losandes.biz: Manchester United 2maweek losses and financial fair play

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Edmund Wilson, arguably the greatest American literary critic, once said no two persons ever read the same book. The cover, paper, typeface and words can be exactly the same but the response will be unique.

Football is like that.

For example, when financial services firm Deloitte published its 2023 Money League report last week, some people would have seen the 23 per cent increase in Manchester United’s turnover as proof of good health.

But others would have noted United’s revenues were still lower than they were in 2018-19, the last full season before COVID-19 arrived, and that Liverpool had overtaken their fierce rivals for the first time in the report’s 26-year history.

On Sunday, some will have watched Arsenal score a last-minute winner to beat United after the type of see-saw battle that decides Premier League titles. Others will have watched a vibrant Arsenal eventually overwhelm their stodgy opponents, underlining the gulf between them.

At some point in the last few weeks, Manchester United’s finance department hosted a delegation from UEFA at Old Trafford.

To one pair of eyes, it was a friendly meeting as part of the club’s regular dialogue with European football’s governing body. To another, it was an urgent conversation about United’s Financial Fair Play (FFP) position.

You see, it is a game of opinions. So, is there anything we can agree on?

Read more: Manchester United takeover bid has been made by Qatari Sheikh Jassim Bin Hamad Al Thani. 

Total revenue — broadcast, commercial and matchday — was £583million, up from £494million in 2020-21, which saw United climb from fifth to fourth in the Money League, behind Manchester City, Real Madrid and Liverpool, but ahead of Paris Saint-Germain, Bayern Munich, Barcelona and the three London-based members of the Premier League’s ‘Big Six’. Not bad, right?

Hmmm, it depends on how you view these things.

The fourth-highest revenues in football during a season in which you finish sixth in the league, fail to get beyond the fourth round in the domestic cups and go out in the first knockout round of the Champions League would suggest there is something to former United chief executive Ed Woodward’s notorious boast that the club could make money regardless of what happened on the pitch.

But the club made a pre-tax loss that season of £115.5million, which means they were running a deficit of £2million a week.

Why? Because those impressive-looking revenues have not kept pace with the rise of their wage bill or transfer spending.

“A couple of things stand out in relation to Manchester United,” explains Kieran Maguire, who lectures on football finance at the University of Liverpool and is the man behind the popular Price of Football blog and podcast.

“The first is that their costs are rising faster than their income. Since Sir Alex Ferguson retired as their manager in 2013, the wage-to-turnover ratio has increased from 50 per cent to 66 per cent. Thanks to Cristiano Ronaldo and other signings, last season’s wage bill went up by more than £60million to £384million — a Premier League record.

“The second is that in respect of income generation, the Old Trafford commercial machine has stalled. Empty trophy cabinets don’t sell deals, and after seeing both Chevrolet and TeamViewer get their fingers burned with front-of-shirt deals it will be harder for the commercial boffins to extract additional monies from sponsors.”

The American carmaker paid United a world-record £64million a year for the right to appear on the club’s shirt between 2014-21. It was a price based on the club maintaining its position as a serial contender for silverware. A League Cup win, a Europa League title and an FA Cup triumph were not what Chevy had in mind.

“Manchester United have seen no growth in commercial and matchday income since 2016 but in that period wages have increased from £232million to £384million, putting all the pressure on broadcast income to cover the extra costs — and broadcast income is determined by results on the pitch, rather than the club itself,” says Maguire.

And let us not forget United topped Deloitte’s Money League for its first nine editions, was No 1 again between 2015-17, and had never been outside the top four until last year.

The club chose not to respond on the record to questions about its current position but when it released its accounts for the 2021-22 season in September, chief financial officer Cliff Baty put an upbeat spin on the numbers.

“Our results have been adversely affected by the absence of a summer tour in July 2021, material exceptional and increased utility costs, and the impact of the weakening of sterling on our non-cash finance costs. Looking forward to fiscal 2023, the club is guiding to revenues of £580m to £600m despite participation in the Europa League, and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of £100m to £110m, reflecting the continued playing squad investment.”

Missing out on a tour, sacking two managers, the cost of keeping Old Trafford open and the pound’s slide against the dollar would all weigh on a club of United’s size and profile. And if you think Baty has had it tough, you should see what his peers at clubs across the continent have been dealing with over the last three years.

It would also be fair to point out that United have continued to invest in the squad, giving new manager Erik ten Hag the best possible chance of turning the club’s playing fortunes around. A summer shopping spree, costing more than £200million, brought in Brazilian duo Antony and Casemiro, defender Tyrell Malacia and Argentina’s soon-to-be World Cup winner Lisandro Martinez on big fees, and the team is playing much better.

