Much has been said and written about what has happened at Manchester United this week. One of the best summaries has been produced today by the leading sports business paper, the Financial Times.
‘Michael Carrick’s sacking this week, the second United
manager to go this year, was the seventh dismissal since Ferguson retired — a
remarkable rate for a club that had only seven managers in the 68 years
following the second world war. It has dropped to eighth in Europe by revenue,
overtaken by Arsenal, Liverpool and Manchester City.
The club’s impatience with coaches stems from several
questionable management decisions made by the Glazer family, owners since 2005,
and Ineos, the 29 per cent shareholder and controller of the club’s day-to-day
operations. But it also reflects the remorseless ratcheting effect of the
initial £540mn debt the Glazer family loaded on to a once conservatively run
club in 2005.
The calculation was that revenues and profits could be
expanded while the club’s vast and loyal support would generate enough funds to
cover the annual interest payments. After all, former manager Tommy Docherty
once commented that United “could wash the jerseys here and hang them out to
dry, and you’d get 15,000 people standing watching them do so”.
But the debt turned United overnight into a business reliant
on constant winning. That in turn relied on Ferguson’s genius to keep
outperforming with less and less (which he did). Once he left, the danger was
that the engine would go into reverse, and the constant interest payments would
become a threshing machine.
Less success meant less prize money, requiring more
commercial revenue to pay the debt. United was gradually spending lower
percentages of its revenue on its squad than rivals, including Chelsea and
Manchester City. The prices of players and related spending commitments added
more multiyear payments to its balance sheet.
That this model hasn’t blown up is largely down to low
global interest rates after the 2008 financial crisis. But then the pandemic
came along.
The first problem was that empty stadiums hit revenue by a
fifth, giving the club less money to make the interest payments. Its cash
reserves dropped by £256mn, or 83 per cent, to £51mn in 2020.
The following year, the club started dipping into its
revolving credit facility annually to keep spending enough to compete. Payment
obligations like player transfers and wages also kept rising. And as interest
rates have normalised, the debt and interest payment numbers have only gone one
way — up.
Although the revolving cash facility is being replenished,
United’s gross debt has risen from £530.2mn in the year to 2021 to £689mn as of
June. Cash reserves have never come close to returning to pre-pandemic levels
and stand at £67mn. In June, the club refinanced $425mn of debt due in 2027,
replacing it with a $550mn loan maturing in 2031 at a 5.36 per cent interest
rate compared with the previous rate of 3.79 per cent.
That has begun to play out on the pitch. In this summer’s
transfer window, the club was only the 11th highest spender in the league. More
than £1bn has left the club in interest and dividend payments since 2005 —
payments that rivals have not had to make. Manchester United is, as the finance
blog Secret CFO put it, “The Club That Survived Its Own Balance Sheet”.
United’s record signing (or rather re-signing) was a decade
ago, when Paul Pogba came back to the club for a fee of just under £90mn. While
Arsenal, Chelsea, Liverpool, City, Real Madrid and Barcelona have all bought
players for more than £100mn, United no longer appears to dabble in that part
of the market. Or perhaps players with those fees no longer want to go to Old
Trafford.
And so the pressure is on the club to get every signing and
every managerial decision right, as the impact of less winning gets more acute. It’s also why Mauricio Pochettino, the latest
Manchester United manager, will start exactly where Ferguson did in 1986: with
the club in the relegation zone of England’s top league.’
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