In recent years, followers of the beautiful game and the English Premier League specifically have become accustomed to the growing level of criticism that has been aimed in the direction of the current Manchester United Executive Vice Chairman, Ed Woodward – the man essentially responsible for the running of the football club. Mr Woodward has faced a barrage of criticism, not just from fans but also from respected ex-players too, with none other than ex-captain Gary Neville lamenting the senior management’s ability to financially back recent managers in the transfer market.
Last season, Manchester United’s transfer spend was the tenth highest in the Premier League, and the lowest that it had been for five seasons. Remarkably, even relative minnows, Brighton and Hove Albion spent more, whilst arch-rivals Liverpool spent more than twice as much on new players. In the new 2019/20 season, the club’s net spend lags behind the likes of Aston Villa, Manchester City and Arsenal.
But it also needs to be understood that in many ways, Mr Woodward and the executive management team have their hands tied. In fact, it’s the club’s corporate and ownership structure that dictates virtually every action that management take. The Glazers’ controversial ownership of the club has been well documented, ever since they took over Manchester United back in 2005. Even after selling 10 percent of the club, through listing on the New York Stock Exchange back in 2012, the Glazer family still control 97 percent of the shareholder voting rights, despite owning less than 80 percent of all outstanding shares. Under the terms of the club’s dual class share structure, the unlisted B shares – which are exclusively owned by the Glazers and represent around 75 percent of the club’s shares – carry ten times the voting power of the listed A shares. Being incorporated in the Cayman Islands further cements the family’s control. Cayman Island law notoriously favours majority shareholders at the expense of minority owners, and makes unsolicited takeover attempts much less feasible.
The Glazers’ complete control of the club is particularly visible in the board room, with the family taking up half of the twelve board positions. The top board positions – executive co-chairmen – are both held by Glazers, whilst there are a further four family members serving as non-executive directors. The role of the board is to ensure that a company is being run in the best interests of its shareholders. The board is responsible for appointing the chief executive officer, in this case Mr Woodward, whilst board members are appointed by controlling shareholders. Basically, Mr Woodward has been selected and appointed by the Glazer family to run the club according to their wishes and desires. In the same way that the board select the CEO, they can just as easily remove him from his position.
In other words, if Mr Woodward wants to keep his job, then he needs to manage the club as instructed by the owners, in pursuit of their strategic objectives for the business. In this case, executive management have no power to go against the controlling shareholders. The Glazers reportedly speak to the management team on at least a weekly basis, and it’s clear that all major decisions will need to go through the board prior to being ratified. This means that it is the Glazers themselves that have the ultimate say on transfers, either directly by influencing individual transfer decisions or indirectly by setting transfer and financial strategy at the beginning of the year.
The Glazers’ commercial objectives are to maximise the value of the business and to maximise after-tax profits. Ultimately, any gains from their investment in the club will come from either selling part, or all of their investment, or by extracting profits in the way of dividends. Their debt-laden takeover of the business is a strong pointer that their interest in the club is mostly financial. Back in 2005, they acquired the club primarily by borrowing against the club’s assets, in what’s known as a leveraged buy-out. LBOs were particularly popular in the early 2000s and have gotten a bad reputation, due to the way in which they saddle the acquired business with lots of debt. They have been blamed for many corporate failures over the last decade, with perhaps the most well-known being Toys R Us. They are predominately used by private equity companies, who look to buy and then maximise the value of their holdings, before selling, typically up to ten years later. Logically, the Glazers’ practice of such financial wizardry, puts them in the same category as a private equity investor.
The Glazers’ takeover of Manchester United was reportedly fuelled by over £500 million worth of debt, with their final purchases valuing the club at around £800 million. At least half of the borrowed amount was secured directly against the club’s assets. In the fourteen years since the infamous takeover, the club’s leadership have successfully managed the debt load, mainly through refinancing. This has essentially involved the club taking out more debt, at lower rates, and over a longer time period, to pay off shorter duration debt, at higher rates. The result is that the overall debt burden increases, but annual interest expenses decrease. The latest refinancing took place in 2015, when the club issued $425 million worth of bonds, maturing in 2027, with a coupon rate of 3.79%. This was used in part to repay the remaining amount of a bond that had a much higher rate of 8.38%, due to mature in 2017. The effect of this refinancing is that interest payments have fallen dramatically. Over the last three years, the club has paid out £51 million to service its debt obligations, whereas in the three years prior that figure was a huge £143 million. In addition to its bond programme, the club has a loan facility, for the principal amount of $225 million, at similarly low rates. However, whilst annual interest expenses may have fallen, total debt has ballooned, from £341 million in 2014, to nearly £500 million today. In fact, Manchester United is now one of the most indebted clubs in Europe, in stark contrast to being virtually debt free before the Glazer takeover.
The Glazer family’s dependence on capital markets and fixation with debt is clearly reflected in the choice of senior personnel. Indeed, Mr Woodward was in fact previously an investment banker at JP Morgan, where he worked on mergers and acquisitions. One of his first roles at Manchester United was to manage the club’s capital structure, and although he has been responsible for much of the club’s commercial success, it’s his ability to navigate the capital markets that makes him so valuable to the club’s owners. As well as Mr Woodward, one of the non-executive directors – a high ranking investment banker at Rothschild – also brings significant capital markets expertise.
