by the start of the new three year CL deal. Commercial growth remains strong.

Costs control at United has been very good. Like all clubs, wages continue to rise sharply (up 7% despite lower player bonuses) but other costs are down 15% leaving total costs flat. Much of this is due to fewer home games than last year and lower travel costs (not flying to a CL final sadly) and there is also an impact from lower expenses relating to various commercial contracts (these are not detailed or quantified and look to be a one-off).

With costs flat and revenue up 3%, EBITDA (pre-exceptionals) was up 9.5% to £100.8m. As ever United is a very well managed football club.

Below the EBITDA line we are back in horrible world of Glazernomics.

The £35.4m goodwill amortisation charge should be ignored, it's an non-cash accounting charge caused by the 2005 takeover and isn't a real cost.

The interest bill of £40.2m includes seven months of bank interest and five months of bond interest. It will be closer to £45m in the coming year.

The "amortisation of issue discount" of £6.7m reflects the fact that the bonds were issued at c. 2% discount to their face value (of £100 or $100) but must be repaid at that face value. The difference is accounted for every year to 2017, but the cost won't actually be incurred until they are repaid in 2017.

The big "nasty" in these number is of course the cost of terminating the swaps (which we learned about at the third quarter results). These swaps are derivative contracts taken out to hedge the interest paid on the old bank debt. The club fixed at a high rate in 2007 and by the end of 2009 when it came to unwind the contracts was sitting on a £40m loss. Although the whole amount is reflected in these accounts, only £14.6m has been paid in cash in 2009/10, the balance will be paid over the next six years. These derivatives were only required because of the debt placed on the club in 2005. This is £40m of costs incurred for no benefit to the football club at all.

The final interest related cost is the unrealised foreign exchange loss of £19.2m. This is another non-cash item reflecting the fact that at today's exchange rate, the cost of paying back the US dollar denominated bonds would be £19.2m higher than their original (sterling) value. As with the "amortisation of issue discount", this can be ignored. Who knows what the exchange rate will actually be in 2017.


Other key points

No money has been paid out of the club to redeem the PIKs. I have no rational financial explanation for this and nor does anyone else I have spoken to in the market. Without sounding like a poor man's Mystic Meg, I can only reiterate that I can see no other source to repay the PIKs other than United and that £70-95m will be used to do so at some point soon.

Net transfer spending (in cash so including ongoing payments for players acquired/sold in previous years) was £30.4m. Actual "additions" in note 11 of the accounts are shown as £25.7m, i.e. players with a value of £25.7m joined the club during the year regardless of the timings of payments. The club reveal that since the 30th June year end, further players have been bought for £8.3m. I can only assume this is Bebe.


Initial conclusions

Thankfully United is not Liverpool off the pitch or on it. This is (operationally as a business) the best run football club in England, it has been for nigh on twenty years. Manchester United are at no risk of going bust.

The tragedy for the club is that so much of the profits are wasted in interest, fees and charges. To ensure the club can cover these, ticket prices are far above the level they would need to be if the club was debt free. Net investment in the playing squad is low and the coincidence with the need to service the debt is too great to ignore.

More to follow.....

LUHG