Wednesday, September 7, 2011

Manchester United - Introducing The Brand

Manchester United’s start to the season has been exemplary. Not only are they top of the league after winning their first three games, but they have also scored an impressive 13 goals in the process. They have already put North London to the sword, brushing aside Spurs 3-0 before spanking Arsenal 8-2 in one of the most extraordinary matches that the Premier League has ever seen.

If there was any hangover from their demoralising defeat to Barcelona in the Champions League final, when the Catalan side thoroughly outclassed United, it was difficult to discern. In fairness, 2010/11 was still a fantastic season for the Reds, as they won the league for the 19th time, a significant milestone that took them past the 18 titles gained by bitter rivals Liverpool, and reached the semi-finals of the FA Cup.

That wily old fox, Sir Alex Ferguson, then wasted no time in rebuilding and rejuvenating his aging squad, when he paid out more than £50 million to bring in the exciting Ashley Young from Aston Villa plus two U-21 internationals, Phil Jones from Blackburn Rovers and David de Gea from Atletico Madrid. Although the Spanish goalkeeper has had some flaky moments, these purchases look like really good business, especially as it was concluded early in the summer, thus avoiding the insanity of transfer deadline day.

It was also a great season off the pitch, as United announced a 16% rise in revenue to £331 million, the highest ever reported by an English football club, which helped boost operating profits to a record £111 million, up 10% from the previous year. This produced a fantastic turnaround in the bottom line, as last year’s pre-tax loss of £80 million became a £30 million profit this year, an incredible improvement of £110 million in just 12 months.

Great stuff, but not quite the miraculous achievement it might seem at first glance. In reality, there are three factors behind this recovery: (a) accounting adjustments; (b) exceptional items relating to last year’s bond issue; (c) and real growth.

The first two reasons are horribly technical, but seasoned followers of United’s financials are no strangers to fancy footwork in the accounts, and these need to be explained if we are to understand what is really happening to the business.

This year, the club has decided to switch from UK GAAP (Generally Accepted Accounting Principles) to IFRS (International Financial Reporting Standards) and so has restated the 2010 results on this basis to give a valid like-for-like comparison. This has reduced the prior year loss to £15 million, an improvement of £65 million, which largely comes from two sizeable adjustments.

"Young, gifted and back"

First, the goodwill amortisation of £35 million resulting from the acquisition of the club has been eliminated. When the Glazers’ purchased the club for £790 million, the “fair value” on the balance sheet was only £260 million with the difference of £530 million representing brand value and future earnings potential. This is known as goodwill in accounting terms and is amortised on a straight-line basis over its estimated economic life (15 years in this case), i.e. £35 million per annum.

Second, the once-off charge for the termination of interest rate swap agreements was reduced by £29 million from £41 million to £12 million. This swap was a derivative used to hedge against movements in interest rates, but the club did not anticipate that they would fall as far as they did in the recession. The loss was crystallised on the switch from bank loans to the bond, though the club claimed that this was still a price worth paying, as the bond would provide them with more financial stability.

There is nothing untoward about this change in accounting policy, even if the mechanics are fairly tedious, with the key point here being that there is no impact in the real world, as there are no cash movements.

"The Nani state"

Similarly, the movement between the exceptional items relating to last year’s bond issue has no effect on the club’s cash resources. There was a (revised) loss of £38 million for these items in 2010, but a £9 million profit in 2011, producing an improvement of £47 million.

Most of this relates to foreign exchange movements on the dollar denominated element of the bonds ($425 million). Last year, this was a £19 million loss as the dollar strengthened against sterling, but this was reversed in 2011 with a £16 million gain, as the dollar weakened relative to sterling. Such FX movements will only be realised in 2017 when the bond is due for repayment. In addition, 2010 included the once-off (revised) £12 million charge relating to the interest rate swap.