But managing the club’s capital structure is only one half of the management strategy. In order to realise a profitable return on their investment, the owners also needed to grow the value of the club, or at least make it more profitable. And so the club has relentlessly pursued a highly commercial model, focused on extracting as much value as possible from the Manchester United brand. Since 2004, Manchester United’s total revenue has more than trebled from £169 million to £590 million. Some of this change can be attributed to what have been huge increases in the value of premier league broadcasting rights over the last decade, from £806 million per year in 2008 to £2.7 billion in 2018. But Manchester United cannot take all the credit for that, rather it is the result of a collective effort by clubs and the FA to make the premier league the most attractive league in the world.
Manchester United can take credit for its commercial performance, though. Commercial revenues in 2018 were £276 million, up from £117 million in 2012. The club offers sponsorship packages at the global, regional and category level. The long list of sponsors includes the likes of 20th Century Fox, DHL, Electronic Arts, TAG Heuer, Kohler, Aeroflot, Marriott and Remington. Sponsorship deals with Adidas and General Motors (Chevrolet) are amongst the most lucrative in world sport, with the Adidas deal worth at least £750 million over ten years, and the Chevrolet deal worth around £56 million a year. The Chevrolet shirt sponsorship is worth nearly three times the value of the club’s previous deal with Aon, whilst the Adidas deal is in a different ballpark altogether with the thirteen-year £303 million deal that the club previously had with Nike. These two sponsorship partnerships demonstrate how attractive the club is to sponsors, and the true value of the Manchester United brand.
The club manages its brand in much the same way that a luxury or premium brand, such as Mercedes or Ferrari would. Considerable emphasis is placed on enhancing the strength of brand, primarily via the performance of the football team, but also by engaging with an increasing number of fans all over the world. After all, the club’s main selling point to global sponsors is its huge, varied and global audience. The club serves as an outlet for sponsors to reach new customers in new markets. The Manchester United brand is based as much on historical football success as it is on the present day. Growth of the brand in Asia – especially in China - is particularly attractive to sponsors, with Manchester United now having more followers on Chinese social media than any other sports club in the world. Meanwhile, the club has more followers on Facebook and Instagram than any other Premier League club. Digital media has become an increasingly important part of the club’s commercial strategy. Not only can the club use digital channels to sell merchandise directly to fans, but it can also engage with customers, deepen brand loyalty, and collect valuable customer data. More than anything else, management seeks to monetise its huge global following – estimated by the club to be over 600 million worldwide. Again, the presence of a fashion executive on the board of directors shows how important brand image is to the owners.
The Manchester United CEO’s chief remit is not to deliver silverware, to play the ‘Man United way’, or to continue the club’s philosophy of bringing through academy players. Instead, it is to maximise shareholder value. This is what he was hired to do, and this is what he is judged upon. Transfer activity is limited by the extent to which it affects the club’s cash-flow, after-tax profits, ability to pay a dividend, and of course the balance sheet. The club’s performance on the field is viewed primarily in the context of its ability to improve the strength of the Manchester United brand. Rather than demanding title wins, the board merely target Champions League qualification and representation in the latter stages of cup tournaments. But the club is still well aware that highly marketable players, such as Paul Pogba, play an important role in brand development.
The management are already spending more on transfers than they would like to. High transfer costs have to be amortised over the life of a player’s contract, ultimately hitting the bottom line. Once a large wage bill and interest expenses are factored in, profits are depressed even further. The club has a target of limiting its wage bill to no more than half of total revenues, which is amongst the most conservative in the league. A desire to preserve net profits and the dividend, ultimately imposes a cap on transfer and wage spend. Even after limiting expenditure, net profit margins are unimpressive. The last five years have produced net profits averaging just £12 million a year, with a paltry margin of only two percent.
The club only began paying dividends in 2016, and has now paid out more than £60 million, with most of that making its way to the Glazers. With such muted dividend payments, the owners are reliant upon the appreciation in the value of the club as whole. Just as well then, that the current share price in New York implies a market capitalisation of £2.4 billion. Separately, KPMG and Forbes value the club at around £2.6 billion and £3 billion respectively. In terms of European football, only Real Madrid and Barcelona are worth more. Even when accounting for the nearly half a billion pounds worth of debt, the Glazers have still easily doubled their investment.
Before the club listed in New York in 2012, it was reported that the owners were looking to sell off a much larger chunk of the business, with talk of raising up to $1 billion. Whilst this didn’t come to fruition – perhaps due to a lack of investor appetite – it shows that given the right opportunity, they are looking to sell down their stake. Hardly surprising given that the club accounts for an unproportionate amount of the family’s wealth.
In this commercial context, it’s hard to argue that executive management haven’t succeeded. Manchester United is the most commercially successful football club on the planet. But this commercial performance has come at a cost to the fans. The club has failed to win a domestic league title since 2012/13, and hasn’t even looked like challenging for elite trophies in recent seasons. If the club’s on field performances matched the work done off the field, then the club would surely be the most valuable in the world. Essentially, this is the dilemma that management face: maximising shareholder value and football performance at the same time. Recent history has told us that this is an impossible task.
Which brings up the question of what football clubs are for. Are they institutions run for the fans, or are they businesses designed to line the coffers of super-rich international businessmen? One thing is for sure, though. The commercialisation of football clubs – such as Manchester United, Arsenal and Liverpool - is a far more sustainable model than the worrying trend of owners viewing clubs merely as trophy assets. This has been all too common in recent times, and continues to threaten the survival of some of the greatest sporting institutions.
GCIS - Commercial Intelligence - Content/ Market Intelligence