Manchester United: How Sir Alex Ferguson and the Glazers Will Secure Future
Manchester United Share Price
While in the past it has been suggested that Sir Alex Ferguson and the Glazers have held back Manchester United in the transfer market, the club's financial fortunes are improving fast as its share price hits new highs.
It is entirely understandable that some fans would not want their club to be owned and dictated by anyone else outside their control or influence. Not surprisingly some of the attacks on the Glazers are about the money that has been "taken out of the club".
This takes no account of the massive improvement in commercial and financial success, especially outside the UK. United are now the most valuable sports brand in the world. This cuts no ice with those who formed FC United, of course, who "want their club back".
Just by writing this article the author will, as in the past, be accused in some sections of being a Glazer "apologist", but the simple truth is that Manchester United's finances are being turned round. The day cannot be far off when they become debt free and potentially the strongest football club in the world.
In this article, we simply propose an objective "mid-term" report on the business and finances of the greatest football club in the world.
At a time when green and gold scarves have largely disappeared on match-days at Old Trafford, it is to be hoped that the majority of readers will feel able to form a dispassionate view of the club's prospects going forward.
We do not propose a complex, in-depth view of the finances, simply to complement the excellent work of Jonathan Beever in yesterday's article.
Feel free to come to your own conclusions and put forward your own constructive arguments.
I Want My Club Back
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The truth is that Manchester United haven't been owned by their fans for at least 111 years since Captain Harry Stafford saved the club from bankruptcy.
Again, in 1931, James Gibson saved the club from bankruptcy and assumed control.
By the late 1950s, Louis Edwards had become Chairman and he went on to assume control of the club in 1964. There were question marks about this as exposed in a Granada "World In Action" programme in the 1980s.
Indeed, anyone who has reservations about the Glazers might like to review Louis Edwards' past.
Eventually Louis Edwards passed control of the club to his son, Martin, who ran it in a more open way. The fans' biggest complaints about Martin might well have been: nearly selling out to Michael Knighton; and floating Manchester United on the London Stock Exchange.
Edwards "sold" his stake to Knighton in 1989 before the ramifications of the deal were unwound and it fell through.
The United Board then repelled a takeover advance by Robert Maxwell before the club was finally floated on the London Stock Exchange in 1991.
While this move was not universally popular with fans, it did have at least two advantages:
- Fans could actually buy a stake in their club
- United could, if they wished, raise money through further share placings to finance development or player transfer fees
There was a downside, however, as the requirements of the Stock Exchange meant that United had to announce proposed "material transactions" before they completed them, which made it impossible to buy major players secretly.
Secrecy in the transfer market has been paramount to Sir Alex Ferguson in recent years. This became especially relevant after Chelsea snatched Arjen Robben and Jon-Obi Mikel from under United's noses after former Chief Executive Peter Kenyon had joined the Blues.
Sir Alex doesn't like to be involved in public auctions for players and, whatever the suspicions about United floating in New York with a Bahamas registration, United no longer need to pre-announce their planned transfers.
In 1998 another takeover bid was repelled, this time by BSkyB. While it was the Monopolies and Mergers Commission that prevented that one, it resulted in the formation of "Shareholders Against Rupert Murdoch" which became Manchester United Supporters Trust.
There are two simple truths however:
- Supporters have not owned Manchester United for at least 111 years
- The possibility of someone undesirable to fans of United taking over the club became a reality as soon as it was floated on LSE in 1991
However, that event also gave supporters back the inalienable right to buy a stake in their club, and that right has been reinstated with the recent flotation on the New York Stock Exchange
The Shares Are Priced Too High
Manchester United Floatation
Before the stock market floatation of Manchester United in August 2012, there were all sorts of warnings and criticisms.
The IPO had originally been proposed for the Singapore Stock Market in 2011. There were probably two main reasons for that: the London market was not yet ready for a significant IPO following the aftermath of the 2007 crash; and the IPO would appeal to a wider Asian investor community.
The fact that it didn't go ahead probably pleased a lot of dissident United supporters still bemoaning the ownership of the club and the amount of money apparently being taken out of it.
There had been an apparent proposal to buy the club by the "Red Knights", supported by M.U.S.T. in January 2010. This came to naught primarily because the Glazers refused to sell. But also it was difficult to see how the Red Knights would raise the money.
So the float eventually went ahead on the NYSE and there were warnings that the share price would collapse. And indeed while the initial hope was that the shares would be issued at $20 apiece, in the event the float took place at $14.
No doubt those opposed to the float rejoiced as the share price slid slowly away towards $12. One has to keep in mind, however, that there is a significant element in the markets these days, especially hedge funds, of investors who make money out of "shorting" shares.
This is a practice whereby a fund, for example, sells shares it doesn't have and buys them back after they have fallen. Shorting may well have been driving forecasts like the one above.
However, shorters may well have got a shock when one of the world's biggest investors, George Soros bought a 7.9 percent stake.
Since then the shares have recovered to an all-time high of $15.50. They broke out of their downtrend in mid-September 2012, since then they have been tracking steadily upwards.