So, if we deduct the £65 million IFRS accounting adjustments and £47 million movement in exceptional items from the year-on-year improvement of £110 million, we are left with no real growth. In fact, there’s a small decline of £2 million compared to 2010. Although revenue grew by a striking £45 million, this has largely been eaten up by £35 million of cost growth and a £3 million increase in the interest paid. If the £9 million fall in profit on player sales is then taken into consideration, United’s pre-tax profits actually fell by £2 million in 2011.

Fair enough, most companies tend to accentuate the positives when they announce their financial results, though I do wish that United would drop their tiresome habit of referring to “operating profits” of £111 million in their press releases when they are really describing EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation), thus excluding £51 million of costs.

This measure is only really relevant if you believe that buying footballers is not part of the normal business of a football club. As legendary investor Warren Buffett cautioned, “References to EBITDA make us shudder. It makes sense only if you think that capital expenditure is funded by the tooth fairy.”

It’s also unnecessary for the club to spin these results, as the operating profit before player sales is a more than respectable £60 million, an increase of £10 million (21%) on the prior year with the profit margin rising 0.7% to 18.1%. Of course, most of that is needed to pay £43 million of interest, though £4 million profit from player sales and £9 million of exceptional items (mainly the unrealised foreign exchange loss) produced the £30 million profit before tax.

That should not be sniffed at, as only four Premier League clubs were profitable in the previous season and three of those clubs only reported small profits (Wolverhampton Wanderers £9 million, WBA £0.5 million and Birmingham City £0.1 million). In fact, United’s 2010/11 profit before tax of £30 million was only surpassed last year by Arsenal’s £56 million, which was inflated by property development and hefty player sales.

United’s profit after tax comes down to £10 million after tax charges of £20 million, but this is not really an issue, as most of these are used to offset losses elsewhere in the group.

Interestingly, player sales have not had a major impact on United’s figures with the exception of 2009 when the mega transfer of Cristiano Ronaldo to Real Madrid produced profit on player sales of £81 million. Since then, the club has only booked profits from this activity of £13 million in 2010 and £4 million in 2011.

The fans clearly did not welcome Ronaldo’s sale, but it did at least lead to a profitable year for the club, which was very much the exception to the rule, as United have reported large losses every other year since the Glazers’ arrival.

However, if we strip out the accounting “funnies”, namely the goodwill amortisation and exceptional items, then a different picture emerges with the club showing large profits for the last five years (2007 - £11 million, 2008 - £14 million, 2009 - £84 million, 2010 - £23 million and 2011 - £21 million) – even after considering the significant interest paid to service the club’s substantial loans.

Of course, the amount of interest paid is still highly damaging, which has been the case ever since the Glazer family bought the club in 2005 in a leveraged buy-out that loaded debt onto the club. They only paid £250m themselves, borrowing the remaining £540m from banks and hedge funds, which significantly increased United’s interest burden. Essentially, the club’s highly impressive operating profits are greatly reduced by the massive interest payments.

In fact, net interest payable actually increased in 2011 by £3.5 million to £43.5 million, as the interest rate on the bonds is higher than the bank loans they replaced.

"What a difference a David makes"

United’s chief executive, David Gill, has argued that this is not a problem, “We have a long-term financing structure in place, excellent revenues that are growing, we are controlling our costs and we can afford the interest on our long-term finance.” As we have seen, this is undoubtedly true, but, when giving evidence to the House of Commons select committee inquiry into the governance of football, even he admitted that “it would be better” if the club did not have to pay such high interest.

Of course, all of the above figures have come from the Red Football Limited accounts, so exclude the crippling interest on the PIK loans, which were booked in the club’s holding company, Red Football Joint Venture Limited. In 2010 this brought the total interest up to a staggering £73 million and the pre-tax loss to £109 million. The club has always insisted that these loans are the responsibility of the owners and nothing to do with the club, even though the PIKs were secured on the club’s assets. In any case, this may be a moot point now, as this debt was cleared last November.

