Tuesday, May 20, 2008

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.


Mike Georger said...

soccernet staff feverishly try to spin this to make it a story about rafa being on the hot seat and having to sell everyone to pay loans

Goat said...

May they both go the way of Leeds.

Ian said...

Wow those United accounts are godawful. Long term debt to EBITDA(rough estimate of cashfolow) is something like 7.6x to 1, and EBITDA barely covers interest expense . That means that in order to buy players United must find additional sources of cash (borrow more money or sell players) because they aren't generating much if any internally. If this company were a widget maker it would be rated CCC by the ratings agencies and in serious danger of bankruptcy. But since its lashed to the premier league goldmine, all is well I guess.

BerbaKeane said...

All clubs should be run like Spurs, sensible jewish businessmen. (Commoli is responsible for Bent and he shall be fired shortly.)

BerbaKeane said...

...and Chelsea's debt means nothing. They have Roman, he is worth close to 20 billion. Those cu*** will never have to worry about cash. United could get fucked but I just cant see them going the way of Leeds ever

Mike Georger said...

all i know is that one dollar bet i made with eddie murphy that i could ruin united financially is about to pay off, junior bacon cheeseburger here i come!

Precious Roy said...

That made me laugh.

Looking good, Billy Ray.

hockalees said...

"Feeling good, Louis."

In a total threadjack... has anyone seen when/if this will come to a Region 1 DVD near us?


hockalees said...



Mike Georger said...

Henry: Legend. Starring Tim Curry as Henry, Tom Cruise as Arsene Wenger, and Mia Sara as Ashley Cole