Manchester United Club: Big Debt Problem Research Paper

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Introduction

The acquisition of the English soccer club Manchester United by the American investor Malcolm Glazier in 2005 triggered a controversial argument in regard to the ability of the investor to handle the club’s financial matters. In particular, the Glazier family relied heavily on loans to obtain the cash needed to purchase the majority shares and subsequently own the club. The team was placed on heavy debt, which the Glaziers expected to cover using the club’s income. However, this initiative has brought a great debt problem, which has also caused debate over the family’s role and ability to handle the English football club. Currently, the club suffers heavy debts amounting to £389.2 million and an annual interest rate of about £70 million.

Although the owners were removed from the London Stock exchange after they had won absolute ownership in 2005, they have launched a financial campaign to pay off these debts, which includes listing in the New York Stock Exchange and holding some games in Asia. The purpose of this paper is to analyze the economic and financial situation at the club, with emphasis on the interest, roles and significance of the Glazier ownership, the process of financing their takeover and the reason why the new owners have gone public after delisting. In addition, the paper will suggest some few initiatives that could save the club from the effects of the heavy debt that it has incurred.

The Glazer Family and interest in English Football

The Glaziers are the members of a rich American family that invests in various projects, including real estates, properties, shares and sports clubs. It is possible that the family had considered a number of economic advantages of owning Manchester United before they pushed for a takeover bid. For instance, the club is one of the most famous and biggest soccer teams in the world and is more than 130 years old. The club is ranked among the top ten most valuable sports team in the world, with a brand tag of more than $2 billion. In addition, it boasts of a large base of wealthy fans located in various parts of the world.

The club’s success in the English Premier League over the years is significant and is gained by its ability to train and own some of the best and the most skilful players in the world. In addition, its location in the UK means that its financial position is secure because of the high soccer culture as well as strength of football industry in the country. By owning the club, the Glazer family expected to control one of the most prestigious and wealthy organizations in Europe and the world, which would increase their financial worth by a large margin.

The Glazer Family takeover of Manchester United

Since the Glazier Family took over the ownership and control of the club, a number of questions have arisen about their economic interest and desire in the project. For instance, what interest or motive did the family have in using heavy loans to cover for their ownership of the club? Was it economically necessary to borrow loans and incur heavy debts after having been excluded from the London stock exchange list?

After more than 100 years of private ownership, Manchester United went public for the first time in 1990. Immediately, it attracted a lot of attention from potential investors, including takeover bids from BSkyB Corporation (owned by Rupert Murdoch) and Michael Knighton, a renowned property trader in the UK. Although these bids had not succeeded, Malcolm Glazer announced their stake in 2003 (Bose 22). Before the end of 2003, the Glazers Family had increased their stake for the club from the initial 3.17% to about 15%. By the end of 2004, the family had again raised their stake for the club to about 30%. Within 5 months, the family further increased their bid to 57%, gaining the majority.

However, this was not the end because the family was then in a position to push a takeover bid, having surpassed the required 30% ownership at the club. In June 2005, the family increased their stake for the club from 57% to 75% of all the shares, which gave them the power to delist from the London stock exchange (Bose 23). Before the end of July that year, the Glazer Family had successfully increased their shares at the club to 98%, which forced them to launch the last bid to purchase the remaining 25% to gain absolute control and ownership of the club. Since then, the club has been the property of the Red Football Company, a parent company owned by the Glazer Family. From their accounts, the family spent over £800 million to purchase the club.

The process of financing the takeover initiative

So, how did the Glazers obtain the needed funds to purchase the club? The Glazer Family is composed of Malcolm Glazer, the father, and his sons, all of whom are investors and are included to the Manchester United Board of Directors. The majority of the funds needed to purchase the club did not come from the family’s own reserves, but rather from loans. In fact, it is worth noting that the family secured these loans against the clubs assets hoping that the club’s income would be used to cover for these loans within the shortest time possible.

The loans secured an initial incurring interest of about £60 million per year; three American hedge funds, all located in the new York city, provided the family with the cash in form of loans. The family announced that Citadel, Perry Capital and Och-Ziff Capital management had accepted to provide funds worth £275 million (Bose 23). It is believed that the total amount loaned to the club ownership amounted to about £660 million, which made the club pay about £60 million per year.

In addition, the family obtained PIK loans to get the remaining cash. Later, they sold these loans in form of hedges. However, it is worth noting that the assets of the clubs were not pledged as loan securities because the Red Football club acted as the parent company, holding these shares.

There is some evidence that the company’s PIK loans had an interest rate of about 14% per annum and was to be paid within the first five years of the family’s ownership of the club. However, by 2010, the family had not paid any of these loans. By March of the same year, the PIK loans increased to about £210 million after the company had issued bonds worth £500 million. However, by the end of that year, the family claimed to have settled all the PIK loans, but the method used to pay these loans remains unclear.

Noteworthy, the club’s overall interest rate had risen from 14% to 165 by the end of 2010. However, the club owners argued that it was still possible to pay off the debt without the need to increase ticket prices. Most critics argued that the debt was too heavy and could not be covered with an increase in ticket prices. By the end of 2010, it was clear that the family could not afford to pay off to its bondholders, which resulted into the increase of interest rate on the loan as well as annual payments that amounted to £38 million per annum.

