Thursday, June 11, 2009

Cristiano Ronaldo And Why Jon Gruden Knew His Sale Was Inevitable

So Crissy is off to Spain and United are £80M the better for it.

That gives United a nice little kitty to swing with in the transfer market. Who will they target? Tevez? Ribery? Villa?

How about nobody?

Yes. Nobody. Okay, it might only be nobody of consequence. There could be a £5M youngster here or a cheaper veteran there (can Arsenal sell Silvestre back to United for a bag of magic sand?) but United might not have the equivalent of a blank check to go spend now that they've unloaded Cristiano Ronaldo.

Why not? Because there is the most gigantic white elephant in all of football poised precariously over Old Trafford.

Lest people forget, United are carrying a massive amount of debt, £699M. And unlike Chelsea's quasi-fictitious debt, United's is real. In other words, they owe it to people that want it back. Really, there's been plenty of ink this week about Hicks and Gillett and Liverpool's finances, but United have over twice the debt of Liverpool FC (I believe the Guardian had LFC's at roughly £320).

United had a pre-tax loss of almost £45M last year. That's with the club's debt rising each of the last two years. I seem to recall when I found any detailed numbers for the club (maybe from two years ago—and pardon my not digging this up right this moment), the only reason they were cash flow positive that year was because they had rescheduled some debt and pocketed the difference to fund operations.

In other words, and this is just an example, instead of owing £300M over 5 years at 7% they said to some lender "How about you give us an additional £100M and we'll owe you £400M but we'll pay it back over 7 years but at 9%." And the lender said, "Okay."

United is worth a ton, but they owe a ton. In fact they've got something like £175M of the debt financed at a crippling 14%. And you can't just look at it and say "Well they owe £699M but the team is worth twice that, so they are fine." The largest asset on the United books is "Goodwill" which, as an accounting term, is simply the amout you paid above book value for something. So United's biggest asset is simply how much the Glazers were willing to overpay for the club.

What's more important than the book value for United as a going concern is the marginal cost of operating the club, and given the negative cash flows, it's greater than the marginal revenue the club is generating.

Think about the Liverpool situation. Liverpool is worth more way more than the £300M-and-change it owes the banks. Hicks and Gillett think it's worth more than that, which is why they borrowed that amount. They figured they would make enough to pay it back. The bank thinks its worth more than that. That's why they took the club as collateral. As a banker, you wouldn't secure a loan with an asset that's worth less than the money you are lending.

Liverpool's problem isn't the value of the club. The owners might be forced to sell because they can't cover the marginal costs of operations (specifically they don't have the cash on hand to make a very large debt payment due to their banks).

A potential buyer also knows what the club is worth. But they also sense that the owners might be fucked and that the banks don't really want to own the club. So they are biding their time so they can wait until the owners are forced to sell at a heavy discount (if it gets to that), or until after the banks take it over and want to unload it so they don't have to deal with running a football club.

Okay, so what's happening at United that is all that different? They are operating at a loss and their debt is going up year after year. What if they were to miss the Champions League. All of the sudden a huge chunk of change is gone. Now maybe they can't meet their debt obligations and suddenly find themselves in a situation similar to Hicks and Gillett.

Once you get down to it, what are a football clubs real assets? A stadium, the shirt sponsor, media rights, the brand... what else? A buyer for United isn't going to say, "Well, you paid £X in goodwill, so I'm certainly going to pay more than that." No, they are going to wait until the club is fucked as possible and try to lowball every place they can.

There is just less talk about the Glazers and United than there is Hicks and Gillette at Anfield because the former have done a much better job of being opaque and keeping their names out of the papers. But things might not be so rosy at Old Trafford.

For a hint of how things might be in the Glazer's financial house, take a look at the Tampa Bay Buccaneers, the other pro sports organization owned by the Glazers.

The Bucs have out-and-out released high-priced veterans, fired coach Jon Gruden and his hefty contract and replaced him with a complete (and much cheaper) unknown. They have moved training camp from Disney/Orlando back to Tampa to save money and they even canceled the club's Christmas party to save money.

