The United Debt: No Need To Panic

The Glazers plotting their next move

The Glazers plotting their next move

When the Glazer family secured their takeover bid of Manchester United in June of 2005, chaos ensued.  Protesters took to the streets, shouted slogans, wrote letters, circulated petitions and burned effigies.  A small handful of ‘hardcore’ fans detached and formed their own club, Football Club United of Manchester (FCUM), who currently play in the UniBond Football League (6 or so promotions away from the actual Football League).  It was the end of Manchester United.  The pesky Americans (especially the one with the weird beard) did not know what they were doing.  The price of tickets would rise to astronomical levels, advertising would force Old Trafford to take on a new name and star players were going to be sold to finance the debt.  They were there to make a quick buck and the club would be run into the ground in the process.

Four years, two league cups, a FIFA Club World Cup, three Premier League titles, and a UEFA Champions League title later; the Glazers have proven that they are in it for the long-haul.  Most United fans have since come to accept the Glazers and many of them openly advocate their ownership.  David Gill, Chief Executive of Manchester United, perhaps serves as a fair representation of United fans in this respect.  He initially denounced the takeover, but has since commended the Glazers on their professionalism, lack of interference, and business management.

In a twist of irony, rival fans (especially those from North London) began to voice complaints and predictions of doom over the Glazers’ ownership just as has those in Manchester had started to subside.   

To these people, I say: Get with the times.  Sport is a business, whether you like it or not.  Get over it. I may also ask a few people to review (or get acquainted with) fundamental economics, business management and some current Manchester Untied policies.

Here’s why.

Arsenal fans poke fun at the Glazers

Arsenal fans poke fun at the Glazers

The first thing people must understand/accept/realize is that football is now a lucrative business (hence the influx of foreign owners).  These people are unbelievably wealthy, but this does not mean they are here to piss away their fortunes while having a laugh.  They are here to make money.  And when invested in correctly, a football club like Manchester United can make a lot of money.  Fans need not worry, as revenue streams go hand in hand with performance on the pitch.  The two parties have mutual interests.  If the team continues to perform on the pitch; the fans go home happy and so do the Glazers.  The vast majority of Manchester United fans have realized this and this is why you don’t see protesters burning pictures of the Glazers anymore. 

This may be well and good for most Manchester United fans, but everyone else still seems to have a problem.  The vast majority of complaints have to do with the ‘crippling’ debt.  How can Manchester United continue to fund wages, transfer fees and everything else when the Glazers incurred a £500 million debt when they bought the club?  Others are convinced (and cannot wait for the day) that the club will go into administration and the Glazers will walk free.

A very basic answer is needed to clear some minds on this issue (commonly found on blogs/comments throughout the media): Using debt has been and always will be a business strategy.  I borrow $1 million and put my $2 million house as collateral to the bank.  I put my money to work. I’m a smart guy so I intelligently invest the $1 million in ventures I predict to have good returns.  I keep up with my monthly payments to the bank (through returns on my various investments) so they don’t sell my beloved house and by the end of it all, I’ve made myself a nice little profit.  This is essentially what the Glazers did.  Obviously the takeover was on a scale far bigger, and paying back the debt will take years, but this represents the general idea (in addition, some of the debt is on the Glazers to pay back, while the other half is on the club).  As basic as this concept is, I thought this explanation was necessary for those who don’t seem to understand that having to pay off a large amount of debt does not equate to the end of the world.

Now, let’s expand on this metaphor a little more.  I’ve been eyeing this new coffee-maker for months and after doing some research, I decide to buy it.  But wait, I still owe over a million dollars (from interest) to the bank; how can I afford to buy this expensive gadget?  In short, I can buy whatever I want as long as I maintain my payments to the bank.  There’s no rule stating I have to pay the bank as much as I can at the first chance I get.  I pay the bank in pre-determined installments in pre-determined amounts of time.  And as long as I keep this up, I can buy as many coffee-makers as I want.  The bank is not going to repossess my house if the payments keep on coming.

This is where the sticking point is.  Manchester United can continue to purchase players, and pay wages because they can still afford their monthly payments.  Have there been any reports or stories about the Glazers and/or United missing payments?  Has there been a fire-sale of United’s best players to finance the debt?  Has Old Trafford been renamed the Budweiser AIG Saudi Telecom SuperMetroDuperDome yet?  The answer to all these questions is no.  The media just likes to quote the enormous figure (and it is enormous) to stir up controversy.  The debt will take a long time to clear, but it remains serviceable. 