Ten Hag’s men are fourth in the league and still in three cup competitions, including the semi-finals of the Carabao Cup. Progress, then, and since releasing that financial statement four months ago, the club’s accountants have revised the revenue forecast for this season upwards to £610million.

But — there is always a but — the situation remains abnormal. Otherwise, the club’s owners, the Glazer family, would still be taking the £30million dividends they have been paying themselves since 2016 and the club’s net debt would not have risen from £260million in 2015 to £660million at the end of last year.

Just let that sink in: a 153 per cent increase in the club’s total debt (money that is owed or due to others) minus any cash it has in the bank in seven years. This is presumably one reason at least some of the Glazer family would like to sell the club or, as their public relations experts put it, explore “strategic alternatives” to their continued ownership.

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The Athletic asked Professor John Barbour, Roger Bell and John Purcell from financial analysis firm Vysyble to look at Manchester United’s recent performance under the Glazers. They were not impressed.

“The fundamental problem is that Manchester United have adopted inferior strategies, priorities and actions over the past few years,” they explain.

“The outcome is that both United’s internal financial position and its results for shareholders have been poor. Its financial condition is now in critical condition and, apparently, the business is for sale.”

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Need a refresh on Manchester United’s potential sale?

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Vysyble’s experts put a lot of the blame for what they describe as “this sad state of affairs” on United’s reliance on the financial metric mentioned above, EBITDA. This was invented in the 1980s by bankers trying to work out if their customers could afford to pay the interest on their loans or not.

Since then, it has become every chief executive’s favourite metric for discussing the potential of their businesses, as it is all the good bits without any of those annoying tax bills, interest payments and the cost of finding stuff you need and replacing it when it wears out.

According to Vysyble, when United talk about their EBITDA growth, “the signal to management is ‘we are doing well, we are profitable even though times are hard, keep on going’”. The club’s cumulative EBITDA for 2015-22 is almost £1.2billion.

The metric Barbour, Bell and Purcell prefer is called economic profit, which is the difference between what you earn and all your costs, including the cost of your capital. In other words, the cost of not doing something else with your money.

And if United do not change?

“Driven by an increasing shortage of cash and the need to take on more and more expensive debt, the financial position will continue to decline,” says Vysyble.

“Current priorities, such as the renovation of Old Trafford and renewal of the playing squad, will be significantly delayed or abandoned. And, eventually, unexpected and rapid financial failure will be preceded by vain attempts to pull in cash by selling assets. This will result in a major financial restructuring or even a fire sale of the club.”

See, we told you football is a game of opinions.

At this juncture, it is important to note that the Glazers, their numerous advisors and United’s finance department would say words to the effect of “you’re a cheerful bunch, aren’t you, Vysyble?” and point to numerous other Casandra-like predictions of extinction for football’s big beasts over the years.

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So what about United’s relationship with the FFP regimes of the Premier League and UEFA, the football industry’s attempts at financial self-regulation?

We can deal with the Premier League’s FFP rules very quickly. Basically, clubs are allowed to lose £105million over a rolling three-year period, providing those losses are filled by cash injections from the owners. If you breach that limit, you could be looking at a points deduction, as we have seen with various English Football League sides, where the allowed losses are only £39million over three years.

But no Premier League team have ever been punished for breaching the £105m limit — Everton have tried but even they have fallen just short.

Add all that up and United have zero Premier League FFP concerns.

UEFA, on the other hand, has always tried to take a firmer line on sustainability — tried being the operative word here. It introduced its regulations in 2012 and, for a decade, they worked in a similar fashion to the Premier League’s, which were based on the European rules, with the important difference being that clubs could only lose €30million (£26.4m; $32.6m) over three years.

For example, eight clubs, including PSG and Italian giants AC Milan, Juventus, Inter Milan and Roma, were given financial penalties in September for overspending between 2018-22. But the clubs are only expected to pay about 15 per cent of the penalty, with the rest being suspended while they are subject to settlement agreements, and these penalties will actually be deducted from the payments UEFA makes to clubs that play in its competitions.

Free-spending PSG’s penalty is the biggest but the deduction should only be €10million (£8.8m), which the club’s Qatari owners will probably view as just another cost of business.

There are three pillars to new regulations: solvency, stability and cost control.

Solvency is just a beefed-up version of UEFA’s licensing system, which prevents any club that wants to play in its lucrative competitions from owing money to players, other clubs, leagues or the taxman.

Stability will be achieved with what UEFA is calling an “enhanced version” of its break-even rule, which is one way of describing the decision to double the permitted losses from €30million over three years to €60m over the same period. And clubs considered to be in “good financial health”, ones with positive balance sheets, will even be allowed to triple the permitted losses to €90m, which is not far off the Premier League’s very-hard-to-breach limit.

