Manchester United 2018 Finances: Made of Stone

Introduction

Tuesday 25^th September 2018 may not go down as a great day in Manchester United’s history, as the club lost in the Carabao Cup to Derby County and there was a very public spat between Jose Mourinho and Paul Pogba, but off the field the club announced record revenues for the year ended 30 June 2018.

How this was achieved is more to do with the abilities of the marketing department which continues to set a standard that most other clubs can only envy.

Earnings this high are likely to ensure that United are once again top or close to the top of the Football Money League when other clubs announce their results, although this is of little consolation to fans who saw their team go without a trophy in 2017/18.

Goals rather than profits excite fans, although the financial results show that United are still setting the standard that others aspire to in terms of generating money.

Losing a match in the Carabao Cup is likely to have little impact on United’s financial fortunes, as the competition generates only £100,000 prize money for the competition winners, compared to £1.8 million for the FA Cup and £38.6 million for the Premier League.

Income

All clubs divide their income into three main streams, matchday, broadcasting and commercial.

Zooming in on the figures show that United’s matchday income fell by £1.8 million last year.

Extracting the matchday income is straightforward, as it is the average ticket price multiplied by the number of matches played at home.

Reducing the number of games at Old Trafford in 2017/18 was the main driver of the fall in income as United’s early exit in the Champions League to Sevilla resulted in five fewer home matches.

Since acquiring the club, the Glazers, whilst criticised for many of their early pricing activities by fans, have frozen matchday prices for most of the last decade and this is reflected in matchday income being relatively constant.

As a member of the Premier League, United, like all clubs, agree to centrally negotiated broadcasting deals which are usually for three-year periods which commenced in 2014 and 2017.

Reds fans are used to rarely seeing their team play at 3pm on a Saturday, and this is because United are very popular with TV audiences, appearing more times last season than Champions Manchester City due to their ability to deliver high ratings.

Each incremental final season position in the Premier League is worth an extra £2 million to a club, so United finishing 4^th compared to 2^nd in 2017 generated £4 million on top of the benefits of being in the Champions League compared to the Europa Cup.

The area in which United have excelled over the last decade has been commercial income as the club’s marketing department has struck global and regional deals with everyone from tractor manufacturers to Indonesian isotonic drink partners.

Whilst commercial income has plateaued in the last three years, mainly due to the new big deals with adidas and Chevrolet both being long term, United have announced a sleeve sponsor deal for 2018/19 with American toilet and generator manufacturer Kohler which is likely to be worth many millions.

Adding all three income sources together took United to overall revenues of £590 million, a substantial way ahead of the only other club to have announced results for 2017/18, Manchester City.

The income gap between the two Manchester clubs has narrowed in 2018, but over the last decade United have generated over £1.1 billion more than City and far more than any other club in the Premier League.

Superior levels of income are however no guarantee of success in terms of trophies, a lot depends on how well a club spends its income.

Expenses

For most clubs the main expenses are going to be player related, in the form of wages and transfer fee amortisation.

United’s wage bill increased by 12% in 2017/18, despite paying no bonuses for winning trophies, the increase was due to new contracts for existing staff such as Jessie Lingard and Jose Mourinho as well as signing Alexis Sanchez in January for a contract estimated to cost the club £20-25 million a year.

City’s wage bill, which a few years ago was out of control as the club tried to attract players by paying above market rates, now show more modest rises since 2013 as the owners focus on FFP compliance and a breakeven model in terms of profitability.

Keeping players happy and recruiting new ones is always a challenge whilst not exceeding the wage budget but what United do have in their favour is good control of wages as a proportion of income.

Only a club with owners who were prepared to underwrite huge losses could have coped with City’s wage bill a few years ago, as wages peaked at £114 for every £100 of income in 2011 whereas United have always had one of the lowest wage control financial metrics since the Premier League started.

Funding transfers is another big outlay for clubs, and this is shown in the profit and loss account via the amortisation charge, which is the fee paid spread over the contract life.

For example, United paid Everton £75 million for Romelu Lukaku in July 2017 on a five-year contract, which works out as an annual amortisation cost of £15 million (£75m/5).

Every transfer fee is amortised, and the total is shown as an overall expense in the profit and loss account, United’s amortisation figure rose by 11% to £138 million.

Despite the amortisation figure rising substantially since Sir Alex Ferguson’s retirement in 2013 United have failed to win the Premier League or Champions League, which adds further weight to those who take the view that Ferguson was able to maximise results without breaking the bank.

Overall costs rose by 9% compared to just a 1.5% increase in income, which hit profits. Included in costs was £896,000 paid to United’s auditors, PriceWaterHouseCoopers (PWC) for the audit and ‘tax compliance services’. Ed Woodward is a former employee of…PWC.

Because the Glazers acquired United by borrowing huge sums of money, the club has historically paid large amounts of interest on loans. The good news for United is that these interest costs are falling as time progresses but have still sucked a large amount of money away from the playing budget over the years.

Over the last decade United’s net interest cost has been £447 million. In the early years of Glazer ownership, the club was seen to be risky borrower, and so ended up paying interest rates of up to 16.25%. As things improved, in part due to Alex Ferguson’s caution in the transfer budget the interest cost has fallen, but the club has now paid an estimated £785 million to banks since the takeover arose in 2005.