So any United fans who bought stock near the bottom are already sitting on around a 25 percent profit.
Burdened with Debt
Old Trafford Glazers Protest
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We don't want to get into all the previous arguments about the Glazers burdening Manchester United with debt, or taking money out of the club to pay directors' fees, dividends or loan interest.
There is no contesting the fact that the parent club of Manchester United has a substantial debt, which may have peaked at over £700 million.
The Glazers were able to buy United primarily because, having built up a stake in the plc, Messrs McManus and Magnier sold them their 28.7 percent stake. Nevertheless, their bid did not become compulsory until they had 90 percent of the shares.
While many of the shares may have been in the hands of institutions, it surely must be the case that Manchester United fans sold their shares to the Glazers.
It does seem ironic that, while the takeover probably couldn't have been defeated, it would only have taken just over 10 percent of the shares in fans' hands to block the compulsory takeover; and with 15 percent or more they could have demanded a seat on the Board.
So if fans are still so incensed now, why didn't they organise themselves to retain and/or buy shares at the time. Furthermore, why didn't the Red Knights launch a counter-bid before the Glazers bought the Irishmen's stake?
Burdened with debt
Yes, it was what is called a "leveraged takeover", that is it was wholly or primarily funded by debt. When that happens it is not unusual for the debt to be placed on the senior company's balance sheet.
Now here is the thing. How would the "Red Knights" have funded a takeover bid of at least £1 billion, but more likely £1.6 billion without it also being a leveraged takeover, funded by debt? And where would that debt have ended up?
Or was it just that the Red Knights were seen as more "friendly" to the United cause.
It is also true that the Glazers could end up owning a company with no debt and drawing dividends from it. That will always stick in some people's throats but again the bid could have been defended or even prevented long before it was accomplished.
Anyone who resents the dividends could buy stock themselves, thereby participating in the ownership and deriving an income.
Many people will have been disappointed with the share issue being much smaller than had been anticipated. Some may have thought this was a pointer to imminent disaster for the club.
It is true that the markets were not in general very receptive to major stock issues at the time United were floated. It went ahead because the "window" for IPOs closes in the summer.
And yes, the shares slipped after issue. This is not uncommon.
In the event only about £150 million was raised in the floatation. This was seen by some as reflecting a lack of appetite for the shares, but Soros' stake appears to undermine that argument.
What is more likely is that advisors would recommend the minimum acceptable proportion of shares should be issued, thereby establishing the stock at a price from which it could be expected to rise.
As fortunes continued to improve both on and off the football field, it could reasonably be expected that the company could return to the market in future to raise more funds at a higher price to repay debt or to finance ground development and/or player purchases.
For the time being the latter is unnecessary. The first quarter results last November confounded the pessimists who were forecasting a loss. Together with internally generated funds, the debt was reduced from £437 million to £360 million.
There seems little doubt that it will fall again this quarter even if Sir Alex has to make a down payment on Wilfried Zaha in January.
There is massive and rapidly growing commercial revenue, such as the eye-watering £350 million Chevrolet deal. Together with the new Sky contract which promises a minimum of £60 million per club and possibly up to £90 million, United can comfortably expect to be profitable and cash-flow generative again this year.
Resources for Transfers
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What do you think happens to the prospective price of a player if Manchester United show an interest? And how much more will his agent demand in salary or even signing-on fees if his client is going to the biggest club in the world, rather than Reading, for example?
People who have in the past asserted that Sir Alex didn't have the funds to spend on players conveniently overlooked the countless times the United manager complained that there wasn't "value" in the transfer market.
So then they might talk about players like Lucas Moura and Eden Hazard going to other clubs. In both cases it seems likely that United were prepared to go to £30 million or so but no further. They did however get value when they paid £24 million for Robin van Persie, despite the many doubters.
Let's take the case of Samir Nasri (that was a near-miss). It appears that United had agreed a fee with Arsenal and a salary package with the player, but then City simply "gazumped" the deal by offering Nasri far more money.
Rightly, Sir Alex will never sign a greedy player because motivation is fundamental at Manchester United. It is thought that Van Persie turned down a much better offer from City because United "breathe football."
The figures in Jonathan Beever's article show very clearly that United do not have the highest salary bill. Like the best run clubs they have a pay structure where the best players get the best salary.
But United are leading the Premier League clubs in wanting the immediate implementation of Financial Fair Play and wage restraints have also been considered.
Of course, if this is successful it will make the rich clubs richer as sponsorship grows and with the new Sky deal, but it also limits the amount of money going into the hands of players who are already earning obscene wages.
With more control over their own income, clubs could also choose to reward fans' loyalty by having a ticket price freeze, reducing prices or paying for away travel, for example. Changing the balance between greedy players and fans in a recession will win the popular vote.
But with United likely to have yet another stellar year financially, with the possibility of the first ever £400 million total revenue, this also opens the way to continue to pay down the debt.
Unless United slip like Liverpool have and Arsenal may, there is the possibility that through further share issues and debt repayment from revenues, they could be debt-free within three years.
That also strengthens the manager's hand in the transfer market if needed.