Incidentally, United will have no problem coping with UEFA’s Financial Fair Play regulations, which aim to force clubs to live within their means. The break-even calculation takes the £30 million pre-tax profit as a starting point, then excludes depreciation £7 million, net profit from exceptional items £4 million and expenses for youth and community development (assume £12 million), giving a comfortable break-even result of £45 million.

This is largely driven by United’s vast revenue, which has reached £331 million following the £45 million growth in 2011. In fact, United’s revenue growth of £165 million in the Glazer era has been mighty impressive, doubling the club’s turnover.

Although you could argue that much of this is down to centrally negotiated television deals and the Old Trafford expansion that was approved by the former board, it would be churlish not to give the Glazers some credit for the rise in revenue, not least the impressive progress made in the commercial arena. Their revenue growth has certainly been better than Chelsea and Liverpool, while only Arsenal (of the Big Four) have kept pace, largely due to the move to a new stadium.

Even so, last year United’s revenue of £286 million was a long way ahead of Arsenal’s £224 million, while other clubs are even further behind: Chelsea £206 million, Liverpool £185 million and Manchester City £125 million.

This placed United third in the most recent Deloitte Money League (based on 2010 results), only behind the Spanish giants, Real Madrid £359 million and Barcelona £326 million. They will almost certainly remain in that position when the next Money League is published, though the gap to Real Madrid (up to £425 million in 2011) and Barcelona (£381 million) is actually widening, though that partially depends on the vagaries of the exchange rate.

United’s revenue has gone from strength to strength over the past few years, leading to an almost perfectly balanced revenue mix with no single stream dominating. The revenue split is now a very healthy 36% media (£119 million), 33% match day (£109 million) and 31% commercial (£103 million). This is in marked contrast to the majority of clubs in the Premier League who have a dangerous reliance on television revenue.

That said, TV has still grown the most since 2005 by £71 million (or 147%), though the other categories have been no slouches either: commercial £55 million (112%) and match day £39 million (57%). In fact, in more recent times, defined as the last two seasons, nearly two-thirds of United’s revenue growth has been due to the commercial arm of the business.

The dazzling progress made in leveraging the global appeal of United’s brand is perhaps the most striking aspect about the club’s financials, which was demonstrated by the £22 million (27%) growth in 2011. Even MUST (the Manchester United Supporters’ Trust) conceded, “The commercial team at United are clearly smart operators.”

As commercial director Richard Arnold explained, “The world’s number one game is football. Manchester United is the number one club and we are offering the number one marketing platform to fantastic partners.”

There’s a lot to this argument: the Premier League is televised in 212 countries, while research undertaken by the club estimated that United has more than 330 million followers worldwide. It is difficult to know whether these figures are accurate, but conclusive evidence of United’s popularity is provided by the sales figures from Nike and Adidas, which point to United (along with Real Madrid) selling more shirts globally than any other club. Furthermore, Wayne Rooney tops the Premier League sales of replica shirts, according to the PL Season Review.

United’s largest sponsorship contract is with long-term kit supplier Nike, which runs until 2015 and increased from £23.3 million to £25.4 million in 2011 in line with a contractual step-up. Nike also manage the club’s merchandising, licensing and retail operations, sharing the net profits equally with United. This kit deal remains the highest in England, slightly ahead of Liverpool’s new Warrior deal £25 million and Chelsea’s improved Adidas contract £20 million, though is a little lower than the deals at Real Madrid and Barcelona.

Revenue from shirt sponsorship also increased by £6 million in 2011 as the club replaced AIG with another insurance company Aon, who will pay £20 million a year until 2014. Only Liverpool’s £20 million deal with Standard Chartered can match this, though the shirt sponsorship element of Manchester City’s Etihad deal has also been estimated at the same amount. Other English clubs’ deals are far behind (Chelsea – Samsung £14 million, Spurs – Autonomy £10 million and Arsenal – Emirates £5.5 million), though better deals have been secured on the continent: Barcelona – Qatar Foundation £26 million, Bayern Munich – Deutsche Telekom £24 million.