The debt problem at Manchester United

The debt problem continued to hunt the club during the world financial crisis. In 2010, the Red Football Company announced that its debt had increased to £717 million. Few days before that announcement, the club aired their intention to discharge the debt by issuing a board worth more than £500 million. The company was successful because the bond issue raised £504 million within a short time, making it possible to pay off the £500 million loan they owed international financiers. In addition, there were agreements that the family would have obtained huge amounts of cash from the clubs resources to cover for the PIK loans before 2015, which includes obtaining £95 million in cash as well as the sale of the lease at the club’s Old Trafford training center. In addition, the agreement allowed the family to pay themselves more than 50% of the income per annum.

By 2010, the club’s debt had reached £ 507 million, which prompted fans to launch a campaign known as “Love United, Hate Glazier” as an opposition to the ownership of the club. In addition, the club was making a pre-tax profit of about £7 million by 2009, which was an improvement because it had incurred a loss of about £3 million in 2008 (Conn 47).

By 2012, analysts claimed that the takeover bid by the Glazer Family amounted to more than £2 billion and that the owners needed some £1.5 billion to pay off the debts. Arguably, it doubled the amount the owners had paid for the initial takeover in 2005. In addition, the club announced that rich fans provide two thirds of £700 million while ordinary fans’ part constitutes the remaining amounts (Conn 49). This means that the fans were now supposed to pay more for club membership as well as for the tickets.

Glazer Family and IPO in the NYSE

Even after delisting from the London stock exchange and after taking over the ownership of the club, the Glazer Family seemed to have failed to obtain cash from the club to discharge their loans. It is now evident that the plan was not possible within the stipulated time. First, it is worth noting that the Red Football Company paid off IPO in the New York Stock exchange as way of obtaining the cash needed to repay the rest loans (Rushe 22). In fact, the company started trading at the NYSE in August 2012, with an initial share price ranging between $14 and $20 per share (Rushe 22). Within the first few days of its presence in the bourse, the club received negative remarks from analysts at the Wall Street, while the troubled Facebook IPO further affected the possible outcomes of the Manchester listing (Rushe 22).

The listing at NYSE was successful, despite the negative remarks of the analysts at the Wall Street. In fact, the Red Football club was allowed to own “A” class shares to gain a large voting power. This is the requirement at the NYSE. The family failed to list as class “A” shareholding company, therefore forcing them to accept class “B” ownership (Miller 22).

In addition, the Glazers have taken advantage of the new regulations in the US stock markets, which limits companies from financial disclosures they should make per annum. The effect is that the club will not be required to file its quarterly financial reports. In addition, it will not be subjected to financial scrutiny at the same level as the other companies present at the bourse. From the new listing, the Glazers have anticipated to obtain some of the debts in order to reduce it from $661 million by 2015.

The initiative has now made the family sell about 10% of their stake at the club, which means that they have some good sources of funds to refinance the debt. However, a number of other initiatives to reduce the debts within the next few years have failed. For instance, the family wanted to list in the Singapore stock exchange in 2011, but the bid failed. The expectation was to obtain additional £400 million needed to reduce the debt from £600 million to about £200 million.

Positive Outcomes

Currently, it is evident that the family’s presence at the NYSE has improved significantly, with the clubs shares selling at an average price of $17 to $21 per share. In addition, the family has announced their success to use the funds from the bourse to reduce the debt from £600 million to about £360 million by august 2013 (Herbet 29). Moreover, the Glazers have successfully pursued AON to sponsor the club, which has attracted many investors in the NYSE (Herbet 29).

New deals with domestic TV and Financial Fair Play measures have further improved the financial status at Manchester United. These initiatives have not only helped the family reduce their debts, but also allowed the former manager Alex Ferguson to successfully place bids and purchase players, such as Robin Vern Persie (Herbet 29). These initiatives have also improved the club’s performance in the last two years, making it possible for investors and fans to invest in the Glazier Family project.

In addition, the desperation experienced by the Glazer Family has forced them to include additional initiatives in order to raise the cash needed to reduce the debts in a short time. For instance, the club has announced that it was playing some of its friendly matches in foreign nations where it had a large body of fans. For instance, the club has played some matches in Hong Kong and Australia and is expected to do the same in India. The rationale behind this initiative is the notion that holding such an event in these countries will entice millions of fans to attend the matches, while millions will watch the club play on TV or via Internet. As such, the company expects to obtain several millions from the initiative, which could be used to reduce the debts.

Conclusion

In April 2013, the Glazers were still looking for £500 million to refinance the club and return it to profitability. One of the proposed initiatives was to dispose the Old Trafford stadium, given that it had become an asset of the club, and thus the family, after the takeover. However, protestors successfully applied to let the stadium remain as an asset of community value, which prohibits the company from disposing it.

Despite this, the family has been successful in obtaining cash from other sources to pay their debts off.

Works Cited

Bose, Mihir. Manchester Disunited: Trouble and Takeover at the World’s Richest Football Club. London: Aurum Press, 2010. Print.

Conn, David. The Football Business: The Modern Football Classic. Edinburgh: Mainstream Publishing, 2011. Print.

Herbet, Ian.“”. The Independent. 2013. Web.

Miller, Alex. “Glazers launch £250m share issue to rescue Manchester United”. The Daily Mail. 2013. Web.

Rushe, Dominique. “”. 2012. Web.

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