There is a caveat, though, and this is where things are about to get more interesting for every club that wants to play in UEFA’s club competitions.

Cost control will be ensured by UEFA’s new “squad cost rule”, which will limit clubs to spending 70 per cent of their revenues on the wages of their players and coaches, but not the non-playing staff, as well as the cost of transfers and agents’ fees. Any profits made from selling players will be added on to the revenue side of the equation and, on the other side, the club’s annual amortisation bill will be used to assess the cost of transfers.

Amortisation is the big winner of these reforms as every fan is now going to have to pretend to know what it means. Let us help.

Put simply, amortisation is how accountants gradually write off the initial cost of acquiring an asset. But it is also how they account for that asset’s value on the balance sheet at any point in time.

For football teams, the key asset here is a player and the cost of acquiring them is the transfer fee. That cost is then amortised over the player’s contract. If that’s a player who has just joined Chelsea, for instance, that is increasingly likely to be on a deal stretching to seven years (or even more) rather than the typical four or five.

So, a player who arrived for a fee of £30m and signs a three-year contract actually costs the club £10m a year for three years in amortisation charges. And they will be worth £20m after a year, £10m after two years and zero at the end of the contract, which makes sense as they can leave on a free transfer.

Now, if said player is sold after two seasons for £60m, the club would be able to claim a player-trading profit of £50m — ie, £60m minus the player’s amortised book value of £10m.

The only other point to note about UEFA’s squad cost rule is that it is being phased in. Clubs can spend 100 per cent of their revenues on the product they put on the pitch this season, next season it is 90 per cent, then 80 per cent, with the 70 per cent limit not coming in until 2025-26.

So, what does this mean for Manchester United?

Well, again, we return to the land of perspectives. First, no English club would ever be so daft as to confirm how much they pay their stars. Instead, we must estimate the sum based on the educated guess that 80-90 per cent of a club’s payroll goes to the players, manager and coaching staff. Broadly speaking, the smaller the club, the higher that percentage will be, whereas a club such as United, with 1,000 employees, would be towards the other end of that spectrum.

Maguire believes you can make a decent guess at United’s squad costs if you ignore their lumpy annual agent fees, as they offset the cost of the non-playing staff. And when he looks at the last decade of their combined wages and amortisation charges he sees the same deterioration that Vysyble has identified.

In 2013, United’s wages plus amortisation, minus that season’s player-trading proceeds, was 59 per cent of the club’s revenues. The following season it was 61 per cent and then 70 per cent in 2015.

But the number then fluctuated between 64-71 per cent for the next four seasons, until it leapt to 76 per cent in 2020, the first season affected by COVID-19. In 2021, the season played without fans, the squad cost ratio was 88 per cent and it was the same again last year.

Comfortably inside this season’s 100 per cent limit, then, but not far from next season’s 90 per cent, particularly when we look at the direction of travel over the last decade.

“If you combine wages with two other issues that contribute to UEFA’s new cost control measures in amortisation and player sales, United have a lot of the former due to a player-recruitment model best described as lacking strategy, and not much of the latter for the same reason,” says Maguire, who is a fan of Brighton, by the way, one of the best clubs at selling players for profit.

So, does replacing the very well-paid Cristiano Ronaldo with the Burnley reject Wout Weghorst make sense now?

Equally, can you see how Chelsea believe they will continue to stay under UEFA’s FFP radar, despite spending nearly half a billion pounds on a new team this season, by spreading the cost of that splurge?

And do you see why every other club has moaned to UEFA about it, forcing the governing body to close the long-contract loophole by limiting teams to five-year deals for the purpose of their FFP calculations?

For the first time in a decade, every club in Europe has been forced to think about FFP compliance, even the mighty Manchester United. This might, though, be the best thing that has happened to them since Ferguson left because they are finally going to have to address one of the club’s greatest weaknesses: how to sell players.

Compared to Arsenal, Chelsea or Liverpool, United have been utterly hopeless at gaining fees for players they no longer need.

Not only will this help United raise some much-needed cash while the Glazer kids decide what they want to do with the cash machine they inherited, but it will also ease any FFP concerns the club may have and provide their academy graduates with more playing time. This may only result in them leaving the club sooner, but ideally for a fee, such as the initial £9million United got from Everton for James Garner last summer, which may rise to as much as £15.5m with add-ons.

For what it is worth, United believe they will be back below the 70 per cent waterline for their squad-cost calculation this season. That sounds optimistic but might be possible if they can permanently move on at least one of Harry Maguire, Aaron Wan-Bissaka, Fred, Donny van de Beek, Eric Bailly or Alex Telles. We shall see.

In the meantime, let us all enjoy the new part of the game we can all argue about: amortisation.