In addition, United have many secondary sponsors, including the likes of Betfair, Thomas Cook, Turkish Airlines, Airtel, Epson, Audi and Singha Beer. Most of these bring in around £1.5 million per annum. This is an example of the enduring power of the United brand globally and the club’s ability to attract new partners, despite the negative headlines arising from the Glazers’ ownership.

"Vidic leading by example"

The good news does not stop there, as more partners are being added to the roster all the time. Most spectacularly, the 2011 figures do not include the amazing DHL deal to sponsor training kit for £10 million a season, which David Gill said, “breaks new ground in the English game.” Incredibly, the contract only covers domestic use, so excludes the Champions League where broadcasters get more access to training. It actually exceeds the value of all but four of the main shirt sponsorship deals in the Premier League.

DHL may have been convinced of the upside of being associated with United by their sponsorship of this summer’s US pre-season tour, which attracted a notable total of 290,000 spectators. As a further example of United’s global appeal, two more deals have recently been signed in Asia, with the leading Vietnamese mobile phone company, Beeline, and a Malaysian snack food manufacturer, Mister Potato.

Under chief of staff Edward Woodward, United’s commercial team has no intention of resting on its laurels and expects to secure much higher sums when the shirt sponsorship and kit deals are up for renewal in 2-3 years time. The bar has been raised by some of the deals signed elsewhere, particularly City’s innovative Etihad partnership and the French national team’s deal with Nike, which is worth €320 million over 7½ years, working out to about £38 million a year for just a handful of matches. Consequently, United are in discussions to extend their deal with Nike for a record £450 million, which would be worth £35 million a year, i.e. a £10 million increase.

They might also consider naming rights, though not for their stadium, but their training ground at Carrington. Sir Bobby Charlton, now a director at the club, asserted, “It’s not our policy to change the name at Old Trafford. It’s too important.” However, fans would be less resistant to giving a corporate name to Carrington, especially if it funded the arrival of a quality new player.

There’s certainly some room for growth, as United were still a fair way behind the commercial income generated by some leading continental clubs, at least last season, when their £81 million compared to Bayern Munich’s extraordinary £142 million, Real Madrid’s £124 million and Barcelona’s £100 million. Obviously, the 2011 figure of £103 million has overtaken Barcelona, but that is before the new Qatar shirt sponsorship is included. In fairness, United’s merchandising operation is outsourced to Nike, so commercial revenue (and operating expenses) would be higher, if it were brought back in-house.

Notwithstanding the commercial boom, television remains the largest revenue category at £119 million, up £14 million (or 14%) from the previous year, which mainly comprises £60 million from the Premier League and £47 million from the Champions League, plus around £10 million from MUTV and MU Interactive.

The Premier League distribution increased £7 million, almost entirely due to the substantial increase in overseas rights for the new three-year deal that commenced in 2010/11. Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£17.9 million). However, facility fees (25% of domestic rights) depend on how many times each club is broadcast live, which benefits United, as they were shown the maximum 26 times, more than any other club, which was worth £13.5 million. Finally, merit payments (25% of domestic rights) are worth £757,000 per place in the table, with that amount going to the bottom club and £15.1 million to the top club, which was obviously United.

Champions League revenue was £6 million higher, mainly because United reached the final compared to the quarter-finals the year before. The distribution from UEFA of €53 million (£47 million) comprised €7.2 million participation fees (same for each team), €20.1 million prize money and €25.9 million from the market (TV) pool.

Interestingly, United actually received more money than the winners Barcelona, as their TV money is higher, due to England’s TV market being bigger. However, they received less TV money than the previous year, as this allocation is split 50% between progress in the Champions League and 50% based on the club’s finish in the previous season’s Premier League. Therefore, finishing second to Chelsea in the 2009/10 Premier League reduced United’s share of the Champions League TV pool in 2010/11.

