I'm Guessing "Owning a Football Team" Is Not on a List of "The Best Things In Life"

"A billion here, a billion there, pretty soon, you're talking real money."
—Sen. Everett Dirksen

I learned two things today. First Dirksen apparently never really said the above, which is often attributed to him. Second, Chelsea and Manchester United are accumulating enough debt that it's rapidly approaching "real money" status.

From the Guardian:

Chelsea and Manchester United, the Premier League's two representatives in tomorrow's Champions League final, owe creditors £1.5bn between them. According to the latest accounts of Chelsea Limited, the company which owns the football club, Chelsea owed £736m to all its creditors. United's accounts, also recently filed at Companies House, showed total creditors at £764m.

Translating from English to American that's about $3 billion between them. Hey, that's about enough to buy Liverpool.... three times over.

Chelsea's debt is somewhat fictitious. The bulk of it is actually a loan from owner Roman Abramovich to the club, an interest free loan that apparently has no repayment schedule on it either. It only becomes an issue if Roman decides he wants it back (or in the event of a sale), in which case the club has 18 months to come up with the dough.

United's debt on the other hand is real in the sense that they just can't pay it back whenever. Worse, unlike Chelsea's "debt" which, if you know the least bit about inflation you understand is actually getting cheaper by the day, United is actually paying a hefty interest rate on theirs.

In summer of 2006, United re-financed the loans it used to buy the club so that the overall interest charge would drop to about £62M per year (down from £90M per year) but the overall debt increased from about $£580M to about £660M (to convert those numbers into dollars, pretty much just double them).

There's a decent rundown of United's financial situation here. More fascinating is the financial statement itself (warning PDF link). About 60% of the increase in their net cash flows in the year ending July 2007 came from the increased financing (i.e. they retired about £620M in debt and took on over £650 in new debt).

So if they hadn't refinanced United would have been cash flow negative for the second year running, that with substantial debt payments (about £150M the borrowing is to hedge funds at a rate of 14.5%). Hell, Glazer could have got a similar deal if he had just used this.

Additionally, United's debt-to-equity ratio is over 10, which is pretty high for a billion dollar operation (for comparison Dell, Coca-Cola, and Amgen all have debt-to-equity ratios under 1). It's a risky profile, but it only becomes problematic when your cash flows can't cover the debt payments. But, as stated above, without the debt restructuring United would have been cash flow negative last year.

So any hiccup in cash flows—tickets, merch, TV, CL money—and United could (emphasis *could*) be in trouble.

Just something to think about when watching the Champions League final tomorrow. Sure, both teams really want to win, but in a very real financial sense, United needs to win for reasons that Chelsea doesn't.