Other clubs, funded by their owners, such as Chelsea, Manchester City and Stoke City, have paid no interest on the sums advanced.

Profits

There are a variety of profit measures to consider when looking at a business, the good news for United is that the club has performed well regardless of the assessment method compared to most other clubs, but 2018 was poor compared to the previous year at Old Trafford.

Operating profit is simply income less day to day running costs excluding interest. This fell by 45% in 2018, as the increase in player costs exceeded the rise in income. United’s record operating profit was in 2009 when they sold Cristiano Ronaldo for a then world record fee and banked a huge profit on the transaction.

Compared to their local rivals, United have made £618 million of operating profits whereas City have lost £474 million.

Some figures in the profit and loss account are erratic and so distort profits. These include gains on player sales, redundancy costs, legal settlements and so on. If these are stripped out we get EBIT (Earnings Before Interest and Tax), which reflects a more sustainable view of United as a business.

EBIT profits fell by nearly 60% to £28 million in 2017/18, again reflecting the club’s big investment in player costs that was not matched by income increases, along with the price of an early exit from the Champions League, which was worth $102 million in prize money to winners Real Madrid last season. The low EBIT figure in 2015 in the table shows the impact of not qualifying for the Champions League to United that season.

Stripping out the non-cash costs of transfer fee amortisation and depreciation gives EBITDA (Earnings Before Interest Tax Depreciation and Amortisation). United like to quote this figure in press releases as it excludes some key costs (interest to banks and player amortisation) and so tends to be a high number. Other analysts like EBITDA because they claim it is a cash proxy of profits as non-cash costs are ignored.

EBITDA fell by 12% to £177 million but was still the third largest in the club’s history.

United’s fiscal muscle is very much shown in the EBITDA figures, generating £1.3 billion of such profits in the last decade, a billion more than Manchester City.

The final profit figure to consider is profit before tax. This shows the impact of the Glazer’s borrowing so much money to finance their acquisition of the club. United’s profit before tax was £26 million, equivalent to Sanchez’s wages for the season. United have made £171 million in profits before tax over the decade, compared to City’s loss of £544 million in the same period.

Profits belong to the club owners, who have the choice of either reinvesting back into the club’s future or withdrawing in the form of a dividend. The Glazer’s are the biggest shareholders in United and they and other shareholders took £22 million of the profits for the year for themselves.

Player trading

United spent £163 million on new players in 2017/18, recruiting Lukaku, Matic, Lindelof and Sanchez, although the latter was part of a swap deal with Arsenal for Henrik Mkhitaryan.

This takes the club’s spending over the last decade to just over £1 billion. The problem for United, is that the transfer market is competitive and crowded, and City have spent £460 million more than them in the same period.

Many fans talk about ‘net spend’ when it comes to player trading, and here United are in an unusual position as unlike many other clubs they do not need to sell to buy.

Having said that their player sales in recent years have not been particularly lucrative, reflecting some acquisitions, such as Depay, Di Maria, Zaha and Babe who have failed to impress in a United shirt.

Since selling Cristiano Ronaldo in 2009, United have only made £86 million profits from player sales in the subsequent nine years. City have more than that in the last three years and Liverpool exceeded this sum from the sale of Coutinho last season.

What United do seem to have done is adopt a policy of signing players on credit rather than paying cash for them.

Since the Sir Alex days, the sums owed by the club have increased rapidly, from £11 million at the start of the decade to £258 million by June 2018. This may explain why the United board were so reluctant to allow Mourinho to sign more players in the 2018 summer transfer window, as so much was still owed for previous recruits.

Funding

Clubs can be funded from borrowing from a bank and/or owner investment in shares. Under the Glazers United borrowed over £1/2 billion from banks to buy the club from the previous owners.

Debt has both good and bad qualities, it is tax efficient and can multiply the original investment from owners but comes at a cost of the interest being paid and can lead to bankruptcy if payments are not made.

United’s borrowings have increased since 2014 but this is as much to do with the club taking out two loans in US dollars (one for $425 million and the other for $225 million) and sterling falling in value post Brexit as much as anything else.

Critics of United supremo Ed Woodward will query why the club has over £240 million of cash sitting in a bank account earning next to no interest, which perhaps would be better used to pay down the loans, where the interest rate being paid is higher.

A look at the loans appears to indicate that the money is not repayable to the banks until 2027 and 2025. Critics of Woodward point out that he’s an ex-banker and is more concerned with earning fees for his old chums in finance than doing what is best for United.

If United’s EBITDA profit falls below £65 million then they may have to pay interest penalties, but there appears to be little chance of that happening at present.

Summary

United are in a strong financial position. Woodward’s recent comment that “playing performance doesn’t really have a meaningful impact on what we can do on the commercial side of the business” won’t have gone down with the United faithful.

This is further evidenced by United’s board’s refusal to accede to Mourinho’s summer transfer requests suggesting that they don’t particular care, or need to care, what the fans think, and whether you’re a Red or ABU, that isn’t good for football.

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