Of course, United’s media revenue is still far below the Spanish giants, Real Madrid and Barcelona, as they are allowed to negotiate individual television deals. Whether this arrangement endures is another question, given the pressure from other clubs in Spain to move to a collective agreement (as they have done in Italy this season).

Match day revenue remains a core part of United’s strategy, though it is probably reaching saturation point. Although it rose £8 million this year to £109 million, this was only back up to the same level as 2009. Essentially, it now depends on the number of home games played, which increased from 28 to 29, though the club also received a share of gate receipts from the Champions League final and FA Cup semi-final.

This is the highest match day revenue in England with only Arsenal (£94 million) coming anywhere close. United generate 60% more than Chelsea (£67 million) and two and a half times as much as Liverpool (£43 million). Each home match earns £3.7 million, so two matches bring in more than an entire season’s gate receipts at Blackburn Rovers, Bolton Wanderers and Wigan Athletic. In fact, it’s probably the highest of any European club, as only Real Madrid were in the same ballpark last season at £106 million.

Even though there has been some weakening in season ticket demand, United have still achieved 99% capacity utilisation and their average attendance of 75,000 is the third highest in Europe, only behind Barcelona and Borussia Dortmund. Old Trafford’s capacity of 76,000 has 16,000 more seats than the next largest English ground, The Emirates. There has been some talk of an even bigger “Theatre of Dreams” by expanding the South Stand, but the logistics would be quite tricky.

The other driver for the growth in match day revenue has been deeply unpopular, namely ticket prices, which MUST claim have risen by 55% under the Glazers’ ownership. Of course, other clubs have also raised their prices, most notably Arsenal with a 6.5% increase this season, and the fact is that United’s cheapest season tickets actually cost less than those at Arsenal, Chelsea, Liverpool and Spurs.

On the costs side, there is no sign of growth slowing down, as the wage bill rose £21 million (16%) to £153 million, the increase being split almost evenly between salaries and success-related bonus payments. Last year United’s wage bill of £132 million was the third highest in the league, but this year it is likely that Manchester City will also significantly grow their £133 million, while Chelsea may come down from their £173 million following a few major departures, so there may well be three clubs all around the £150 million level. Wages were even higher on the continent in 2010: Barcelona £233 million, Inter £207 million, Real Madrid £166 million and Milan £152 million.

The wages to turnover ratio remained unchanged at 46%, which is the lowest in the Premier League. To place that into context, over half of the Premier League clubs are struggling with ratios above UEFA’s recommended upper limit of 70% with Manchester City “leading the way” with 107%. United’s huge turnover has helped them maintain this ratio in a very healthy range of 44-47% for the last five years.

How long United can compete without spending more on salaries is open to debate. In the bond prospectus, the club warned, “it may be difficult to maintain this ratio at historic levels without negatively impacting our ability to acquire and retain the best players.” This issue was highlighted this summer with the fruitless pursuit of Wesley Sneijder.

Two conflicting factors will affect next year’s wage bill. On the one hand, it will increase following numerous contract extensions, including Nani, Nemanja Vidić, Antonio Valencia, Park Ji-Sung and infamously Wayne Rooney’s bumper new deal, which will cost an additional £4-5 million on its own. On the other hand, several high earners have been offloaded, including Edwin Van der Sar, Gary Neville, Paul Scholes, Wes Brown, John O’Shea and Owen Hargreaves, which should save at least £20 million, though this will be offset by the arrival of younger replacements.

Other operating expenses have risen at an even faster rate than the wage bill with a 26% (£14 million) increase to £68 million. This is due to costs associated with the growth of the commercial business, the US tour, the Champions League final and the sale of MUTV international rights.

"Me and Mr. Jones"

In addition, there were £5 million of exceptional costs, namely a £2.7 million provision for professional advisor fees and a £2 million impairment charge in respect of investment property.

Player amortisation, which is the cost of writing down new players, has actually fallen 2% to £39 million. This concept is not always clear to football fans, but the example of this summer’s purchases should help explain the mechanics. Both Phil Jones and Ashley Young were signed for £17 million on five-year contracts, but those transfers are only reflected in the profit and loss account via amortisation, which is booked evenly over the life of his contract, i.e. £3.4 million a year for each player (17 million divided by five years).