Here’s how.    

The Manchester United brand is a money-making machine

The Manchester United brand is a money-making machine

A lot of people questioned what the Glazer’s brought to the table.  Well, without them the club would never have signed the record £56 million sponsorship deal with American insurance giants AIG.  And even though AIG has been hit hard by the financial crisis, they are still going to pay the last installment of the deal at the end of next season.  The Glazers then masterminded another 4-year sponsorship deal with another American company, AON.  This deal is worth £80 million and is the most expensive sponsorship deal in football, ever.  What financial crisis?

Old Trafford underwent a somewhat recent expansion and can now seat over 76,000 fans.  It sells out every week.  Ticket prices did go up, but they still remain below average in the Premier League.  The expansion helped boost match day revenue by 30% in its first few years.  Last season, £101.1 million was generated through match-days alone.  In addition, United generated £50 million in TV revenue last season.  Other media deals with companies like Saudi Telecom bring in over £60 million each year.  This doesn’t even take into account revenue generated from overseas (especially Asia), where the club estimates it has over 100 million fans.  These sponsorship deals are certainly good to have and are unmatched by any other club anywhere in the world (except by Real Madrid).  

With these two gone, United literally cannot afford to slip up

With these two gone, United literally cannot afford to slip up

 However, the most important factor in all of this is the performance of the team.  Simply put, as long as the team keeps on winning, the debt will remain serviceable.  The club needs the revenue generated from top-2 finishes in the Premier League, and successful Champion’s League campaigns more than anything else.  In fact, it would take an extraordinary fall from grace (not making the Champion’s League, for example) for United to fall into real trouble.

  This is the risky part.

 But United can afford to be optimistic.  Since the Glazers took over, the club has experienced an unprecedented spell of success, highlighted by a hat-trick of Premier League titles and back-to-back Champions League Final appearances (one resulting in a victory).  This period of success comes after a ‘barren’ spell when it was feared Chelsea and their billions had permanently overtaken United.  It was not to be.  The Glazers realized that the team’s performance on the pitch would be the most important factor in revenue (as does every other owner) and have acted accordingly by allowing Fergie to splash the cash. 

Both these players scored in Champions League Final shootout

All of these players scored in the Champion's League Final shootout

The debt continues to ‘soar’ simply because of the interest on the deal coupled with the fact that the payments are not yet due (and have thus not been paid).  Yes the club and the Glazers (separate entities) owe upwards of £600 million, but what these articles fail to mention is that they have about 6 years to pay it back.  It’s a huge figure on its own, but it maintains serviceable in smaller chunks, especially as United continue to shatter profit and turnover records each and every year.

 Again, this depends on the club’s success.  If they peform like they have done for the past 3 years, there should be no foreseeable problem with the debt.  This is no easy feat, if anyone can do it, its Manchester United.

Some may argue that this type of business is ‘immoral’.  They have a point,  but it remains perfectly legal.  It’s not United’s fault that businessmen are taking advantage of the market.  Blame the loose rules and regulations of FIFA, UEFA, and the FA, not the clubs. 

However, I suspect the majority of these people are deluded ‘idealists’ who live in North London Utopia (where I actually grew up).  I might remind them that their own club is not exactly debt free either.  I would also like to remind them of what a trophy looks like. 

The Premier League Trophy

The Premier League Trophy

 

.

4 Responses to The United Debt: No Need To Panic

  1. downswinging says:

    Surely, no one treats their club like a business more than those from North London. They spend shrewdly and have turned the most profit of any club in England over the past 3 seasons… Manchester United and Chelsea, while both firmly stuck in the red, are currently playing a very dangerous financial game that could come to a head quite soon.

    This is an article from a year ago discussing this very problem.

    http://www.guardian.co.uk/football/2008/may/20/premierleague.chelsea

    You’ll notice Arsenal has the third highest debt, however 2/3 of their debt from 2006 has been eliminated because they are working on paying off their stadium debt.

  2. downswinging says:

    needless to say the 80m for ronaldo will help

  3. s7_rocks says:

    How do glazer indend to pay off the actual Debt?

  4. […] by about 8000 seats, meaning that the stadium now has a capacity of around 76,000 per match. As pointed out by The Bleacher Bums, “The expansion helped boost match day revenue by 30% in its first few years. Last season, […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: