It is currently very fashionable for fans and media to question the sustainability of debt at certain high profile football (soccer) clubs in England. In fact, it is practically a sport unto itself at Manchester United, one of a handful of clubs owned by Americans. While it is always wise to use debt with an abundance of caution, the drama at ManU has frankly far exceeded the data. Personally, I think the hysteria is fueled as much about Yanks owning the English sport as it is about debt to equity ratios.
If one examines the situation at ManU purely from the perspective of the metrics and not as an impassioned fan or patriotic protector of the beautiful game, it is clear that the club is far from distressed. Since acquiring the club in 2005, the Glazers have grown the revenues, profits and valuation at an annual rate that outpaces the rate of interest on the debt. This acts to de-lever the club from a debt perspective. While the amount of debt is large (roughly $950 million), it is approximately half of the value of the club, which Forbes put at $1.83 billion earlier this year. The club has annual revenue of $460 million and profits of $150 million. A 33% profit margin is something every sports team owner would celebrate. This makes ManU the world’s most valuable and most profitable sports team. On top of those astonishing numbers, the team continues to win (three consecutive league titles) while making prudent, long-term decisions about its player development and wage bill. In our view, the Glazer management team has done an excellent job of growing the business and has proven it has the correct business model to manage its current debt levels. If you take a purely financial view, the fans of Manchester United should be quite happy about the current and future health of their club. And if the owners were English, they would be…at least for a while.
Now, let me tell you where there is real danger in English football. If you want to see where owners, boards and management are doing a poor job and jeopardizing the health of football clubs, look no further than the Coca-Cola Championship League. In the false belief that wage bill alone determines wins, too many clubs are spending their hard-earned money on players in an undisciplined manner. With pressure from fans and the desire to get a piece of the ever-growing media rights share from the EPL, clubs are spending beyond their means. If you examine the wage to revenue ratio of the last three seasons, you’ll see an alarming trend. The wage bill average has gone up as a percentage each year from 72% to 79% to 87%. Because media rights have far out-paced other revenue streams (attendance for example), there is an even stronger pull for Championship clubs to use debt to fund operations as a high risk gamble to buy their way into the EPL. The theory goes that once promotion to the EPL is gained, debts will be paid and all will be well. It’s a sucker’s bet. Deloitte’s Sports Business Group has issued a warning about the rising wage bills. We think it should not be ignored. If you study the past 15 years of English football, you’ll see that the path to insolvency is well worn. If you look at the NFL and the NBA today, you’ll see that the ability of management to control its single largest operational cost (wages/benefits), in the context of unprecedented economic weakness, is at the core of CBA negotiations and may jeopardize a 2011 season for both sports. http://www.forbes.com/business/sportsmoney/
So, what’s the point here? Our view is that English football clubs can actually gain from owners who are driven by the profit motive. The profit motive aligns shareholders, management and fans in regards to building a strong, healthy valuable organization. There are lots of opportunities today to find distressed football clubs at great values, but the key is management. The value of the clubs is in the ability of management to repair the broken balance sheets, improve the income statements, provide financial discipline and operate the organizations with a view towards long-term, sustainable success.
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