In 2011, any acquisitions during the year were offset by the impact of the many contract extensions, where any remaining amortisation is written off over the revised contract, thus reducing the annual expense. United’s amortisation is much lower than those sides that have spent big in the transfer market, such as Manchester City £71 million, Barcelona £63 million and Real Madrid £57 million.

This is a reflection of United’s restrained spending on new players in the past few years. In the era of foreign ownership, since Roman Abramovich’s arrival purchase of Chelsea in 2003, United’s net spend is less than £100 million (according to the Transfer League website), which is much less than their peers with the obvious exception of Arsenal. In the same period, both Chelsea and Manchester City’s net spend is over £400 million. Clearly, United’s net spend is reduced by the Ronaldo proceeds, but even so, that’s a telling comparison.

That said, United‘s 2011 net spend of £43 million is not far behind City £57 million and Chelsea £48 million and is actually higher than Liverpool £36 million, so maybe the purse strings are being loosened just a shade. Nevertheless, Ferguson’s claim that the reason that he has not made any marquee signings is that he cannot find any value in the transfer market really does stretch fans’ credulity to breaking point when the likes of Mesut Ozil move to Real Madrid for £13 million and Rafael van der Vaart to Spurs for £8 million. Indeed, when Rooney agitated for a transfer, he openly questioned the club’s ambition and ability to compete for world-class players.

The suspicion is that the debt mountain has influenced the club’s transfer policy, so it is a promising sign that the net debt has been cut from £377 million to £308 million (£459 million gross debt less £151 million cash), as the club has bought back £64 million of its bonds. This is down from a peak of £474 million in 2008.

Last year the club raised around £500 million of funds via a bond issue, so that they could repay the previous bank loans, in order to fix the club’s annual interest payments for a longer period (up to 2017), thus ensuring more financial stability. However, there was a price to be paid, which can be seen with a comparison to Arsenal’s bonds, as the debt has to be repaid quicker (7 years vs. 21 years) and the interest rate is higher (8.5% vs. 5.75%).

The really annoying thing for United fans is that this is still unproductive debt. While clubs like Chelsea and Manchester City have used their debt to fund the purchase of better players and Arsenal used theirs to build a new stadium, United’s debt was only used to enable the Glazers to buy the company.

"Ryan Giggs - still life in the old dog"

At least the Glazers managed to find £249 million last November to pay off the prohibitively expensive PIKS, though it is unclear how they funded this repayment. Many observers believed that the club’s cash would be used, especially after the bond prospectus explicitly allowed the payment of a £95 million dividend for “general corporate purposes, including repaying existing indebtedness” and future dividends of up to 50% of net cash profits (as long as the club’s interest is covered twice by EBITDA).

However, the board confirmed that no club cash had been used, though it remains unclear whether this was always the plan or whether this was in response to supporter protests. The chances are that the PIK debt has simply been replaced by another loan, which would mean that the threat of using club cash for repayment remains, but at the very least any new loan would surely be at a lower rate of interest than the 16.25% PIKs, thus advantageous to the club.

Included within the net debt are astounding cash balances of £151 million, though this has been boosted by cashing the £80 million Ronaldo cheque and the £36 million upfront payment from the shirt sponsor. The seasonality of the cash flow also needs to be understood, as most of the season ticket money is received before the end of June and used to pay operational expenses over the next few months.

"Hard Times for Rio"

The board has argued that it likes to retain so much cash to provide “flexibility”, but this seems a strange decision when they have to pay 8.5% interest on the bonds, while cash balances are unlikely to attract more than 2% interest.

David Gill has always insisted that the money can be spent on improving the squad, “The Glazers have retained that money in the bank and it’s there for Sir Alex if he needs it for players”, adding that “there is no pressure at all to sell any star player.” In fairness, over £50 million of this was used this summer to bring in new players.

