Double Glazing

How are the Glazer family’s clever financial games working out for them?

The purchase of Manchester United football club, by the Glazer family in 2005, was in the form of a classic and somewhat controversial leveraged buy-out. If it isn’t clear to you exactly what that is just think of buying a business with money you have borrowed from others, often using the business as security for the debt. Leveraged buy-outs exist solely to make people rich and they have only been around for one more year than I have.  The first leveraged buy-out may well have been in 1955 with McLean Industries, Inc buying Pan-Atlantic Steamship Company.

My, hasn’t the leveraged buy-out, apparently so-named by Victor Possner of DWG Corporation, come a long way since 1955? There was something of a boom in the 1970’s, thanks to Jerome Kohlberg Jr and later his protégé Henry Kravis, working at Bear Stearns, before leaving to form the legendary Kohlberg Kravis Roberts in 1976. In the 1980’s, the era of the “corporate raider” there were more than 200 of these deals valued at over $250M and culminating in the $31bn RJR Nabisco deal. Access to debt was what drove the 1980’s boom and this continued almost unabated until the turmoil in the mortgage markets spilled over into the leveraged-finance and high-yield debt markets around 2007.

Leverage is arguably both a very clever financial mechanism but also the scourge of the western world. Housing mortgages have spread its dubious benefits to the masses. If in the 1990’s you had only put down 10% of the cost of a house and then you sold it 10 years later, after the house had doubled in value, you would have nearly doubled your money, even after the costs of debt, the mortgage, was taken into consideration, but your return on your own capital would have been ten-fold if you ignore these interest payments, maybe 8-fold if you don’t. So, leverage allows you to buy something you couldn’t otherwise afford, using others’ money so you limit your personal downside risk and there is the real prospect of making a great financial return if you get the timing right. Of course, it is the lenders who shoulder most of the risk as we have all found out, to our costs, recently.

Timing is everything and like the housing market the financial markets have changed a lot since 2007, a couple of years after the Manchester United deal: the leveraged buy-out is no longer in favour as much as it was and “junk” debt has wreaked havoc around the globe, so funding is now hard to come by. On top of that, Manchester United failed to qualify for the latter stages of the lucrative European Champions league last year; Mr Ferguson, possibly the greatest football manager of all time, in my humble opinion, is one year closer to retirement; and even Manchester City looks to be bettering them on both the field and the balance sheet.

No wonder then that the Glazers are looking for cash to lighten the debt load still carried on the Manchester United balance sheet. Characteristically though they are looking for other people’s money, rather than using their own. The original idea was an IPO in Singapore to “access the Asian market” but sentiment has somewhat disappeared and they are not alone in changing their minds about that. At the time they were thinking about a £1.7bn valuation for the club, more than twice what the Glazers bought it for in 2005. Now though valuation is much less certain and they are talking about a US IPO to raise some cash.

The rather modest US IPO headline objective of $100m is probably only enough to buy a decent player these days, so I’m not too sure how that is going to help much, particularly with interest charges of close to £50m per year and with only a cash reserve of £25.6m, at the end of the first quarter, after burning though £125m in cash in the nine months to the end of March. The Glazers had wanted to raise $1bn in Singapore: it looks like they are now waiting to see just how much they can get away with in the current market conditions.

With net revenues of £245.8m, for the nine months to the end of March, up 6.1% on the year before, and profits before tax of £15.7m for the same period, up 32%, they seem to be trading OK, but “cash is king” and I foresee tougher times ahead for Manchester United.  However, I expect the Glazers will still more than double their money, probably several times over, by the time their involvement with the club is over and they move onto the next deal.




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