WATCHING live sport provides a welcome respite from the realities of life but examining the business models behind English soccer provides an opportunity to witness fantasy.
English professional soccer resides in a virtual world where the normal rules of economics and business do not seem to apply: or at least it did so until recently. The so-called richest clubs – particularly Chelsea and Manchester City – try to buy success by spending enormous sums on the inward transfer of players and on wages for them and managers. More often than not these “investments” result in massive losses. In the past week both clubs have admitted to losses that, when combined, amount to more than £130 million (£45m at Chelsea and nearly £90m at City) for the 12 months ended last June.
Since then City has spent another £118 million on new players, a sum to be added to this month, as well as compensation to be paid to sacked manager Mark Hughes.
The shows have been kept on the road by indulgent billionaire owners who want to bask in the reflected glory of winning competitions or by banks which were prepared to allow debts mount as long as regular interest repayments were made.
Roman Abramovich at Chelsea is known to have “invested” more than £700m, money that will never be recovered. The new Arab owners of City – the Mansour family – has “invested” more than £300m so far, but apparently this is small change: the family, with control of Saudi oil reserves, apparently has more than £550bn in wealth available to it.
But the days of excess may be coming to an end, with two of the biggest names of the English, European and indeed global game – Manchester United and Liverpool – showing signs of suffering badly.
Man Utd is a fascinating institution of some cultural significance. It is not just a football club with a support base far outside its natural hinterland – including Ireland but stretching to Asia – but a major business venture with worldwide brand recognition. It has provided the best football entertainment in Britain over the past decade because of the attacking winning style encouraged by manager Alex Ferguson. The assumption many make is that Man Utd will always be successful because of revenue from regular 75,000-plus attendances at home matches, fees for televised games, rewards for winning competitions and the sales of branded merchandise internationally. That gives it far more money than most other clubs to spend on getting the best players. However, it is a club with financial problems that are affecting its on-field capabilities. The manner in which control was taken by its American owners, the Glazier family, has left the club, to use a fitness and injury analogy, “hamstrung”.
As of June 30, 2008, the date of the last published accounts for Red Football Joint Venture Ltd, which actually owns Man Utd, showed that it had £519m of secured bank loans, on which it paid £45.4m in interest in the previous year.
That was not the full extent of United’s debts however. It had £175.5m of what are called payment-in-kind (PIK) notes, which is another form of borrowing in effect. The interest rate on these loans is a massive 14.25%. However, the cash repayment on this is not made each year. Instead this amount is added to the principal of the PIK notes, to be repaid at a later date.
In spending £43m in the year to mid-2008, it increased its debt significantly, to just short of £700m. What has happened in the past year is very significant. The Premier League was won again last year and the Champions League final was lost, but Cristano Ronaldo was sold to Real Madrid for £80m.
While replacing a player as good as Ronaldo with someone as talented is almost impossible, it was clear the squad needed reinforcement anyway. As defeat in the FA Cup third round last Sunday at home to Leeds United, a team two divisions lower, emphasised, United does not have a strong squad anymore.
While the loss of likely FA Cup revenue is not insignificant, the real danger is that United would get beaten by AC Milan in the last 16 of the Champions League denying the club much needed revenues.
Clearly, United could do with some better players (although some of the most desirable would not be available for this competition because they have already played in with other clubs) but it seems it may not have the money to buy them. United is trying to replace some of its existing borrowings with new borrowings but these may not actually be cheaper to service on an annual basis. It is looking to raise about £600m through a bond issue, the proceeds of which would be used to repay some of the existing debt.
It is not looking to replace the expensive PIK bonds (which admittedly do not have an immediate cash requirement because the repayments are added to the overall debt), but its existing normal loans which carry interest rates of about 5%. However, the new bonds will probably cost about 8%. In other words, the interest costs will go up.
It does not seem to make sense to pay off that low-interest debt with the proceeds of a bond paying a higher interest rate but it appears the banks have insisted that their loans must be repaid before United can deal with the PIKs.
It seems United’s banks have first claim on any money deployed to repay loans, so they would probably not allow the PIKs to be redeemed unless some or all of their loans were also repaid.
However, United can’t keep not paying the PIKs and adding the interest repayment to the capital, where the new, bigger amount then attracts further interest of 14.25%. It is something of a Catch 22, but it all suggests Alex Ferguson’s financial ability to buy new players even next summer will be limited.
MANY people forget that it had been 26 years since the club had last won the English Football League when it regained the title in 1993. There was a 31-year gap between winning the European Cup in 1968 and its replacement Champions League in 1999. Fans have become so accustomed to United winning – with only Arsenal and Chelsea offering a disruption to its dominance of English football in the past 15 years – that it is assumed such a lengthy spell without success could never happen again.
But while United are most unlikely to ever suffer a decline in fortunes to the extent that it would drop out of English football’s top division – as it did in 1974, just six years after winning the European Cup – its future successes are not guaranteed. Fans of Leeds United, of whom I am one, went through a very similar experience in the early part of the last decade, culminating in the near extinction of the club, the loss of its best players and a fall of two divisions in the football league.
Last Sunday’s victory, which I was lucky enough to be at Old Trafford to witness, provides hope to football fans everywhere that torment, as well as success, is not necessarily permanent either. And that clubs can be rebuilt on a more sensible financial base and that the virtues of hard work and endeavour can be rewarded.
It’s not all about money.
The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.