However, this has not really been the case in the last three years, when the large operational cash flows of around £100 million have been primarily used to service the club’s debt, as opposed to buying players, e.g. in 2010 the club spent £120 million on paying interest (£52 million) and repaying loans (£68 million), which was ten times as much as player registrations (£11 million).

In fact, since the Glazers’ arrival, the club has paid out around half a billion pounds for the privilege of having them as owners, either in interest, professional fees or repaying debts. Obviously, if the club had remained a PLC, then it would have had to pay out dividends, but it is unlikely that they would have risen to this level. The current structure also produces tax savings compared to the PLC, but the net impact of the Glazers’ ownership is surely negative. Equally plausibly, United could instead have been bought by a benefactor like Roman Abramovich, who has provided Chelsea with massive interest-free loans.

Even though Ferguson has been supportive of the owners, “They don’t have any criticism from me or anyone in the club”, it is easy to see why many fans have protested. All of the money paid to the Glazers could have been made available to strengthen the squad or keep ticket prices down, but has instead disappeared into the financial ether.

The latest financial engineering from the Glazers is the decision to float a minority stake of the club via an IPO (Initial Public Offering) on the Singapore Stock Exchange. It is understandable why Asia was selected, as this is an obvious region for future growth, but it is less clear why they went for Singapore instead of Hong Kong, though some believe that this is due to the less onerous regulatory requirements.

"The Glazers laughing all the way to the bank"

Whispers suggest that the board is seeking to raise £600 million for a 30% stake, which would value the club at £2 billion. That seems a very “rich” valuation, especially if they opt for a two-tier share structure with one non-voting share for every voting share. This may have the advantage to the Glazers of protecting their control of the club, but it is less attractive to investors.

Stephen Schechter of the eponymous investment bank suggested, “They are betting they will get a higher valuation in Asia based on smoke and mirrors rather than facts. I think it’s worth probably half of what they’re looking for.” Indeed, the Red Knights, a group of wealthy fans interested in buying the club, suggested that the club was not worth more than £1 billion.

The risk is that if the targeted valuation is too high, then the offer will fail to get off the ground. In fact, you have to wonder why the Glazers are pushing the IPO at a time when the equity markets are lower than they have been for some time, which begs the question of what they will do with the proceeds.

"Little Black Eyed Pea"

There are effectively three possibilities: (a) repay some of the club’s debt; (b) use the cash elsewhere in the business, e.g. a transfer/wages fund; (c) pass it to the Glazers, potentially to pay off any family loans they may still have, e.g. from repaying the PIKs. Or a mixture of all three.

If they repaid some of the club’s debt, as the club has apparently briefed journalists, then United would benefit from lower interest payments, though this would not be much use if they were then replaced by dividends to the new shareholders. We shall see.

Some have suggested that this IPO is the first step in the Glazers’ exit from the club, but it has been reported that the owners have already rejected several offers above £1 billion, including one of £1.5 billion from Qatar. If that were not clear enough, the board stated, “The owners remain fully committed to their long-term ownership of the club. Manchester United is not for sale and the owners will not entertain any offers.”

"Cheer up, Alex, you're top of the league"

Even so, Manchester United director Michael Edelson said, “It is inevitable that at some time they will sell”, though he added, “That will be a long way down the line.” Clearly, everything has its price and investors that employ the LBO model usually sell when they feel that they have maximized value, so that could be any time.

At the right price, United are an exceedingly attractive investment proposition, as they are a veritable cash machine. Even though the profits are currently largely siphoned off by the enormous interest payments, the financials look great at an operating level.

However, perhaps the club’s biggest asset during the Glazers’ reign has been Sir Alex Ferguson. It is doubtful whether any other manager could have operated so successfully under the constraints imposed by these owners. Indeed, one of the greatest challenges facing Manchester United is how effectively he is replaced when he eventually retires. Whoever it is will have a tough act to follow.