The Buccaneers have more money under the salary cap than any other team in the NFL this off-season. Most teams clear cap space to go out and sign high-priced free agents. Not the Bucs, they haven't signed anyone of note (or cost). They are cutting costs. Period.

The Glazers can let the Bucs go to pot and not invest money in them for a few years because they won't get relegated out of the NFL. Just doesn't happen. Even if the Bucs become the Detroit Lions for a few seasons, fans will still turn up and the enormous TV contract will still put money in the Glazers' pockets.

But if they don't pour money into United, they'd be screwed. There's no safety net the EPL. If that side drops from the Top 4 or doesn't advance in the Champions League, the hit to their revenues could be significant. So there is a very real possibility that the Glazers have to use the savings from Tampa to subsidize the massive debts of United.

The selling of Ronaldo, it might have less to do with his petulance and any personal conflict with Alex Ferguson than it does with the Glazers' finances.

If I were a United fan, I might not be alarmed but I'd be concerned and would certainly start paying a lot more attention to what's happening in South Florida and start asking some questions about the ownership of my club. You might not be able to draw a direct line from Tampa to Manchester, but it is more than just peculiar the way the Bucs are suddenly being run.

That's what also makes this sale so intriguing. With Ronaldo in the line-up that team is almost a lock for finishing 1 or 2 in the league and making it into the group stage of the Champions League. Without Ronaldo in the side, that team looked absolutely pedestrian (remember they drew at home to fucking Newcastle then struggled to win at Portsmouth when he was out).

How much is that worth to the club? More than £80M?

This is still Manchester United. They have the best manger in the game and they are still loaded with talent. But they are also losing the best player in the game. Suddenly deep cup runs and parking atop the league table become much more difficult tasks for United. And without the money from those extra games servicing £699M becomes more difficult. What if, without Cristiano Ronaldo, United finish next season like Arsenal finished this season? Fourth place, no trophies, no Champions League final. Do they forgo more money than they made in the sale? Did they pay down enough debt for it not to matter?

If you look into the numbers United are not rock solid financially as what they are doing isn't sustainable indefinitely. Moves this summer might be done more out of financial necessity than European glory.

Of course if United turn around and spend every last cent of the Ronaldo transfer fee to bring in players then this is all off the mark. Now that the Red Devils have accepted Madrid's truckloads of cash, what happens next will say more about the Glazers than they have ever said about themselves.


Mike Georger said...

What a post.

WhiteSpeedReceiver said...

Spectacular work, whoever is responsible for this.

And just remember, boys and girls: Goodwill needs to be reviewed for impairment on a "regular" basis. So if the actual value of the club goes down, the goodwill on the books gets knocked down as well.

EbullientFatalist said...


phil said...

Nice work, PR.

I've felt for some time now that the Glazers have constructed a house of cards that is going to take on little slip to completely collapse.

WhiteSpeedReceiver said...

Whoops. Didn't see the PR deserves the appluase. Well done.

MoonshineMike said...

Great Work Precious Roy. I am glad I kept my yap shut and let you go at it.

Precious Roy said...

Thanks... can't believe nobody in the NFL is connecting the dots either. Again I could be totally off here, but that's a lot of debt to be serviced.

Steve said...

great work PR. i'm not so surprised about the lack of connections made from the NFL side, though. I doubt most know that the Glazers own both teams.

jjf3 said...

Well done, PR. I'm not sure I agree with all of the resulting conclusions, but the underlying issues are important to understanding what is happening there...

Magnakai Haaskivi said...

Great piece.

I can see the NFL not paying attention because they're incredibly myopic in their worldview; most owners, players, and coaches don't have time for other endeavors, and certainly don't care about other sports. With the major media outlets in this country not really caring about soccer, it's really easy to skate this one under the radar.

The other dual-owner is Randy Lerner, who happens to own my Cleveland Browns. When we traded Winslow to the (Glazer-owned) Bucs, I did wonder if that was so Lerner could spend the money he would've used on a new contract to use on the transfer market getting a new centerback.