Sir Alex's Transfer Policy
Wenger & Ferguson
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Given the choice over the last few years, whose transfer approach would you rather have had? Sir Alex Ferguson or Arsene Wenger? Or John Henry, Mike Ashley, Randy Lerner...?
If you read the transfer speculation surrounding Manchester United for a year, you would probably come up with hundreds of names they are supposedly interested in. And that may well be true.
But the press have to sell newspapers and they notoriously start rumours. We don't do that on Bleacher.
Sir Alex simply chuckles at all the ludicrous rumours and doesn't confirm a story until the deal is done. A week ago he was asked in his Press Conference yet again and his reply was simply "nothing to report." That didn't mean he wasn't interested in buying anybody.
He is always interested in a player who he has scouted, who is passionate about joining United and who ideally is young enough and, most importantly represents value in the market.
Who would have thought he would pay £12 million for a stringy 18-year-old from Sporting Lisbon who went on to become the greatest player in the world. Heartbreaking to let him go, but £80 million? Good business.
Or Chicharito, for example? Or maybe the next Ronaldo, Mr Wilfried Zaha?
Disappointing for all the James Rodriguez fans, but with a down-payment of £10 million and an English qualification who is to say that one of the most talented young English players of his generation won't end up being the "buy of the century"?
People don't directly criticise Sir Alex's transfer dealings except when he buys a Djemba-Djemba or Bebe without even seeing him play. (Incidentally, both Bebe and Manucho were recommended by Carlos Queiroz.)
They may think there are better wingers than Ashley Young or even now Antonio Valencia. Sir Alex buys players like Ashley Young, Phil Jones, Shinji Kagaw, Robin van Persie; blends them with Tom Cleverley, Rafael and Danny Welbeck; and stitches them into a team.
There will always be people who get frustrated because Sir Alex doesn't buy a particular player. We live in an age of fantasy football where there are too often unrealistic expectations.
Take Wesley Sneijder, for example, in whom United have been interested in the past. So they were supposedly within 48 hours of signing him 18 months ago, but the deal foundered on his wages.
That wouldn't have stopped some people believing United failed to sign him, or they weren't ambitious enough. They probably believe that a £250,000 a week tax-free package (which is what he was reputed to be getting in Italy) should not be an insurmountable obstacle.
So how do you equate fans' concerns about obscene salaries with a gross equivalent UK package of £500,000 a week being not unreasonable?!
So to clarify, Sir Alex's view of "value" in the transfer market will have at least three components: transfer fee; salary; and age, usually. In addition, the player must want to play for United.
Surely none of that is unreasonable?
So it's not about the availability of transfer funds, because the Vice-Chairman has confirmed that Sir Alex has funds available.
But it is about financial soundness and surely that must be right if people are worried about United going bust?
And that is why a salary cap for all Premier League clubs, fixed to a proportion of their total revenue must make sense.
After all, if Wesley Sneijder arrived on £500,000 a week, how much would Wayne Rooney want?
Securing the Future
Ferguson, Charlton & Glazer
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It looks like the Glazers are here to stay.
That may well suit Sir Alex and David Gill from one point of view, because it appears that there is little or no interference in the footballing side or the management of the club on a day to day basis.
Yes, United may have to make more trips to the USA or Asia to satisfy the commercial demands of a fast-growing and hungry fan base.
In addition, it is clear that Sir Alex is in charge of his own destiny and that increases club stability. When he decides to retire, of course the Glazers will be kept informed, but surely they will take the collective recommendation of Sir Alex, David Gill and Sir Bobby Charlton on the successor.
Compare that to Chelsea where it appears Roman Abramovich hires and fires managers and runs the transfer policy (and maybe even team selection where Fernando Torres is concerned?)
Financial Fair Play
Of course, if you've been in the footballing wilderness for nearly 40 years you would want a "sugar daddy" to be able to finance as many losses as he wants.
The trouble is that the present financial free-for-all is a recipe for disaster as Portsmouth's case has shown. There is a very real possibility that many more clubs could go out of business over the next few years across the leagues.
And how would City or Chelsea survive if the owners walked away.
The two biggest problems are ever-escalating transfer fees and salaries. Both are obscene. Some players are on 500 times the UK national average wage. Some players cost the price of an office block and can run their contracts down over five years.
We have been in a recession for five years now and it could take another five years to sort out. What message does it send to poverty-stricken football supporters when such figures keep on rising.
Football may be in the entertainment industry but even Hollywood film stars are experiencing relative austerity as global business lives in the real world.
Meanwhile, Manchester United could be debt-free and the richest football club in the world within the remaining period of Sir Alex's stay as manager.
Yes we all want the debt removed, but even after that we want a continuing well-run club with sound finances that will continue indefinitely whoever the manager is.
Sir Alex may be more cautious than Roman Abramovich or Sheikh Mansour in the transfer market but he understands economy, as well as how to blend talent, youth and experience into a winning team.
United are at the pinnacle of English football and, unlike City or Chelsea, have made the knock-out stages of the Champions League.
The finances are burgeoning and the share price is rising. Can't be that bad, can it?